AUDIENCE MEMBER 00:07
In the last few years with very low interest rates out there it’s been difficult to find opportunities for having a long term compound interest based strategy. So beyond investing in Berkshire, Value Investing, or index funding, where would you invite us to find opportunities for long term investment where compound interest is really that force?
CHARLIE MUNGER 00:30
Well, my advice for a seeker of compound interest that works ideally is to reduce your expectations. Because I think it’s going to be tougher for a while. And it helps to have realistic expectations. Makes you less crazy.
And I think that – you know they say that common stocks from the aftermath of the Great Depression, which was the worst in the English speaking world in hundreds of years, to the present time may be an index that’s produced 10 percent. Well that’s pre-inflation.
After inflation it may be 7 percent or something. And the difference between 7 and 10 in terms of its consequences are just hugely dramatic over that long period of time.
And if that’s 7 in real terms, but achieved starting at a perfect period and through the greatest boom in history, starting now it could well be 3 percent or 2 percent in real terms. It’s not unthinkable you’d have 5 percent returns and 3 percent inflation or some ghastly consequences like that.
The ideal way to cope with that is to say, “If that happens, I can have a happy life.” Because why shouldn’t you be happy in spite of the fact that civilization wasn’t quite as easy as it was for my generation.
Now beyond that, when it gets more difficult, how should you do it? Well the answer is, because it’s going to be very difficult, you should work at it. And if all that gets you is 6 percent for a lifetime of work instead of 5, you should be cheerful about it. If you want to hit it out of the park easily, you should talk to Jim Cramer. (Laughter)
"My advice for a seeker of compound interest that works ideally is to reduce your expectations. Because I think it’s going to be tougher for a while. And it helps to have realistic expectations. Makes you less crazy." ~Charlie Munger