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Getting through the storm

Charlie Munger has some sound advice for savers and investors no matter how much or how little money you have

Getting through the storm

Warren Buffett's and Charlie Munger's diaries are blank, just like those of the rest of the planet. In an interview with the Wall Street Journal, the 96-year old Munger reveals that Berkshire Hathway is not looking at any investments right now. Despite having one of the largest holdings of cash in the world (about US$ 125 billion, or about Rs 10 lakh crore) and assets going cheap, Buffett and Munger are sitting on their hands. Munger makes it clear that this is not a situation that he understands (or anyone understands) and therefore would like to ride it out with all their liquidity intact rather than rush into something and regret it later. As he says, "This thing is different. Everybody talks as if they know what's going to happen, and nobody knows what's going to happen."

According to Charlie Munger, this is not the time to do anything at all, except stay exactly where you are. The best course is to not change course at all. The question to ask is, do you have any evidence that the change you are going to make will be better than the current course? Unless you have any evidence, then it does not make any sense. The likelihood of overreaction is higher than that of stumbling upon some course of action that may prove to be better than the current one.

Of course, this applies to those actions that are taken to somehow take advantage of the circumstances to somehow generate some quick returns or some trick like that. If that's what is tempting you, resist the temptation and be like Buffett and Munger. It's really not possible to foresee anything in the short and medium term so do not even try. As the old man says above, there's no shortage of people who are talking as if they know what is going to happen. Pay no attention, it's just talk.

About the only course of action which is justifiable is if, for financial or family even psychological reasons, you would like to eliminate all risk in your life and do something drastic like shifting all assets to a bank deposit or something. It may not make financial sense, but if it gives someone peace of mind in these difficult times, then it's fine. However, this kind of a change is in the opposite direction. It seeks to eliminate all risk. What Munger is advising against is trying to use the situation to take some risks and increase returns. That's not advisable, either for you or me or Buffett and Munger.

As the liquidity crisis in debt mutual funds shows, there will be many individual crises along the way, both big and small. Some of them will happen because so many businesses were already stressed. The biggest example is debt funds themselves, which have been having a series of hiccups concerning stressed assets for more than a year or so. Quantitatively, these add up to a tiny percentage of the total assets managed by debt funds. Certainly, the NPAs are negligible compared to the banking system. While this indicates strong investment standards, the fact remains that mutual funds are a passthrough vehicle and problems get passed through to investors without delay or mitigation. This is alarming in the short run but robust in the long run because unlike banks it does not allow problems to be swept too far under the carpet. However, it does mean that the current period is very critical and the government and the RBI will have to shepherd the country's financial system with great care.

As Charlie Munger says in the interview, "I would say basically we're like the captain of a ship when the worst typhoon that's ever happened comes. We just want to get through the typhoon.." Not a bad principle to follow.