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Robert Stephens, CFA
Robert Stephens, CFA
Articles (405) 

Charlie Munger: Seize Rare Investing Opportunities Today

Quality stocks do not frequently trade at low prices

September 01, 2020 | About:

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) vice-chairman Charlie Munger (Trades, Portfolio) does not buy stocks frequently. Instead, he prefers to invest in a small number of businesses for the long run.

In my view, a central reason for this is that the very best investing opportunities do not come along all that often. After all, there have been only 14 bear markets in the past 75 years.

This means that stocks may fail to offer a generous discount to their intrinsic value most of the time. Therefore, investors should seize rare buying opportunities while they are temporarily available.

Seizing the moment

In an interview in April 2019, Charlie Munger (Trades, Portfolio) discussed his longstanding lack of buying activity. During the interview, he highlighted that Berkshire's success has been built on a small number of transactions that have delivered exceptional performance over the long run.

For example, companies such as American Express (NYSE:AXP) and Coca-Cola (NYSE:KO) have long featured within the firm's portfolio. They have each delivered four-figure percentage gains for Berkshire and have proved to be excellent investments.

The rarity of attractive buying opportunities means that Munger and Berkshire chairman Warren Buffett (Trades, Portfolio) are comfortable taking large positions in them when they come along. For instance, the firm purchased a 6.2% stake in Coca-Cola in 1988, while it currently owns around 19% of American Express.

This willingness to make large, infrequent investments in a small number of companies was summarized by Munger in an interview:

"You only get a few opportunities, and you have to grab them aggressively when they come because even in the most favored life, they're really rare. If I took the 30 biggest transactions out of Berkshire (in the past) 60 years, what would Berkshire be? Not much. I mean we wouldn't be poor, but we wouldn't be rich either. Maybe once every two years we had a major opportunity. Not very many."

Buying opportunities in today's stock market

In my view, Munger's comments are particularly relevant in today's stock market. Although large-cap technology businesses have driven the S&P 500 to record highs following the 2020 market crash, many other businesses face uncertain futures that are weighing on their valuations. This may mean there are value investing opportunities on offer that may only be available temporarily.

The prospect of an economic downturn, heightened political risk and further Covid-19 cases may convince some investors to wait for even cheaper stock prices before buying. However, this could mean that they miss out on low valuations that eventually recover as the economy grows.

Of course, one caveat when seizing rare buying opportunities is to ensure that your portfolio is sufficiently diversified. Otherwise, an investor could end up with a small number of stocks in their portfolio that causes them to be exposed to significant "unsystematic" risk.

This is where an investor is reliant on a limited number of businesses to generate returns for their portfolio. A simple means of reducing unsystematic risk is to not only purchase more stocks, but to buy a range of companies that operate in different sectors and locations.

This strategy may strike a balance between obtaining high returns, as well as limiting overall risks by holding a diverse range of businesses. In my opinion, it is a prudent strategy to adopt in today's stock market, where value opportunities exist at a time when the economic and political outlook remains uncertain.

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

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