At 98 words, previous poston Stable Investor was the shortest one ever. But probably one of the most important ones, if I was to consider its potential impact on a genuine long term investor’s life.
Read these 98 words by Charlie Munger again…
“Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”
I got a mail from a reader yesterday suggesting that I should have added something else to my previous post apart from just quoting Charlie’s words.
Honestly speaking, I thought that these words were so complete, useful and impactful, that there was no need to add anything else. And whatever I would have added would have been born out of my personal, biased and little experience which I have. So it would not have served any purpose.
But then I thought that may be its a good idea to do it as it will help me document my thoughts about these 98 powerful words. And hence I decided to write this follow up post.
I for the second time, quote these words in this post.
Emphasis below (in red) are mine:
“Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavilywhen the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”
Now let’s see what we can make out of these highlighted words.
These 2 words are not only applicable to markets, but life in general. Being prepared means to have thought through and be ready to take advantage of any situation, good or bad. In markets, there are times when stocks are undervalued compared to the real value which actual business behind the stock offers (Read: What we missed if we didn’t buy at Lows of 2009).
And during such times, it makes sense to put in money and buy those undervalued businesses. But for that, you need to be prepared. Prepared with the knowledge (based on study) that stocks are underpriced; Prepared with free money to buy such stocks; And a strong, disciplined mindset to be ready to hold onto these stocks till they become overvalued.
Simple & Logical Things
We are average investors. We don’t have access to inner circles of companies and hence have no clue about what these companies are planning to do in future. So the logical thing to do here is to not to make big guesses about future. And to stick with companies which have a track record of ‘not-fooling’ investors, have the ability to survive bad times and have potential for making money from their business for themselves as well as for their shareholders.
It’s plain and simple.
No need to rush for IPOsor companies selling future-changing technologies etc. The companies of latter type have mortality rates in excess 90%. And we are not capable enough to identify the remaining 10% of the companies.
Few Major Opportunities
If you have been in markets for last few years, you would know what happened in 2009. The markets were so undervalued that if you blindly bought stocks of any well known company, chances are that you would have doubled you money in next 2-3 years.
Now, lows of 2009 (in terms of valuations) are very rare. And during those times, it looked like a crisis situation from which markets could never recover. But markets move on. Yes. No matter how bad or how good the situations are, the markets move on. And those who realised this fact and took actions accordingly, were the ones who made truckloads of money in next few years.
Willingness To Bet Heavily
Now this one is not easy. It is possible that you are well prepared for the crisis. You also knew what you wanted to buy in case markets crashed. You had the money to buy. And once the markets tanked, you were getting the chosen stocks at prices well below your imagination.
But still you did not buy.
What was the problem?
You did not have the guts to go out their and make a big bet.
Its understandable that for average investors, its tough to make big bets which can alter their financial life dramatically. But its also a proven fact that unless and until you are ready to put substantial amounts of money in shares of good companies when markets and economy is down, you will not get life changing results.
You need all the 3 ‘C’s to become ridiculously rich,
Cash…Crisis and ofcourse…Courage.
This is very simple. You may be great at identifying opportunities, and also have the guts to go out there and bet big money. But unless and until you have the cash to invest, you cannot make use of this opportunity.
Once again, you need all the 3 ‘C’s to become ridiculously rich.
Crisis…Courage and ofcourse…Cash.
Patience In Past
You cannot easily become rich in stock markets. Though it is as simple as the 98 words being discussed, it is not easy at all. We can boast about how we can time the markets and know how to buy low and sell high.
But becoming rich in market, and staying rich (which is much tougher) takes time.
It takes years.
And unless and until you are patient enough, you will take some rash action which will hamper your chances of getting / remaining rich (read: Don’t disturb the magic of compounding)
It might be years before you get an opportunity of the type which can change one’s life. And during all these years, you would need to stay connected with developments of businesses which you have already shortlisted as ones worth buying. You would need to continuously accumulate resources (read: cash) to be ready when the opportunity comes. And you would need to continuously develop the mindset that you will need to buy heavily when the opportunity comes, i.e. you need to build your guts.