Berkshire Hathaway chairman Warren Buffett, left, and vice-chairman Charlie Munger chat with reporters on May 3, 2019. Munger, who helped Buffett build an investment powerhouse, has died at 99. Photo: AP
Opinion
The View
by Richard Harris
The View
by Richard Harris
Charlie Munger’s wisdom on crypto ‘poison’ shows investment experience counts
Munger, along with investment partner Warren Buffett, built a strategy around good assets that had been underpriced by the market
With a little of Munger’s discernment, investors and regulators might have avoided much pain over the likes of FTX and Binance
Charlie Munger, the Robin to Warren Buffett’s Batman, has died at 99, leaving an unparalleled investment legacy. Famous for his one-liners, he remains a beacon for the critical role of experience in investment. One of his oft-quoted aphorisms is “The big money is not in the buying or selling … but in the waiting.”
Trading is the mechanism by which investors get exposure to stocks. Trading in and out, constantly trying to buy low and sell high is not investment but speculation, which often results in the opposite outcome because of human emotion.
Munger could be wise and pithy, describing bitcoin as “rat poison”. After its price rose from US$150 to US$9,000, he described it as “more expensive rat poison”. To those who knew Buffett-Munger value-style investing, this was unsurprising. The two sought to buy and hold good assets when the market had underpriced them.
Buffett’s Berkshire Hathaway today has an US$800 billion portfolio of shares like Apple, Bank of America, American Express, Coca-Cola, Mitsubishi and BYD. This is the opposite of the fluky world of the cryptocurrency exchanges, whose dodgy dealings and lack of value have recently been exposed in the litigation and bankruptcy courts. With a little of Munger’s experience and discernment, both investors and regulators might have avoided such pain.
Like stock and commodity markets, the new cryptocurrency exchanges allow an expanding investor base to easily trade cyber tokens in cash and derivative form. The biggest of them, Binance, has no headquarters or national regulator, and was founded in 2017 by Changpeng Zhao (known as CZ), a Chinese-born citizen of Canada and the United Arab Emirates.
FTX was established in 2019 in Hong Kong and grew like a weed when it moved to the lightly regulated Bahamas. FTX ran an advertising campaign starring Super Bowl champion Tom Brady and his then wife, supermodel Gisele Bundchen. (Meanwhile, footballer Cristiano Ronaldo is being sued for US$1 billion in a class-action lawsuit alleging that his endorsement of Binance caused loss-making investments.)
03:14
FTX crypto exchange founder Sam Bankman-Fried convicted by US court on fraud charges
FTX crypto exchange founder Sam Bankman-Fried convicted by US court on fraud charges
FTX was founded by Sam Bankman-Fried, or SBF, whose professed aim was to make a huge amount of money to give to philanthropic causes. He sounded more saintly than Buffett and Munger, who made loads of money first – and only later decided to give it away. With his talk of effective altruism, Bankman-Fried even managed to enthral financial journalist Michael Lewis, who was writing his biography.
Bankman-Fried cultivated his image as a slobbish altruist, in T-shirt and shorts, with messy hair, a beat-up Toyota and an evident aversion to showers. He impressed the money men, who saw a young man too busy working to have a proper bed (he said he mostly slept on a beanbag). Nevertheless, he also lived in a penthouse and was ferried in private jets from the Bahamas to Washington, where he often lobbied policymakers.
He was convicted of fraud last month, having used customer funds to plug losses at his own trading operation, Alameda Research. Alameda had been run by his sometime girlfriend, maths genius Caroline Ellison, who was the worm that turned against him when the Feds came.
In 2022, the CoinDesk website broke the news that the balance sheet for Alameda comprised mostly of FTX’s token. FTX was also reported to be lending customer funds to Alameda. As FTX customers began to withdraw money, Binance came along as a “white knight” but soon pulled out of a deal, leaving FTX swinging in the wind. Bankman-Fried has been found guilty of defrauding investors out of billions and could face 110 years in jail.
Over at Binance, Zhao has been dethroned and the company has agreed to pay an eye-watering US$4.3 billion in fines to settle charges of supporting activities like terrorism and narcotics. This should dull appetite for unregulated cyber exchanges.
Binance founder Changpeng Zhao leaves the US District Court in Seattle, on November 21. Photo: TNS
You may ask what sophisticated and professional investors, with MBAs from top schools, were thinking in using other people’s money to fund, in the billions, a 20-something without much, if any, experience in regulation, accounting, or the perils of misleading investors – let alone risk management.
The tech bros in trainers were not into due diligence. They did not seem to know or care that FTX’s accounting records were kept on QuickBooks software, or that the company’s self-issued token was worthless as collateral for loans. They believed inauthentic stories because they too lacked experience.
The only grown-ups in the room were those who would have been well paid to attend FTX conferences, like Tony Blair and Bill Clinton. The young tech investors either hadn’t seen it before or thought “this time it’s different”. In Twitter-speak, FOMO led to YOLO. They followed the madness of the crowd, justifying the Fear Of Missing Out by saying You Only Live Once.
Men like Munger, on the other hand, followed the wisdom of the crowd, which trends toward the truth because money will flow towards reality. His investment strategy is proved in the rise in the net asset value of Berkshire Hathaway between 1964 and 2022, of an exceptional 3.8 million per cent, when the S&P rose just 25,000 per cent. That’s certainly a testament to the importance of waiting in investment.
Dr Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, writer and broadcaster, and financial expert witness
