Charlie Munger Warned: '95% Of People Have No Chance Of Beating' S&P 500 Index – But Adds 'Why Shouldn't Life Be Hard?'

Even in a posthumous context, Charlie Munger's words from the 2017 Daily Journal meeting resonate with a unique clarity that blends wisdom, wit, and a dash of grim reality. In a session that veered from the technical to the philosophical, Munger offered his sharp observations on the proliferation of index funds – a relevant topic as the investment world evolves.

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Munger was characteristically blunt about index funds’ limitations and potential pitfalls, especially during market distress. When asked whether the surge in index fund popularity could lead to liquidity issues during a crisis, Munger didn't hesitate. "The index funds of the S&P are like 75% of the market," he noted, implying that such a large portion of the market tied to indexes could cushion against the kind of drastic price discrepancies the question suggested. However, he was not entirely dismissive of potential problems, particularly the risk of overconcentration in smaller indexes.

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He used the "Nifty Fifty" of the 1960s as a warning. These stocks, driven to unsustainable heights by eager investors, crashed dramatically. "Their own buying forced those 50 stocks up to 60 times earnings, and then everything went down by about two-thirds quite fast," he noted. The lesson: no index is immune to a sharp correction when valuations soar too high.

Despite acknowledging the risks, Munger didn't see the S&P 500 facing the same fate due to its broad market representation. Yet, he was realistic about the limitations of any system: "The whole thing can't work perfectly forever."

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One of the most striking parts of Munger's discussion was his analysis of the challenges faced by today's investment professionals. The rise of index funds has created what Munger described as "absolute agony among intelligent investment professionals," who find themselves in a near-impossible position of trying to beat the indexes – a feat that, as Munger put it, "95% of the people have almost no chance of beating over time."

This competitive struggle has led to a decline in the fees charged by money managers, particularly those handling large sums. The downward pressure on fees, combined with the difficulty of outperforming indexes, has left many in the investment profession grappling with the harsh realities of their trade. "The prices for managing really big sums of money are going down, down," Munger observed, adding with his trademark candor, "I would hate to manage a trillion dollars in the big stocks and try and beat the indexes. I don't think I can do it."

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Munger's success with Berkshire Hathaway was not about maintaining a large portfolio to beat the market but rather making key decisions. "Take out a hundred decisions, which is like two a year," he explained. Berkshire's impressive track record came from making a few crucial choices over time, rather than attempting to outpace the market through sheer volume.

As he often did, Munger closed with a bit of humor wrapped in truth. "The indexes are a hell of a problem for you people, but you know why shouldn't life be hard?" It was a reminder that while the financial world is fraught with challenges, they are part of the game – a game that, for Munger, was as much about navigating difficulties as it was about achieving success.

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