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Activest uses a tax harvesting strategy that seeks to reduce clients’ tax burden when market volatility creates portfolio losses. This article explains how tax harvesting turns market losses into tax savings. Our goal is to stay invested so portfolios can participate in a possible recovery. However, results depend on each client’s tax situation, and the strategy cannot guarantee savings.

The arithmetic behind the strategy

In accounting terms, the goal is for the following formula to produce a net loss:

Net gain or net loss = (long-term capital gains minus long-term capital losses) + (short-term capital gains minus short-term capital losses)

In other words, the firm sells positions at a loss to offset gains realized during the year. As a result, the client may owe less tax on those gains, whether from sales or fund distributions. Keep in mind that harvesting generally defers taxes rather than eliminating them. The replacement position usually carries a lower cost basis, which can mean a larger taxable gain later.

In addition, net capital losses can offset up to $3,000 of ordinary income per year. The limit is $1,500 for married taxpayers filing separately, per IRS Topic No. 409. These limits may change, so confirm current figures with a tax professional.

What happens when losses exceed gains

Unused losses can carry forward to future tax years. For example, suppose a hypothetical investor realizes $20,000 of losses and $12,000 of gains. Next, up to $3,000 of the $8,000 net loss may offset ordinary income that year. The remaining $5,000 can carry forward to offset gains or income in later years. In contrast, tax on net realized gains is generally due for the year they occur. This illustration is hypothetical and reflects no actual client.

When harvesting may make sense

Harvesting tends to be most relevant during market declines, when some holdings trade below their purchase price. For example, a position bought near a market peak may show a loss months later. Its long-term outlook, however, may not have changed at all. In that case, the firm may sell the position and buy a similar investment to maintain market exposure. Meanwhile, the client remains invested and can still benefit if prices recover.

Timing also matters. In practice, investors can look for unrealized losses throughout the year rather than only in December. First, weigh the potential tax benefit against trading costs. Next, confirm that the trade still fits the account’s investment objectives. Finally, check whether a suitable replacement exists that is not substantially identical to the original. Of course, a loss that looks attractive today may shrink or disappear if the market rebounds before the trade occurs.

Rules that govern how tax harvesting turns market losses into tax savings

Taxes should not drive the portfolio. Instead, the firm aims to keep each account aligned with its specific investment objectives. Above all, clients should coordinate this strategy with their accountants and other advisers. Trade-offs include transaction costs and possible performance differences, and harvesting offers little benefit in IRAs and other tax-advantaged accounts.

Advisers must also consider IRS rules, most importantly the wash sale rule. It exists to discourage selling assets at a loss simply to claim a tax benefit. Buying a substantially identical security within 30 days before or after a loss sale triggers it. Consequently, the IRS disallows the loss for now and adds it to the new position’s cost basis.

For instance, an investor might sell a fund that tracks the S&P 500. Next, the investor could buy a Dow Jones Industrial Average fund, which often moves similarly but holds different stocks. However, the replacement may perform differently from the original. In addition, the IRS has not precisely defined “substantially identical.” Therefore, understanding how tax harvesting turns market losses into tax savings means reviewing each trade with a tax professional. This example is illustrative only and is not a recommendation to buy or sell any security.

Using market volatility to lower a client tax bill means selling positions that have fallen in value to realize losses. Those losses can then offset realized gains, a practice known as tax-loss harvesting. In practice, the aim is to stay invested so a portfolio can participate in any recovery. However, results depend on each client’s tax situation, and the strategy does not guarantee a lower tax bill.

Using market volatility to lower a client tax bill: the formula

In accounting terms, the goal is a net loss in this calculation.

Net gain or net loss = (long-term capital gains minus long-term capital losses) + (short-term capital gains minus short-term capital losses).

In other words, realized losses can offset gains realized during the same year. As a result, the tax owed on those gains may shrink or disappear. Those gains may come from sales or, for example, mutual fund distributions.

If losses exceed gains, a taxpayer may deduct up to $3,000 of net capital loss per year against ordinary income. The limit is $1,500 for married taxpayers filing separately (IRS Tax Topic 409). In addition, the limit applies per tax return, not per portfolio.

How carryover losses work

If net losses exceed the annual limit, the unused amount generally carries forward. They can offset future gains and, within the annual limit, ordinary income. In contrast, tax on net realized gains is generally due for that same tax year.

