Discover why Charlie Munger believes extreme diversification is insane. Learn the “Focus Investing” strategy and why patience is your ultimate financial weapon.
Introduction
In our previous post, [Why Your Brain Wants You to Be Poor], we explored the psychological traps that cause us to panic sell at the bottom and buy at the top. We learned that human beings are biologically wired to make bad financial decisions when under stress.
So, how do we fix this? The traditional Wall Street advice is “diversification.” Financial advisors tell you to buy 100 different stocks, mutual funds, and bonds to be safe. They tell you to constantly adjust and rebalance your portfolio.
But Charlie Munger strongly disagrees. In fact, he thinks this conventional wisdom is a recipe for mediocrity. Today, we are going to look at Munger’s “Focus Investing” strategy, and why the ultimate secret to building massive wealth isn’t trading faster, but simply learning how to sit on your ass.
The Myth of Extreme Diversification
Charlie Munger believes that trying to know everything about everything is totally insane.
Think about it logically. How can one individual investor, or even a professional fund manager, truly understand the deep business fundamentals of 100 different companies? It is impossible. If you buy 100 stocks, you are not investing; you are just blindly throwing darts at the market.
Munger’s investment style is called “focus investing,” which implies holding only about ten exceptional businesses, not one hundred or four hundred. He believes that finding a truly great investment is incredibly difficult, so when you finally find one, you should concentrate your capital into it. Ninety-eight percent of the investment world doesn’t think this way, but going against the crowd has been exceptionally good for Munger and Warren Buffett.
Instead of constantly buying mediocre stocks just to be “diversified,” Munger acts like a winning player in a pari-mutuel betting system. He patiently waits for a “near cinch”—a rare, mispriced opportunity—and when he finds it, he loads up heavily. The rest of the time, he does absolutely nothing.
The “Sit-on-Your-Ass” Strategy
If focus investing is the vehicle, then extreme patience is the fuel.
Once you have purchased a wonderful business at a fair price, the hardest part begins: waiting. Munger frequently reminds us of Albert Einstein’s famous quote: “Compound interest is the eighth wonder of the world”. Munger’s strict rule for compounding is simple: never interrupt it unnecessarily.
Every time you buy and sell a stock, you pay transactional taxes and frictional costs (like broker fees). If you constantly trade in and out of the market, these small leaks will eventually sink your great ship of wealth. You must avoid taking action just for the sake of taking action.
According to Munger, having a good investing temperament basically means being very patient, combined with vast aggression when you finally know enough to do something.
The Cost of Impatience: My $0.60 Mistake
Let me share a humiliating story from my own portfolio to show you exactly what happens when you fail to “sit on your ass.”
Up until June of last year, I held 1,000 shares of a company called Opendoor. It had been one of the hottest IPOs in the market. Like many others, I bought into the hype. I vaguely thought, “Real estate transactions are too complex and involve too many middlemen; this company has a lot of room to improve the industry.” I viewed it positively, but the truth is, I didn’t deeply understand their business model. I just bought it because it was popular.
Then, the era of interest rate hikes began. The stock plummeted, and the market completely lost interest. By May and June, the price had collapsed to a mere $0.60 per share.
This was money I didn’t urgently need. I could have easily afforded to wait it out. But I completely lost my nerve. Every time I opened my brokerage app, that glaring red minus sign stared back at me, accompanied by a relentless stream of bad news. Unable to endure the psychological pain of watching my account bleed, I panicked and sold all 1,000 shares at the absolute bottom.
Do you know what happened next? In July, the stock started a sudden rebound. By October, it had skyrocketed to $10 a share. Because I couldn’t sit on my hands for just a few more months, I completely missed out on a massive 15-fold recovery.
I was a total amateur. This painful experience taught me two brutal lessons. First, never buy a hyped-up stock if you don’t thoroughly understand the business—if you do, you will be violently shaken by every tiny rumor. Second, checking your brokerage account too often is financial suicide. If I had simply deleted the app from my phone and ignored the market, I would be vastly richer today.
Conclusion: How to Implement Patience
If you want to get rich, stop trying to pick 50 different hot stocks. Stop looking at your brokerage app every single day.
If you have the time and skill to deeply analyze businesses, find 5 to 10 great companies, buy them, and sit on them for a decade. But what if you don’t have the time to read financial statements? What if you know that your emotional brain will force you to panic sell during the next market crash?
There is a perfect solution: The S&P 500 Index Fund.
By consistently buying a low-cost S&P 500 ETF every month and never selling it, you are automatically practicing Munger’s philosophy. You are buying the best businesses in America, and you are letting the mathematical magic of compound interest do all the heavy lifting. You don’t need to be a genius; you just need to set up an automated system that protects your money from your own boredom and impatience.