Charlie Munger (Trades, Portfolio) is one of the greatest investors of all time. He has earned a multi-billion dollar fortune investing in equities, and if there's one thing that has been more responsible for his success than anything else, it is his patience.
Munger's ability to buy and hold securities, and ride out the peaks and troughs of the market, is legendary. He does not let anything distract him in his quest. He is always focused on the long term, no matter what happens in the short run.
The billionaire investor has repeatedly advocated this approach, but there are some drawbacks to using this strategy, especially for individual investors. That's why I believe that copying Munger's approach may not work for everyone.
The problems of buy-and-hold
Investors like Munger and Warren Buffett (Trades, Portfolio) have achieved tremendous success using buy-and-hold strategies. However, these individuals, and other successful institutional buy-and-hold investors, have many advantages that work in their favor.
For a start, they are connected. Buy-and-hold investing requires a high level of confidence in the business concerned. It may be difficult for individual investors to acquire the information they need to build a strong enough case for investment in a single business.
High-profile investors may be able to pick up the phone and talk to CEOs (both of the company and its customers) to discuss any questions they may have. Individual investors may not have this advantage. They only have access to the information published by the company, which may be limited in its scope.
The second advantage these investors have is the scale of their investments. A billionaire investor can afford to invest all of their money in a single stock. Even if they lose 99% of their investment, they will still be left with $10 million. That is more than enough for most people to live off quite comfortably. With such a large cash cushion, these big investors can afford to take a longer-term view and ignore any short-term market gyrations.
If an investor with only $1 million loses 99% of their investment, the remaining balance of $10,000 is not enough to live off. The percentage loss in these examples is the same, but the financial positions are incomparable. These are examples of the advantages large investors have over individual investors when it comes to buy-and-hold investing.
Of course, these advantages do not guarantee that large investors will always be successful when it comes to long-term buy-and-hold investing. Neither do they ensure that smaller individual investors will always fail.
Nevertheless, I believe they illustrate why it is vital to consider the benefits and drawbacks of any investment approach and never blindly follow the approach of successful investors.
Multiple factors to consider
Investors need to consider multiple factors when they are planning their investment strategy. These factors include individual financial positions and psychological biases, which may influence their investment decisions and potential outcomes.
An investor who can only afford to lose $10,000 may not want to put all of their money in one or a handful of individual stocks. Even if these companies are the next Amazon (AMZN, Financial) or Facebook (FB, Financial), the psychological and financial challenges of making these substantial investments may be too great.
I should make it clear at this point that I am not against long-term investing. In fact, I am exactly the opposite. I am against short-term investing because I believe focusing on short-term horizons brings unnecessary risks into the equation. However, this is just my personal preference. I realize some investors may be more suited to short-term investing.
That does not mean I think all long-term strategies are suitable for all investors. Some investors may be comfortable following Munger's strategy. Others may be better off following Buffett's advice and buying a low-cost market tracker fund. It all comes down to what one feels most comfortable with.