Here is a hypothetical illustration. Suppose an investor realizes $10,000 of gains and harvests $18,000 of losses in one year. First, the losses erase the $10,000 gain. Next, $3,000 may offset ordinary income. Finally, the remaining $5,000 may carry forward. Results vary by filing status.

When to look for harvesting opportunities

Volatile markets can push some positions below their purchase price, even in a year when the overall portfolio gains. Therefore, many advisers review client accounts for losses throughout the year rather than waiting for December. A sharp decline in one sector, for instance, may create a loss worth harvesting while other holdings stay profitable.

Meanwhile, the character of each loss matters. Short-term losses generally offset short-term gains first, and long-term losses generally offset long-term gains first. Short-term gains typically face higher tax rates than long-term gains. As a result, harvesting short-term losses can carry extra value for some clients. Of course, the adviser should also weigh the client’s income, filing status, and expected future gains before acting.

What the strategy must not do

Using market volatility to lower a client tax bill should not damage the portfolio. Instead, the portfolio should stay aligned with its investment objectives. For instance, harvesting often defers taxes rather than eliminating them, because the replacement position starts with a lower cost basis. Trading costs and tracking differences can also reduce the benefit.

Most importantly, advisers should coordinate this strategy with the client’s accountant and any other investment advisers. This article is general education, not tax, legal, or investment advice.

Where the wash sale rule fits

Above all, advisers must consider the wash sale rule before making portfolio changes. A wash sale generally occurs when an investor sells a security at a loss. The rule applies if the investor buys a substantially identical security within 30 days before or after. An IRA or spouse’s purchase can also trigger it. As a result, the investor cannot claim the loss that year.

For example, an adviser could hypothetically sell a fund tracking the S&P 500. The adviser could then buy a fund tracking the Dow Jones Industrial Average. The indexes often move similarly, but the Dow holds only 30 stocks, so returns can diverge. However, the IRS has not precisely defined “substantially identical,” so any swap carries risk. Therefore, advisers should confirm any swap with a tax professional.

We share this article to help you learn how to spot social engineering and protect your accounts. A few figures from a third-party source show the scale of the problem. However, Activest has not independently verified them, and some date from 2020 and 2021.

• Attackers reportedly hack about 30,000 websites worldwide each day.
• Roughly 64% of companies worldwide have experienced at least one form of cyber attack.
• March 2021 alone saw about 20 million breached records.
• Meanwhile, ransomware cases grew by about 150% in 2020.
• Email delivers around 94% of all malware.
• On average, a new attack occurs somewhere on the web every 39 seconds.
• Security tools block an average of around 24,000 malicious mobile apps daily.

Source: techjury.net

Where social engineering fits

Increasingly, attackers pair social engineering with technical cyber attacks to obtain information from the victim. In other words, social engineering is the practice of manipulating and deceiving someone to gain control of private information. For example, an attacker may use the phone, email or direct contact. The goal is to gain illegal access to sensitive details such as usernames, passwords and account information.

How to spot social engineering and protect your accounts

Start with email. The same source ties most malware to email, including viruses and other malicious programs. Therefore, treat any email that asks you to change account credentials or transfer funds as a warning sign. Do not answer it, click its links or reply with any information. Instead, contact the sender through a phone number you already know is genuine.

Common tactics to watch for

Social engineering usually relies on pressure rather than technical skill. First, an attacker may create a sense of urgency. The message may claim that an account will close or a payment will fail unless you act at once. Next, the message may appear to come from someone you trust, such as a colleague, a bank or a service provider. In addition, the sender may ask you to keep the request private or to skip your usual checks.

Look closely at the details. For instance, a display name can look familiar while the actual email address contains small misspellings. Links may also point to a website that imitates a real login page. As a result, a quick glance is often not enough to judge whether a message is safe.

Phone calls, texts and direct contact

Email is not the only channel. Callers may pose as support staff and ask you to read out a code that your bank or app sent to your phone. Meanwhile, text messages can carry links that lead to fake sites or harmful apps. In person, someone may simply ask for help getting into a building or borrowing a device. In each case, the safest response is to pause and verify the request independently.

Everyday steps that reduce your risk

Learning how to spot social engineering and protect your accounts works best when you pair awareness with simple habits. Consider the following steps:

• First, use a unique, strong password for each important account.
• Next, turn on multi-factor authentication wherever it is available.
• In addition, keep your devices and apps updated with the latest security patches.
• Review your account statements regularly for activity you do not recognize.
• Finally, never share one-time codes, passwords or PINs with anyone who contacts you.

