In the HBO documentary "Becoming Warren Buffett (Trades, Portfolio)," the man himself explains, "The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot, and if people are yelling, 'Swing, you bum!' ignore them." And that has been the key to the success of Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio). They seized opportunities, but only the right opportunities for them.
Life does not provide many chances to hit an investment home run. When rare opportunities arise, you must be ready to seize them decisively. Both Buffett and Munger stress the importance of having the courage and conviction to go all in when the time is right. Do ntt get cold feet or hesitate. Swing for the fences when you get that golden pitch down the middle.
Buffett's baseball analogy
The legendary investor often uses baseball analogies to explain his investing approach. Specifically, he references Ted Williams' classic book "The Science of Hitting."
Williams was one of the greatest hitters ever to play the game. He became the last player to bat over .400 for a season based on his incredible discipline at the plate. He only swung at pitches within his optimal "sweet spot" to give himself the best chance of getting a hit.
Buffett views investing through a similar lens. Most new investment opportunities are like pitches out of the strike zone – not worth swinging at. But occasionally, he comes across a business trading at an attractive valuation that perfectly matches his circle of competence. That is his sweet spot.
When he identifies one of those golden opportunities, Buffett takes a massive swing no matter what the naysayers think. He invested billions in Coca-Cola (KO, Financial) in the late 1980s and Apple (AAPL, Financial) in the early 2010s because he understood those businesses and saw they were undervalued.
Just as Williams would ignore hecklers telling him to swing at bad pitches, Buffett tunes out the critics urging him to chase shaky investments outside his circle of competence. He waits patiently for his specific pitch, but when it comes, he bets big.
Munger's three principles
As Buffett's long-time business partner at Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Munger shares similar views on seizing the right opportunities. He outlines three fundamental principles.
Look at inefficient markets
The best chances to find discounted securities occur in out-of-the-way places. Small, overlooked stocks that Wall Street analysts ignore offer the most potential for finding mispricings.
Munger advocates that regular investors focus their efforts on micro-cap stocks with market values under $300 million.
These tiny companies fly under the radar of institutional investors. As Phil Fisher described, digging through them requires extensive "scuttlebutt" research. But inefficient micro-cap markets contain hidden gems for those willing to do the work.
The key is accessing parts of the market where emotions dominate over fundamentals. Investor overreactions create wider spreads between price and value. Look off the beaten path where few tread.
Swing big
Williams knew that waiting for the perfect pitch to hit was critical to success. But when he got that pitch in his wheelhouse, he would take a huge cut at it.
Munger believes investors need the same mindset. Outstanding opportunities are rare. When you are lucky enough to identify one, do not nibble around the edges. Make it count with an all-in bet.
No need to diversify either. Munger concentrated nearly his entire fortune into just three stocks – Berkshire Hathaway, Costco (COST, Financial) and Li Lu (Trades, Portfolio)'s fund.
Rather than diluting results with a basket of mediocre ideas, he focused on a few opportunities with the highest conviction. Swinging for the fences can produce tremendous results if you connect.
Stay in your circle of competence
Of course, you cannot take big swings unless you have done the work to develop deep conviction. To build that knowledge and certainty requires identifying industries and businesses squarely within one's circle of competence.
Understand the key factors impacting a company's future economics. Study the competitive dynamics in detail. Get to know the strengths and weaknesses of the management team.
With comprehensive insight into a business, you can make informed decisions on its upside potential and downside risks. Conviction stems from having an informational edge from countless hours of research.
But never forget the importance of staying within your circle of competence. No matter how tempting, do not invest in businesses you do not understand.
Why you must act decisively
So why must investors act aggressively when those rare pitches come along? Here are a few reasons:
- Outstanding investments are uncommon. Buffett has famously said they may come along two or three times in a lifetime.
- Fear overpowers greed. When great opportunities arise, most investors are paralyzed into inaction. Emotions get the better of even experienced investors.
- The window closes fast. Valuation discrepancies tend to revert quickly once discovered. You must act fast or the chance will vanish.
- More analysis leads to paralysis. Overthinking erodes conviction. Once convinced, move forward with decisiveness before doubts creep back in.
- You will never know everything. Further inspection reveals new risks in every business. But you have to believe your initial analysis is sufficient.
- Perfect is the enemy of great. Do not hold out for theoretical 100% certainty. Make a decision and run with it. Fortune favors action over contemplation.
In investing, like baseball, waiting for exactly the right opportunity is crucial. But you must back up that patience with bold, decisive action when the moment arrives.
The keys to seizing opportunities
So how can investors prepare to capitalize when rare chances arise? Here are some keys to seizing golden opportunities.
First, know your strategy. You need a clear sense of what constitutes an opportunity worth pursuing in the first place. Define an ideal investment strategy, including parameters for business quality, valuation, competitive advantages and management.
Second, stay vigilant. Do not take long breaks from monitoring the market. Pay continuous attention so you do not miss short windows. As Munger says, "The observant guy will get the edge."
Third, prepare a watchlist. Keep a list of "on deck" companies meeting your criteria that you would buy at the right price. That way, you are ready to act if one takes a hit.
Further, holding some cash reserves ensures you have dry powder on hand to load up on bargains when they appear. Do not be fully invested all the time.
Additionally, be sure to move fast. Speed matters when opportunities arise. Submit buy orders right away before second-guessing yourself. You can always sell if the thesis changes.
It is important to ignore the noise. When critics call you crazy, remember Williams ignoring fans shouting, "Swing, you bum!" Stick to your own analysis.
Also be sure to size positions wisely. Make big bets on best ideas, but size them appropriately against total capital. Concentrate yet stay somewhat diversified.
Finally, think long term. Hold for 10-plus years, while not worrying about short-term price action. Give great businesses time to compound value.
Fortune favors the bold
As Munger says, "All I want to know is where I'm going to die, so I'll never go there." When investing, all you need to know is where the big opportunities are so you can aggressively seize the ones right for you.
Like Williams at the plate, wait with patience and discipline for just the right pitch in your sweet spot. But when it comes, swing for the fences.
As Buffett explains, you have to wait for an investment that matches your personal strike zone and circle of competence. But when you spot that perfect pitch, step up with conviction and take a big swing.
Buffett and Munger prove that fortune favors the bold, but you must be bold on opportunities customized to your own strengths and knowledge. Define your personal sweet spot, prepare relentlessly and commit completely when the moment is right. Your golden chance may arrive at any time.
