Charlie Munger said, “You don’t make money when you buy and you don’t make money when you sell. You make money when you wait.”
That assertion is so powerful that it is easy to overlook how critical it is. The whole idea of Rule #1 Investing is buying a stock low, and selling it high. But, the key here is that you're doing nothing most of the time. In this video, we're going to talk about just how powerful waiting is and why professional fund managers just can't afford to invest like this:
The first thing we can note is that it is impossible advice for professional money managers to follow. When Charlie says, "Wait" he means, "Wait for 5 years if necessary". If you’ve been given serious money to invest, waiting five years in cash is not a plan; it is a recipe for disaster.
No one is going to let you wait five years and do nothing. They’ll pull their money and move on. And I mean nobody; not your friends, family or fools and certainly not any professional investors who run pension funds. If you wait like Charlie, you’re not going to have anyone else’s money to invest but your own. Charlie can get away with it because he’s Charlie. And Warren can get away with it because he runs Berkshire and the only thing that happens if you pull your money out of Berkshire is that Warren gets to buy the stock back cheap.
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If you are a pro and you sit on the cash and the market goes up, your fund will underperform the market and you will almost certainly be fired.
Every fund managers has heard cautionary tales of young hot-shot money managers who thought they were the next Warren Buffett and who were summarily booted out on their butts after waiting a bit too long for that super deal to come along.
Fund managers learn from other’s mistakes that the best thing they can do is to be very active, have a lot of stocks and stay with the market. This is so deeply embedded into money manager DNA that doing better than the market when the market is going down is actually cause for concern that this fund manager might do worse than the market when the market is going up.
Why? Because the big guys are almost to a person convinced of the truth of the modern portfolio theory that says that you can’t beat the market.
Therefore, if a money manager did better when it went down, he will likely do worse when it goes up… so they’ll pull their money out of that fund at the end of his good year.
Bottom line: Charlie believes there are only a small number of real opportunities to get very high returns with very low risk. Maybe 20 in a lifetime. He said that if you remove the 10 best deals Warren and he ever did, Berkshire would have average market level performance. The only way to get those kinds of returns is to wait and wait for the right opportunity to come along.
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