Charlie Munger is famous for being rational, but being smart alone is not enough to achieve investment success. Great investors understand that the most common enemy of returns is between our two ears; that is, it is ourselves when we succumb to fear and greed. During an interview with Jazon Zweig, Munger provided a recipe for seizing investing opportunities:
"You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is."
Successful investing requires "this crazy combination of gumption and patience and then being ready to pounce when the opportunity presents itself because in this world opportunities just don't last very long."
I believe the most important part of this answer is the connection and balance that we must have between rationality and gumption. As Munger says, if we are able to value companies and accurately figure out what they are worth, it would be of no use if we do not take advantage of the differences between our estimates and the market price if we fret too much or share the market's feelings of fear and greed.
As Warren Buffett has mentioned, the market is there to serve us, not to instruct us. Also, a critical point is to know our circle of competence. While we could be very good at understanding a sector, it does not mean that that knowledge can be directly applied to other sectors. This lack of knowledge can make us incur adverse results.
Once we are rationally certain that we have a good estimate of value, we can proceed to take advantage of a mispricing, if available. Munger correctly states that good opportunities do not last long. So when we are able to recognize one fat pitch in the sweet spot, we need to be ready and willing to swing away without fear and with a good amount of resources to make the win significant. That, Munger mentions, is the way big money is made.
What do you think?
