Howard Marks has one mantra at the core of his investing thesis:
Don't sell your compounders.
He walked through the Amazon example. Stock peaked at $90 in 1999 during the tech bubble but then crashed to $6 in 2001. Down 93%.
If you were smart enough to buy at $6, would you have sold at $12 after doubling? Most people would.
What if you held to $60, up 10x? Most people would sell there.
What if you made it to $600, up 100x? Almost everyone sells at that point.
Here's the problem: Amazon eventually hit $3,300.
If you sold at $600, thinking you'd nailed a 100x return, you left 85% of the total gain on the table.
85%.
Marks' point: the natural inclination to sell when things are up is one of the most expensive instincts in investing. Buffett says he made all his money on 12 ideas across 70 years of investing. Charlie Munger said he made all of his money on just 4 ideas.
Think about what that means.
Great ideas are genuinely scarce. Real compounders, businesses that can keep growing for decades, are rare. When you have one, the job is not to optimize the exit. The job is to hold it.
The big mistake isn't buying too early. It isn't buying at the wrong price. The big mistake is getting off too soon.
You must understand the following: In order to master a field, you must love the subject and feel a profound connection to it. Your interest must transcend the field itself and border on the religious.
Charlie Munger was a good stock picker, but he wasn’t a good seller.
That one flaw of his, made him worth $2.2 Billion. 💵
“I bought my Berkshire stock in 1966, I’ve
been a good picker. Other people know more on exit, I try never to think of exiting.”
In 1997, he bought Costco and never sold a single share. At death, the Costco position was valued at $100 Million 💵
"Think of the pleasure I've gotten from watching Costco march ahead. Exiting is a much less satisfactory life than rooting for people I like and admire.
“So I say, find Costcos, not good exits."
"It takes character to sit with all that cash and to do nothing. I didn't get to the top where I am by going after mediocre opportunities." - Charlie Munger
Peter Lynch: "In a stock, all you can lose is 100% — and I've done that. Your greatest mistakes are selling a good company and then it doubles and then it triples and it quadruples."
"Some of my mistakes are saying, 'Oh my God, this stock is too high!' and I was wrong."
Investor Chris Hohn (2,924% returns since 2004) on 7 types of "moats" as Warren Buffett calls them:
First Hohn clarifies that a "moat" means a business that is difficult to replace & compete with:
"Those are…two risks: substitution risk & competition risk. They become very difficult to overcome long-term. And why is that so important? Competition kills profits…Substitution eliminates your business."
Next, Hohn on the 7 moats:
1. Irreplaceable Physical Assets
"One which most people don't look at—most investors don't really look at, interestingly—is irreplaceable physical assets. We're in a world where people just look at earnings. They don't look at asset value or physical assets.
So we like quite a bit of infrastructure. Airports, for example, one of our investments has been the airport group in Spain that the government privatized, AENA. You can never build a second airport in Madrid or anywhere else. These are natural monopolies. That also applies to toll roads, railroads, and telecom towers."
2. Intellectual Property
"A second [moat] is Intellectual Property that is so advanced it's very difficult to replicate. One space we like is aircraft engines. It's a very complicated product: the materials complexity, the temperatures these engines run at, the metals that would otherwise melt, the thousands of complex parts that all have to come together.
That's a business where there are only two players in narrowbody engines and two in widebody, and there have been no new entrants for more than 50 years. The last new entrant was GE. It's a big industry, but it's so complex it's very hard to enter."
3. "Installed Base"
"Another barrier to entry is Installed Base, which also applies to the aircraft engine business. Once those engines are there, you get the spare parts business that comes with them."
4. Scale
"Scale is another barrier, though that's not a guarantee of a competitive moat."
5. Network Effects
"Network Effects are another important barrier. You can see this in assets like Visa and Meta."
6. Brands
"And Brands are another barrier to entry, though not every brand is powerful. A McDonald's has real value. Some brands are powerful and sustainable, but not all."
7. Customer Switching Costs
"One more moat worth mentioning: Customer Switching costs. Take mission-critical software. Once it's installed, companies are very reluctant to mess with it and switch because of the complexity."
Chris Hohn: "A lot of people think [a good investment] is about growth or something new. Neither of those things, to us, matter by themselves."
"The most important thing, for the type of investing we do, is high barriers to entry. The moats that Warren Buffett has talked about."
(h/t @NicolaiTang1)
Charlie Munger:
“As Warren says, when a business with a reputation for being tough and a manager with an reputation for being brilliant get together, it’s the reputation of the business that remains.”
I've always liked the story of Charlie Munger.
At 31, he was basically at rock bottom.
He was freshly divorced, had lost the house, and his son died of leukemia. Munger paid for every treatment out of pocket and was left with almost nothing.
Yet he kept going.
Instead of drowning in bitterness, he worked, he read, and he kept his head down.
With a new marriage and some stability, he began investing his lawyer's salary into stocks and real estate.
Then in 1959 he met Buffett.
Inspired by someone who was already running his own partnership, Munger founded Wheeler, Munger & Company in 1962.
The wealth started to accumulate. Through real estate projects and his growing investment partnership, Munger became a millionaire around age 43.
Many successful investments followed, many alongside Buffett, and the relationship grew close enough that working together was the only thing that made sense.
Munger wound down his partnership in 1975. Over 13 years, he had compounded at 19.8% annually, against 5% for the Dow.
In 1978, he became Vice Chairman of Berkshire Hathaway and helped build the empire it was set to become.
Somewhere along the way he lost an eye to a failed surgery, but that didn't bother him much. He still had one left. Plenty enough to read annual reports.
When most people think of Munger, they just see a rich old wise man who almost stood in Buffett's shadow. But the truth is that Munger's wisdom didn't come from nowhere.
He worked himself up from rock bottom, a place where many others would have stayed down, to become one of the most respected investors in history. And a billionaire on top of that.
He never let it go to his head. He lived in the same house in Pasadena for decades. The place didn't even have AC. He cooled it with ice and fans.
Hard to find a better role model than that.
Charlie Munger:
“[Warren & I] are both smart enough to have watched our friends who got rich build these really fancy houses & I would say in practically every case they make the person less happy, not happier.”
HOWARD MARKS ON THE MOST EXPENSIVE LESSON OF SELLING TOO EARLY:
"Amazon was $90 in 1999. When the tech bubble burst, it went to $6. It was down 93%."
"What if you were smart enough to buy it at $6? Would you have held to $12? What about $60? You've made 10 times your money, would you sell?"
"What about when it got to $600? You made 100 times your money. Most people would sell."
"At the time I wrote it, Amazon was $3,300. If you sold at $600, you left 85% of the money on the table."
"Buffett says he made all his money on 12 ideas. Charlie Munger said he made all his money on 4. The big mistake is getting off too soon."
Warren Buffett: "The really great business is one that doesn't require good management. That is a terrific business. And the poor business is one that can only succeed — or even survive — with great management."