I came across the transcript of a conversation between Monish Pabrai and Warren Buffett highlighting the risk of impatience…AKA the risk of trying to get rich quick.
Pabrai asked Buffet about this old partner, Rick Guerin (yes, he had another partner besides Charlie Munger). Buffett highlighted Guerin’s superb investment record but told Pabrai that Guerin used margin loans to leverage his investments because he was “in a hurry to get rich.”
As Buffett tells it, Guerin was slammed with margin calls after suffering devastating losses in the crash of 1973-74. As a result, and as you can imagine, Guerin was forced to sell shares to Buffett that were later worth an immense fortune.
Buffett goes on to say he and Munger were never in a hurry because they always knew they’d become enormously wealthy if they kept compounding over decades without too many damaging mistakes. Probably over a meal of steak, hashbrowns, and a Coke, Buffett said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime, you cannot help but get very wealthy.”
Buffet was saying that not only is impatience an enormous source of risk, but the willingness to be patient is a significant differentiator between successful and failed investors. Ok, I’ll even go so far as to add that being patient is THE significant differentiator, but far be it from me to try to improve on something Buffett says….but still.
“Yeah, but Dave, he was using MARGIN!” you say.
Look, it doesn’t have to be the use of margin or leverage that causes irreparable harm because, in reality, impatience comes in many forms. The most common being a function of excitement or hysteria, otherwise known as the “fear of missing out (FOMO) investing.” (More on that here in my Instagram reel.)
Here are just a few examples of this kind of impatient investing:
Overweighting tech stocks before they crashed by almost 80% in 2000
Overloading on real estate (and debt) in the mid-2000s
And most recently, the NFT/crypto mania that started in 2022
At the apex of each hysteria, anyone left out of those “investments” felt like they were failing, falling behind, and out in the cold. I mean, how many people remember people bragging about their internet stocks, or house flipping, or that one guy who bought a digital NFT image created by an artist known as Beeple for $69m at Christies?
In my day, the guy who sold weed in the high school smoking lounge was called “Beeple”! That was the rumor around my Honors Program study hall and chess club meetings anyway.
But today, we see they were all bubbles…with agonizing endings.
Here is the broken record fact of investing
The more exciting an investment seems, the more likely it is to cause irreparable harm. Counter perspective: when was the last time you heard anyone on CNBC talking about the Virginia General Obligation Municipal Bond with a yield to maturity of 4% maturing in 2034? (I made that actual bond up, but you get the point.)
Let the wise words of Buffett sink in and never be forgotten…successful investing requires compounding over decades and not making any catastrophic mistakes (translation: time, discipline, and patience).
It’s just like “Buy low and sell high,” which is simple to say yet hard to do. Focus on your ACTIONS, and the outcomes will materialize…and look, I didn’t even mention how you should have 12-18 months of cash to ride out any possible volatility.
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