March 2021 Newsletter

Munger on the Markets

When one of the richest and oldest active investors on Wall Street speaks out, it is worth noticing…especially when his perfunctory remarks are famous for worldly wisdom.

Internationally-famous Berkshire Hathaway Vice Chairman, Charlie Thomas Munger (born January 1, 1924) efficiently spoke to the problem of wild speculation on Wall Street this past week. Regarding public damage to both the day traders and clearing houses, he put the blame squarely on the “free” trade brokerage and banks. He exploded the notion that no-fee institutions are superior as principled passive actors working on behalf of the little guy, when in fact, they sell their trade data to larger institutions who, in turn, play off this data for dramatically superior profits than might be earned for a trade fee.  

To quote Charlie, “Nobody should believe that Robinhood’s trades are free,” Munger stated. He added that the trading app’s practice of selling order flow was “dishonorable,” and it was a “dirty way to make money.”

Regarding “selling order flow,” this is the practice by which a brokerage firm, bank or hedge fund sells your trade information to institutions (big money) so they can front-run your orders in milliseconds. Indeed, I have known individual high-frequency traders who were adamant that no trade of theirs would be placed through so called free-trade firms. These individuals did not want their trade data observed by artificial intelligence systems, effectively offering the alternate trade as a way of making money, thereby mitigating the benefits of the strategy. So, it’s 97-year-old Charlie Munger who remembers a time when the brokerage house was an honorable exchange of balance between buyers and sellers. Now Charlie uses the terms dishonorable and dirty.

Critics are growing. The U.S. Department of Justice, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission, the FBI, and the New York Attorney General’s office all have confirmed that they are looking into high-frequency trading and how it is being used or possibly misused.

Clearly, if front-running buy and sell orders from public data is more profitable than preserving the privacy of trade activity, there should be an investigation on the metric of free vs. no-fee public decision making.

The SEC estimated, as far back as 2010, that at least 50% of all equity trades could be identified as high-frequency trades.  

So why is the Vice Chairman of Berkshire Hathaway now saying that selling your information is a dirty business? Welcome, Charlie, to the digital age. Free traders may have simply chosen to offer what they could not hide, or they chose to establish the business model on the administrative platform of a naïve compliance industry. After all, Robinhood is just the latest free-trade brokerage firm to worm in on the bonanza of selling trade flow.  And remember who the beneficiaries are, private client bankers, big institutions such as hedge funds, teachers’ unions, and state pension funds.

So as Charlie says, “It’s a mistake for investment management to hire armies of people to make conclusions. Better off to concentrate your decision power in one person…and choose the right person. I don’t think it’s easy for ordinary people to become great investors.”

One of the most revealing comments Munger made at the Daily Journal annual meeting held in February was that he continues to learn every day. He says this reminding every investor that there is no singular book or study course that will bring an investor to the head of the class strategically. The investment world is always changing and developing. One must change and adapt. Every technical and fundamental environment one faces is different.

Regarding the extreme speculation from SPACS or Special Acquisition Companies (otherwise known as blank-check companies) will end. Munger is reported to have said, “The investment banking profession will sell sh*t as long as sh*t can be sold. I think it must end badly, but I don’t know when.” People often crowd into stocks on a buying frenzy on credit. This is very dangerous.

On diversification Munger admits, “The idea of diversification makes sense to a point… An idiot could diversify a portfolio! Or a computer for that matter. But the whole trick of the game is to have a few times when you know that something is better than average and to invest only where you have that extra knowledge.“

As to special knowledge, that special knowledge employed on your behalf includes over 50 years of experience in the financial markets, between Robert and myself, along with the support and oversight of hundreds of professionals at our broker/dealer, Bolton Global Capital and clearing broker, Pershing, LLC.

Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0258

Charlie Munger’s thoughts from the Daily Journal annual meeting: 02/25/2021