What Charlie Munger Gets Completely Wrong about Stock Trading

Charlie Munger, Warren Buffett’s longtime investing and business partner, said that teaching young people how to trade stocks is like starting them on heroin.

Yes, you read that right. One of the most famous – and most successful – stock pickers in the world likened stock trading to a heroin addiction.

charlie munger
“If you take the modern world where people are trying to teach you to come in and trade actively in stocks, well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin,” said Munger.

Well, the thrill of victory certainly is intoxicating. But we couldn’t disagree with Munger more. Frankly, we don’t think he agrees with his own advice, considering the billion-dollar fortune he’s amassed from buying stocks.

While you shouldn’t be in stocks for the thrill, you absolutely need to be if your goal is the long-term accumulation of wealth. Active investing is the key to building wealth – real wealth – so you can live the life you want, whether you are retired or still working.

Instead, Munger recommends investors gain exposure to stocks through index funds. There is an argument for that because many stock pickers, including professional money managers, tend to lag behind the market in performance. The legendary John Bogle, the late founder of the Vanguard Group and inventor of the index fund, built an industry on just that fact.

Now, paying a massive fee to professional money managers just to get average market returns doesn’t make much sense. But beating the market is possible. And you’ll need to do it if you want to meet your long-term retirement goals.

Morningstar projects a mere 1.8% return for stocks over the next 10 years, while GMO, a financial firm, predicts -4.5% returns when factoring in inflation. That might be downright optimistic compared to this projection

While long-term wealth building should be the core of your investing philosophy, we believe a combination of both trading and investing can help you reach your goals. If you do it correctly and strategically, you will be able to make money in any market.

Here’s how to do it…

Why Passive Investing Isn’t All It’s Cracked Up to Be

Leave it to the propeller-heads in Wall Street research firms to cook up all sorts of financial wizardry to take advantage of every fad.

Are you old enough to remember portfolio insurance? That ended up being the gasoline poured on the fire that was the crash of 1987.

How about funds of funds? These are mutual funds that invest in a portfolio of other mutual funds. It sure sounds like you not only diversify your stock exposure – which is good – but you also get to diversify your fund managers. It’s too bad you then pay double the fees, which eat up your returns. And if the market is choppy, you’re losing money.

Don’t forget about exotic investments like XIV. That was the leveraged ETN betting volatility would keep falling. It made its owners money until volatility spiked last February, then they lost everything overnight.

That’s Munger’s heroin. It’s more like gambling than investing.

But it does not have to be that way. A small amount of short-term trading has its place in even conservative investors’ portfolios.

Think about one simple example of a bear market. In bull markets, everything goes up (more or less), so passive investing seems to be the easy way to go. But in choppy or falling markets, passive investors will lose the same as the market loses. Wouldn’t it be great to be able to reduce volatility and preserve capital so that when the bull returns you won’t have to make up as much ground?

Don’t forget, if the market drops 50% – as it often does in bear markets – you have to earn 100% returns just to get back to where you were. If you bought a passive fund at the peak of the market in 2007, it would’ve taken you until 2013 just to break even. That’s despite stocks roaring 100% during the recovery.

Now, we are not saying you have to time the market with all your holdings, but you can be strategic.

There is no magic bullet, but there are serious strategies anyone can employ to prosper in lean times and knock it out of the park when conditions get better.

One of them, which we’ve been pounding the table about at Money Morning for years, is aligning your portfolio with the Unstoppable Trends. These are the global trends that will power industries for years to come.

Money Morning Chief Investment Strategist Keith Fitz-Gerald identifies six trends that are all driven by trillions of dollars that will get spent practically no matter what happens in the years ahead. They are demographics; scarcity/allocation; medicine; energy; technology; and war, terrorism, and ugliness.

Thing about it. If the population is aging (demographics), doesn’t it make sense to pick more stocks in healthcare (medicine)?

We know that green and renewable energy is in the news, and it is not going to let up. And unfortunately, border security, cyber security, and geopolitical security are needs that will never go away.

That’s just the big picture. On a more tactical front, you can hedge or even enhance your returns with options. Money Morning‘s options trading specialist, Tom Gentile, teaches ways to make money on stock options by researching historic patterns. And you can add substantial gains to your portfolio by adding options plays alongside your long-term investments.

In fact, Tom is currently offering our readers access to his seven-day Cash Course on how to do just that for just $1…

You Can Learn How to Trade Like the Pros – for Just $1

America’s No. 1 Pattern Trader, Tom Gentile, is giving you a rare opportunity to learn how to amass a constant stream of extra cash – year in and year out.

And he’s going to teach you how to do it entirely on your own.

People have paid up to $30,000 to access his secrets… but it can all be yours for only $1.

Go here to claim your seat in America’s No. 1 Pattern Trader Cash Course…

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