Warren Buffet and Charlie Munger vs modern portfolio theory

Warren Buffet and Charlie Munger explain why volatility does not equal risk. This reasoning applies beautifully to cryptocurrency investing, in my opinion. Another important lesson is to not put too much trust in charts and statistics but rather apply, as Charlie calls it, “enlightened common sense.”


“Buffett noted with fascination that what is taught about investing has gone backward over the last 40 years.
Munger claimed that it is because professors are so enamored by modern portfolio theory. For the man with a hammer, every problem looks like a nail.

Buffett continued the thought, noting that because computers can generate huge amounts of data, modern portfolio theorists end up looking for answers in chicken tracks. They ignore the simple fact that when you buy a business, you own a business.
In conclusion, Buffett mused that he and Charlie, as buyers of good businesses, should support the study of modern portfolio theory: “If you’re in the sailing business, you want to set up flat-earth scholarships.”

“Buffett and Munger took their annual shot at debunking modern portfolio theory.
Buffett defined risk as “the possibility of harm or injury.”
In modern portfolio theory, beta is used as a measure of the volatility and, thus, the risk of an investment. However, Buffett sees the use of beta as nonsense, emphatically stating, “Volatility is no measure of risk to us.”
For example, super catastrophe insurance will lose money in a given year, but over a decade, Buffett expects to make money—more money than writing something predictable.
He said it is Wall Street nonsense to say that something that earns a lumpy 20% to 80% is “riskier” than something that earns a predictable 5% year after year.
Buffett said that while he is risk averse, we would be surprised at how much he might put on a seven-to-five flip. “We go where the probabilities are good.”
Munger summed up, “We act as if we never heard of modern finance theory, which can only be described as disgusting.”

Excerpt From: Daniel Pecaut. “University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting.