Collection: Charlie Munger - #132 'Speculative Trading'



Our first question comes from Michael Wong. Michael Wong asked in this year’s annual letter, you mentioned the share price increase was driven by speculative frenzy and forced index buying. I would imagine that applies to the broad market too. What are the psychological implications of this type of market behavior? What could investors do to cope better with periodical frenziness?


Well, these things do happen in a market economy. You get crazy booms. Remember the Dot Com boom when every little building in Silicon Valley ran into a huge price and a few months later about a third of them were vacant. There are these periods in capitalism. And I’ve been around for a long time and my policy has always been to just write them out. And I think that’s what shareholders do.

In fact, what a lot of shareholders actually do is a lot of them crowd in buying stocks on frenzy — frequently on credit — because they see that they’re going up. And, of course, that’s a very dangerous way to invest. I think that shareholders should be more sensible and not crowd into stocks and buy them just because they’re going up and they like to gamble.

Kipling once wrote a poem called The Women (The Ladies) and the concluding line was to the effect that you should learn about women from him instead of doing it yourself, because, he says, "I know you won’t follow my advice."



[YAPSS Takeaway]

Don't Buy In the Hyped-Up stocks just because it is going up. Study, Understand and Value them before you invest your money in.