Is This Literally The Best Investing Strategy that Exists?

We're now almost halfway through 2023, and while we've seen inflation cool in recent times, there's no doubt we're still battling with high interest rates, which ultimately put the brakes on the economy and slow business. While this kind of environment is certainly effective in lowering the inflation rate, it does hurt us as investors who are always looking for ways to compound our money. Business performance is choked across the board. Companies make less profit, and generally, share prices fall.

This has led people like Charlie Munger to say recently that we, as investors, should get comfortable with making less. But interestingly, one of Charlie's close friends, Monish, recently gave a talk explaining how we, as investors, can actually take advantage of this recession environment to make money. His idea, as he explained, is called "circling the wagons." Some of you might have seen Yellowstone, and there's one particular scene when the Native Americans are attacking, and then they say, you know, "circle the wagons." When the Native Americans attacked, the best defensive posture was to put the wagons in a circle and then try to defend as best as you can with that configuration.

I thought that that analogy might be a good way to think about investing. Admittedly, the analogy isn't the most obvious, but once you hear it, it really clicks. Manish describes it like this: as an investor, what you're looking for are the five or six big wagons that provide you the best defense. AKA, what he's talking about is finding the five or six businesses that you can hold on to for life that continue to compound through the decades and ultimately protect your portfolio from literally all the other mediocre trades you make.

This is something that most investors don't really pay attention to, but very commonly — and I'm not exaggerating here — very commonly, it is the core reason behind the best investors’ successes. Even Warren Buffett over the years has circled just a few key wagons that have ultimately accounted for most of Berkshire's success and have protected the business from all the other mediocre decisions that he's made.

This year in Buffett's letter, he had a couple of very candid and great quotes. You know, he said, "Over the years, I've made many mistakes, and our extensive collection of businesses consist of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal." This is, you know, the best practitioners of the art.

Then he goes on to say, "In 58 years of Berkshire management, most of my capital allocation decisions have been no better than so-so, and our satisfactory results have been the product of about a dozen truly great decisions." So, of the hundreds and hundreds of decisions Warren Buffett has made since 1965 when he first bought Berkshire up until today, the best investor the world has ever seen says most of his decisions are garbage.

In fact, almost the entirety of Berkshire Hathaway's success comes down to about 12 big winners — 12 wagons that are the difference between Berkshire being the largest company in the U.S. by physical assets and it being a dud. I try to basically look at this period from like '65 to '22, and so, you know, you have, let's say, 80 acquisitions in this 58-year period. He probably bought at least 210 stocks. I used 210 for my convenience; I get to a round number.

And his key hires — I'm expecting that in the last 58 years, he had at least 10 key hires, you know, which were very important to Berkshire. So, if you look at these decisions, there's about 300 important decisions, and he's saying that 12 move the needle. Manish goes on to say that it's investments like Geico, Coca-Cola, American Express, Apple, the hiring of Ajit Jain, BNSF, National Indemnity, and so on that are really responsible for almost all that Berkshire is today.

But what's the lesson here? It's that as investors, you really only need to find four or five truly great long-term compounders in your life to do very well. So, stop messing around and just look for those companies. Look for a moat, look for high return on invested capital, look for talented management, and look for a long runway.

But beyond that, the other important lesson is to never let them go. You hear this with a lot of property investors; they'll tell you the only bad decision they ever made was selling a property. Well, it's the exact same thing in the stock market. As investors, well really as humans, we tend to be notoriously short-term focused, and this usually makes us lock in profits as soon as we get them and then put that money into something else. Now, in Monish's eyes, this is a huge fault, and we should instead of selling up, hold on to these businesses for dear life when we find them.

If the company is healthy, if it's managed well, if it has a strong moat, and if it's been compounding, we should be enjoying the ride no matter the economic conditions. I took a stab at what the 12 businesses might be, and what was really important, if you go back to these decisions, the important thing was not that they bought these 12 or they hired Ajit. The important thing was they kept them all.

