Think in Terms of Total Return

Another key component for successful investment management is to think in terms of the total return expectation for each and every investment one makes (including cash).

• the price you pay determines your return.....therefore the lower the price the better the returns
• Graham: "Buy stocks like you buy groceries, not like you buy perfume."
• Example: Buying Coca Cola stock at 50% off today's price will enhance returns nicely over a long timeframe (say 20 years, until the time you really need to "liquify" the holding if at all).
• Again, when you look at your statement each month and see the $ figure of your portfolio, that represents ONLY the amount you would receive if you liquidated your portfolio TODAY. It DOES NOT represent the VALUE of the ultimate liquidation date (which is more than likely many years ahead). Seeing that you are likely to be a NET PURCHASER of holdings until liquidation is required, you want a LOWER price , NOT a higher one.
• SO if I am able to buy Coca Cola stock at a 50% discount today, I love it because it enhances my TOTAL RETURN expectations until I will want to sell (which includes the dramatically increased dividend yield as a result of the lower price)

Simplify

A key component for long-term investment success is in keeping things simple. The markets can actually be quite complex, however there are ways to see things from a more simplistic level, particularly as an individual investor. Here's an example:

Suppose you are a baby boomer who will retire in about 15 to 20 years time and have an investment account where the proceeds will not be required until AFTER that particular date. Then realistically one should NOT be concerned about what happens with the movements (either up or down) of the portfolio during that 15-20 year period or longer. They should only be concerned with what the investments will look like after that period of time. Psychologically it can be quite difficult NOT to be concerned to see an investment portfolio decline in value (like many portfolios did in the crash of 2008).

However, should an individual really be THAT concerned if the $$$ is not required immediately? In fact, an investor SHOULD be happy with such an occurrence because he or she is a NET BUYER of securities so they are able to buy investments at a discounted price. Like Munger says: "Invert, always invert."

• the value of a business today should only be concerning if you are a BUYER....in other words you want a lower price, not a higher one!
• for individual securities: the value of any business is the net present value of future cash flows, so if an investor won't need the $$$ for the next 15-20 years, the value of the their investments will be discounted based on the subsequent long-term discounted FUTURE cash flows AFTER 15-20 years......SO, really the value of one's portfolio should only be viewed based on what an investment's future cash flows are over a 30 year timeframe....how many companies have THAT kind of staying power??? Not many , but there are some :)
• compounding matters more and more as the time frame gets extended.
• therefore, as a 30 year investor, DURABLE competitive advantage of a business is the most critical.
• a finite competitive advantage is a death sentence because people end up overpaying for an advantage that only lasts a short time. DURABLE competitive advantage, on the other hand, is like heaven on earth...paying a reasonable price for such a business and waiting for compounding to do its work is what it's really all about.
• the bottom line is that only a few businesses are required to make one successful as a long-term investor. Buy only the ones maintaining DURABLE advantages at reasonable prices....it's really as simple as that!