How to build a resilient investment portfolio in uncertain times? Here are 4 key principles

It is a common belief that it is easy to make money in a bull market. Still, when the going gets tough, it becomes challenging to not only make money but to survive in the market. That is why the song quote: “When the going gets tough, the tough get going” by Billy Ocean needs to be always remembered and drawn inspiration from, even in equity investing when the market turns turbulent.

To further consolidate the focus on building a resilient portfolio one needs to have a clearly defined strategy along with the same power to think and make clear decisions.

Charlie Munger for example, the former Berkshire Hathaway Vice Chairman mastered this art of clear decision making during turbulent times. Giant investors and market veterans like Warren Buffett and Peter Lynch the prominent American investor and the writer of the book: One Up on Wall Street have both shown similar traits of mastering themselves in chaos. Due to the same they have also outperformed the benchmark indices for very long periods of time.

What can new investors learn from these investing legends?

On a cumulative level, their principles, rooted in intellectual humility, psychological discipline, and long-term thinking, offer valuable insights for strategists today which if followed can lead to epic wealth creation. Let us briefly touch up some of the ideas shared by them:

Understand both sides of the argument before deciding

During turbulent times it is important to carefully understand both sides of the argument before taking an investment call. For example, during the hype of the AI surge of 2023, Munger elaborated analyzing both sides of the argument: “I never allow myself to have an opinion unless I know the other side’s argument better than they do.”

His intense, well thought approach and scrutiny of psychological biases and short-falls helped him navigate through irrational exuberance. For example during the dot-com bubble, Berkshire avoided overhyped tech stocks, underperforming briefly but ultimately outperforming after the crash.

Focus on developing a strategy and thinking independently

Buffett just like Munger believed in building decisions from the ground up rather than predicting trends. Now to escape the crowd psychology it is important to think independently. For the same one should consider reading as much as possible.

Munger viewed independent thinking as the key behind escaping crowd psychology. For example, Berkshire exited the textile business in the 1980s, after understanding that industry wide cost reducing efforts would benefit customers. They will not boost profits. To foster independence individual investors should encourage diverse perspectives, build knowledge and consider understanding the fundamentals of the market on a deeper level as elaborated by Munger and Buffett both in numerous Annual General Meetings (AGMs) of Berkshire Hathaway.

Stay in your circle of competence and understanding

Munger stressed operating within areas of expertise, stating that clarity stems from understanding one’s strengths and limits. For decades, Berkshire avoided complex industries like biotech. However, Munger also expanded his competence when necessary, such as investing in Apple after recognizing its ecosystem strength.

Circle of competence is another thesis proposed by both Warren Buffett and Charlie Munger as their central idea of investing. Many modern investment managers, fund managers and bankers follow these ideas diligently even today to succeed in capital markets.

Charlie Munger’s famous quote discussing this thesis is: “I want to think about things where I have an advantage over other people. I don’t want to play a game where people have an advantage over me. I don’t play in a game where other people are wise and I am stupid. I look for a game where I am wise and they are stupid. And believe me it works better. God bless our stupid competitors. They make us rich.”

Balance patience, composure and calmness with bold action

For this idea, Munger stated that: “The big money is not in the buying and selling, but in the waiting.” This idea also resonated in the Coffee Can Investing thesis of Robert G. Kirby.

Even Peter Lynch has mentioned this idea in his prominent books and various press meets. He believes that to navigate difficult markets it is crucial to make considered decisions with a long term vision.

Hence, Munger’s vision of careful consideration, independent analysis, focus, and decisiveness, still remains a beacon for clear thinking amid uncertainty.

To conclude, it has been stated that to build a resilient investment portfolio during economic downturns is difficult to do. Still, by following well established principles and ideas as discussed above it is not something impossible.