I recently discussed the appeal of "cigar butt" investing, and why investors like Berkshire Hathaway's (BRK.A, BRK.B) Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) no longer deploy capital in poor, cheap businesses. In a 2017 speech at the University of Michigan, Munger explained why long-term results are best achieved by looking at stocks from an ownership standpoint.
Always think in the long term
What is a share? At the end of the day, stocks represent an ownership share in a business, not just a piece of paper (or electronic certificate) to be traded in a marketplace. This perspective helps to explain why investors like Munger and Buffett ultimately decided to move on from investing in cheap, bad companies:
"It was kind of scroungy and unpleasant when you're firing people, so we just ran the money out and bought better businesses, and we've been doing it ever since. Coming to business - not as business school graduates - but as people who had owned portfolios of securities: we thought like capitalists, because we were always in the shareholder mindset.
A lot of people running the businesses think like careerists. Believe me, you've got to think like a careerist to some extent if you're in a career, but it also helps to look at the business strategy problems as though you're an owner. My advice to you is you never want to be a careerist so much that you don't see it from the owners point of view."
Munger clearly has some qualms with the activist investor mindset wherein someone buys a failing business, fires a lot of people and fundamentally reorganizes it. For one thing, it's difficult to do, especially if you don't have any expertise in the particular industry that the company operates in.
Although most average investors will never have enough capital to buy a publicly traded business in its entirety, they can still learn a lot from Munger's long-term-oriented mindset. Good businesses do one thing particularly well - they compound the capital invested by their shareholders. The longer you own a good business, the more it will compound your investment.
For instance, $10,000 invested in a business that increases earnings by 10% a year for 10 years will yield a final amount of $16,300 - a 63% increase. However, investing the same amount in the same company for 20 years will yield a final amount of $26,500 - a 165% increase. Doubling the investment time increased the final return by a factor of 2.62. And the longer that you hold on to that quality business, the more efficient the compounding factor will become. That is why Munger likes to think like a lifetime owner of the businesses he invests in.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Why Did Warren Buffett Move on From 'Cigar Butt' Investing?
- Howard Marks Explains Why Investors Need to Pay Attention to Market Value
- Is It Possible for Small Investors to Do Well?
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