Powerful Investment Advice From a Legend
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Powerful Investment Advice From a Legend
Last November the investment world lost an icon in Charlie Munger. For those that don’t know, Charlie was Warren Buffett’s Vice Chairman and business partner for decades. Warren credits Charlie with much of his success in the investment world, as they were friends for almost 70 years. Now, when I mention some powerful investment advice from Charlie, it should be known if it was good enough for Mr. Warren Buffett then it is good enough for you and me.
I came across this nugget of advice the other day during some reading, and I thought it was too good not to share. Let’s look at the quote and then break it apart together, shall we?
“The first rule of compounding, never interrupt it unnecessarily.”
Nine simple words that tell so much. What does it mean and why is it such powerful advice? For starters, Charlie accurately points out that compound interest is truly the 8th wonder of the world. Let’s look at a quick example.
Compound Interest
If you invested $100,000 20 years ago (Dec 04) in the S&P 500, letting all your dividends reinvest, today (Jan 24) you would have a whopping $577,649.49 (fun calculator).
You can see Charlie’s astute observation that first the power of compounding is a miraculous thing. It doesn’t happen overnight, and it is far from a straight line, but over time compound inflation is a miracle drug. It is important to note that not only was it not a straight line but over that 20-year time span you’ve had hyperinflation, global pandemic, Brexit, wars, house market collapse, and many more rough spots for the markets and the world. Heck you’ve even had both Trump and Biden as Presidents and the markets still have had incredible appreciation.
Now, the brilliance in his comment isn’t pointing out that compound inflation is a powerful thing, as many people know that or have said that before. It is a fact that he combines this statement with a simple but brilliant line of never interrupting it unnecessarily.
Timing The Market
You see many and I mean many of us don’t leave well enough alone. We make poor decisions almost always at the wrong time. We act, or overact, during good times and bad. Very rational and intelligent people when it comes to money get extremely irrational. Simply put, we get in our own way. Markets are unpredictable, emotional, and can’t be “outsmarted”. If this is true, why do we continually try to do so with market timing?
Let me show you a truly remarkable example to make my point.
The greatest mutual fund from 1977-1990 was the legendary Peter Lynch’s Fidelity Magellan fund. It returned 29% annualized returns during his tenure. As if that wasn’t remarkable enough here are the mind-bending statistics. Can you guess what the average investor faired during this same period? Would you believe me if I told you that the average investor of the Fidelity Magellan fund during Peter Lynch’s unimaginable reign actually lost money? You heard me right, the average investor simply left with less money than they started with.
Can you freaking believe that? Imagine you stumbled on the greatest mutual fund of all time. Its returns are absolutely unimaginable. All you had to do is give this man your money and get out of the freaking way. If you had done so that $100,000 investment over those 13 years would have been roughly $2,739,468. However, instead of having most people benefit immensely the average freaking investor would have walked away with less than $100,000. And I repeat, “THE FIRST RULE OF COMPOUNDING, NEVER INTERRUPT IT UNNECESSARILY.”
Seeing This In Real Life
I am privileged in the fact that I get a first-row seat to this every single day. I see investor clients of ours question their investment strategies in good times and bad. Oftentimes, my advice seems like a lack of advice yet is truly the best guidance one can give. Mr. & Mrs. client I know it is a ________ period in time, but my best recommendation is to do nothing and let your investments work.
Emotions increase our fight or flight instinct and cause us to make what we believe is a self-preservation decision when in reality it is a self-destructive action. The reality is you don’t have to find the greatest mutual fund of all time to reap the rewards of the markets or compounding. Rather, it is more critical that you find an investing partner or strategy and simply let them do their thing during good times and bad. If so, you will likely be the benefactor of the 8th wonder of the world like so many others.
Thank you, Mr. Munger, for a lifetime of wisdom, and RIP to a legend. As always stay wealthy, healthy, and happy.