Above all, give yourself permission to slow down. A legitimate organization will understand if you hang up and call back on a verified number. In practice, that short delay is often enough to stop a scam before it causes harm.

Of course, no single habit can stop every attack, and criminals may also use calls or texts. As a matter of policy, Activest does not ask clients to change accounts or make transfers by email. Most importantly, if you suspect unusual activity, please contact our office right away.

This article explains the three kinds of bear markets and how they recover. At the time of writing, the broad market had fallen roughly 21% from its peak this year. In our view, several forces drove the decline. First, the Federal Reserve adopted a hawkish monetary policy. In addition, inflation ran high as supply chains faltered and Russia invaded Ukraine.

A bear market typically means a fall of more than 20% from a peak. Given how sharply macro expectations shifted, we do not find a decline of this size very surprising. For example, twelve months ago the market expected no rate hikes this year and only a couple by the end of 2023. At the same time, growth expectations were rising with the post-pandemic recovery. Meanwhile, few investors foresaw the war between Russia and Ukraine.

Understanding the three kinds of bear markets and how they recover

Investors often view market declines as binary: you are either in a bear market or you are not. In practice, however, bear markets differ depending on their drivers. Analysts commonly group them into three broad types.

• Structural bear market. This type usually stems from structural imbalances or financial bubbles. For example, during the 2007 financial crisis the market fell 57% and took 49 months to recover.
• Event driven bear market. In contrast, this kind stems from specific, infrequent events that typically do not lead to a domestic recession. Examples include wars, emerging market crises and pandemics. The 34% drop between February and March 2020 is the latest example.
• Cyclical bear market. Finally, this type typically follows shifts in the economic cycle, a rising interest rate curve and higher inflation. The last one ran from July to October 1990, when the market fell 20% and took about four months to recover. The invasion of Ukraine has influenced the current correction. However, in our opinion it most closely resembles a cyclical bear market, and this view could prove wrong.

Why does the type matter? The driver of a decline often shapes how deep it runs and how long recovery takes. For instance, structural declines may take longer because imbalances need time to unwind. In contrast, event driven and cyclical declines have often been shorter, as the examples above show. Of course, no classification is perfect, and a single bear market can share features of more than one type.

What history says about the recovery

We understand that bear markets can feel unsettling. Historically, returns following declines close to 20% have averaged around 19%, 36% and 72% after one, three and five years, respectively. However, these are historical averages, and past performance does not guarantee future results. Individual periods varied widely, and some recoveries took far longer. In other words, studying the three kinds of bear markets and how they recover offers context, not a forecast.

Keeping perspective during volatility

In our view, staying focused on the plan you built at portfolio construction may help you participate in a recovery after intense volatility. Of course, a plan cannot remove risk, and markets may fall further first. We are not suggesting that short-term volatility has ended. Instead, we aim to show how long-term positioning can help investors pursue their goals. This article is educational and is not an individual recommendation. Therefore, please speak with your advisor about your own situation.

It can also help to review a few practical questions with your advisor. First, does your time horizon still match your goals? Next, does your current mix of investments still reflect your tolerance for risk? In addition, do you hold enough cash for near-term needs, so you are less likely to sell during a downturn? Finally, would rebalancing bring your portfolio back toward its target allocation?

Source for bear market and recovery history: Goldman Sachs. Figures are historical and illustrative only. Indexes are unmanaged, and investors cannot invest directly in them.

Within fundamental analysis, two factors often influence the performance of a stock: the earnings a company generates and how investors value those earnings. One common way to gauge the value of a share is the price to earnings multiple, or P/E ratio. This guide explains how to read the price to earnings ratio and where its limits lie. In other words, it covers the components, the analysis, and the warning signs.

What are its components?

To calculate the P/E, an analyst divides the price of a share by the company’s annualized earnings per share. The trailing P/E uses the earnings reported over the last twelve months. In contrast, the forward P/E uses the earnings analysts expect for the next twelve months. Forward estimates can change. Optimism can drive an expansion in the P/E. For example, when perceptions about a company improve, investors may be willing to pay more for each unit of earnings. As a result, the multiple can rise even if earnings stay flat. When expectations turn negative, however, investors may pay less for each unit of earnings, and the P/E can contract.

