The release of Warren Buffett’s letter to Berkshire Hathaway shareholders Saturday is a good time to remember the advice of his business partner Charlie Munger who once said “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Mr. Munger‘s overriding point was that over the long term, investors are rewarded for playing it safe (or passive) rather than attempting to outsmart the market by taking big risk and swinging for the fences.
The Of Dollars and Data investing site further elaborated on this theme in a Feb. 18 post called “Why Avoiding Bad Decisions is More Important Than Making Great Decisions”.
The column starts by noting that in the tortoise and the hare fable, it was hare’s bad decision making – having a nap - that caused the result rather than anything great the tortoise did. The tortoise won by not screwing up.
The author Nick Maggiulli goes on to write, “Investing is a loser’s game, because most investors who attempt to beat the market typically underperform in the long run… The better strategy for investors then is not to try and win, but to not lose…The warning … is crystal clear: avoid the zeros. Avoid them at all costs.”
In this terminology, zeroes take many forms with high fees, taxes, leverage and divorce mentioned as examples. But in each case the negative outcomes are the same – a large unexpected financial loss that interrupts the compound annual growth of portfolios, the process which creates wealth over the long term.
The temptation to buy a speculative stock in hopes of the vaunted 10-bagger (a stock that increases 10 times in value) is strong in every investor, at least at times. Investors, however, should avoid the temptation and the risk of putting up a zero, winning with patience over the long term.
-- Scott Barlow, Globe and Mail market strategist
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Compiled by Globe Investor Staff