So it wasn't the buy because they had, you know, 288 mediocre to poor decisions; they kept those too, right? So basically, in effect, they kept all 300. They lived with all 300 decisions, and it was really important for these 12 not to be deleted or sold. So basically, when we look at this kind of statistic, what we find is that investing is a very forgiving business.

But it is forgiving if you don't cut the flowers and you don't water the weeds. When you look at Berkshire Hathaway and when you put it all together and consider the four percent of decisions that were really good and the 96 that were so-so, what that deal got you was an average annual return of 19.8 versus the S&P 500's annual return of 9.9. So double the market return.

So, it really goes to show that in this recession environment, while it seems so hard to make money right now, we shouldn't be trying to do any sort of fancy footwork. We should instead be hyper-focused on identifying whether any of those long-term compounding businesses are being presented to us at reasonable prices. Remember, the big money that moves the market is always short-term focused.

So while they're all selling and causing stocks across the board to fall, we have to ask, does this present us any long-term opportunities in great businesses? And usually, the answer, particularly in a recession environment, is yes. So it's our job to cut through the noise and load up on high-quality compounders and prepare to hold them for the long haul.

If you're still on the fence, you know, maybe swaying towards some swing trading or options bets or something like that, luckily for us, Monish actually takes the time to explore a few examples of just how powerful this circling the wagon strategy can be. Unsurprisingly, he starts with Naspers. I want to go over a few other examples because I want to show that it wasn't that Warren and Charlie were anomalies here.

Naspers used to be a newspaper publisher, and they've been around for about 100 years. In 19, I think, 1999 or 1998, they brought in a hired-gun CEO, Cruz Becker, who, in 2001, took 32 million dollars of that and bought an obscure Chinese company called Tencent. He got a 46 percent stake — 46.5 percent stake in Tencent for the 32 million. When Tencent went public, the value of Tencent was about 900 million at the IPO, and so the Naspers share was almost like north of 400 million, which would have been most of the value of the company.

The company, with about 500 million, was now approaching like half the value. They sold a little bit of a few shares at the IPO, but they pretty much did nothing after that. So from 2004 to 2018, they never sold a single share of Tencent. If you look at it in 2018, Tencent's market cap was 530 billion. So it went from 900 million to 10 billion to 50 billion to 100 billion, and they're not touching it at this point.

You know, when Tencent is a hundred billion dollar market cap, it's like 99 of the value of Naspers is sitting in Tencent, and through all of that, Goose Becker doesn't sell. So from a newspaper publisher in South Africa, Naspers only needed one solid investment — being Tencent — for literally every single other thing they ever did to be completely irrelevant. The only thing they had to do was resist the temptation to cut the flowers, and Monish is naive; he admits this is very hard to do as an investor.

Not taking a good result in hoping for an amazing result is very difficult. But if you have a business that's compounding well under good management, and they're keeping a high return on invested capital without taking massive risks, then oftentimes it's simply better to leave those businesses be, as opposed to thinking you have to sell them. And again, the important thing was not that they invested in Tencent, you know, because they invested in many other things. The important thing was that they didn't touch it.

Even today in 2023, Naspers is the largest shareholder of Tencent. But it wasn't just Berkshire and Naspers; have a listen to this story of Nick Sleep. Nick Sleep, as his name suggests, is a very sleepy investor. He actually shut down his Nomad fund because he could essentially tell his investors everything he was going to do for the next decade. So he just left it up to them instead. He said to them all he was going to do was hold Amazon, Costco, and Berkshire and then just go back to sleep for a decade. Thus, they may as well just do it themselves.

Most of you are probably familiar with Nick Sleep, but, you know, Nick Sleep's a good friend of mine, and he ran the Nomad partnership for about 13 years with his friend, uh, Case Zakaria. In 2004, they had put 20 of their portfolio into Amazon when they were running the fund, and a number of his investors exited at that time because they thought it was too concentrated. Then later, when it became about 33 or something, even more left.

