At a recent talk at Trinity College in Dublin, value investor Mohnish Pabrai (Trades, Portfolio) was asked what he has learned from studying the investment philosophies of Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio). Regular GuruFocus readers will probably not be surprised to read that he spoke at length about the value of patience and the importance of sticking to a circle of competence, both pillars of value investing thought. However, Pabrai explained these concepts in a fascinating way to his audience, utilizing a few thought-provoking examples.
Patience is a virtue
Pabrai began by saying that the access to real-time price changes in the equity markets has made it more difficult to be patient. If you have 24-hour access to the current valuation of your portfolio, you are far more likely to lose sight of what is actually happening in the companies that you own:
“The most important trait to be a good investor is patience - extreme patience, which is difficult for humans. The interesting thing about equity markets is - if we look at our phones and screens and flashing lights, things are changing by the second, everything is flashing red or green. Real change in businesses takes years, sometimes decades. And changes in market prices of equities take seconds. And so the two are in many ways disconnected from each other.”
Not only does this encourage short-term thinking, it can also incentivise investors to get over-involved with their portfolios:
“Fidelity did a study. They have a lot of clients that open accounts with them and then manage those accounts themselves. So they studied these accounts that people were operating on their own to figure out which of their clients were really good investors, and they found that there was a set of accounts, which was sitting in the top 10% performance of all the accounts. The overwhelming number of people who owned those accounts they found fell into one of two categories: either they were dead, or they had forgotten they had the account. Generally speaking, activity in investing is likely to hurt you, more than help you.”
Pabrai rounded out his discussion of the importance of patience by recounting a story about Charlie Munger (Trades, Portfolio), probably one of the most patient people alive today:
“Charlie Munger (Trades, Portfolio) says that he’s been reading Barron’s for fifty years. And in 2003, after fifty years of reading Barron’s he got a stock tip. Each issue of Barron’s has probably ten stock tips, and so you’re getting about fifty issues a year, over fifty years that’s 2,500 issues - 25,000 stock tips. So he goes through all the 25,000 stock tips - picks one, after fifty years, a company called Tenneco, making auto parts and service centres. He puts $10 million into Tenneco in 2003. By 2006 it’s worth $80 million.”
It takes patience to read through thousands of stock picks for years on end and then finally take a swing at something that lines up for you. Few people can do it, which is probably why Munger has been so successful.
Sticking to your circle of competence
“Almost equally important is sticking to circle of competence, making sure that we’re investing in things that we understand really well. There’s a friend of Charlie Munger (Trades, Portfolio)'s, John Arrillaga. And all he’s done in his entire career is invest in real estate within a mile of the Stanford university campus in Northern California, and that’s all he’s done.”
Sticking to what you know and developing the edge that you already have in a certain area is an idea championed by a number of value investors, most notably Peter Lynch. However, this is definitely one of the most extreme cases of specialization:
“His circle of competence is not US real estate, or California real estate, or even Northern California real estate - none of those things. It’s actually just real estate within a very small geography. The interesting things about investing is that the size of your circle of competence is not that relevant in terms of how well you do. Sticking to it, being inside it, is critical. You don’t need to know a lot of things to do well in investing as long as you stick to the things that you know really well.”
In investing, as in many other careers, it is better to be highly-specialized than be a generalist with a wide but shallow knowledge base.
Disclosure: The author owns no stocks mentioned.