How to read the price to earnings ratio in practice

First, observe whether the P/E looks high or low against the company’s own history. Many analysts call this absolute valuation. In practice, it means comparing the current P/E with its average over 10, 15 or 20 years. Next, compare the company’s P/E with that of similar companies in the same industry. Analysts call this relative valuation. Of course, the interpretation of the P/E can vary by sector. For instance, some industries carry above-average multiples because investors expect faster growth. Meanwhile, other sectors trade at lower multiples because their businesses are more mature or more cyclical. Historical averages may not repeat, so neither comparison offers a definitive answer.

Why earnings quality matters

The earnings figure in the denominator deserves the same scrutiny as the share price. For example, a one-time gain from an asset sale can inflate earnings for a single year. As a result, the P/E can look unusually low until that gain drops out of the trailing figure. In contrast, a large one-off charge can depress earnings and make the multiple look high. When a company reports a loss, the P/E has no meaningful value. Instead, analysts often turn to other measures in that situation. In practice, it helps to read the notes behind reported earnings. It also helps to check whether the result reflects the ongoing business. Fortunately, many companies disclose unusual items separately, which makes this check easier.

What deserves attention

No single P/E reading leads to an absolute conclusion. Instead, you first need to identify which component, the share price or the earnings, is driving the result. In our view, a high P/E deserves a check that solid fundamentals support it, rather than excessive optimism. In addition, companies with a low P/E call for care. A low multiple can look like an opportunity. In reality, it may reflect a lack of catalysts and little interest among investors.

The P/E multiple can reveal a great deal about how investors perceive a stock. It may help flag potential opportunities, in the form of a cheap valuation, or potential risks, in the form of an expensive one. However, it is only one data point, and a low or high reading does not predict future returns. Therefore, before making any investment decision, investors should pair this valuation analysis with a deep understanding of the business model and the financial situation. Finally, they should also weigh the growth strategy and the experience of the management team. Knowing how to read the price to earnings ratio is a starting point, not a complete analysis.

This article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security.

In our opinion, there are four ways artificial intelligence could change healthcare, and this article outlines each one. Here, we turn to healthcare, where we believe innovation can be a strong force for change. For example, healthcare systems hold large amounts of data that analysts can use to generate insight. In addition, pharmaceutical companies keep looking for ways to shorten lengthy drug development timelines. In theory, AI could help match the right treatments, in adequate quantities, to the right patients. However, these potential benefits depend on data quality, privacy safeguards, and regulatory approval.

Four ways artificial intelligence could change healthcare

The list below reflects our view of where early applications may appear.

• Research and development. First, AI could help improve the success rates of medications in clinical trials. However, any such gains may take years to appear, and results may vary widely.
• Clinical trials. Next, AI tools applied to logistics could speed up the trial process and improve efficiency. For instance, they could help companies find faster-enrolling sites and flag underperforming ones. Of course, these tools rely on accurate site data, and poor inputs can lead to poor choices.
• Commercial development. In addition, AI could help companies identify physicians and specialists suited to support a new product launch. Meanwhile, it could point companies toward the events most likely to build awareness of a new medication. In practice, marketing rules and approval requirements still limit how companies promote any product.
• Complementing the human experience. Finally, every patient wants an accurate diagnosis, and this is where AI could make a meaningful difference. For example, AI tools may help a physician assess a patient’s uncommon symptoms. By using AI to support diagnostic accuracy, providers may reach better conclusions and potentially improve outcomes. Above all, we see AI as a support for clinical judgment, and it can produce errors or reflect bias.

Evaluation and regulation may set the pace

In our view, these applications could be AI’s first steps into the sector. However, progress may take time. Researchers and regulators will likely keep evaluating whether these tools deliver better results and economic benefits. We believe these capabilities are here to stay. Nevertheless, adoption may be uneven, and some applications may not meet early expectations.

For instance, UnitedHealth Group has stated that AI could help reduce the time needed to turn data into information. According to the company, this may lead to a better understanding of the factors that affect a person’s health. In our opinion, strategic use of this technology may support better healthcare decisions and lower costs for companies. However, implementation costs, data privacy concerns, and integration challenges may offset some of these gains. Therefore, these four ways artificial intelligence could change healthcare remain possibilities rather than certainties.

