Charlie Munger: The Stock Picking Industry Is Four Or Five Percent Super-Rational, Disciplined People, And The Rest Of Them Are Shamans

One of the best resources for investors are the Daily Journal Annual Meetings chaired by Charles Munger. During the 2015 Annual Meeting Munger was asked the following question regarding indexing and what it might lead to:

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“Indexing has grown a lot in the last thirty years or so as a form of investment management for a lot of good reasons. You said a few years ago that if we ever get to the point where everybody’s indexing, it’s not going to work very well. I’d love you to explain a little more about that and what would that lead to.”

Following is Munger’s response:

“It’s far enough away from happening so that I don’t spend much time thinking about it. I think human nature is such that it will never happen. So, I don’t spend much time thinking about what is almost certain never to happen.

In the world as it is, indexing has gained a lot. It probably should have gained a lot, because it’s quite rational. It’s bad for a lot of people who would otherwise be earning money as stock pickers. It probably should have been bad for those people. It doesn’t make it pleasant to have it happen any more than it helped Japan have a pleasant time when Korea came up so fast as a competitive powerhouse, and even more so when China rose. But I think indexing is here to stay. I think it’s a fact of life.

If you stop to think about it, civilized man has always had soothsayers, shamans, faith healers, and God knows what all. The stock picking industry is four or five percent super-rational, disciplined people, and the rest of them are sort of like faith-healers or shamans. And that’s just the way it is, I’m afraid. It’s nice that they keep an image of being constructive, sensible people when they’re really would-be faith-healers. It keeps the self respect up.”

You can listen to the entire meeting here:

Article by Johnny Hopkins, The Acquirer's Multiple




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The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”