Market News

BY  Emily McCormick

Charlie Munger, vice chairman of Berkshire Hathaway and long-time business partner of Warren Buffett, issued a strong condemnation of the businesses he said enabled the recent frenzy of speculative trading by retail investors.

The 97-year-old investor, speaking during a question-and-answer session at the Annual Meeting of Shareholders of the Daily Journal Corporation (DJCO) in Los Angeles, responded to a query about the recent run-up in shares of heavily shorted stocks like GameStop (GME) last month.

“That's the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would in betting on race horses," he said. "And the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. And of course, when things get extreme, you have things like that short squeeze."

"It's not generally noticed by the public, but clearinghouses clear all these trades," he said. "And when things get as crazy as they were in the event you're talking about, there are threats of clearinghouse failure. So it gets very dangerous."

The specter of a clearinghouse failure was one of the issues raised during the U.S. House Financial Services hearing on the Reddit-fueled trading frenzy earlier this month. During the hearing, Vlad Tenev, CEO of Robinhood, the online brokerage popular with retail investors, admitted that the company would not have been able to post the $3 billion in required collateral that the Depository Trust & Clearing Corporation (DTCC) made against the company in late January after investors flooded the platform with trades. In a worst-case scenario, this ultimately could have forced liquidation of the unsettled clearing portfolio and "resulted in a total lack of access to the markets" by users, Tenev said at the time. Ultimately, Robinhood restricted trading in GameStop, and dozens of other equities, to the chagrin of its users.

"It's really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors. And of course it's going to create trouble, as it did," Munger said.

"And I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them," he said. "And if you're selling them gambling services where you rake profits off the top like many of these new brokers who specialize in luring the gamblers in. I think it's a dirty way to make money. And I think that we're crazy to allow it."

In another question, Munger was asked whether he still identified "wretched excess" in the financial system, as he had warned of in February 2020, and asked where he saw the excesses as most egregious in the current market.

"It's most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robinhood," Munger said. "And I think all of this activity is regrettable. I think civilization would do better without it."