How to read these possibilities

For investors, the key question is not whether AI sounds promising but whether it produces measurable results. First, it may help to look for evidence that a tool improves a specific task, such as trial enrollment or diagnostic support. Next, investors may want to consider who pays for the technology and who captures the savings. In other words, a tool that helps patients may not always help a company’s earnings. In addition, healthcare tends to move slowly because patient safety comes first. As a result, companies may test new tools in limited settings before wider use. Meanwhile, competition may reduce any early advantage.

Most importantly, we think a balanced view weighs potential gains against the risks noted above. Of course, the pace of change may differ across research, trials, marketing, and clinical care. Fortunately, investors do not need to predict every outcome to follow the trend. Instead, they can track progress over time and adjust their expectations as evidence builds.

This article is educational and is not investment advice or a recommendation regarding any security or company named.

Following our earlier comments on how artificial intelligence (AI) may support investment analysis, this article explores where artificial intelligence could reach healthcare first. In our view, innovation can drive meaningful change in healthcare. For example, healthcare systems hold large volumes of data that analysts can turn into useful information. In addition, pharmaceutical companies constantly look for ways to shorten long drug development timelines. Theoretically, AI could support more effective management across the industry. In other words, it may help deliver the right treatments, in the right quantities, to the right patients. However, AI adoption in healthcare remains early, and outcomes are uncertain.

Where artificial intelligence could reach healthcare first

• Research and development. AI could potentially help improve the success rates of medications in clinical trials. For example, researchers could use AI to screen candidate compounds before costly laboratory work begins. However, that process could take years, and results may vary.
• Clinical trials. Applying AI to logistics could speed up trials and improve efficiency. For instance, it could help companies find clinical sites able to enroll patients faster. It could also flag underperforming sites that need improvement.
• Commercial development. AI could help companies identify the physicians and specialists best placed to support a new product launch. As a result, it may reduce some obstacles to reaching the market. It could also help companies focus on the events most likely to build interest in a new medication. Of course, strict healthcare marketing rules still apply.
• Complementing human expertise. Every patient wants an accurate diagnosis, and AI may make a meaningful difference here. For example, AI assistance could help a physician assess a patient’s uncommon symptoms. In practice, providers may then reach better-informed conclusions. Even so, AI tools can make errors, so physician judgment remains essential.

Why progress may take time and face regulation

These areas could mark the first contact between AI and the sector. Even so, in our view the process will likely take time. Regulators, providers, and investors may evaluate progress continually to confirm whether AI delivers better results and economic benefits. Meanwhile, new rules could slow adoption or add costs. In our opinion, these capabilities appear likely to endure, although their pace and impact remain uncertain.

How to read early signals of adoption

Investors may find it useful to watch a few practical indicators. First, they can look for evidence in company results that AI tools shorten timelines or reduce costs. Next, they can follow how regulators respond to new tools and whether guidance becomes clearer over time. In addition, partnerships between technology firms and healthcare providers may show where demand is building. Above all, readers should treat early announcements with caution, because pilot projects do not always scale.

Data quality also matters. AI systems depend on the records they learn from, and incomplete or biased data can weaken results. Therefore, organizations may need to invest in better data management before they see benefits. Patient privacy adds another layer of responsibility. As a result, providers must protect sensitive information while they test new tools. In practice, this balance between innovation and privacy may shape how quickly each area develops.

What one industry participant has said

For instance, UnitedHealth Group has said that AI can help reduce the time needed to turn data into information. According to the company, this may allow a better understanding of the factors that affect a person’s health. When organizations implement it strategically, the technology may support better healthcare decisions and lower costs. However, implementation can be expensive, and benefits may not reach every organization. Finally, tracking where artificial intelligence could reach healthcare first may help readers follow how the sector evolves.

This article is for educational purposes only and is not investment advice or a recommendation regarding any security. Company references are illustrative, and the opinions expressed may not come to pass.

Activest is proud to mark another year supporting FUNDANA and orphaned children in Venezuela. This non-profit foundation exists to provide support and care to orphaned children in Venezuela. In practice, its work aims to give them love, education and an opportunity for a better future.

Every child deserves a safe place to grow, a caring adult to trust and the tools to build a future. However, many children in Venezuela face their early years without the support of a family. As a result, organizations like FUNDANA carry a heavy responsibility. They step in where family care is missing. They also offer stability during the most formative stage of life.

