The Munger Test for Income:
Show Me the Incentives
Jan 9th, 2026
Every income investor has lived through this, even if they did not recognize it at the time. A fund pays a generous distribution. Month after month, cash arrives. The yield looks stable. The price drifts lower, but slowly enough that no one panics. The statements feel comforting. Then one day, the distribution is cut. Not trimmed. Cut. The price collapses overnight. Investors are shocked. Commentators say it came out of nowhere. It did not. It came exactly from where incentives pointed. Charlie Munger’s rule applies here with surgical precision. Show me the incentives, and I will show you the outcome. The most common way incentives corrupt income investing is not fraud. It is far more mundane. Fees get paid regardless of outcomes.
Let’s look at a very real example. Consider PIMCO Dynamic Income Fund, ticker PDI.
PDI is a closed end fund that invests in credit. It has paid very high distributions for years. Investors love it. The yield often looks mouthwatering. Monthly cash shows up reliably. You can see the fund’s price, distribution history, and leverage structure here: https://finance.yahoo.com/quote/PDI
Here is the incentive problem. PIMCO earns fees based on assets under management, not on how sustainable the distribution is.
As long as the fund is large and trading actively, fees flow.
If returns weaken, the fund can continue paying distributions by using leverage, rotating assets, or returning capital. That keeps investors calm. It keeps assets in the fund. It keeps fees coming.
No one is lying. No rule is broken. But the incentives are clear. Smooth income today is often preferred over preserving long term net asset value. When credit conditions tighten, the math eventually wins. Distributions get cut. The price adjusts violently. Investors feel betrayed.
This is not because PIMCO is evil. It is because the structure rewards continuity of payments more than durability of principal. Now compare that with an incentive structure that is much harder to corrupt. Consider Enterprise Products Partners, ticker EPD. Enterprise owns pipelines, storage facilities, and processing assets. It pays a distribution as well. The yield is attractive, but not reckless. You can see its cashflows and distribution coverage here: https://finance.yahoo.com/quote/EPD
Here is the key difference. Enterprise cannot manufacture cash. It must earn it through volumes moving through pipes. If management overdistributes, leverage rises. Credit ratings fall. Borrowing costs increase. Future projects become uneconomic. Pain shows up quickly and visibly. Management compensation and reputation are tied to long term cashflow stability. If they stretch, lenders push back. Ratings agencies downgrade. The market punishes them immediately. That leash is short. Contrast that with a fund structure where leverage can be rolled, fees continue, and distribution optics are prioritized until the last possible moment. Both pay income. Only one has incentives chained to physical reality. This is the corruption Munger warned about. Not theft. Not fraud.
Delay. Delay the reckoning. Delay the pain. Keep the checks flowing long enough that investors confuse consistency with safety. Income Charlie is built around avoiding this trap. It does not assume that every distribution is dangerous. It assumes every incentive must be interrogated. Who gets paid first? If distributions are maintained even when economics deteriorate, ask who benefits.
If distributions fall quickly when conditions worsen, that is often a sign of alignment, not weakness. The cruel irony is that income investors often punish the wrong behavior. They flee at the first cut, even when the cut restores health. They cling to smooth payments, even when those payments are hollowing out the asset. Incentives explain why.
A manager who delays a cut protects assets and fees. A manager who cuts early protects the business. Only one is thinking like an owner. The Munger test is simple and unforgiving. If income can be sustained by accounting, leverage, or optimism, incentives are suspect. If income requires cash to be earned in the real world, incentives are aligned. Show me how the manager gets paid, and I will show you how long your income will last. That is not cynicism. That is survival.
Subscribe to Income Charlie Premium
Click Here!
