Since it is impossible to cover all of the advice Munger has given on this topic in one article, I decided to continue on.Â
This installment is devoted to a speech Munger gave in 2008 titled "The Art of Stock Picking." It is highly recommended reading. You can find the full text here.
Below is a short extract, which covers some of Munger's views on patience and how he and Warren Buffett (Trades, Portfolio) are happy to bide their time, waiting for the perfect opportunity. If there's one thing you take away from this text, it should be that the best investors are never in a rush to deploy capital; waiting is an integral part of investing.
The art of stock picking
"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it ”‘ who look and sift the world for a mispriced be that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.
That is a very simple concept. And to me it's obviously right based on experience not only from the pari-mutuel system, but everywhere else.
And yet, in investment management, practically nobody operates that way. We operate that way ”‘ I'm talking about Buffett and Munger. And we're not alone in the world. But a huge majority of people have some other crazy construct in their heads And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they'll come to know everything about everything all the time.
To me, that's totally insane. The way to win is to work, work, work, work and hope to have a few insights.
How many insights do you need? Well, I'd argue: that you don't need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that's with a very brilliant man Warren's a lot more able than I am and very disciplined devoting his lifetime to it. I don't mean to say that he's only had ten insights. I'm just saying, that most of the money came from ten insights.
So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple.
When Warren lectures at business schools, he says, 'I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches ”‘ representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all.'
He says, 'Under those rules, you'd really think carefully about what you did and you'd be forced to load up on what you'd really thought about. So you'd do so much better.'
Again, this is a concept that seems perfectly obvious to me. And to Warren, it seems perfectly obvious. But this is one of the very few business classes in the U.S. where anybody will be saying so. It just isn't the conventional wisdom."