The S&P 500’s recent crash and subsequent recovery took many investors by surprise. The index’s performance proves that it is impossible to accurately predict stock prices over a short time period.
However, outperforming the stock market over the long run continues to be an achievable goal that has allowed value investors such as Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) vice-chairman Charlie Munger (Trades, Portfolio) to obtain high returns.
Munger's investment strategy focuses on simplicity, continuous improvement and patience. By adopting these traits, you could improve your investment ability and generate higher long-term returns.
Continuing to learn
The world economy is continually evolving, which means that every industry is experiencing change. The pace of change may currently be higher than it has been for many years, since consumers are adapting to containment measures. Therefore, there are new growth opportunities and innovative business models for investors to learn about.
Broadening your knowledge to include a wider range of sectors and businesses could improve your competitive advantage. This may increase your chances of unearthing the most attractive investment opportunities available.
Even though Charlie Munger (Trades, Portfolio) has an enviable investing track record that has allowed him to obtain a net worth of around $1.7 billion, he still aims to increase his knowledge everyday. As Munger once said:
“Warren Buffett (Trades, Portfolio) has become one hell of a lot better investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge hand we had, the record would have been much worse than it is. So, the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”
Being patient
One of the simplest, but most challenging, means of improving your investing ability is to adopt a patient approach. The past performance of the stock market shows that there are likely to be relatively few standout buying opportunities during your lifetime. For instance, there have been just 14 bear markets in the past 70 years.
It is tempting to look around at the low returns available from fixed-income securities and fully invest in stocks. However, holding cash until highly favorable risk/reward opportunities present themselves could be a more efficient means of apportioning your capital.
Munger has previously discussed how patience has had a large impact on Berkshire Hathaway’s market-beating past performance:
“If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.”
Backing your judgment
When opportunities to buy quality companies at attractive prices come along, backing your judgment with a large amount of capital can prove challenging. Often, stocks are priced at their most enticing levels when short-term risks appear to be at their greatest. This may dissuade many investors from buying stocks that they deem to be attractive long-term investments.
However, if a company’s fundamentals are sound and a wide margin of safety is on offer, then it is likely to represent an efficient use of your capital. Therefore, apportioning a sufficient amount of capital to the investment opportunity so that it can make a real difference to your portfolio’s returns is a logical path for any value investor to take. As Munger once said:
“A few major opportunities, clearly recognized as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- Howard Marks on Improving Your Investment Decision-Making
- Warren Buffett on the Advantages and Disadvantages of Holding Cash
- Mohnish Pabrai on Investing in These Precarious Times
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