Charlie Munger revealed his not so secret investing tricks in how much diversification you need.
At the 2019 Daily Journal Corporation annual meeting, Charlie started his tales of wisdom by saying, “the idea of diversification makes sense to a point if you don’t know what you’re doing and you want the standard result.”
If you to know the secret to Charlie’s investing success, it’s this simple as he said, “the whole trick of the game is to have a few times when you know that something is better than average and to invest only where you have that extra knowledge. And then if you get just a few opportunities that’s enough. What the hell do you care if you own three securities and J.P. Morgan Chase owns a hundred? What’s wrong with owning a few securities?”
Charlie said how his best friend and partner Warren Buffett “always says that if you lived in a growing town and you owned stock in three of the best enterprises in the town, isn’t that diversified enough? The answer is of course it is — if they’re all wonderful places.”
If you want above average returns, then Charlie said, “the whole idea of diversification when you’re looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task. What fun is it to do an impossible task over and over again? I find it agony.”
Charlie explained how this rich old woman who used to live in the “biggest mansion in Omaha’s best neighborhood” was a great example of this investing trick working brilliantly. She bought five good stocks, and “then she never changed those stocks. She never paid any adviser. She never did anything.”
Charlie also told a quick story about Li Lu, the Chinese Buffett. He said that “Li Lu just went where the fishing was good and the rest of us are like cod fishermen who are trying to catch cod where the fish have been fished out” because Li Lu simply took advantage of Chinese opportunities rather than dealing with the “highly competitive American market.”
Someone asked for Charlie’s advice in how to compound our money for the long term, and he answered, “my advice for a seeker of compound interest that works ideally is to reduce your expectations. Because I think it’s going to be tougher for a while. And it helps to have realistic expectations. Makes you less crazy.”
He went on to cite some examples of potential rates of return you might expect given inflation considerations back in 2019, before double digit inflation happened. But the more important moral of the story is no matter what the economic conditions are, the “ideal way to cope with that is to say, ‘If that happens, I can have a happy life.'”
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