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Charlie Munger Waited 50 Years to Find the Perfect Stock. But There is an Easier Way

Jul 18, 2019

Rahul Shah, Editor, Profit Hunter

There are successful investors. And then there are investors who are successful as well as eloquent.

I have no hesitation in putting Mohnish Pabrai in the second category.

Whenever he talks, he has some interesting stories and anecdotes to share.

Pabrai spoke at Trinity College in Dublin recently.

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As usual, his talk was choc-a-bloc with fascinating stories and thought-provoking insights.

The story I liked the best was about how patience pays off in the long run.

Although a little extreme, it does make for an interesting case study.

Turns out, his mentor and guru Charlie Munger waited for 50 long years for a perfect stock.

Yes, you read that right.

Munger fought off temptations and kept emotions at bay for as much as 50 years. Why? Well, to find a stock that ticked all the boxes.

Here's Pabrai in his own words.

  • Charlie Munger 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 centers. He puts $10 million into Tenneco in 2003. By 2006 it's worth $80 million.

Wow. To go through 25,000 stocks without compromising on principles is mind blowing.

And if this kind of discipline doesn't bring success in investing then I don't know what will.

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It certainly bought for Munger. The stock went on to be an 8-bagger in mere 3 years.

Munger indeed had the right strategy in place. And also the discipline to go with it.

But what works for Munger may not work for the rest of us. The biggest stumbling block could be to play the waiting game for so long. Of course, 50 years is an extreme case. But to wait for something as less as say 5 years may be a lot to ask of some people.

There's a way out of this dilemma.

Munger must have certainly seen something in the stock that made him feel it was undervalued.

After all, this is what investing is all about, isn't it? You buy a stock because you feel its trading at a significant discount to the value of the underlying business.

My theory is that the value of a decent business is at least equal to its book value if not more.

The book value of a company by the way is its net worth. It is what remains after you subtract total liabilities from the total assets.

Thus, buying a group of such stocks at a discount to its book value is pretty much like Munger buying Tenneco. In both the cases, you are trying to buy a 100-rupee note for Rs 80 or lower.

After all, the underlying principle is the same - Buying an asset at a discount to its approximate value.

Studies going back several decades agree with my point of view.

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A strategy of buying a group of good quality stocks at a discount to book value can give market beating returns.

But you need a handful of other parameters to ensure you are getting into the right stock.

And unlike in Munger's case, you don't need the patience and discipline to wait for 50 years.

You only need the patience and discipline to buy below a suitable discount to book value.

And, the discipline to sell at a pre-defined sell limit.

It is this approach I prefer to use in my Microcap Millionaires over the one that Munger has used.

Guess what, the results have been quite encouraging.

Following this approach has led to gains such as:

  • 545.4% from Titagarh Wagons in 11 months
  • 206% from Puravankara Limited in 19 months
  • 176% from Lloyd Electricals in 11 months
  • 170% from HIL Limited in 12 months

And many more.

Mind you, this is no cherry picking. Over the last five years, we've closed 42 positions with only 8 in the negative. Which means 34 of the 42 generated a profit. This is a strike rate of more than 80% i.e. closing 8 out of 10 recommendations in the positive.

On a compounded returns basis too, Microcap Millionaires has returned 20% since its start in Feb 2014. This compares with the 12% returns given by the Sensex in the same period.

So, the bottom line is this.

You can continue to love and listen to Charlie Munger like I do.

But you don't have to copy his stock picking approach.

A much simpler strategy that has a sound logic and a few well-defined rules can do the job as well.

In my case it was picking stocks...

And the track record of Microcap Millionaires is proof that this works.

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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