By Rupert Hargreaves. Originally published at ValueWalk.
“The practice of playing the stock market for relatively short-term gains has now reached such a high level that it tends to give a bad name to capitalism, thus threatening the cornucopia of goods and freedoms which only capitalism can provide.” – Charlie Munger
The above quote comes from an opinion piece written by Charlie Munger at the end of January 1984, although it could quite easily be a reference to today’s markets.
The opinion piece is a fascinating insight into Charlie Munger’s thoughts on the short-termism of markets, and what can be done to reduce what Munger calls “paper shuffling.”
“Our liquid stock market, sheltered by gentle tax laws, has acquired a Jekyll and Hyde character and serves not only as an orderly place for the transaction of essential economic business but also as a near ideal gambling casino. In recent years the casino part, with its great wealth and prominence, fascinating denizens and occasional bonanzas, has drawn in ever increasing cascades short term speculation.”
To try and reduce the volume of short term trading, and rebuild the stock markets reputation as a place for “orderly transaction of essential economic business” Munger recommends a “thought experiment” as devised by Albert Einstein.
Charlie Munger On The Benefits Of Long Term Investing
This proposed experiment is a change of the laws to discourage anything but long term holding of stock. A hefty income tax of 70% for all non-underwriting holders with a holding period of fewer than five years is suggested.
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With such a tax in place, Munger suggests investment in common stocks would become “a little more like real estate investment” as investment in newly issued common stock and common stock related securities would continue although the first issues of formerly private companies would create “a less liquid aftermarket, tending to force prices toward levels which would attract serious buyers planning to hold for a long time.”
With such a tax plan in place, Munger believes both investor and management speculation would be greatly reduced. He writes, “it is contrary to the national interest to have corporate managers as preoccupied as they are now with short term records and temporary stock-market effects. So preoccupied managers cause corporate action too similar to that of politicians voting to affect outcomes in the next election rather than the next-generation.”
Not only would the investment environment the substantially improved by forcing investors to hold stocks for a period of five years or more but Munger also believed, innovation would receive a boost as “some portion of the nation’s best brainpower would be diverted from stock speculation into activities such as creation of more efficient retailing or diesel engines.”
After laying out all the possible benefits of forcing investors to hold their stock longer Munger concludes his article with the following statement:
“The utility of “thought experiment,” for lesser mortals as well as Einstein, lies in its capacity to force acceptance of truths which are counterintuitive. Counterintuitive as it may be for traditionalists and “free-enterprise” types, the country would work better if the income tax law were revised to deter short term speculation and reduced liquidity in the stock market. The truly productive part of “free enterprise” and the security of its future would thereby be both (1) enhanced by increased emphasis on long term effects of investment accompanied by diversion of talent from speculation to more useful work and (2) less likely to be damaged by unsound future legislation attributable to public resentment of after effects of stock-market orgies and wasteful proliferation of “new capitalists” who produce too little for what they get.”
The post Charlie Munger On The Benefits Of Long Term Investing appeared first on ValueWalk.
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