Find A Strategy You Can Stick With

“The great strategy you can’t stick with is obviously vastly inferior to the very good strategy you can stick with.”
— Cliff Asness

This is why protecting your downside is more important than maximizing your upside. Forget the horserace and look to a strategy you can live with in good times and bad. For me, that strategy is investing largely in defensive, high quality companies that grow their dividends. It may lag in a bull market, but I can sleep like a baby in tough times. The key is that I know it works and I believe in it. That inoculates me against selling and locking in a big loss during a bear market.

You Don’t Get Extra Points For Degree of Difficulty

“If you’re in a wonderful business for a long time, even if you pay a little too much going in, you’re going to get a wonderful result if you stay in it a long time.”
— Warren Buffett

High quality companies can be great long term compounders.

Figure Out What Not To Do And Don’t Do That

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
— Charlie Munger

Inversion is the key to Munger’s success. Learning from the folly of others and avoiding their mistakes gives you a huge advantage in life and investing. Figuring out what not to do is more important than trying to be brilliant.

The Cost of Taxes Should Be Included In Your Opportunity Cost Calculations

“Intelligent people make decisions based on opportunity costs. It’s your alternatives that matter.”
— Charlie Munger

“Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you’re going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15% or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work.
— Charlie Munger

Something I struggle with is the temptation to always be doing something. If I have a position with a big gain that is trading above fair value, I start to play with alternatives. The problem is that action for the sake of action should be avoided. It helps me to remember Munger’s comment about the huge advantage you can get from letting a company compound tax deferred over the long term. Unless there is something fundamentally wrong with the business or I have a much cheaper and more desirable alternative, sticking with a high quality winner generally makes sense. This helps me by increasing my hurdle rate to action in such a situation. 3.5% is Munger’s high end estimate for a company with a 15% annual total return, so depending on the company, I adjust downward. Since my holding period is less than 30 years, I generally figure between 0.5% and 1.5% for the benefit for long term tax deferral. If it’s a close call, taking no action can make sense.