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Charlie Munger Has a Warning for Investors

By David Jagielski - Mar 10, 2021 at 9:12AM

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Here's why now is a good time to take a second look at your portfolio.

Even as the coronavirus pandemic has taken hold over the past year, there has been plenty of bullishness in the stock market. Not only are investors buying up expensive stocks trading at high valuations, they are also making risky bets on struggling businesses like AMC and GameStop. With little regard for fundamentals, speculators and retail investors may have helped create a bubble that could soon pop.

Recently, Charlie Munger, an executive at Berkshire Hathaway and Warren Buffett's right-hand man, expressed his concerns about where the markets are today. He made a sobering prediction about the future, one that investors shouldn't ignore.

Horses' hooves kick up mud in a horse race.

Image Source: Getty Images.

What Charlie Munger thinks of the current situation

When speaking at an annual meeting for Los Angeles-based newspaper publisher Daily Journal Corporation (of which he is chairman), Munger had some harsh words for aggressive investors, comparing some of them to "racetrack bettors" who were "buying stocks on a frenzy." And he believes that where the markets are right now is comparable to the dot-com bubble, stating that "I think it must end badly, but I don't know when."

Munger's fears aren't unfounded -- the S&P 500 is at a price-to-earnings (P/E) ratio of nearly 40, and the last two times it went higher than that were during the financial crisis and the dot-com bubble. Valuations are excessive for many investments right now, and the danger is that a correction or large-scale crash may be inevitable. However, that doesn't mean it will happen tomorrow, next week, or even a month or two from now.

What should investors do?

A good way for investors to protect themselves if they are worried about a market crash or that stocks are too expensive is to reevaluate their portfolios. Instead of buying Amazon at a P/E of more than 70, investors should consider buying shares of a blue-chip healthcare stock such as Johnson & Johnson (JNJ -0.09%). At a P/E of 28, it is a much cheaper buy, and the business looks incredibly strong.

It ticks all the main checkmarks value-oriented investors should be looking for. It has consistently posted a profit, and only once during the past five years has its net margin fallen below 17%. Although sales of $82.6 billion in 2020 were only nominally up from 2019's total of $82.1 billion, Johnson & Johnson still has growth opportunities on the horizon.

Most notably, the U.S. Food and Drug Administration issued an emergency use authorization for its COVID-19 vaccine last month. The company plans to deliver up to 1 billion doses of the vaccine before the year is over, and at a price of $10 (based on the billion-dollar deal it struck with the U.S. government for 100 million doses in August 2020), that could boost its top line by $10 billion. Johnson & Johnson also acquired Momenta Pharmaceuticals last year for $6.5 billion, which will expand its portfolio of drugs to treat autoimmune diseases. These are just a couple of examples of why the company's sales aren't likely to stop growing.

And on top of all that, Johnson & Johnson is also a Dividend King that has raised its payouts for more than 50 years in a row, the most recent hike coming in April 2020 when it raised its quarterly payments by 6.3%. Now investors are collecting $1.01 every quarter from the company for each share that they own, which yields 2.6% -- higher than the S&P 500 average of about 1.6%. And with a payout ratio of just over 70%, there is no reason for income investors to worry that the trend of hiking dividend payments will end anytime soon.

Many other options out there for investors

Johnson & Johnson is just one example; there are many other good investments that you can safely hold in your portfolio now, even if a market crash ends up happening. Good blue-chip stocks may fall in value during a crash, but because they are solid investments, they are also likely to recover from a downturn. As long as you stick to investing based on fundamentals rather than buying a stock simply because it has gone up in value, you will minimize your risk and maximize the odds that you earn great returns over the long run. There are no guarantees of when a market crash might happen, so rather than worrying about it, investors are better off simply avoiding high-risk investments and stocks that are wildly overpriced.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$179.46 (-0.09%) $0.16
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$468,805.04 (1.28%) $5,915.04
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$312.50 (1.25%) $3.86
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,221.55 (4.03%) $86.05
GameStop Corp. Stock Quote
GameStop Corp.
GME
$128.46 (11.54%) $13.29
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$12.23 (2.95%) $0.35

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