Known as Warren Buffett’s right-hand man, billionaire Charlie Munger believes it’s never been more difficult for young people to make and keep money.

The vice-chairman of Berkshire Hathaway recently noted that successfully navigating the investment world has become a lot harder over the last few decades. He also pointed out that, even after accounting for inflation, living costs in the United States and around the world are much higher than they have ever been.

Still, it’s not all doom and gloom – by equipping yourself with investment knowhow, one can still reap benefits from the stock market. Here are more of Munger’s observations.

1. It’s harder for young people to get rich off investments

Munger’s go-to advice for decades was to “own a diversified portfolio of common stocks”, a technique he claimed could give clever investors a 10% return. However, given how complicated investing has become, this is no longer a surefire strategy.

Instead, understanding one’s level of skill and receiving personalised counsel have become more crucial.

Munger says the gap between the rich and the poor in the current generation has grown considerably smaller since it is more difficult for young people to generate as much money as their parents’ generation had.

He is probably right. Look at how the US financial markets have fared over the last 40 years, from 1980 to 2020:

• S&P 500: +9,745%
• 10-year treasuries: +1,831%
• cash (3-month treasury bills): +412%

The total returns resulted in annualised gains of 12%, 8%, and 4%, respectively. Sadly, over the next 40 years, financial markets will be unable to match those gains.

2. Do nothing when there is nothing worth doing

Doing nothing is not typically associated with success. To understand Munger’s point, consider the actions that are typically connected with investing.

Most individuals believe it entails researching investments, selecting and monitoring them, looking for new ones, filtering out old ones, and so on. That’s a lot to take care of and, during times of significant underperformance, investors often feel compelled to take action such as selling out of the market or adding to their portfolios.

The decision to do nothing is frequently the best course of action. While it may seem paradoxical, especially when market values are rapidly decreasing, Munger believes sticking it out can add significant value to your portfolio if you’re patient.

3. Know the edge of your circle of competence

The concept of the “circle of competence” is simple: each person has acquired useful knowledge in some areas of the world through experience or study. Some topics are familiar to most, while others necessitate a higher level of expertise.

Does the layperson have an in-depth understanding of, say, the inner workings of a microchip company or biotech medicine firm? Surely not. But, as Buffett stated and Munger espouses, one does not need to comprehend these arcane matters to invest.

It’s far more vital to be honest about what one knows and use that to one’s advantage.

4. Understand value investing

Value investing means buying stocks that appear to trade for less than their intrinsic or book value. Value investors actively search out stocks that are seemingly undervalued by the market.

They believe the market overreacts to both good and bad news, resulting in stock-price swings that are out of line with a company’s long-term fundamentals. Munger says the market’s response provides an opportunity to benefit by purchasing equities at a discount.

5. When you buy shares, you buy the business

Most individuals are aware that purchasing a stock entails purchasing a percentage of a firm’s ownership. Hence, Munger suggests treating stocks as if they were your company, and to carefully select which ones to purchase.

Be mindful of cashing out too soon as you follow the performance of the business. Individual investments should be made with money you are comfortable tying up for at least the next five years.

Holding for the long term, especially during periods of volatility, is the best way to optimise your gains. One of the most common investing blunders, Munger adds, is not giving your investments enough time to grow.

6. ‘Mr Market’ is emotionally volatile but you can still learn from him

While Munger was not always in agreement with the principles of American economist Benjamin Graham, he does support the concept of “Mr Market” – a gloomy man coined by Graham who purchases and sells stocks at irrational prices according to his mood.

Graham’s concept teaches investors to manage behaviour and leave emotions out of investing. Instead, Mr Market will provide you with the opportunity to purchase low and sell high if you wait for the perfect time and price.

7. Be rational, objective, and dispassionate

Rationality is necessary in investing, as it necessitates the development of thought processes that improve one’s chances of success over time. It stops investors from acting on impulse and making mistakes.

As Munger puts it: “Any of Berkshire’s great accomplishments began with folly and failure. The concept of rationality, objectivity and impartiality will never be outmoded.”

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.