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Charlie Munger: Be Patient and Don't Gamble

A patient strategy could pay off in the long run

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Nov 17, 2021
Summary
  • Some investors are taking high risks in buying today’s overvalued shares.
  • A patient approach may lead to frustration in the short run, but could be more successful in the long term.
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The stock market’s recent rise could cause some investors to take greater risks. They may be encouraged by the high returns achieved in a short period of time following the S&P 500’s 100% gain since March 2020. This may lead them to believe recent upward trends will continue and that obtaining a margin of safety when buying stocks is unnecessary.

However, this viewpoint is flawed. Certainly, the stock market could rise beyond its current level in the short run. But investors who have experienced previous bull markets know they ultimately come to an end. Often, they are replaced with periods of intense volatility and share price declines that quickly wipe out gains previously made over a sustained period of time.

Therefore, it could be argued that investors who buy today’s overvalued shares are essentially gambling instead of investing. They are failing to purchase stocks when they are fairly priced. Instead, they are betting the current bull market is bound to continue based on recent trends.

Munger’s patient approach

A patient approach could be a sensible means of navigating today’s stock market environment. This could entail waiting for more appealing buying opportunities to emerge than those present today.

In the short run, this may lead to frustration on the part of the investor if the current bull market continues. They may miss out on further stock price gains while their peers enjoy ever-bloated portfolio values. However, in the long run, a patient approach may allow them to access far more favorable stock prices that equate to a more efficient allocation of capital.

Indeed, Berkshire Hathaway (

BRK.A, Financial) (BRK.B, Financial) Vice Chairman Charlie Munger (Trades, Portfolio) has previously discussed the importance of patience when managing a portfolio. He said, “The world is full of foolish gamblers and they will not do as well as the patient investors.”

Perspective

Of course, it is always difficult to put today’s stock market events into perspective. For example, it can easily feel that a bull or bear market will last for a very long time while it is occurring. Emotions can make it more challenging for any investor to look at the bigger picture.

However, the average bull market has previously lasted for around three years and delivered a gain of approximately 110%. Although the current bull market is behind on both of those figures, the fact there have been 26 bear markets since 1928 shows that patient investors who are prepared to wait for better buying opportunities are very likely to be rewarded many times over during their lifetime.

Constantly being reminded of such facts could make it easier to avoid relinquishing a patient approach to a strategy that involves buying overvalued shares in the hope they will rise even further.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
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