A successful investor needs both knowledge and discipline, Warren Buffet's right-hand man Charlie T. Munger says in a piece on finews.first.
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Say you want to become the best tennis player in the world. You might try it for a while and then realize that the entire thing is hopeless. There are others who have more talent and are better. But what about becoming the best plumber in the small Minnesotan town of Bemidji? Two-thirds of the way is up to you. Will and intelligence are important but not as much as discipline. It might take a while to learn the craft of plumbing but then you will have mastered it.
What I am trying to get to. We can achieve a great deal in life by acquiring skills and furthering our knowledge to become more competitive. Even if none of us ever win a major tennis tournament. The school of life shows us that we should aim to become good plumbers in Bemidji. Very few people will ever win a Grand Slam.
«And believe me, that is hard enough»
The same thing is true of investments. I don't want to talk about emerging markets or complicated arbitrage structures. Just about choosing stocks from normal companies. And believe me, that is hard enough.
What is the inherent nature of the stock market? Many years after I graduated from university, the efficient market hypothesis was all the rage. No one could beat the market. The textbooks since then have been all about that.
What is much more interesting than all of that is that one of the greatest economists in the world is also a Berkshire Hathaway shareholder. While he was teaching students that stock markets were entirely rational, he put his own money in Berkshire and got rich.
«If the only tool you have is a hammer, you tend to see every problem as a nail»
Is the stock market really so rational that no one can beat it? Yes and no. The market has both efficiencies and inefficiencies. Intelligence is needed but discipline is more important in order to outperform it in the long term. That is something that not everyone can do. One of the iron rules of life is that only 20 percent of people can belong to the top 5 percent. That is just the way it is.
I believe that those who hold too tightly to the efficient market hypothesis are crazy. It is something for those who have deep mathematical talent because you can do very pretty things with it in that way. The problem is that its basic assumptions do not tie up with reality. If the only tool you have is a hammer, you tend to see every problem as a nail.
When I was young, I played poker with a man who earned his livelihood from harness racing. The race track is a relatively inefficient market. There is not as much so-called intelligence there as there is in normal horse racing.
«But you need discipline for that!»
My poker friend made most of his money from betting. He didn't do it very often but he earned a considerable fortune after deducting all costs. But his example is the exception rather than the rule. But even if the market is not completely efficient, there will always be people who do better than others with a measure of shrewdness – or even fanaticism.
The same is true for the share market. Those who keep their costs under control by waiting for the right opportunity and not trading actively improve their chances of having above-average returns. But you need discipline for that! In short – what successful horse racing gamblers and stock investors have in common is that they don't bet very often.
Charles Thomas Munger (born on 1 January 1924) is an American investor, businessman and philanthropist. He is the deputy chairman of Berkshire Hathaway and one of Warren Buffett's closest confidantes. Like Buffett, he was born in Omaha, In the Second World War, he was a meteorologist for the US Army after studies at the University of Michigan. In 1948 he graduated with a degree from Harvard Law School. He met Buffett 11 years later at a dinner party. As successful value investors, both of them are regarded as leading exponents and an example to investors around the world. This contribution is a small excerpt from a Munger speech presented at the USC Marshall School of Business that has been authorized by wealth management firm Flossbach von Storch.
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