A few months ago in this same commentary, I wrote that private investors have the privilege of biding their time, waiting and doing nothing. With asset prices so overinflated right now, the ability to watch and wait is more important than ever. Having just read Charlie Munger’s new book on investment strategies (Tren Griffin, Charlie Munger, The Complete Investor, Columbia Business School Publishing, Columbia University Press, New York 2015), my views have been entirely confirmed.
For decades, Charlie Munger has been the partner of Warren Buffett, possibly the most successful investor of all time. Munger describes his and Buffet’s approach as follows: “We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business.” (p. 94)
It requires a great deal of discipline to do nothing, especially when everyone else is taking action. But it is often better to do nothing than to do something foolish. “We’ve got great flexibility and a certain discipline in terms of not doing some foolish thing just to be active – discipline in avoiding just doing any damn thing just because you can’t stand inactivity.” (p. 93 onwards)
We have all learned that people who do more and work harder will achieve more. “No sweat, no glory” is a saying that we are all familiar with, but it is one that often causes more harm than good. Inactivity leads many people to have a guilty conscience. In the case of athletes, it can actually lead to over-training – experienced sportsmen and women have learned that more training doesn’t necessarily mean better results; more intelligent training does. And the same applied to investing. The author of the book about Munger writes that “doing nothing” can be very difficult indeed, “as there is a tendency to think that the level of activity is somehow correlated with value” (p. 91).
Munger admits that it would be great if, “finding great investments happened all the time. Unfortunately, it doesn’t”. He describes his and Buffet’s approach: “We’re perfectly willing to wait for something decent to come along. In certain periods, we have a hell of a time finding places to invest our money.” (p. 91)
All of this applies equally to investors who, just like Buffett and Munger, are working with extended investment horizons. Short-term speculators can be active in any situation. All they are really interested in is finding someone, quickly, who is willing to buy their asset – shares, real estate or other assets – at a higher price than the speculator originally paid. These methods are no different to “chain letters” or other pyramid schemes, and can deliver short-term “successes” (which in cases means nothing more than: being lucky). I certainly wouldn’t rely on “luck”. These methods are also a world away from Buffett and Munger, who normally hold onto their investments for the long haul.
Doing nothing can also sometimes mean turning down opportunities to make short-term profits. Many people find this especially difficult, worrying that apparently more successful investors will make fun of them. Buffett and Munger were ridiculed in the late 1990s, when they stood back and didn’t get sucked into the excesses of the “New Economy”. A major financial magazine even ran the headline: “What’s wrong, Warren?”.
The situation was similar on the overheated U.S. real estate markets between 2006 and 2008, when so-called “flippers” made massive profits, buying houses before they were even completed in order to sell them almost immediately for more. In my opinion, such strategies do not count as investing.
You are at most risk of succumbing to ill-advised temptation just after you have made a lot of money from a successful investment. That is when you are most likely to over-estimate your own abilities. These are the moments when you have the least chance of duplicating your successes. After all, if you have sold at a high price, the chances are that the market is bullish, which makes it even more difficult for you to extract any value when reinvesting. In terms of self-protection, these are the moments when you are better advised to do nothing. Of course your advisors, who only earn when you are active, will tell you to do the opposite. Or have you ever met a hairdresser who has told your wife to leave her hair as it is rather than suggesting a new style, colour or other expensive treatment?
So what are my current strategies?
- Shares: I have instructed my bank to buy a fixed value of shares in an MSCI World ETF each month. The shares are bought automatically, irrespective of share price movements. I will only invest more if there is a stock market crash.
- Gold: Hold, do nothing. This merely serves as insurance in the event of a serious financial collapse.
- Liquidity: Park funds in short-term (!) German and American government bonds.
Residential real estate: Sell, provided you are outside the capital gains speculation period. Alternatively, convert rental units into condominiums, selling them successively as they become vacant. For real estate still covered by the speculation period: Hold.