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Rupert Hargreaves
Rupert Hargreaves
Articles (777)  | Author's Website |

Charlie Munger on Being a Disciplined Investor

Some thoughts on the importance of discipline

February 05, 2019

The world's best investors have developed a trait many other investors struggle to understand. They are not afraid to say no to investment opportunities, even when they may look extremely attractive. Indeed, Warren Buffett (Trades, Portfolio) once remarked, "The difference between successful people and really successful people is that really successful people say no to almost everything."

Really successful people are highly disciplined in most areas of their lives, and they carry this over into the investment arena. Buffett and Charlie Munger (Trades, Portfolio) have both achieved the records they have because they have discipline in choosing good ideas. They are not willing to chase an idea just because it might look attractive. Only after rigorous due diligence will they make a move, and even then they will only decide to invest if they know and understand the business and it falls within their circle of competence. If not, it will not feature in their portfolio. Buffett once summed up his approach this way:

"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 get to make in a lifetime. And once you’d punched through the card you couldn't make any more investments at all. 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."

The quote explains Buffett's investment perspective. Even though we know he has made more than 20 investments over his career (the real number is more than 2,000), just thinking you can only make 20 trades is enough to inspire a different set of ideas in your head.

Any investor who thinks like this will undoubtedly make an extra effort to avoid the worst investments and save their money for the best opportunities. When you find these opportunities, acting with conviction should not be a problem, as investor Li Lu once said:

"Ted Williams is the only baseball player who had a 0.400 single-season hitting record in the last seven decades. In 'The Science of Hitting,' he explained his technique. He divided the strike zone into seventy-seven cells, each representing the size of a baseball. He would insist on swinging only at balls in his ‘best’ cells, even at the risk of striking out, because reaching for the ‘worst’ spots would seriously reduce his chances of success. As a securities investor, you can watch all sorts of business propositions in the form of security prices thrown at you all the time. For the most part, you don’t have to do a thing other than be amused. Once in a while, you will find a ‘fat pitch’ that is slow, straight, and right in the middle of your sweet spot. Then you swing hard."

It is, however, important to make sure the good opportunities are actually good and not just ones other people think will make money. As Munger once noted in regard to Benjamin Graham's philosophy:

"It's not the bad ideas that do you in. It’s the good ideas. And you may say, ‘That can’t be so. That's paradoxical.' What he [Graham| meant was that if a thing is a bad idea, it's hard to overdo. But where there is a good idea with a core of essential and important truth. You can't ignore it. And then it's so easy to overdo it. So the good ideas are a wonderful way to suffer terribly if you overdo them."

For many, this approach is too hard to follow, especially in bull markets when everyone else seems to be getting rich and you're not. The critical point to keep in mind is investing is all about achieving a comfortable medium for yourself and investing in things you are pleased with.

If you're not comfortable investing in certain assets, it is best not to as the mistakes of doing so can ultimately be more costly than avoiding the whole asset class altogether. As Munger once described:

"f you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy. Soros couldn’t bear to see others make money in the technology sector without him, and he got killed. It doesn’t bother us at all [that others are making money in the tech sector]."

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

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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