Munger on Activity vs Patience

Charlie Munger’s 1998 speech, Investment Practices of Leading Charitable Foundations, observes how large charitable foundations and university endowments managed their money — and what they often got wrong. The speech may be addressing charitable foundations, but it has lessons for individual investors too.

One aspect of his speech is the importance of patience and doing nothing, versus constantly engaging in investment activity. What Munger says is that activity doesn’t necessarily equal progress — or long-term returns.

Why activity isn’t always a good thing

Munger was against excessive activity and constant portfolio shuffling because long-term wealth comes from compounding and compounding requires patience — or the willingness to do nothing.

• Every trade creates friction: Munger says that with every time an investor invests or lets go of an investment, they incur a cost. Some of these costs are upfront, like brokerage charges or taxes. But others may be less transparent, Others are less visible, including bid-ask spreads, portfolio turnover and the opportunity cost of selling a quality investment too early. Individually, these costs may appear insignificant, but taken together, they reduce the amount of capital left to compound over time.
• Activity is driven by overconfidence: This ties into one of Munger most-repeated lessons: the dangers of overconfidence. Many individual investors believe they can game the market, identify the perfect moment to invest, what to invest in, and even predict short-term movements. This overconfidence — which may not be backed up by fundamental knowledge about a business — spurs unnecessary trading and constant portfolio adjustments. And the truth is, consistently making brilliant decisions is rare.
• Wealth takes time: Wealth creation doesn’t happen overnight. Compounding takes time, but is powerful in wealth generation when left to do its magic. Constant trading interrupts an investment before it has time to grow and realise its potential. Munger says in his speech, “The foundation can follow the example of Berkshire Hathaway, and thus get total annual croupier costs below one-tenth of one percent of principal per annum, by investing with virtually total passivity in a very few much-admired domestic corporations.” Simply put, less is more, both in terms of activity and what you invest in.

The enduring lesson…

Munger isn’t against reassigning one’s portfolio. He simply says that a constant flurry of activity does not equate to intelligent investing.Many of the greatest drivers of long-term returns — such compounding, business growth and value creation — take years to unfold. And they reward patience, not activity and restlessness.