Steve's note: Contributing today's essay is my friend Dan Ferris. Dan's one of the finest long-term investors in the world... and he's onto one of the best ways to compound your money for years and years. Read on for...
The Low-Risk Way to Make 15% a Year for More Than 30 Years
By Dan Ferris, editor, Extreme Value
February 14, 2008
One night in 1994, Berkshire Hathaway Vice Chairman Charlie Munger found himself at dinner with the president of Santa Anita, a horse racing track in southern California.
Munger's dinner companion told him about bettors who wagered so much that they had lines of credit with the racetrack. Naturally, the great majority of those bettors were just like the hordes of smaller bettors: net losers over time.
The few times when they managed to win, they never won enough to take care of their losses, plus pay for the racetrack's cut. These are the whales, the high rollers, the people who gamble big, lose big, and provide a good living for the gambling industry.
But a tiny few bettors, over the long term, really did manage to make a little money gambling on the horse races at Santa Anita. Munger was impressed that these few were "shrewd about something with as much unpredictability as horse racing."
Munger wanted to get to the bottom of the bettors' success. That night, he learned "the one thing that all those winning bettors in the whole history of people who've beaten the pari-mutuel system have is quite simple. They bet very seldom."
Munger reasoned, "It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for a mispriced bet – that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple."
First, bet seldom. Then, when you bet, bet big. Replace the word "bet," with the word "buy," and there's your formula for investing in stocks.
Most people just don't have the patience for it. They don't want to bet seldom. They want to trade, to bet often, taking many small losses and small profits. They don't want to bet big, either. They want to diversify, to make many small bets.
Once you've placed your bet, you must then do something else no one wants to do. As Joel Greenblatt put it at the Value Investing Congress in New York City a couple years ago, "Nobody wants to wait three years." And because nobody wants to wait three years, an enormous opportunity exists for those who will.
Last month, I produced a list of stocks I believe will help any investor who wants to bet seldom, bet big, and be patient, but perhaps lacks the right temperament to follow through.
One company that should have been on the list is Loews Corp. (LTR)... Stocks like Loews make betting seldom, betting big, and waiting much easier. Loews is simply a collection of great assets... from insurance to offshore drilling to pipelines to tobacco production. It generally trades at a discount to the net value of its underlying businesses... and the company has bought back 25% of its shares during each decade since the 1970s.
With the founding Tisch family and chief investment strategist Joe Rosenberg at the helm, you don't have to worry about what to do with the stock. Holding and/or buying more is almost always the right thing.
Berkshire Hathaway (BRK-A) is another great example. You know Warren Buffett's in charge. You know he's assembled $150+ billion of great investments and 70+ operating companies, all pounding out cash night and day. You don't worry about anything as long as you own that stock.
I encourage you to go back to that list and do some serious research over the next few weeks. The people running those companies are great at producing big returns because they're patient, and invest safely for the long term.
By making a few big bets on these companies, you get big returns without the anxiety you can get with... well... just about any other stock in the world.
Good investing,
Dan Ferris
Editor's note: Dan Ferris is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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