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Rupert Hargreaves
Rupert Hargreaves
Articles (465)  | Author's Website |

Charlie Munger's Secret

The guru's method for successful investing is to do nothing

November 29, 2017 | About:

Some investors spend a considerable amount of time researching the market and tweaking their portfolios. I follow several investors and traders on Twitter who never seem to sleep. They are always doing some equity analysis or looking for ideas.

To me, this approach seems like a waste of time and effort (much too hard). Yes, you might be able to juice your returns by working all hours of the day on your strategy, but when you consider how much time and effort you put in, is it worth it? When you factor in the time spent slaving over balance sheets to find the best deals, or charts to find the best momentum plays, the returns may not look as rosy as they were before.

You might think your time is free, but in reality, it is not.

Charlie Munger (Trades, Portfolio) has the same view. Munger is an advocate of “sit on your ass investing,” a concept he introduced at the 2000 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting.

Do nothing investing

The logic behind this strategy is simple. For investors to succeed over the long term, with minimal effort, they should buy high-quality businesses and do nothing. Over time, compounding will do all the heavy lifting, and you should make lots of money.

What’s more, because this strategy does not require much effort, you can continue compounding for longer.

The first part of this process is to find companies that are suitable long-term compounders. This is the easy part. Over the years, Munger and Warren Buffett (Trades, Portfolio) have issued some guidelines on what they are looking for in an exemplary compounder.

Munger’s speech, "A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business," breaks it down nicely:

“Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.”

Similarly, here is what Buffett said about Coca-Cola (NYSE:KO), See's Candies and Buffalo News at the 2003 Berkshire Hathaway meeting:

“The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth. But there are very very few businesses like this. We look for them [areas to wisely reinvest capital], but they don't exist.”

At the same meeting, Munger said:

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there's never any cash. It reminds me of the guy who looks at all of his equipment and says, 'There's all of my profit.' We hate that kind of business.”

At the Financial Crisis Inquiry Commission (FCIC) in May 2010, Buffett said:

“If you've got a good enough business, if you have a monopoly newspaper, if you have a network television station — I'm talking of the past — you know, your idiot nephew could run it. And if you've got a really good business, it doesn't make any difference."

As mentioned, finding these businesses is the easy part. Once you have located them, price is not necessarily a stumbling block. A company earning 20% to 30% on capital is always going to be expensive, but over time the compound returns will really add up.

The hard part is holding onto the stocks for the long term and letting your wealth compound. If you can sit on your hands and let your money grow, that is the key to successful investing.

Unfortunately, there is no secret key to success here. You need to discipline yourself to not jump at the market's every move and look to the long term. If you are able to do this, everything else should start to fall into place.

Disclosure: The author owns no stocks mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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