Why was Charlie Munger reluctant to invest in 'hot trends'?

The Core Reasons Why Charlie Munger Avoids "Hot-Topic Investing": Adhering to the Circle of Competence and Avoiding "Stupidity"

Charlie Munger's aversion to "hot-topic investing" (chasing the most popular industries or concepts of the moment) stems not from conservatism or a lack of understanding of new things, but is an inevitable consequence of his entire investment philosophy. His decision-making logic is rooted in a profound understanding of risk, insight into human nature, and an extreme pursuit of the power of compound interest.

Here are the core reasons why Munger avoids "hot-topic investing":

1. Adhering to the "Circle of Competence"

This is the cornerstone of Munger's investment philosophy. He believes every investor must clearly define the areas they understand and those they don't, and strictly invest only within the former.

The Essence of "Hot Topics" is Uncertainty: Industries in the "hot topic" spotlight—whether the early internet, recent new energy vehicles, or artificial intelligence—are fraught with immense uncertainty regarding their technological paths, business models, and ultimate industry structure. Predicting the eventual winners is like finding a needle in a haystack. This far exceeds the predictable, understandable "circle of competence" Munger defines.
Avoid Competing in Games You Don't Master: Munger famously said, "We make money by remembering the obvious, not by grasping the profound." Investing in "hot topics" means competing against thousands of the smartest, most fervent investors in the most opaque and rapidly changing fields. Munger chooses to avoid this brutal game of wits and luck.

2. Focusing on Intrinsic Value, Not Market Sentiment

The core of value investing is buying assets priced below their intrinsic value. "Hot-topic investing," however, is often driven by emotion and hype.

Price Severely Divorced from Value: Companies in the "hot topic" spotlight often see their stock prices inflated to extreme levels, incorporating optimistic expectations for decades or even centuries of future growth. This valuation is no longer a "good price," nor even a "fair price." Munger's goal is to "buy wonderful companies at fair prices," whereas buying hot-topic companies is typically "buying a company with uncertain prospects at an insane price."
Buying a Business, Not a Lottery Ticket: Munger invests in a company's long-term profitability and cash flow, viewing himself as an owner of the business. "Hot-topic investing," in contrast, is more like buying a lottery ticket, betting it can be sold to an even more enthusiastic investor at a higher price (the greater fool theory).

3. Extreme Aversion to Risk, Especially "Permanent Capital Loss"

Munger defines risk not as short-term price volatility, but as the risk of permanent capital loss.

"Hot Topics" are Breeding Grounds for Bubbles: History has repeatedly shown that almost all "hot topics" eventually evolve into massive bubbles. When the hype fades and the bubble bursts, most companies swept up in the frenzy crash spectacularly, leading to permanent loss of investor capital. As Warren Buffett said, "Only when the tide goes out do you discover who's been swimming naked."
Lack of Margin of Safety: At sky-high valuations, "hot-topic" companies have virtually no margin of safety. Any earnings disappointment, shift in technology roadmap, or intensifying competition can trigger a sharp stock price decline. Munger's investment system demands a sufficient margin of safety to withstand unforeseen risks and miscalculations.

4. Emphasizing the Durability of the "Moat" (Durable Competitive Advantage)

Munger seeks great businesses with wide and enduring "moats" that protect them from competitive erosion, enabling them to sustain high returns over long periods.

"Hot-Topic" Companies Often Have Shallow Moats: Many companies riding a "hot topic" wave may possess only temporary technological leads or innovative business models. Huge potential profits attract countless competitors, rapidly eroding any moat. It's difficult to determine who will build a genuine, lasting competitive advantage before the industry structure stabilizes.
Munger Prefers "Old Businesses": Compared to uncertain emerging industries, Munger favors "old businesses" with proven business models spanning decades and impregnable moats, such as Coca-Cola and See's Candies.

5. Inversion and Avoiding the "Herd Mentality"

Munger is a thorough contrarian thinker. His famous advice: "Invert, always invert."

How to Guarantee Investment Failure? Munger would ask: "How can I ensure I fail at investing?" One answer is: "Chase the hottest, most crowded, most overvalued sectors." Therefore, avoiding "hot-topic investing" is a shortcut to avoiding failure.
The Human Tendency for "Social Proof": Humans have an innate herd instinct; seeing others profit in an area makes them eager to follow suit. Munger deeply understands this human weakness and considers it one of the greatest enemies in investing. He believes that when everyone thinks something is an "obvious" good opportunity, it often ceases to be one.

Summary

Charlie Munger's avoidance of "hot-topic investing" is not born from disdain for innovation, but rather a form of high discipline based on probability, rationality, and risk control. He chooses a path that is less exciting but offers higher certainty:

Within his circle of competence, seek excellent businesses with strong moats, buy them at fair or undervalued prices, then hold them long-term, relying on the power of compound interest for steady wealth accumulation.

For him, the highest level of investing is not about catching every trend, but about avoiding major, stupid decisions throughout one's life. Steering clear of the seductive yet perilous "hot topics" is a manifestation of this wisdom.