Charlie Munger Handling Big Losses

BM C14 01

Majority of the big winners’ companies have also seen the worst period during their journey. It is not necessary that if the company has delivered a 25%+ CAGR then it will get into the smooth way. There always be a huge up and downs to it. Many storms such companies have experience but as investors, we need to stay during those storms if we have made an investment into the great companies then only we can able to earn good returns from it.

Mr. Munger has established a hedge fund company, Wheeler, Munger & Company in the year 1962 which has a pre-fees return of 37.10% during the year 1962 to 1969. And 14-years of partnership, Mr. Munger has delivered around 19.82% CAGR compared to 5.20% CAGR with the dividend of S&P500.

BM C14 02

If we love when stocks moving into the upward direction then we must have to be ready to accept its downward journey also. It is a part of the game and without accepting the losses, we cannot become a seasoned investor. Even Mr. Sachin Tendulkar cannot hit a century into the each of the match, some of the match having a ZERO score also. If he only focuses on the century then it might be possible that he cannot able to play well. Similarly, if we keep focussing on the scoreboard then we may not able to create a good investment fortune.

Mr. Munger has an investment of 61% of his portfolio to the Bluechip stamp and original business of the bluechip stamps has started getting deteriorate from the peak revenue of $12.42 crore in 1982. Bluechip has made an investment into the See’s Candies, the Buffalo Evening News, and Wesco Financial before getting merged into the Berkshire Hathway in the year 1983.

The firm of Mr. Munger has lost 31.90% in the year 1973 and 31.50% in the year 1974 v/s 13.10% and 23.10% decline of Dow Jones respectively. And he bounces back by 73.20% of the gain to the year 1975 but few of the large investors have left him which break him mentally and emotionally. He decided to liquidate the partnership. But after the worst performance during the year 1973-1974, Mr. Munger has delivered a 24.30% CAGR before fees.

BM C14 03

We need to be mentally ready for the big losses during our investment journey if we want to earn a decent return for the long term. If we are not mentally and emotionally ready we will not able to survive to the investment journey.

BM C14 04

We should not sell stocks just due to a fall in the price of the stocks. If we keep on doing such practices then we will not survive for the long term to the stock market. If we know that stock can fall by 50% after we bought it, then we will make a position which is comfortable for us during the decline.

BM C14 05

We need to make a balance between equity and debt as per own comfort. So that we can able to play an investment game in a good manner. Also, get the strength of absorbing such shock.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

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