A night at the theater for FUNDANA

During the month, a theater performance took place to benefit the foundation. The play, called The Influencers, ran at the Colony Theatre in Miami. Fortunately, the theater was full, and the evening drew warm support from the audience.

Events like this one do more than benefit a cause on paper. For example, they bring people together around a shared purpose. In addition, they give the community a simple way to show that it cares. A full theater sends a clear message to the children and to the people who look after them: they are not alone.

Meanwhile, the play itself offered something valuable of its own. Theater invites an audience to sit together, to listen and to feel. Therefore, a benefit performance turns an ordinary night out into a small act of solidarity. We were glad to see so many people choose to spend their evening this way.

We also want to recognize everyone who helped make the evening possible, from the cast and crew to the audience that filled the seats. Their work and presence turned a good idea into a memorable night for a worthy cause.

Why another year supporting FUNDANA and orphaned children in Venezuela matters to us

Above all, we believe solidarity is a driving force behind a better society. This belief reflects the vision we share with FUNDANA. We are proud to support initiatives that aim to help those who need it most. In addition, we value the chance to participate actively in this work.

For us, supporting a cause is not a one-time gesture. Instead, we see it as a commitment that grows stronger over time. Marking another year supporting FUNDANA and orphaned children in Venezuela reminds us why consistency matters. Children need care that continues from one season to the next. In the same way, the organizations that serve them need partners who stay.

What love, education and opportunity mean in practice

FUNDANA’s mission rests on three ideas: love, education and opportunity for a better future. Each one matters on its own. However, they work best together.

First, love gives a child a sense of belonging and security. Next, education builds the knowledge and confidence a child needs to grow. Finally, opportunity opens the door to a future the child can shape. No single event or partner can provide all of this alone. Most importantly, it takes a community of people who keep showing up, year after year.

Looking ahead with gratitude

We would like to thank FUNDANA for allowing us to be part of this noble cause. Of course, we look forward to continuing our collaboration. Together, we hope to help make a meaningful difference in the lives of orphaned children. Finally, more information about their work and ways to collaborate is available at fundana.org.

We encourage everyone in our community to explore the foundation and consider how they might help. Even a small gesture, shared by many people, can change a child’s day. As a result, we will keep looking for ways to stand beside FUNDANA in the year ahead.

In late November 2023, Charles (Charlie) Munger, longtime partner of Warren Buffett, passed away at the age of 99. Munger served as vice chairman of Berkshire Hathaway for decades. In addition, many market commentators regard Buffett as one of the most influential investors of recent times. Together, they grew Berkshire from a small textile manufacturer into a large conglomerate. As of late 2023, public market data put its market capitalization at approximately US$775bn. This article looks at four investing principles Charlie Munger lived by, along with their limits.

Munger’s philosophy rested on multidisciplinary thinking. For example, he drew insight from diverse fields such as psychology, history and economics. He also stood out for a fundamentals-based approach to investment decisions. In other words, he evaluated the essential aspects of a company. These included its revenue sources, earnings potential, balance sheet health and market position.

The four investing principles Charlie Munger lived by

Munger promoted these ideas alongside Buffett.

• The big money is not in the buying and selling, but in the waiting. In practice, Munger was not active in day-to-day trading. Instead, he tried to identify positions he considered as safe as possible and hold them, often for several years. However, no investment is risk-free, and holding for years does not guarantee a gain.
• Buy wonderful businesses at fair prices. Munger avoided stocks that looked appealing only because they seemed cheap. Instead, he favored companies with strong fundamentals and reasonable valuations. In his view, the market would eventually recognize their intrinsic value over the long term. Of course, markets can take years to reflect value, and sometimes never do.
• Great opportunities are rare. Munger believed that life does not shower anyone with unlimited opportunities. As a result, he aimed to rule out as many weak or unsupported investment ideas as possible. He favored significant moves at those rare moments when a strong opportunity appeared, and only after thorough analysis. Therefore, his approach required patience and a willingness to sit out long stretches without acting. Meanwhile, concentrating on a few large bets can increase risk if one goes wrong.
• Good businesses are ethical businesses. One of Munger’s favorite tenets was that good business is ethical business. Conversely, he argued that a business model built on deception is headed for failure. Munger and Buffett built a reputation for closely analyzing the companies they considered. For instance, they looked for strong growth potential and models they viewed as fair, equitable and ethical.

