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Robert Stephens, CFA
Robert Stephens, CFA
Articles (358) 

Charlie Munger’s Advice on Buying Stocks

Following a patient, simple strategy could improve your returns

April 20, 2020 | About:

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) vice president Charlie Munger (Trades, Portfolio) seldom buys stocks. He prefers to adopt a patient strategy and is content to wait for the very best buying opportunities to come along.

This has served him well, judging by the 20% annualized returns recorded by his investment partnership over a 13-year period prior to joining Warren Buffett (Trades, Portfolio) at Berkshire Hathaway in 1975.

By following his simple strategy that calls for investors to be selective in their stock purchases, you could potentially enhance your portfolio returns.

Patient investing

Waiting for the right buying opportunities to come along can be a difficult task. Low interest rates mean that your cash is likely to be earning a sub-inflation return in the meantime. This could encourage you to buy stocks in the hope of generating relatively high returns.

However, Charlie Munger (Trades, Portfolio) warns against this approach: “The big money is not in buying and selling. But in the waiting”.

By holding off on buying stocks until they offer their most favorable risk/reward opportunities, you can generate higher long-term returns. You may be able to capitalize on the stock market’s cyclicality to buy the same stocks you would have purchased today at an even lower price in future.

Being selective

When the right time to buy stocks comes along, Munger is highly selective in terms of which companies he decides to purchase. The value investor once said, “I didn’t get to where I am by going after mediocre opportunities”.

With trading costs being low, it is easy to buy a large number of stocks within a portfolio without accruing high fees. This may improve your diversification, but it can mean that your portfolio’s returns are diluted due to its lack of focus on the best buying opportunities.

Keeping it simple

When you find a company that could be worth buying, it is tempting to rely on a range of formulas, valuation methodologies and other complicated techniques to assess its appeal. Although these can provide guidance as to whether a company has investment appeal, they may not paint the full picture when it comes to the risks and potential rewards offered by a specific stock.

Munger prefers to adopt a simple strategy that focuses on understanding a business rather than relying on complicated formulas. He once said, "People calculate too much and think too little… We have a passion for keeping things simple.”

Being open to counterarguments

It can be difficult to consider the risks of a specific stock. You may become optimistic about its prospects and fail to realize the possible challenges that it faces.

Munger is a keen advocate of considering reasons not to buy a stock before making an acquisition. He once advised investors, “You must force yourself to consider opposing arguments. Especially when they challenge your best-loved ideas.”

Through ignoring your emotions about a particular stock and seeking counterarguments to your view, it is possible to make more complete decisions when allocating your capital. For instance, you may have overlooked a possible threat that changes your overall view of a business.

Disclosure: The author has no position in any stocks mentioned.

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