After reading this passage from Charlie Munger, 90% of your investing problems will be solved! Why? Because this passage goes straight to the underlying logic of investing: Buying a stock is buying a company.
Munger put it this way: Over the long term, investment returns are very unlikely to be much higher than the company’s average annual profits. If a company’s return over 40 years is 6%, and you hold this company during those 40 years, even if you bought at a very cheap price early on, your return won’t differ much from that 6%. Conversely, if a company’s return over the past 20 years is 18%, then even if you buy at an expensive price now, the returns you get in the future will still be very substantial.
Do you understand? Ultimately, investing and running a business are the same thing. The return on investing in a business should equal the return on running that business. If there is any difference, it’s that running a business makes you the full-time person—the CEO—while investing in a business means you do nothing and are just an armchair boss. But over the long term, the money you make as CEO and as an armchair boss is actually about the same. Given that, why not choose to be an armchair boss? That way you have more time to do what you love. You don’t make less money, and you have your own time and space. Two birds with one stone. Is there anything more wonderful in the world?
Why do most value investors hold long term? Now you should understand! It’s because the money you make from investing is itself the money the business earns from operating—not the so-called price differences from buying and selling all day. Once you truly understand this, you can completely distance yourself from the market and become a true armchair boss.