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John Engle
John Engle
Articles (545) 

Charlie Munger on the Value of Patience

According to Warren Buffett's long-time business partner, patience can be a profitable virtue

October 22, 2020 | About:

Charlie Munger (Trades, Portfolio) is a living legend of the investing world. At 96, he has been intimately involved in the stock market for longer than virtually anyone else alive today. The fruits of Munger's long career are clearly visible in the performance of Berkshire Hathaway (BRK.A)(BRK.B), which he helped Warren Buffett (Trades, Portfolio) build into a wildly profitable conglomerate and investment vehicle.

According to Munger, patience has been a key determinant of his long and successful track record.

Value investing is about more than valuation

Munger has long held the view that rigorous adherence to the core tenets of value investing is the surest path to lasting success in the market. Countless investors have striven to follow in Munger's footsteps, yet some of his disciples seem to believe that only quantitative factors, such as valuation multiples and strategic moats, should matter to a value investor. Many fail to pay sufficient attention to some Munger's most important lessons and insights, especially those regarding the psychological component of investing.

Munger has made a lifelong study of human psychology, which has shaped and informed his whole philosophy of value investing. A value investor is, by nature, a contrarian of sorts. For a value play to succeed, an investor must act when the rest of the market is not, whether through misjudgment, ignorance, or fear. Thus, it is unsurprising that Munger has sought to better understand why people make erroneous, or at least sub-optimal, decisions. By understanding psychology both of oneself and of others, an investor can better identify and seize rare opportunities.

Patience is a profitable virtue

Patience is widely seen as a virtue, and for good reason. But it can also be profitable, according to Munger. Indeed, he has claimed publicly that Berkshire's market-beating success can be attributed in large part to his and Buffett's supremely patient approach:

"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."

In other words, a few key investment decisions – made over the course of several decades –made the difference between an average performer and a titanic success. By remaining patient and keeping a cool head, an investor is able to both avoid making bad decisions and be ready when rare moments of opportunity emerge.

Keep calm no matter the market conditions

Value investors are humans too. They are susceptible to human psychological pressures. As Munger has pointed out many times over the years, succumbing to such pressures can prove costly:

"You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success."

Self control is a valuable skill in any walk of life. It is absolutely vital when it comes to investing. Unfortunately, the bias for action and the impulse to "do something" can cause investors to make irrational decisions. For some market participants, such as portfolio managers and wealth planners, the pressure can be even greater as they may feel compelled to demonstrate value to customers through action. By the same token, success can lead to overconfidence. Thus, Munger has sought to impart to others the value of patience at all times: Be patient in waiting for opportunities, but do not succumb to irrational exuberance when they do emerge.

My verdict

In the stock market, waiting can sometimes be the best strategy. In the case of value investing, it is an essential part of the game.

Buffeted constantly as they are by an endless stream of data, news and signals, investors today may find it harder than ever to keep their cool and wait patiently for an investment thesis to play out. But as Munger's long career has shown, patience pays. Keep calm, carry on and trade carefully!

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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