I recently re-read one of Charlie Munger speeches from 1986 to students of the Harvard Westlake business school. In the speech, Munger laid out his rules for living a miserable life, in an attempt to warn students away from these actions.
The full speech is published in Munger’s unofficial biography, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger. It is well worth seeking out if you’re interested.
After reading Munger’s words, I’ve been inspired to create my own list of misery. Without further ado, here are my four prescriptions for a miserable investing life.
Focus on the upside
My first prescription for a miserable investment career is to ignore risk.
One of the biggest mistakes investors can make is to focus solely on the profit potential and ignore the downside.
A great example: Most investors will look at a mining stock and think “this business could double my money.”
However, statistics show less than 10% of mining projects ever make money. That’s a 90% failure rate. Yes, you could double your money, but there’s a 90% chance you’ll lose everything.
If you overlook risk in favour of reward, your investing career might be very short-lived.
Let others dictate your investment decisions
My second prescription for a miserable investment career is to let others dictate your investment decisions.
A big mistake beginner investors make is mindlessly copying the investment actions of others. This can lead you down a dark road. If you don’t know why you own a stock, you’re more likely to make irrational decisions, buying or selling on a knee-jerk market reaction.
Every single investor is different. We all have different skill-sets, risk tolerances and levels of experience. It’s ok not to buy a stock just because you don’t understand it.
Stick to what you know and are comfortable with, the further you deviate from your circle of competence, the more likely it is that you will suffer a severe setback.
Targeting returns is also guaranteed to make you a miserable investor.
Setting a target of, say, beating the S&P 500 by 2% every year only encourages bad behaviour. As Seth Klarman, one of the most successful value investors of all time and the manager of the $30 billion hedge fund giant Baupost once said, “Setting a goal, unfortunately, does not make that return achievable.“
The problem is, setting a goal does not tell you a thing about how to achieve that goal.
As Klarman went on to explain:
“Investment returns are not a direct function of how long or hard you work or how much you wish to earn. A ditch digger can work an hour of overtime for extra pay, and a piece worker earns more the more he or she produces. An investor cannot decide to think harder or put in overtime in order to achieve a higher return.”
Instead, Klarman’s advice is to “follow a consistently disciplined and rigorous approach” and over time “the returns will come.”
Another surefire way to make sure that you have a miserable investing life is to overstretch yourself. This applies to both financial and mental capacities.
You should only ever invest as much as you can afford to lose. And you never put yourself in a position where your financial situation forces you to make investment decisions.
This means building a substantial savings pot to rely on and cover day-to-day expenses if you run into financial difficulty. If you don’t have this insurance policy, a sudden change in your financial situation might force you to make a disadvantageous investment decision (such as selling a stock at the bottom of the market).
The same goes for mental capacity. If you don’t have time to own and monitor 50 companies in your portfolio, don’t. Own a tracker instead.
The more work you take on, the more likely it is you’ll make a mistake — something that’s easy to avoid if you know your limits.