If everything else in his portfolio had gone to zero in 2004, they would have still beaten the S&P by six percentage points with just the 20 in Amazon alone. So Nick and Zack had many, many mistakes along the way, but it didn't matter. You know, in their case, you could have been wrong 80 percent of the time, and it didn't matter; it still worked out very well. Another really good example of identifying a long-term compounder and, as Monish says, holding on for dear life.

It's not even a particularly complicated case of, you know, not being sure if Amazon had stalled or if it was no longer a great business. If you were to just look at their revenue and their operating income over the past 10 years, they really haven't faltered, with the exception of their 2022 operating income. But even considering that, they're still compounding very nicely over a 10-year time period.

So Nick Sleep, another great example of having a few strong wagons that protected him from all of his mistakes. Monish's list continues this time with the granddaddy of value investing himself, Mr. Benjamin Graham. Then we have Ben Graham, and you know Ben Graham very famous for net-net investing and, you know, deep value and so on. But in 1948, he bought half of Geico, and he bought half of Geico for $712,000. Ben’s, you know, cornerstone of the Graham and approach to investing was that you buy things well below liquidation value and definitely well below intrinsic value.

And as it gets approved, when he starts approaching those valuations, you sell them, you know, and then you go back and find something else. He never applied that to Geico; he applied that to all his other stocks. He never applied it to Geico. And so when he passes away in '76, that $712,000 is $95 million excluding dividends, and he never wrote about it. So all the Ben Graham books never talk about the fact that the biggest success came from buying a great business.

The other thing is that he would be very diversified, but he put 25% of the portfolio into Geico, and basically, if everything else again had gone to zero, he would have still been done twice the S&P, you know, 12.9 percent versus 6.9 percent. And like I said, it was never mentioned, you know? When he passed away, it was more than half of his net worth. So even the inventor of the cigar butt approach to investing — buying a diversified basket of incredibly cheap companies — with one puff left in him, even he succumbed to the glory of holding one great business that was a long-term compounder.

All these cases just highlight that if you hold just a few really good businesses in your portfolio and have a long enough future runway, then that is a massive, massive advantage. It really protects your downside. None of Monish's examples hit that point time quite as well as the case of the Nifty 50.

And then, you know, we look at this concept in the late '60s and early '70s. Some of you may remember the Nifty 50. So the idea at that time was that there were these 50 great businesses, you know, blue-chip companies in the U.S., and you should, you would invest in all 50 of them, like 2% into each one. Valuations didn't matter. In 1972, just before the great crash of '73-‘74, you know, these companies were trading at crazy numbers. You know, Xerox sold at 49 times trailing earnings, Avon was 65, Polaroid was 91 times trailing earnings.

And, you know, Xerox fell 71 percent in the next two years, and Avon fell 86 percent, Polaroid fell 91, and eventually, they all went to zero, you know? They disappeared eventually, and the Nifty 50 as a group lost half its value in that '73-‘74 period. But even if you bought the Nifty 50 in 1972 at those absolute peak valuations without Walmart in the picture, from then to now, it’s 10.2 percent annualized. It’s just 0.1 percent a year below the S&P.

So even with no price discipline and even with a lot of zeros and even with no outlier like Walmart, you almost go toe to toe with the S&P, and it still works out. But the reality is when the Nifty 50 dropped 50 percent in '73-‘74, by 1975, no one was in the Nifty 50. You know, they had all moved on, you know, badly bruised and so on. Again, staying with it would have still worked out quite well.

So really, the key lessons in the investing environment we find ourselves in right now are number one: avoid being overactive or getting sucked into the noise. You know, use this time of depressed stock prices to highlight fairly valued or undervalued long-term compounders. And then number two, most importantly, go into these types of businesses knowing that you will not cut the flowers to water the weeds.

Find those key wagons that will protect your portfolio and then let those key compounders flourish over time. Overall, that's the best defense you have against all the mediocre investment decisions that you're inevitably going to make as a human being.

But guys, with that said, thanks very much for watching this video. Please leave a like on it if you did enjoy. Subscribe if you'd like to see more, and I'll see you guys in the next video.