Charlie Munger was right to say investors need to remain stoic about market crashes

How would you feel if your equity investments more than halved in price next year?

I’m guessing: not good. However, the recently deceased Charlie Munger, Warren Buffett’s right-hand man at Berkshire Hathaway, was more philosophical about such matters, saying: “If you’re not willing to react with equanimity to a market price decline of 50 per cent two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament.”

Harsh words but Munger had a point. Crushing market declines are an unavoidable part of investing. Ordinary investors may be tempted to change fund managers in times of trouble, but even the best investors endure painful drawdowns. Take Munger himself. Ritholtz Wealth Management’s Ben Carlson notes Munger’s investment fund bagged spectacular returns in the 1960s and 1970s, but his returns were volatile. For example, his fund more than halved in value during the 1973-74 bear market. Munger teamed up with Buffett at Berkshire Hathaway in 1978 (full disclosure: I own shares in Berkshire).

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The following decades brought more gargantuan returns, but it wasn’t a pain-free ride. Berkshire suffered painful declines of 20, 32, 34, 46, 51, 22, and 25 per cent – “plenty of bear markets and crashes”, notes Carlson. No one knows what’s in store for 2024, but long-term investors would do well to heed Munger’s advice and greet declines with equanimity.

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