How to read these ideas today

These principles describe a mindset more than a formula. For example, waiting patiently only helps if an investor first understands what they own. In addition, a fair price depends on careful research into a company’s fundamentals, not on a quick glance at its share price. Next, an investor who wants to wait for rare opportunities needs a clear view of their own goals and time horizon. Otherwise, it can be hard to tell discipline from simple inaction.

The ethical test also deserves attention. In practice, investors can review how a company treats customers, employees and shareholders. They can also read annual reports and compare management’s statements with actual results over time. However, none of these steps removes risk. Markets can fall, businesses can change, and even careful analysis can prove wrong. As a result, many investors spread their holdings across several assets rather than relying on a single idea.

A lesson beyond investing

Perhaps his most significant reflection was about life rather than investing. Above all, he said that the best thing a human being can do is help another human being know more. Finally, the four investing principles Charlie Munger lived by reflect one investor’s views and experience. They may not suit every investor’s goals, time horizon or risk tolerance.

Important information

This article is educational and is not individual investment advice. Past results do not guarantee future results. Consider speaking with a qualified financial professional about your own situation.

Charles (Charlie) Munger, Warren Buffett’s longtime partner, died in November 2023 at the age of 99. He served as vice chairman of Berkshire Hathaway, and many investors regard him as highly influential. Together, he and Buffett grew Berkshire from a small textile maker into a large conglomerate. In addition, Berkshire’s market capitalization stood at roughly US$775 billion at his death, according to publicly reported market data. This article looks at what Charlie Munger taught investors about patience and fundamentals.

Munger’s philosophy rested on multidisciplinary thinking. In other words, he drew insight from many fields, including psychology, history and economics. He also made decisions using a fundamentals-based approach. In practice, that meant evaluating the essential aspects of a business. For example, he studied revenue sources, earnings potential, balance sheet health and market position.

What Charlie Munger taught investors about patience and fundamentals: four ideas

• First, patience over activity. Commentators often paraphrase his view this way: value comes from patience, not from buying and selling. He did not trade actively day to day. Instead, he sought positions he considered as safe as possible and held them, often for years. Of course, long holding periods do not remove risk.
• Next, wonderful businesses at fair prices. He preferred companies with strong fundamentals and reasonable valuations over stocks that merely looked cheap. In his view, the market would eventually recognize their intrinsic value. However, that was his opinion, and markets can misprice a business for a long time.
• In addition, great opportunities are rare. Munger believed life does not offer unlimited opportunities. Therefore, he tried to discard as many bad or poorly supported ideas as possible. He favored significant moves in those rare moments when a strong opportunity appeared, and only after thorough analysis. In contrast to diversified strategies, concentrated bets can magnify losses.
• Finally, good businesses are ethical businesses. One of Munger’s favorite principles held that ethics and business quality go together. In his view, a business model that depends on deception tends to fail eventually. He and Buffett built a reputation for examining businesses closely. For instance, they looked for growth potential and for models they judged fair, equitable and ethical.

How to read a company’s fundamentals

Investors who want to apply a fundamentals-based approach can start with a few basic questions. First, where does the company’s revenue come from, and how dependable is it? Next, does the business earn consistent profits, or do its earnings swing sharply from year to year? In addition, a quick look at the balance sheet shows how much debt the company carries relative to its assets. Finally, investors can ask whether the company holds a durable position against competitors. None of these questions guarantees a good outcome. However, they encourage the kind of careful study Munger favored over quick reactions to price movements.

Why patience is hard in practice

Holding a position for years sounds simple, but many investors find it difficult. Market headlines change daily, and falling prices can trigger fear. As a result, some investors sell at poor moments or chase popular stocks. Munger’s interest in psychology offers a useful lens here. For example, recognizing common biases, such as following the crowd, can help an investor pause before acting. Of course, patience does not mean ignoring new information. Instead, it means separating meaningful changes in a business from short-term market noise.

Where these ideas fit for investors today

This article paraphrases the principles above, since his wording varied across interviews and shareholder meetings. Past performance does not guarantee future results, and adopting his principles cannot replicate his outcomes. Most importantly, this article offers general education, not individual investment advice. Investors should consider their own goals, time horizon and risk tolerance. Even so, understanding what Charlie Munger taught investors about patience and fundamentals may help frame long-term thinking.

Meanwhile, his most memorable reflection may have concerned how to live, not investing. As he put it: “the best thing a human being can do is to help another human being know more.”