“Someone will always be getting richer faster than you. This is not a tragedy.” -- Charlie Munger
The other day I stumbled across the above quote from Warren Buffett (Trades, Portfolio)’s right-hand man Charlie Munger (Trades, Portfolio), and it really stuck with me because, like so much of what Munger says, there is a deeper meaning.
Even though Buffett and Munger are some of the most successful investors of all time, each holding multibillion-dollar fortunes, they know their limits.
If you read through all of the correspondence, both Buffett and Munger have written to Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) shareholders (as well as all the other literature that has been published on them over the years.)
Both investors know their limits, so they are not willing to step outside their comfort zones, even if it means potentially sacrificing returns. I believe investors can learn a lot from this approach because it should help minimize any devastating mistakes, which can hold back your investment success in the long run.
Understand your limits
Understanding and respecting the boundaries of your investment prowess is difficult, but I believe it is essential if you want to be a successful investor.
Investing outside your comfort zone may offer the potential for higher returns, but when something goes wrong, you may be unable to respond in a way that is best for both you and your portfolio. By understanding your limits, you might miss potential investment opportunities and your tons may even suffer, but it is also more likely you will avoid making significant mistakes--which is paramount.
Personally, I know I am not the world's best investor, therefore, I strive to be as rigorous as possible when researching investment opportunities. I only invest in sectors I understand and only buy when I truly understand each business opportunity. Sometimes this has held me back. If I do not have the time to research an opportunity well enough before its stock price recovers, I miss out on profits. Regardless, I would not be comfortable jumping into a position I do not truly know and understand. Therefore, the trade-off is worth it.
I am also quite happy to get rich slowly because I realize I do not have the resources required to be able to consistently and profitably uncover growth stocks for some of the more complex deep-value situations.
“If something is too hard, we move on to something else. What could be simpler than that?” -- Munger
I do have my version of a "too hard pile," and I am not afraid to use it. In fact, almost every idea starts in this pile.
I am also acutely aware that investors tend to build a positive investment case for securities if they think these stocks can generate high returns. Therefore, I try to avoid thinking about a stock's potential and share price (also who else owns it; I am not going to convince myself to buy a stock just because Buffett owns it) before I have considered the fundamentals. If the value is not immediately apparent, or I cannot see how the company makes money, I am happy to avoid. I will not feel comfortable owning something that I do not know enough about.
“We have three baskets: in, out, and too tough. … We have to have a special insight, or we’ll put it in the 'too tough' basket.” --Munger
Building an investment strategy is not just about generating the best returns, it is about building a plan that works best for you. If you do not have an approach suited to your level of education and financial goals, the chances of you being forced to do something that damages your long-term returns is high.
At the same time, having to change strategies costs investors one of the most valuable resources, time.Time and the power of compounding are vital if you want to grow your wealth.
“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.” -- Munger
As an investor, one needs to always be improving their knowledge, not just of the market, but also world events. You never know where the next idea could come from and finding processes to help you live a better, more productive life can be highly rewarding. This is another knock-on effect of knowing your limits. I know I do not know everything, so I am always seeking to learn more.
All in all, Munger’s quote at the start of this article should be a lesson to investors that investing is all about building a strategy that works for you, no one else. Yes, there may be other people getting richer faster than you, but there is nothing you can do about it. You need to be the best you can be and stay within your comfort zone. Munger and Buffett’s record is a testament to the returns that can be achieved by following this logic.
Disclosure: The author owns no stocks mentioned.
