When you’re 97 years old and still active — and successful — playing the Wall Street game, your words carry weight.
They carry even more weight when you’ve been Warren Buffett’s business partner since 1978.
I think about this when I hear Charlie Munger say that today’s stock market is “even crazier than the dot-com era,” while adding: “There’s no great company that can’t be turned into a bad investment just by raising the price.”
He even had some harsh words for cryptocurrencies like Bitcoin, going so far as to praise China for trying to snuff them out.
It’s easy to discount all of this as the rantings of an old man. Though not recorded in the interview transcript, Munger might have also opined on the need for those neighborhood hooligans to get off his lawn.
But there are some nuggets of truth we’d be foolish to ignore here.
Charlie Munger Knows Price Isn’t Everything
To start, Munger is spot on when he says that even the greatest companies are lousy investments if you pay too much for them.
This doesn’t mean that every stock you own has to be a screaming bargain. Munger’s partner Buffett, one of the most prolific value investors, abandoned deep value investing decades ago, saying: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
It’s OK to pay a premium for a fantastic growth stock. But price matters.
There comes a point at which the price is so high it no longer makes sense. This is one of the reasons value is one of our six investment factors in Green Zone Fortunes. We like to buy strong growth and momentum stocks that are also trading at a reasonable value.
Those opportunities still exist. But they’re a little scarcer these days.
Crazy Market and Cryptos
Munger is also spot on when he says that today’s market is even crazier than during the dot-com era of the late 1990s. But this needs a little explanation.
Back then, investors paid outlandish premiums for tech stocks with uncertain futures, many of which went belly-up in the tech bust of 2001-03.
Today, many stocks sporting the craziest valuations are profitable beyond imagination and own world-dominating businesses.
Sure, Apple Inc. (Nasdaq: AAPL) sports a $3 trillion market cap. But it also grows its revenues at a 28% clip and enjoys fat profit margins.
But for every Apple, Amazon or Microsoft that might almost make sense, there’s a barely profitable Tesla trading at 330 times earnings and sporting a trillion-dollar market cap.
And then there’s crypto.
Unlike Munger, I see a lot of value in crypto and believe in the concept behind it.
I see the blockchain as a fantastic model for public databases, and I believe that the larger and more stable cryptos could eventually be the savings vehicle of choice for inflation-sensitive investors that look at the Federal Reserve and other central banks with a healthy degree of skepticism.
But all of those arguments get thrown out the window when Shiba Inu, a puppy-dog-themed meme coin, rises 8,000,000% in the first 10 months of 2021. It grew to a market cap of nearly $40 billion… because Tesla CEO Elon Musk owns a pet of the same breed. That’s a degree of crazy that makes 1990s dot-com mania look downright sensible and prudent.
Cash on the Sidelines
As for how to invest in this environment, I have a few suggestions.
To start, watch Buffett and Munger. They’re not selling everything at Berkshire Hathaway and running for the hills. But they are keeping a little more cash on hand than usual at $149 billion. It might make sense for us to keep a little more cash than usual in reserve.
But we need to earn a return lest we lose ground to inflation. So, rather than buying and holding and hoping for the best, it makes sense to keep the short-term in mind for 2022 by dedicating at least part of your portfolio to short-term trading strategies.
My buddy and Money & Markets Chief Investment Strategist Adam O’Dell has you covered with his premium trading research service Wednesday Windfalls.
Each week, Adam recommends a trade on Monday, and his readers are out again 48 hours later on Wednesday. Click here to see how you can make this short-term strategy part of your trading game plan for 2022.
To safe profits,
Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.