In the past month, I have increased my exposure to the stock market, primarily in the technology sector, only to see my positions decimated. Stock prices now seem completely divorced from fundamentals. Even companies with substantial cash reserves and well-positioned to ride out the economic storm are now trading at below cash value. To quote Paine, these are truly the times that try men’s souls.
It is in these times that one gains a better understanding of oneself. I am an investor, not a trader. I will not attempt to out-trade the traders. I invest only with money that I do not need now, and am able tolerate even dramatic short-term losses and ride out the storm. I focus on fundamentals and businesses that I can comprehend, because this gives me the intellectual and emotional strength to hold on despite the losses. Investors in Charlie Munger’s partnership saw the value of their holdings decrease about 53% over 1973-74. In fact, for the first years of Munger’s investing life ending in 1974, an investment in his partnership would have yielded a return of just above zero, or a negative return after taking into account management fees. Several of Munger’s investors chose to liquidate in 1974 (despite Munger’s strong pleas), thus seeing their investments halved from 1972 to 1974, while missing out on the 73% gain in 1975. Fortunately, more than 95% of Munger’s investors stayed on with him through those tough years, and when Munger liquidated his partnership, these investors enjoyed a 24% compounded return over 14 years, even through the 1973-74 period. That downturn prompted the following quote from Munger :
“If you, like me, lived through 1973-74 or even the early 1990s… There was a waiting list to get OUT of the country club — that’s when you know things are tough. If you live long enough, you’ll see it.”
I’ve not lived as long as Munger, but I think I’ve seen it.
