Trying to make a million in the stock market isn’t that hard… if you have a rigorous savings plan in place and time on your side. However, most investors fail to hit this key benchmark for one simple reason; they’re trying to be too smart.
Warren Buffett and his right-hand man Charlie Munger have made tens of billions of dollars by investing in the stock market, and if you read through their annual correspondence to investors, as well as listening to interviews with these two mega-investors, it becomes clear that a large part of their strategy is based on simplicity.
You don’t need to be a genius
Munger is the most prominent advocate of simplicity in investing.
Before Buffett and Munger became partners, Buffett was content with his strategy of buying stocks trading at deep discounts to intrinsic value. However, Munger convinced him to change his approach to purchasing high-quality businesses at reasonable prices, sitting back and watching the money roll in.
This investment style isn’t glamorous (most of the time there’s nothing to do), but it’s highly profitable. As my Foolish colleague Zach Coffell highlighted in an article last year, Munger claims that the key to successful investing is to do nothing 99% of the time, but aggressively seize the 1% opportunity.
But there are to other elements to Munger’s strategy that are often overlooked.
Don’t be stupid
Investing in the market’s best companies is relatively easy compared to the desire to chase investment fads and trends. That’s why Munger believes that the single most crucial element of an investment strategy is to be “non–idiotic”, or to put it another way, in order to be a successful investor you have to avoid making stupid mistakes.
This might seem obvious at first, but it’s hard to put into practice. For example, there’s an overwhelming volume of research which shows that cheap stocks outperform the market over the long run. However, the data also shows that during the depths of the financial crisis, when equities were trading at the lowest level in a decade, investors were rushing for the exits. Buffett and Munger, knowing that the data was correct, dived in and have made billions as a result.
Being “non-idiotic” also means avoiding highly speculative investments.
Most companies trading on the AIM market are highly speculative and in their early stages of growth. The risk of a total capital loss here is high, and the chances of you finding a 10- or 20-bagger are slim. So, why take the risk?
If the odds are stacked against you, you’re taking an unnecessary risk. If experienced investors such as Neil Woodford struggle to find winning small caps or private early-stage businesses, then individual investors will really struggle.
Stick with what works
Munger’s strategy is about sticking to knowing what works.
We know investing in high-quality companies produces steady long-term returns with minimal risk of total capital impairment. So why should we try to beat the market using a strategy that’s untested?
Investors can’t control the market, but they can skew the odds of success in their favour by using proven strategies, not taking unnecessary risks, and letting the magic of compounding do all the hard work.