Not Being Stupid.
It’s the strong swimmers who drown.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying: ‘It’s the strong swimmers who drown.’ ” – Charlie Munger.
“Strong swimmers are the ones who swim way out and potentially get themselves in trouble. Weaker swimmers stay close to shore, where it is safe. In the investing game it is the high IQ math/quant types who use the super complicated trading models who get themselves into trouble. Charlie isn’t interested in complex mathematical models and trading strategies that Wall Street PhDs use to exploit the short-term fluctuations of the stock market. Just the opposite: he is interested in a simple investment strategy that allows him to post superior results over the long term, the foundation of which is trying not to do anything stupid. To Charlie, being stupid means spending more for a business than you get in value.” - An excerpt from the book “The Tao of Charlie Munger” by David Clarke.
Following are a few ways to avoid being stupid in investing/stock market world.
Focus on few good companies: If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But, if you can buy a few great companies, then you can sit on your ass. That’s a good thing.
Understand the Odds: Move only when you have the advantage. You have to understand the odds and have the discipline to bet only when the odds are in your favor.
Don’t predict: We don’t make money predict accurately. Look for good business which you can buy at fair price.
Know when to walk away: It’s important to understand the need for room for error, not just financially but mentally and physically. “Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much loved hand - you must learn to handle mistakes and new facts that change the odds.” - Charlie Munger.
Surprises: Prepare for the worst, and hope for the best. Favorable surprises are easy to handle. It’s the unfavorable surprises that causes the trouble.
Privilege tomorrow over today: In markets as in life, people tend to evaluate risk in terms of short-term harm rather than long-term reward. Stocks undoubtedly offer the potential for short-term harm, despite the fact that they have been enormously predictable and rewarding over time. By privileging today over tomorrow and certain mediocrity over possible greatness, fearful investors provide behavioral investors with an equity risk premium that is improbably large. This premium can be earned by doing the opposite: by privileging tomorrow over today.
Don’t follow the crowd: Don’t get attached to social proof in a field that demands contrarian thinking to achieve above-average results. The problem with viewing crowds as evidence of accuracy when dealing with money is that opportunity is almost always inversely correlated with popularity. What really drives outsized returns over time is an increase in valuation multiples, and increasing valuation multiples relies on an investment getting more popular in the future – something that is always anchored by current popularity.
Margin of Safety: The larger margin of safety isn’t in the price we pay, but in the risks we choose to assume and the businesses we choose to own. The idea is to stick to strong boats, not predict storms. Well-placed businesses in attractive industries with conservative balance sheets run by decent people have built-in resilience. While they’re not immune to trouble, they’re as close as it gets to last man standing. If their survival is in question, I suspect humanity has bigger problems than investment returns.
Newsletter #9
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