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Avoid the Biggest Financial Mistake I’ve Ever Made

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Although his more famous partner gets all the attention, I’m still a big fan of Warren Buffett’s right-hand man, Charlie Munger. Munger has been Buffett’s partner, confidant, and friend for more than 50 years now.

Munger’s role is essentially one of a professional thinker. He’s constantly reading, consuming ideas as fast as his brain will process them. Every now and again he’ll put an important idea or two together and communicate this timeless wisdom to investors. The world is extremely lucky to have a teacher like Munger dispensing this advice.

Remember, Munger is 95 year old and he won’t be around forever. We need to appreciate every new piece of advice he gives.

I know there’s one piece of Charlie Munger’s advice I wish I had listened to earlier in my investing career. My portfolio would be in better shape because of it.

Always invert

One of Munger’s most iconic pieces of wisdom is telling investors to “always invert” — which means that you should always look at something from the opposite side.

The way I embraced this in my portfolio is as follows: instead of trying to make the highest return, focus instead on avoiding situations where there’s massive downside potential. In other words, you’ll succeed at investing by not screwing up too badly.

When I first started investing in the stock market, I embraced a deep value approach. I was attracted to the cheapest stocks on the market, no matter the quality. All these companies needed to do was move from being absurdly cheap to just cheap, and I’d make a decent return.

This happened sometimes, but often a seemingly dirt-cheap stock would fall substantially and get even cheaper. Sometimes, these stocks would even fall all the way to bankruptcy. This obviously hurt my portfolio performance.

Now, thanks to Charlie Munger, I have a much different approach. My portfolio is stuffed with the best quality Canadian blue-chip stocks out there, the kinds of companies I know are rock-solid. I might be losing out on a bit of upside by doing this, but this method ensures that I’m not going to see massive declines in the value of my portfolio.

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My Charlie Munger portfolio

Take one of my biggest positions, Enbridge Inc. (TSX:ENB)(NYSE:ENB). The company is a behemoth in the energy services space, owning an impressive array of oil pipelines, natural gas pipelines, natural gas utilities, and a power generation subsidiary. These are the kinds of businesses that have pricing power, will be in demand for a long time, and aren’t about to get disrupted by new technology.

And, perhaps most important, these assets are poised to throw off gobs of predictable cash flow each and every year.

Enbridge is so big it likely won’t grow much more than 5% annually over the next few decades, which is fine. This growth, combined with the current dividend yield of 6.2%, makes it exceedingly likely I’ll be able to count on an 8-10% total return over time. That’s all I need to make my investing goals come true.

Or, to borrow a baseball analogy, there’s no need to sell out for a home run when a single will win the game.

Another stock I own is BCE Inc. (TSX:BCE)(NYSE:BCE), which might be even more boring than Enbridge. BCE is Canada’s leading telecom with a dominant position in the wireless and wireline part of the sector. But there’s staunch competition, always hanging around to jump on any good growth opportunity.

BCE’s expansion prospects are limited to passing on annual price increases to its existing customers, stealing market share from competitors, and organic growth in the Canadian economy. It also has the odd opportunity to make an acquisition, too. These growth avenues should combine for 3-4% long-term revenue increases annually.

But if we combine that with the company’s 5.3% yield, we get a potential total return in the 9% range with minimal downside risk. Again, that’s enough for me to meet all my investing goals.

The bottom line

Rather than trying to maximize my total return, I’m choosing instead to focus on the safest Canadian stocks I can find. I’m trying to make sure I don’t screw up very badly, in other words. Perhaps your portfolio would benefit from that perspective as well?

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns shares of BCE INC. and ENBRIDGE INC. The Motley Fool owns shares of Enbridge.

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