Last week, we looked at five quotes from Berkshire Hathaway's
1. "If you took [Berkshire's] top fifteen [investing] decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stick to your principles and when opportunities came along, you pounced on them with vigor."
I know of very few true "traders" who've accomplished much more than stressing themselves out, making their brokers rich, and making tax day a living nightmare. Sure, a handful have made fortunes exploiting short-term factors through hyperactivity, including Steven Cohen, James Simons, and Ken Griffin, etc. But for every billionaire success story, there are a million wallowing wannabes. In fact, a study published in the Journal of Finance showed that during a five-year period in the early and mid '90s, those who traded the most underperformed the market averages by more than 6% per year. Patience, grasshopper.
2. "If you have competence, you know the edge. It wouldn't be a competence if you didn't know where the boundaries lie. Asking whether you've passed the boundary is a question that almost answers it self."
Munger's referring to an investor's "circle of competence," or the areas of investing you know like the back of your hand. For long-term investors, knowing and respecting this boundary is vital. Take some of Buffett's better-documented investments, such as Coca-Cola
Contrast that with another company Buffett never showed much interest in -- Microsoft
3. "People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts."
If you knew what the winning lotto numbers would be, would you tell anyone? If someone truly knew what the future had in store, they'd have a huge incentive not to tell you, and to exploit as much of the advantage as they could. The people most eager to slip you secret forecasts are usually focused on selling you something. The best anyone can do is make an educated guess on the probabilities of different outcomes, then hope for the best.
4. "Stocks are valued partly like bonds, based on roughly rational projections of producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up so far. This situation can conceivably produce much mischief."
Finally, this last quote needs so further explanation, yet it remains one of the most elusive financial skills out there:
5. "Spend less than you make. Always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer!"
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Fool contributor Morgan Housel owns shares in Berkshire and Procter & Gamble, but none of the other companies mentioned in this article. Microsoft, Coca-Cola, and Berkshire are Motley Fool Inside Value selections. Berkshire is also a Stock Advisor pick. The Fool owns shares of Berkshire Hathaway, and its disclosure policy has nothing else to add.