Charlie Munger on the ability to handle volatility

Apr 20 (edited) • Long term investing ideas

When people invest long term, it is inevitable that they will deal with volatility.

Volatility is such an abstract concept - so let me make it real for you

It means your portfolio will go down by 50%

Here's what Charlie Munger said:

“I think it’s in the nature of long-term shareholding that the normal vicissitudes in markets means that the long-term holder has the quoted value of his stocks go down by, say, 50%,”

Is Charlie worried at all?

“Zero,” he said. “This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%.”

Even if you are not planning to stock pick like Warren and Charlie, it pays to know that S&P 500 largest drawdown can be 34% to55%

"The Great Depression saw an 86% decline, the Dot-Com Bubble burst a 49% drop, and the Global Financial Crisis a 55% loss. The COVID-19 crash in 2020 saw a 34% drop in just weeks."

If you plan to use leverage to improve your results, you must stomach such volatility (your portfolio going up and down).

One alternative that I find very helpful is to build up a cash reserve to invest.

Another alternative I find very helpful is to learn how to short the market such that even when the market is going down - you can make money.

For example, while S&P 500 is down significantly in April (-5.6%)

My portfolio for long term using leverage is +31% this month (mainly because I shorted a few times this month)

There is still quite a bit of uncertainty in the remaining weeks of April but that's where I stand for now

Cheers,

Eric

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Eric Seto

Chartered Professional Accountant (CPA)

Chartered Investment Manager (CIM)

Founder of 5MinInvesting.com

In April, my goal is to help 5 people without a financial background to master investing through Investing Accelerator.

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If you are interested, then let's hop on a call to see if you can benefit from the strategies in Investing Accelerator and get 30% per year.

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