Warren Buffett and Charlie Munger are Professional Gamblers

By Carsten Tolkmit @https://www.flickr.com/photos/laenulfean/3767122854

30 Jul Warren Buffett and Charlie Munger are Professional Gamblers

I meant it in a good way. Warren Buffett and Charlie Munger are professional gamblers and extremely good in their game.

Warren Buffett started out with Benjamin Graham and the former picked “cigar butts”  (stocks that are trading below current value but future prospects may not be rosy).

It was Charlie Munger who influenced Warren Buffett to change his perspective and stop picking cigar butt stocks. It was a life changing moment. He wouldn’t have became the richest man in the world if he was picking cigar butts.

We have to understand why and paint the context properly.

We know that trying to pick stocks can be very frustrating. Skip that frustration, get 21 ideas to finding profitable stocks in an instant. 

There were many clues on how the two of them approached the stock market through their speeches and shareholder letters.

Like Baseball

Warren Buffett loves the baseball legend Ted Williams because the former said his approach to investing is similar to how Ted hit a baseball. Ted’s batting average is the highest with more than 500 home runs. He found that he does not need to swing the bat at every ball. He only swung when a ball is entering the sweet spot. In this way, he could hit the ball further and create more home runs.

I always tell the students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision they used up one of those punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five, or three, or seven, and you can get rich off five, or three, or seven. But what you can’t get rich doing is trying to get one every day. ~ Warren Buffett

Warren Buffett do not invest in many stocks. He is ultra selective and only go in big when he sees he has an edge over the rest of the investors. His concentration of stocks could have make or break him. It turned out that his bets were right and made tons of money. If his bets turned out to be wrong, the world wouldn’t have heard of Warren Buffett.

Like Pari-mutuel Betting

“If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet… That’s what happens in the stock market.And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.” ~ Charlie Munger

These are clues that Warren and Charlie had the intention to win the game big time and become really rich. Probably they also didn’t know how rich they would become. But they have definitely swung for the fences, concentrate the bets in very few stocks.

Can Retail Investors Invest like Warren Buffett?

Most people cannot do what they do because

  1. We do not intend to be the richest man on earth
  2. We do not have the risk appetite

We do not need to be the richest, or even the top 40 Richest Singaporeans. I do not know about you but I am happy with a couple of millions and that wouldn’t get me near the top in Singapore. If that is the case, why would I want to take on more risk and swing for the fences? I know that if I concentrate my bets in a few stocks (there is a difference between you know the stocks very well versus you think you know the stocks very well) I can make it big or lose very big. I am not going for the top 10% richest. I am happy lower down the packing order so diversification works for me to prevent me from ending up in poverty.

I created this diagram to illustrate the risk and reward when you concentrate your stock picks (yes, this is generalisation. As long as you get the point):

Bell Curve of Investing

They did caveat to say that if you want to concentrate your bets, only invest in things you understand. But we can be easily fooled to think that we understand something, only to know that we don’t know much about it. Buffett and Munger are very good at looking at things objectively and prevent their biases from acting up. For the rest of us, our untamed minds are great at bluffing ourselves. And it is scary to know you have put a big chunk of money in a wrong investment. Guess where you will end up?

Nothing Wrong Not Being the Richest

“However, if we’d stayed with classic Graham the way Ben Graham did it, we would never have had the record we have. And that’s because Graham wasn’t trying to do what we did.” ~ Charlie Munger.

I prefer the Benjamin Graham’s method. I wasn’t trying to do what Buffett and Munger did. I wasn’t trying to be the richest man.

I always wondered, were there many other ‘Warren Buffetts’ who did not make it with their concentrated bets. Is the focus on Warren Buffett a deep survivorship bias in the society? What do you think?



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5 Comments
  • My 15HWW
    Posted at 09:19h, 30 July Reply

    Hi Alvin,

    Agree totally that most of our risk appetites don’t justify holding just a handful of stocks in our portfolio.

    The bottomline is whether we can afford to be absolutely wrong on that stock (>50% decline). It’s probably more palatable if you hold 20 of such stocks rather than just 5.

    The size of your capital also matters. I am a believer that one would take more risk if one has $10 million compared to $100,000. For eg, I would be more prepared to hold just 5 stocks if I can set aside a couple of millions in bonds/cash. =)

  • Richard (Invest Openly)
    Posted at 10:11h, 30 July Reply

    Very true! I do view that all investors are gambling in some way. Of course, some make it, and many others don’t! I believed I have answered your question ;-)

  • Createwealth8888
    Posted at 20:38h, 30 July Reply

    You mean speculating or gambling?

  • Wing Way
    Posted at 16:48h, 03 August Reply

    This kind of Professional Gambler rocks!!!

  • Alvin Chow
    Posted at 07:15h, 05 August Reply

    Warren Buffett is currently sitting on US$50 billion, waiting for the fat pitch.

    http://www.bloomberg.com/news/2014-08-04/buffett-waits-on-fat-pitch-as-cash-hoard-tops-50-billion.html

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