At Berkshire Hathaway 2011 (BRK.A, Financial) (BRK.B, financial) annual meeting of shareholders,
warren buffet The right arm of (Professions, Portfolio),
Charlie Munger (Trades, Portfolio), said the following:
“The one place where I feel like we are making a huge mistake is not learning enough from the big mess that has come from the miserable excesses of our financial system…if you look at all the panics and depressions in the States United, they all came from financial meltdowns, usually preceded by perfectly idiotic and greedy behavior.And I think that would be saying a lot to cut the ax to our financial sector and reduce it to a more constructive size…I I would like the tax system to discourage trading I would have different types of Tobin taxes I would have securities trading more with the frequency of real estate than trading by computer algorithms where a person’s computers outsmart computers another person in what amounts to some kind of legalized front running. I don’t think we need all that.”
Most people may not be interested in Munger’s thoughts on reforming America’s financial system, but they really matter to the individual investor.
They are important because these statements are based on what is wrong with the system and how the system is robbing the average investor of wealth. To try to avoid being taken advantage of by the system, we need to listen to this advice, recognize where the system is trying to take advantage of us, and work to avoid falling into these traps.
To begin with, Munger acknowledges that some of the greatest economic crises in history have been caused by the financial system. In each scenario, the financial system allowed too much debt to accumulate and as a result, it caused an economic collapse.
We cannot prevent financial institutions from lending too much money to subprime borrowers, but we can seek to reduce our own exposure by avoiding highly indebted companies and companies that lend money to low credit borrowers, and we can avoid borrowing too much money ourselves. .
Even using these strategies, we will not be able to entirely avoid the fallout from a debt-driven economic collapse. Yet we might be able to insulate ourselves from the worst of the next crisis.
Munger also said he wanted to rewrite the tax system to encourage long-term investments and fewer short-term transactions. Taxation may be a way to force investors to adopt a long-term mindset, but we can do it without having to pay more to the government.
We need to make sure that when we make an investment, we intend to hold it for an extended period of time and not jump into different holdings. Some markets encourage a long-term perspective by levying a tax at the point of purchase.
There is no financial transaction tax in the United States, but in many European countries there is a charge of 0.5% or more on each stock transaction. If you pay 0.5% on each trade, you are much less likely to make multiple trades per day with the same investment. This could encourage a long-term mindset.
Finally, Munger said he would get rid of the practice of high-frequency trading, which increases the cost for individual investors. We can’t really do much against high frequency traders, but avoiding free trading platforms such as RobinHood (HOOD, Financial), which relies on bribes from these merchants to fund its free point-of-use model, we can improve our odds.
None of these solutions are perfect, but they go some way to addressing the concerns expressed by Munger in 2011. It is certainly worth considering these solutions if we want to improve our investment results.