The unknown story of the guy that could have been “Buffett” famous!
When it comes to long-term investing, many people think the goal is to maximize returns as quickly as possible. But as investors like Warren Buffett and Charlie Munger demonstrate, it’s more about optimizing for endurance rather than maximizing for short-term gains.
Let’s break this down by looking at two key ideas: the difference between optimizing and maximizing, and a fascinating story about Rick Guerin, a brilliant investor who was right there with Warren and Charlie but made one crucial mistake.
Optimize, Don’t Maximize
In investing, many fall into the trap of trying to maximize every possible gain. They chase higher returns, often using leverage to amplify their winnings or change investment strategies year by year. But here’s the problem: when things go wrong—and they inevitably will—the downside risk is magnified just as much. Losses are amplified, margin calls can force you to sell at the worst possible time, interest costs erode returns, and increased volatility leads to rapid swings in value. In such cases, leverage can turn minor setbacks into catastrophic losses. As Warren Buffett famously said, “The more you bet, the more you lose when you lose.” Instead of aiming to always maximize performance, Buffett and Munger operate at what might seem like 70% of their potential, choosing steady, optimized growth over time.
This strategy allows them to survive the bad days, which is key. Howard Marks, investor and co-founder of Oaktree Capital Management, often says it’s about surviving on the bad days, not just thriving on the good ones. And let’s face it, the market isn’t always sunshine and rainbows. It’s volatile, unpredictable, and full of surprises—think the dot-com crash, the 2008 financial crisis, COVID, the list goes on. By focusing on endurance, you can weather these storms and still come out ahead in the long run.
The Tale of Rick Guerin
Here’s where the story of Rick Guerin comes in. In the 1960s, Rick Guerin was investing alongside Buffett and Munger, making the same brilliant moves. However, Guerin took on too much margin (debt) in an effort to amplify his returns. When the 1974 bear market hit, he was wiped out. Buffett later reflected, “Rick was just as smart as us, but he was in a hurry.”
Buffett and Munger, on the other hand, took the slower, more methodical route. They didn’t try to maximize in the short term, and as a result, they’ve compounded their wealth over decades. This is the core idea behind strategic mediocrity, a term popularized by PIMCO in its early days. It means not worrying about being in the top half of performers every single year but ensuring that over a longer horizon—10 or 20 years—you end up in the top 10%. Consistency beats flashy, short-term wins.
Why Strategic Mediocrity Wins
Strategic mediocrity may sound underwhelming, but it’s a winning strategy in investing. By optimizing for long-term success, rather than short-term brilliance, you avoid unnecessary risks that can derail your portfolio. As Morgan Housel, acclaimed financial writer and partner at the Collaborative Fund, puts it, “You don’t get paid for making big wins; you get paid for enduring volatility.” Essentially, investing is a marathon, not a sprint, and you need to pace yourself.
In summary, investing isn’t about being a genius who always picks winners. It’s about enduring through the inevitable ups and downs, making smart, steady decisions, and optimizing for the long haul. As the Rick Guerin story shows, even the smartest people can stumble if they try to do too much too quickly. So next time you’re tempted to go all-in on a hot stock or get out of your long-term allocation based on market events, remember that slow and steady wins the race.