Meditations On The 100 Year View

As Munger continued, “In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% 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, who can be more philosophical about these market fluctuations.” Munger has 96 years and $1.7 billion to back up his wisdom right there.

So, stock market fluctuations like this past week are normal. Carry on as you were. Do nothing different. If you can, maintain regular automatic contributions to your portfolio.

Incidentally, this recent volatility is a reminder of why owning individual stocks could generate bad investor behavior (trading frequently) whereas owning broad indexes of stocks could generate good investor behavior (doing nothing in the face of volatility). Heading into a recession, we can easily see why any particular business will get crushed. We can’t help but have an emotional reaction to a particular story of a particular company. But a broad index of stocks, heading into a recession, maybe inspires us to remember that over the next few decades a few thousand of the best-run and most innovative companies in the world will figure out ways to generate profits, and therefore a return on investment. Indexes help us worry less about any particular story and to focus on the longest time horizon possible. 

The stock market, understand as a whole, follows a linear path through the medium term. It sure doesn’t seem that way, especially this past month. We humans with our hominid brains want to take note of a every single up and down movement, like baboons tracking a particularly delicious, but peripatetic, insect on a tree branch. Up, down, up, up, up, down.

The up and down is an illusion, however, as the stock market, again as a whole, goes upward with each decade. In the long run, over a century, the stock market understood as a whole, follows first a linear, and then an exponential upward, path. In the longest run, a basket of stocks is unidirectional. Birth, life, and then an ascent into the infinite. That’s what I mean by the metaphor of the Judeo-Christian tradition.

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