The Rational Investor #012: William Green on the Risk of Impatience
Happy Saturday to you,
Welcome to the 12th edition of The Rational Investor Newsletter.
Today’s quote comes from the fantastic book, Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life by William Green. This book will invariably be quoted again as it includes thoughts, philosophies, and ideas from a wide range of great investors. It’s a long read, but I believe it contains as much investing wisdom as any book you will find.
Today’s quote is a highlight of a conversation between Monish Pabrai and Warren Buffett in which Pabrai asks Buffett about their forgotten 3rd partner (in addition to Munger), Rick Guerin. It offers a great lesson on the risk of impatience—or in other words, the risk of trying to get rich as quickly as possible.
Onto the main event…
Here’s Green/Pabrai/Buffett on the Risk of Impatience:
For Pabrai, the lunch yielded two unforgettable lessons—one about how to invest, one about how to live. The first came when he asked Buffet, “Whatever happened to Rick Guerin?” Buffett had mentioned Guerin’s superb investment record in “The Superinvestors of Graham-and-Doddsville.” But Buffett told Pabrai and (Guy) Spier that Guerin used margin loans to leverage his investments because he was “in a hurry to get rich.” According to Buffett, Guerin was hit with margin calls after suffering disastrous losses in the crash of 1973-74. As a result, he was forced to sell shares (to Buffett) that were later worth an immense fortune.
By contrast, Buffett said that he and Munger were never in a hurry because they always knew they’d become enormously rich if they kept compounding over decades without too many catastrophic mistakes. Over his meal of steak, hashbrowns, and a Cherry Coke, Buffett said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy.”
As Buffett eludes to, not only is impatience an enormous source of risk, but the willingness to be patient is a (perhaps, the) significant differentiator between successful investors and failed investors.
It doesn’t have to be the use of leverage as Guerin used that causes irreparable harm because impatience comes in many forms. The most common being FOMO investing, or what I call, easy money trades.
As just a few examples of this easy money phenomenon: Overweighting tech before it crashed by almost 80% in 2000, real estate in the mid-2000s, and the NFT/crypto craze in 2022.
Anyone not “investing” in those areas felt like they were falling behind, but it’s obvious today that they were all bubbles and all ended badly. This is a fact of prudent investing: The more exciting an investment is, the more likely it is to end badly.
We should always remember the wise words of Buffett that successful investing requires compounding over decades and not making any catastrophic mistakes.
Simple to say, hard to do.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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