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Robert Stephens, CFA
Robert Stephens, CFA
Articles (371) 

Charlie Munger on Managing Your Portfolio in a Turbulent Market

Reassessing your investment goals could boost your returns

July 01, 2020 | About:

The stock market’s performance in the first half of 2020 was extremely volatile. It declined 34% within a five-week period, before experiencing a rally that pushed it to within 5% of its price level from the start of the year.

Therefore, some investors may now find it difficult to make decisions when managing their portfolio. Discrepancies between the economy’s uncertain outlook and the S&P 500’s recent gains could make this process even more challenging.

As such, following the advice of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) Vice-Chairman Charlie Munger (Trades, Portfolio) could be useful to many investors.

His focus on company fundamentals and ability to learn from his mistakes could be some of the key reasons for Berkshire Hathaway’s long-term outperformance of the stock market.

Learning from your mistakes

Many investors may have been caught out by the stock market’s volatility in the first half of the year. For example, they may have failed to capitalize on the low valuations that were available across many industries for a limited period of time.

This may cause them to doubt their investing ability. However, no investor can be right all of the time. Inevitably, mistakes are made due to the unpredictability of short-term stock movements.

Learning from your mistakes is arguably key to becoming a better investor. For instance, you may decide to grasp opportunities where quality businesses are trading at low prices much faster in the future than you have done in the past. This may allow you to more easily take advantage of temporary stock market mispricings.

Despite Munger’s track record of high returns, he has previously highlighted that mistakes are commonplace for all investors: “There is no way you can live an adequate life without making many mistakes.”

Staying focused on your investing aims

The stock market’s recent volatile performance may lead you to lose sight of your investment aims. For instance, you may become concerned about the prospect of a sharp short-term decline in the stock market’s price level due to the uncertain economic outlook. This may lead to you to sell some holdings to try and avoid short-term losses.

However, that strategy may be short-sighted if you have a long time horizon. It could mean that you take part in speculation, instead of seeking to invest to build a portfolio that grows over the long run.

Reaffirming your long-term strategy could be a productive use of your time. It may lead you to make logical investment decisions that apportion your capital in a more efficient manner.

As Munger once said, “A majority of life’s errors are caused by forgetting what one is really trying to do.”

Assessing the changing investment landscape

Some investors may seek a simple solution to the stock market’s volatile performance in the first half of 2020. For instance, they may try to find a one-size-fits-all formula when analyzing a business in an uncertain economic period.

However, this strategy may not lead to an efficient allocation of your capital. It may fail to take into account subjective factors, such as the size of a company’s economic moat, that cannot be captured in a simple formula.

Therefore, taking the time to analyze company fundamentals to understand a business and its operations could be a better use of your time. It may lead you to discover mispricings across the stock market that can offer above-average returns in the long run.

Munger has previously highlighted the lack of a simple formula that will lead to investment success: “There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.”

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

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