Charlie Munger Says “Value Investing” Is Bad Use of the Language
Spot on, and that is precisely the problem
There is no doubt that Charlie Munger, Buffett’s longtime business partner, is a straight shooter. He infamously called Bitcoin “rat poison.” He referred to crypto trading as “dementia,” and likened it to trading turds. He also called the entire Bitcoin development “disgusting and contrary to the interest of civilization.” If you are looking for more, his greatest hits are a delight to watch.
You might wonder… Given how opinionated he is (just to be clear, this is a compliment; we are big fans of Munger), what does he think about value investing? Thanks to YouTube, we actually know.
Charlie Munger has many good clips on the internet, but this one is definitely one of his money videos:
Here is the key quote:
When people talk about value investing, you’ll always be a value investor (emphasis added).
Bingo! Is it really a surprise that Charlie Munger agrees with Ben Graham, who never used the phrase “value investing” in The Intelligent Investor, and Warren Buffett, who said “value investing” is redundant?
The term “value investing” is the greatest misunderstanding of the last century and arguably one of the largest failures in the English language. Worse, the discussion is not just academic. A seemingly simple verbal flaw reallocates trillions of dollars from productive endeavors into unproductive ones, such as crypto. It sets the stage for the creation of cult heroes like Michael Saylor, who has, inexplicably, recommended that people mortgage their homes and buy more Bitcoin. It confuses regulators, policymakers and academia. Furthermore, because important domains of law, such as securities laws, require a robust understanding of real finance (and the word investing), not the popular pseudo-finance, to resolve disputes properly, it also confuses courts and leads to erroneous legal outcomes that seem out of touch with the realities of finance.
It is hard to accept that all of this can result from calling investing, “value investing.” No doubt. But remember, economics is not a hard science, and it never will be (Disclaimer: the author of this piece is an economist), because it deals with humans who respond to incentives. Remember also that a butterfly can flutter its wings and cause a hurricane.
We are not conspiracy theorists; we don’t believe there was a grand plan in place to purposefully mislead people and profit from it. That said, decades of confusion did lead to the misleading of people, and many have been profiting from it. The ambiguity may have been the result of some random events here and there; maybe even a book publisher’s meeting played a role. Earthquakes also start with some early cracks that are not visible to the human eye, but give them a few decades and they could turn into an earthquake that can turn your life upside down. Financial earthquakes are no different; they also start with some early cracks.
Value investing is bad language. Charlie Munger makes the exact same point:
I think it’s a bad use of the language to think there is a difference between value investing and other good investing. All good investing is value investing, by definition. (emphasis added)
To us, the overall context is clear. Just like Buffett, Munger thinks “value investing” is a redundant term. Now, a couple of quibbles. Charlie Munger says:
All intelligent investing Is value investing. (emphasis added)
And:
All good investing is value investing. (emphasis added)
That’s not how we would have said it. We feel there is even better language out there. To us, the statement should be:
All investing is value investing.
The difference between Munger’s statement and ours is subtle but important. The qualifier “intelligent” may make people think there is unintelligent investing, but what exactly is that? Investing, as Munger said, is buying something for less than what it is worth. The margin of safety is already embedded into the definition of investing, so how could true investing ever be bad?
Sure, it may not pan out, but it’s about the process not the outcomes. It is easy to conclude that a trade was bad investing if you end up losing money, but there will always be an element of randomness in life. If your best player takes the wide-open shot at the buzzer for the win, that’s the best shot you can take. It won’t always work out; nobody makes 100% of the shots they take, but as Wayne Gretzky famously said, you miss 100% of the shots you don’t take. If you get the process right, over a lifetime, you are probably looking at double the returns of stock market indexes. That’s the type of return real investors achieve, and that’s what matters. If you are not following the process, you are not taking a shot at all, and you will likely miss out on the best shot opportunity.
The analogy is not perfect, because you can still make money, and in some cases, make even more money if you choose not to be an investor. That’s fine, that’s largely a personal choice. We are not anti-speculation. We just want to make sure it is understood that what you are missing is a shot to be an investor. If this is the choice you want to make, please make it while being fully informed, as opposed to fancying yourself as an investor when you are not.
Of course, the process itself may not work as intended. For example, one can do a subpar job in estimating the value. But that’s not bad investing; that’s just feeding bad input into the valuation process. The concept of estimating a value and acting on it depending on the price itself is not the issue; it’s just that the execution needs to be better. Being generous with the discount rate to make something work or relying on extremely rosy projections (you know what we mean if you value assets for a living) is not the way to do it. At all times, you need to be honest with yourself, question everything, and once you have a value estimate, take another, say, 20-50% off the top as a margin of safety. Doing this consistently is precisely why true investors can run circles around the market.
In short, the words “intelligent” and “good” are unnecessary qualifiers. Arguably, Charlie Munger is influenced by Ben Graham’s masterpiece, The Intelligent Investor, which itself includes an unnecessary qualifier. One doesn’t need to say the “Great” Michael Jordan. We already know he is great, the qualifier adds nothing.
Let’s apply basic logic rules to Munger’s statement, and hopefully, that makes our position clearer. The first statement below is his, and the one after is the contraposition.
All good investing is value investing.
If somebody is not value investing, it’s not good investing.
This is a problem! The phrase “good investing” implies that even if something is not good investing, it would still be investing. Why is that? Because, if there is a good version of something, there is likely a bad version of the same thing, as well. If one pizza is good, and another pizza is bad, they’re both still pizza. They aren’t burgers.
Thus, if there is good investing, there must be other types of investing that may not be as good, but they are still investing! Effectively, the qualifier “good” inadvertently expands the boundaries of investing.
Once contraposed, Munger’s statement is exposed. What does the second sentence say? It says even if somebody is not value investing, they would still be investing. It wouldn’t be good investing, but it would be investing nonetheless.
Many people obviously believe that, which is why we dedicated an entire month of writing (June 2023) to the misguided view that crypto purchases constitute investing. That said, Charlie Munger clearly does not believe that. In the video above, he also said:
Because why would you want to buy something which wasn’t worth as much as you are paying for it, and who wouldn’t like paying something for less than it is worth.
Exactly. This is, in fact, equivalent to what Warren Buffett said in his 1992 investor letter, in which he observed the redundancy of the “value investing” concept:
In addition, we think the very term "value investing" is redundant. What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening). (emphasis added)
Would somebody ever pay for more than what something is worth? Yes, if you are a speculator, you could, hoping to find a greater fool. If you are an investor, however, you wouldn’t. There is simply no other way to invest other than calculating a value (for which cash flow generation is a prerequisite) and buying the asset at a price that is sufficiently lower than the calculated value. Remember, investing is buying cheap apple trees.
Many people tend to think that buying a cash-flow-generating asset cheaply is good investing, and buying it expensively is bad investing. That’s not the case. Buying a cash-flow-generating asset cheaply is investing, period. No qualifiers are needed. Buying a cash-flow-generating asset that is expensive is speculation, not investing. Buying assets that do not generate cash flows in the first place? That’s also speculation.
For completeness, let’s apply the same contraposition to our version of the statement, which is the same as Munger’s sans the unnecessary qualifier.
All investing is value investing.
If you are not value investing, you are not investing.
That’s the ballgame. That is what Ben Graham, Warren Buffett, and Charlie Munger are all saying, and if you read their work and listen to what they say, not with preconceived notions, but with an open mind, we don’t think there is any other conclusion that is possible.
