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Why Charlie Munger's Tips Can Help You Outperform

GuruFocus.com

The current bull market presents value investors with a challenge. Stock valuations are high in many cases, but the economic outlook is very uncertain. This may cause investors to pay too much for companies that could face difficult trading conditions. The end result could be disappointing investment returns.

Therefore, it could be worth listening to the advice of experienced value investors. Among them is Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) vice-chairman, Charlie Munger (Trades, Portfolio). His track record suggests that a simple approach to managing your portfolio could be useful in current market conditions.


Avoiding mistakes

Some investors may feel that the stock market's recent gains will continue. Equally, other investors may believe that the current bull market will soon come to an end based on excessive valuations among a range of large-cap stocks.

However, it is impossible to predict the stock market's future performance. There are an infinite number of variables that could positively or negatively impact on stock prices at any time. Therefore, trying to time the market may be an unachievable aim.

A better idea could be to focus on successfully implementing basic value investing principles such as ensuring that your portfolio contains quality businesses that are not overvalued. Over the long run, they are likely to deliver impressive investment returns.

As Munger once said, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Waiting for opportunities

Some investors may fear missing out on further gains after the stock market's recent rapid rise. This may lead them to buy overvalued stocks that offer disappointing return prospects over the long run.

Although it is difficult to wait for a more attractive buying opportunity when stock prices are rising, it could be a logical strategy. It may mean that you purchase the same stocks as you would have done in today's bull market, but at more attractive prices further down the line.

When a bull market will end is an unknown. However, the average length of a bull market is less than three years, with the longest bull market in history lasting for 13 years between 1987 and 2000. Therefore, patient investors are very likely to have an opportunity to buy when valuations are lower. In the meantime, holding cash may be a more logical approach than buying overvalued stocks.

As Munger once said, "The big money is not in the buying or the selling, but in the waiting."

Maintaining a rational outlook

It is easy to become irrational in a bull market. For instance, you may start to believe that exaggerated earnings forecasts can be met. You may even start to use them when trying to justify rich valuations.

However, maintaining a rational outlook on the stock market may help you to allocate capital more efficiently. For value investors, this may mean that you do not deviate from your long-term strategy of buying quality companies when they trade at low prices. Although this may lead you to miss out on the final part of a bull market, when prices are at extreme levels, it can lead to greater returns in the long run.

Munger has previously discussed the importance of being rational when investing. As he once said, "What are the secrets of success? One-word answer: rational."

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.