norswap

aka Nicolas Laurent

Charlie Munger's Big Lesson: Prepare for Opportunity

10 Oct 2017

This is the first post in a serie about Charlie Munger's wisdom.

When proper circumstances present themselves, act with decisiveness and conviction.

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."

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.

Our game is to recognize a big idea when it comes along, when one doesn’t come along very often. Opportunity comes to the prepared mind.

You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing. [...] You should remember that good ideas are rare — when the odds are greatly in your favor, bet heavily.

What is the most important personal quality an investor can have?

Patience... followed by pretty aggressive conduct. It is given to human beings who work hard at it—who look and sift the world for a mispriced bet — 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.

It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

Ted Williams is the only baseball player who had a .400 single-season hitting record in the last seven decades. 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 dont 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. This way, no matter what natural ability you start with, you will substantially increase your hitting average.

One common problem for investors is that they tend to swing too often. However, the opposite problem is equally harmful to long-term results: you discover a 'fat pitch' but are unable to swing with the full weight of your capital.

We just look for no-brainer decisions. As Buffett and I say over and over again, we don't leap seven-foot fences. Instead, we look for one-foot fences with big rewards on the other side. So we've succeeded by making the world easy for ourselves, not by solving hard problems.

You have to be aversive to the standard stupidities... you don’t have to be smart. We look for easy decisions, but we find it very hard to find "easy decisions". Really, I’m just out there trying to be non-idiotic.

Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.

When proper circumstances present themselves, act with decisiveness and conviction.

  • Be fearful when others are greedy, and greedy when others are fearful
  • Opportunity doesn't come often, so seize it when it does
  • Opportunity meeting the prepared mind: that's the game

Summary

Addendum

The above seems to imply big make-or-break decisions. In reality, while the bets should be few and far between, there should be enough of them to balance the potential losses.

You don't win by predicting the future; you win by getting the odds right. You can be right about the future and still not make any money. At the racetrack, for example, the favorite horse may be the one most likely to win, but since everyone wants to bet on the favorite, how likely is it that betting on the favorite will make you money? The horse to bet on is the one more likely to win than most people expect. That's the one that gives you the best odds. That's the bet that pays off over time.