Stock pickers beware: Charlie Munger thinks you're in big trouble

Charles Munger
Jonathan Alcorn | Bloomberg | Getty Images

Active investment managers have been taking a beating through most of the eight-year bull market run for stocks, and Berkshire Hathaway's Charlie Munger thinks the pain isn't going to stop anytime soon.

Much has been made over the poor performance of stock pickers. Fewer than 1 in 5 beat the in 2016, driving half a trillion dollars of investors cash into indexes, primarily through passively managed exchange-traded funds.

During a talk Wednesday, Berkshire's vice chair had little comfort to offer.

"The index thing is absolute agony for investment professionals … who have almost no chance of beating it," Munger said. "Most people handle that with denial ... I understand — I don't want to think about my own death, either."

American Express shares dip after Munger comments on company
American Express shares dip after Munger comments on company

Investors have turned to ETFs for their low fees and ease of trade compared with mutual funds. ETFs mostly track indexes such as the S&P 500, Nasdaq or specific sectors, and are thus not subject to the vagaries of individual stock movements.

The funds had just a few hundred billion under management a decade ago but now boast $2.7 trillion in U.S. assets.

Munger said the rise of ETFs has driven fees lower overall, squeezing managers accustomed to generous compensation.

"It's a huge problem, and it makes your generation of money managers have way more difficulties and causes a lot of worry and fretfulness, and I think the people who are worried and fretful are absolutely right," he said. "I would hate to manage a trillion dollars in the big stocks and try to beat the indexes. I don't think I could do it."