Matt Franz : Zealous For Knowledge

Masterly Inactivity

One of my favorite investing quotes came from Charlie Munger at the 2008 Berkshire annual meeting:

“You have to be like a man standing with a spear next to a stream. Most of the time he’s doing nothing. When a fat juicy salmon swims by, the man spears it. Then he goes back to doing nothing. It may be six months before the next salmon goes by.”

This quote perfectly captures why investing is simple but not easy. Most people fail because they lack the patience and discipline necessary to stand at attention and without moving for months.

Buffett discusses the same concept, which he calls masterly inactivity, in Berkshire’s 1984 letter to shareholders:

“It’s been over ten years since it has been as difficult as now to find equity investments that meet both our qualitative standards and our quantitative standards of value versus price.  We try to avoid compromise of these standards, although we find doing nothing the most difficult task of all. (One English statesman attributed his country’s greatness in the nineteenth century to a policy of “masterly inactivity”. This is a strategy that is far easier for historians to commend than for participants to follow.)”

Masterly inactivity is “doing nothing with a great deal of skill.” It implies deep knowledge and watchful diligence; remaining quiet and unmoving until the time is right.

In The Real Warren Buffett James O’Loughlin explains the concept with a story:

“Peter Ustinov, the actor, raconteur, and wit, tells a story of the time he went to watch the performance of a screen actor in a stage play. This particular individual had been schooled in the art of method acting, a form of performance suggesting that he should fret about the stage giving physical expression to every emotion he was attempting to portray. Ustinov found this a great distraction. After some time, he could stomach no more and cried from the balcony: “Don’t just do something. Stand there!”

Another good example comes from the The Man Who Never Was. The movie is based on the true story of operation Mincemeat where the British secret service gave a dead body a fake identity with false papers and planted him to fool the Germans into believing they were not going to attack Sicily. In the film masterly inactivity is the strategy of keeping a quiet eye on a known spy rather than capturing him in order to ensure the success of the larger mission.

At the 2017 Daily Journal meeting Charlie Munger gave a real world example of how masterly inactivity works in investing:

“I read Barron’s for fifty years. In fifty years, I found one investment opportunity in Barron’s of which I made about $80 million with almost no risk. I took the $80 million and gave it to Li Lu who turned it into $400 or $500 million. So I’ve made $400 or $500 million out of reading Barron’s for fifty years and following one idea.”

This is similar to what Buffett told CNBC about buying IBM:

“I’ve probably read the annual report of IBM every year for 50 years. And this year it came in on a Saturday, and I read it. And I got a different slant on it, which I then proceeded to do some checking out of. But I just—I read it through a different lens.”

Conceptually, this is not a new idea. In the fourth century B.C. Laozi wrote in the Tao Te Ching:

“Do you have the patience to wait
Till your mud settles and the water is clear?
Can you remain unmoving
Till the right action arises by itself?”

Another example comes from the Battle of Bunker Hill when American William Prescott told his men: “Don’t fire until you see the whites of their eyes!”

Munger did exactly this when he bought Wells Fargo for The Daily Journal in 2009. He waited until the shares traded below $10. Then he bought 1.6 million shares.

As Munger recounted to Jason Zweig:

“We just put the money in. It didn’t take any novel thought. It was a once-in-40-year opportunity. You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is.”

And at a Daily Journal meeting he said: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”  If you can wait, you will have a huge leg up on your competition.

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