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Robert Stephens, CFA
Robert Stephens, CFA
Articles (374) 

Charlie Munger on the Value of Efficiency

Using your time and capital wisely could produce higher returns

June 23, 2020 | About:

It can be difficult for value investors to decide how to use their time and capital efficiently when there is a wealth of information freely available. It is tempting to use a wide range of data to develop an overly-complex investment strategy. Likewise, you may be distracted by short-term stock price movements that detract from your capacity to identify buying opportunities.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) vice-chairmanCharlie Munger (Trades, Portfolio) has a track record of apportioning his time and capital in an efficient manner. In my view, this is a key reason for his long-term outperformance of the stock market.

The future is unknown

Many investors spend a great deal of their time trying to predict the future. For example, they may attempt to accurately forecast the economys future performance so that they can apportion their capital more effectively.

However, estimating the future is impossible. Assessing the strengths and weaknesses of companies could be a more efficient use of your time. It may enable you to find a larger number of businesses that can more easily adapt to a changing macroeconomic outlook than their sector peers.

As Munger once said, Knowing what you dont know is more useful than being brilliant.

Selling existing holdings

It is natural for investors to become emotional about their existing holdings. However, holding on to a stock even when the company is no longer growing may produce an opportunity cost that makes it an inefficient use of your capital. There may be other opportunities available that provide more attractive risk/reward ratios.

As Munger once said: Part of what you must learn is how to handle mistakes and new facts that change the odds. Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand.

Worrying about the short run

The stock markets performance in 2020 highlights the volatility that all investors can experience. The S&P 500 declined 34% before rising 40% to trade close to its level from the end of 2019.

Despite this, many long-term investors are likely to have worried about their portfolio performance over the past few months. This is illogical, since paper losses are ultimately unlikely to matter to investors who have a long time horizon. It is also an inefficient use of your time, since it could have been spent identifying quality businesses that had wide margins of safety on offer for a limited amount of time.

Munger previously highlighted his policy of ignoring short-term price fluctuations and reviewing his investment decisions on a long-term basis, saying, We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.

Using a simple strategy

Value investors may be tempted to use an ever-increasing amount of data to decide how to apportion their capital. However, a more complicated investment strategy does not necessarily equate to better results.

A simpler approach that focuses on key investment principles, such as assessing company fundamentals and valuing a business, could yield higher returns. It may also provide you with a greater amount of time to locate favorable investment opportunities that produce modest outperformance of the stock market on a consistent basis.

As Munger once said, You dont have to be brilliant, only a little bit wiser than the other guys, on average, for a long time.

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

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