Charlie Munger’s fishing tackle tale and investment insights

Published in The Sunday Times on December 17th 2023.

The investing world lost one of its greatest minds with the passing of Charlie Munger in November. And one of its greatest wits. “Envy is a really stupid sin,” he once said, “because it’s the only one you could never possibly have any fun at.” 

Much has been written about Munger’s considerable legacy. I’d like to share one of my favourite Munger stories, behind which, lies considerable investment wisdom.

Some time ago, when asked why there is so much irrationality in investor behaviour and why people so often react to forecasts that have no predictive value, he offered the following:

“I was in Minnesota and I was buying a fishing lure. And I looked at them and they were pink and green and so I asked the shopkeeper, do fish really take this lure? And the old-timer behind the counter said, Mister, I don't sell to fish.” 

There are at least two ideas here worth exploring.  

Investment advice should not be about selling 

The focus of Munger’s ire in this tale was mostly directed at investment banks that offer trade ideas usually to professional investors. Investment banks are only concerned about whether those ideas are useful to the extent that they keep them coming back. “They’re like the guy who was selling salt to the guy who already had too much salt. And as long as the guy will buy salt, why they’ll sell salt. But that isn’t what ordinarily works for the buyer of investment advice.”

Quite. Investment advice shouldn’t be about selling you anything. If the commercial imperative for an adviser involves you having to transact – you are not receiving advice. You are receiving a product.

Successful investing involves constantly acting towards the realisation of goals identified in a plan. It is not based on reacting to whatever is happening in financial markets. Investment advice needs to be aligned with this goal. Managing a client’s wealth is far too important to be built around the necessity for action. This is a distinction that I don’t think many people make or appreciate in terms of importance. 

Advice is the great ‘un-commodity’

Advice, as US adviser Nick Murray likes to say, is the great un-commodity. It varies quite widely in terms of quality, as do advisers themselves. The fee you pay for advice must be returned to you many times over in terms of improved real-life returns – delivered through the best investment solutions and the right interventions along the way.

There’s a battle we all fight between a need for certainty and a tolerance for doubt. Stock market selloffs are the market’s way of pricing in and demanding an appropriate return for the extreme unpredictability of equity returns from one period to the next. Naturally, there will be some doubt in your mind when you’re investing.

There can be no certainties. Though that doesn’t stop us from seeking them out. And this is the secondary point Munger is making in his fishing tackle tale. A lot of advice is based upon market prognostication and what funds will outperform. A form of advice that inevitably comes unstuck.

It’s a fertile time of year for market forecasts

In much the same way as people are interested in horoscopes or astrology, it's not because there's predictive value in those things, it's because people want to believe. And the astrologer or the people writing the horoscope are satisfying that market in the same way the man selling the fishing tackle was selling to people, not to fish. Often people are giving a forecast because they've been asked for one, not because they know. And if it’s a forecast you’re looking for, this is a very fertile time of the year as investment houses roll out their 2024 outlook reports. 

I’ve often questioned the usefulness of this tradition, given the dubious ability of financial market professionals to forecast accurately. An article about this by Tim Harford in the Financial Times captures the nature of this process brilliantly. On forecasts he says, “They are often useless, not because they are wrong (although they often are) but because we have no idea what to do with them.” The last two years are a testament to this. Even with the ability to foresee what way the economy would unfold, it’s far from clear whether this would have helped asset allocation decisions.

Inside every tortoise is a hare struggling to get out

It's not that we should just blithely accept the future as completely unknowable and throw caution to the wind. As Harford advises, the best we can hope for from the market forecasters is that they open our eyes to different plausible futures and motivate us to anticipate threats and opportunities. 

Action will sometimes be required, but not at the frequency we tend to think. To use Nick Murray’s metaphor, inside every tortoise there’s a hare struggling to get out. A good adviser’s job is to try to prevent that. Not to pander to it. 

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on twitter @gconno1.