Charlie Munger On Investing During Changeable Market Conditions

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Munger’s investment strategy could be a useful guide in today’s uncertain market

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The stock market’s prospects are highly changeable at the moment. One day investors are extremely bearish about the prospect of a prolonged lockdown that hurts the profitability of companies operating across a wide range of sectors.

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However, on other days investors are upbeat about the possibility of the economy reopening and consumer spending bouncing back to pre-coronavirus levels.

Investing in this set of market conditions can be a difficult task. That’s why it could pay to follow the guidance of successful long-term investors such as Charlie Munger. His simple, but effective, investing style could help you to navigate a challenging time for investors.

Reassess your existing holdings

Coronavirus could cause significant permanent changes to some industries. For example, it may encourage more employees to work from home, which could impact on sectors such as transport and energy.

Therefore, it could be a good idea to reassess your holdings as the impact of coronavirus on the economy gradually becomes clearer. This may lead to a reapportionment of your capital, but could be a prudent exercise according to Charlie Munger:

“Part of what you must learn is how to handle mistakes and new facts that change the odds. Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand”.

Selling stocks just because the market has fallen is never a good idea. But if a changing outlook means there are better opportunities for your capital elsewhere, then selling some of your holdings may be a profitable exercise in the long run.

Stick to your long-term aims

Many investors have a clear picture of what they are trying to achieve from their portfolio when they start buying stocks. For example, you may be looking to build a retirement fund, or use your portfolio to pay for college education for your children.

However, changeable market conditions can cause some investors to lose focus of why they originally started to buy stocks. Reminding yourself of your long-term plan could be a helpful move in Charlie Munger’s view:

“A majority of life’s errors are caused by forgetting what one is really trying to do”.

By focusing on your long-term goals, you may find it easier to look beyond the short-term volatility present across the market. This could make it easier to use changing investor sentiment to your advantage in terms of buying stocks while they offer wide margins of safety.

Changeable market conditions: Ignore investor hype

Changeable market conditions can cause your own views about the outlook for the stock market to quickly switch from positive to negative, and vice-versa.

For instance, a sharp decline in stock prices may make you less inclined to buy undervalued business. Likewise, a brief rally may make you much more optimistic about the future prospects for your existing holdings.

Instead of becoming carried away by prevailing investor sentiment, Charlie Munger prefers to calmly consider the prospects for his holdings and the wider market:

“We both (Charlie Munger and Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think”.

By ignoring short-term market movements and instead focusing on fundamental analysis, you may be in a better position to spot undervalued stocks that could make a real impact on your long-term financial position.

Manage your emotions

When the stock market is regularly changing direction and displaying high levels of volatility, it is easy to become increasingly emotional. You may, for instance, become fearful during periods of decline and overly confident during the market’s brief rallies.

When discussing his emotional state, Charlie Munger stated:

“Is there such a thing as a cheerful pessimist? That’s what I am”.

Being upbeat about a company’s long-term future, but mindful of its potential to record losses in the near term, could be a means of successfully managing your emotions. This state of mind could make it easier to capitalize on undervalued stocks during changeable market conditions, when the best buying opportunities often appear for value investors.

This article was first posted on ValueWalkPremium