Our usual market survey is taking a tea break today. Instead, I thought I would share some reflections on one of the toughest parts of long-term investing. One of the most uncomfortable truths of long-term investing is that even the best investments or the most carefully crafted portfolios will occasionally nosedive. In finance classrooms, we call this a “drawdown.”
I advise a number of portfolios focused on long-term investments and I have seen firsthand how market drawdowns test both investors and strategies. My job is to ensure that our portfolios are built to weather these storms while keeping investors focused on the bigger picture.
Charlie Munger, the legendary former vice chairman of Berkshire Hathaway, spent a lifetime reminding investors that this is the price of admission. As he famously put it:
“The big money is not in the buying and the selling but in the waiting.”
Waiting, of course, sounds easy until your portfolio decides to test your blood pressure. Markets can and will hand you 30%, 40%, even 50% declines, and yet Munger believed the long-term rewards far outweigh the temporary pain.
He said it even more bluntly:
“If you are going to invest in stocks for the long term or real estate, of course there are going to be periods when there is a lot of agony and other periods when there is a boom. I think you just have to learn to live through them.”
Munger’s own track record proves the point. His investment partnership compounded at an impressive 19.8% annually from 1962 to 1975. But along the way, investors had to stomach a staggering 53.4% drawdown during the 1973–1974 bear market. That kind of gut check separates the patient from the panic-prone.
Long-term investing is more about surviving drawdowns. Drawdowns are not a sign that something is broken, they are the tuition fee for superior returns.