During the 2017 Daily Journal Annual Meeting, Charles Munger explains why the only way to achieve sustained outperformance is to make a small number of very good investment decisions. He cites Berkshire Hathaway as an example, pointing out that the company’s success has been driven by a handful of key investments, such as Coca-Cola and American Express. Here’s an excerpt from the meeting:
Munger: I would hate to manage a trillion dollars in the big stocks and try and beat the indexes. I don’t think I could do it. In fact if you look at Berkshire, take out a hundred decisions, which is like two a year, the success of Berkshire came from two decisions a year over 50 years.
We may have beaten the indexes, but we didn’t do it by having big portfolios of securities and having subdivisions managing the drugs and subdivisions, and so the indexes are a hell of a problem for you people, but you know, why shouldn’t life be hard?
It’s what had to happen, what’s happened now. If you take these people doing some of those early trading by computer algorithms that worked, then somebody else would come in and do the same thing with the same algorithm and play the same game, and of course the returns went down.
Well, that’s what’s happening in the whole field is the returns you’re really going to get are being pushed down by the progress of the sums.
You can watch the entire discussion here:
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