Tuesday, April 01, 2014

Buffett and Ben: That’s As Good As It Gets—Redux—Part I

This is the tenth anniversary of a five-part series of articles published in Viewpointe that I regard with the most pride. Considering that I have been writing an article a month (often more) without fail for somewhere between 15 to 18 years (I’ve lost track), it’s interesting how relevant that series still is to today’s investment environment. The series, under the headline of this article above, was published each month from December 2003 through April 2004.

It detailed the relationship between Warren Buffett and his idol and mentor, the iconic Benjamin Graham (nee Grossbaum), who is looked upon the Father of Value Investing, as well as the author of Security Analysis, a book considered by serious investors as the bible of investing.

The series also provided a comprehensive account of Buffet’s rise in the investment world as he guided Berkshire Hathaway to its prominence at the time, as well as describing his ascent as he rose to become one of the richest men in the world. (A few weeks ago Forbes magazine changed his status from the fourth richest to the third richest man in the world.)

What prompted the idea to refer back to that ten-year old series was my recent receipt, as a longtime shareholder (full disclosure), of the 2014 annual Berkshire Hathaway shareholder letter, always written personally by Warren Buffett. If you are not aware, this annual letter is looked upon by shareholders, investment advisors, money managers, heads of hedge funds, mutual fund managers, just about everyone in the investment industry, as some kind of Holy Grail for investors. Further impetus to revisit the information in the original series is also instigated by the fact that over the last ten-year period, there is a large crop of new resident readers who were not exposed to the original articles.

What follows are the main points of part 5 of the ten-year old article referred to above. If I were to write this same article today, it would be word for word, the same as the original. I have eliminated some subject matters that were only peripheral to the main thrust of the article. I have also added some up-to-date information in brackets where it is necessary to place numbers in perspective, and I have underlined several items that I believe to be especially important. Here is the first part of that ten-year old article:

Buffett and Ben—That’s As Good As It Gets, Part V

While the search for the original Holy Grail has consumed and intrigued scholars for over nine centuries, the hunt for a Holy Grail related to the wealth building process is probably as old as mankind. On a more current basis, every investor, whether amateur, professional, or even institutional, has or wishes to have a system––be it quantitative, qualitative, technical, philosophical, psychological, intuitive—that would reveal Holy Grail-like secrets that guaranteed investment success. Some might argue that these secrets are already contained in the tenets as practiced by Warren Buffett.

Buffett’s fundamentals were derived from the teachings of Benjamin Graham [looked upon as the Father of Value Investing, and the author of Security Analysis, a book still considered the bible of investing.] Buffett was also greatly influenced by the legendary investor, Phillip Fisher, who began Buffett’s transformation from a strict quantitative bargain hunting approach to one that took into account qualitative factors such as a company’s suppliers, customers, management, and franchise value.

Even more influential however, has been Charles (Charley) Munger, Buffett’s long time partner and Vice Chairman of Berkshire Hathaway. Buffett’s son, Howard, once commented that his father was the second smartest man he ever knew; Charley Munger was the first. (As an aside, for you many Costco lovers, Munger is a director of that company. [Costco 2004price: $37.50. Price now: $115]. It was Munger who not only espoused Fisher’s beliefs, but also convinced Buffett that a “bargain” price was not always a bargain, and that “buying a great company at a fair price was far better than buying a fair company at a great price.” In addition, he persuaded Buffett that the long held view that a widely diversified portfolio was an attribute was incorrect. [My opinion: That strategy may be fine for a Buffett or Munger, but not for the average investor.]

Buffett (and the concepts that have guided his enormously successful investing decisions) has been the object of more books than any other investment professional who ever lived. Each author, for the most part, implies that you as an individual investor can emulate the masters’ success by merely following his principles as outlined in his book. I suspect the books’ authors’ true belief is that they will be better rewarded by providing the advice than their readers will be by following it, not because the information is wrong, but because of the difficulty of following the advice.

Here are some Buffett Principles:
  • Unless you can watch your stock holdings decline by 50% without becoming panic stricken, you should not be in the stock market.
  • Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing is wonderful.”
  • Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.
  • As far as you are concerned, the stock market does not exist, ignore it.
  • Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.
  • Lethargy, bordering on sloth remains the cornerstone of investment style.
  • An investor should act as though he had a lifetime decision card with just twenty punches.
  • Do not take yearly results too seriously. Instead, focus on four or five year averages.
  • The advice, “You never go broke taking a profit” is foolish. Always invest for the long term.
  • Remember that the stock market is manic depressive.
  • Buy a business. Don’t rent stocks.
  • Rule No. 1: Never lose money; Rule No. 2: Don't forget rule No. 1.
  • If you insist on trying to time participation in equities, you should try to be fearful when others are greedy, and greedy only when others are fearful.
Here is a recent social comment:
  • If you’re in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.
With all the knowledge you may have accumulated by reading these do-it-yourself books —basically what is purportedly the Holy Grail of investing—would you be ready to apply this wisdom in the belief that you can emulate the master? Not so fast! If, after reading a book describing the techniques of brain surgery, would you be capable of performing a brain operation? If we assume that the strategies used by Buffett actually work (his historical performance records validate that assumption), it is most unlikely that the average investor, even with a full understanding of all the mathematical complexities and principles, could have in the past, or can in the future, duplicate Buffett’s success. All those books out there imply it can be done –– I disagree. Furthermore, Buffett readily admits that the future performance of Berkshire Hathaway’s share price is unlikely to be as spectacularly rewarding as in the past.

Without doubt, the average non-professional investor, even those who are knowledgeable about Buffet and Graham, is most unlikely to achieve their success. Remember, that aside from Buffett’s affability and popularity, there lies a brilliant mathematical mind and the unequalled experience of working with Benjamin Graham on Wall Street. It is impossible for the average investor to duplicate his business experience, intuition, and innate ability to discern the difference between a great buying opportunity and one that is just mediocre, or worse.

You might try to imitate his techniques, but no one can imitate the man. While that conclusion may be a big letdown after investing time and effort in reading this series of articles, and having the Holy Grail within your grasp, but all is not lost. There are other options you might consider.

That is not the end of the 2004 article. However, because of space constraints, this article, Part I of a two part series, must end here. Nevertheless, next month, at the end of this two-part series, you will read that in his new shareholder letter, Buffett describes a decision he made relating to his personal wealth that created shock waves through the investment professional community. More importantly however, you will read that decision provides the average investor with a free piece of invaluable advice by the best investor manager ever, advice that only the most honest money manager would admit to. You will also read that Buffett, almost by design, is not infallible, nor does he claim to be. That’s what is so appealing about the man. He is strikingly self-effacing and readily admits mistakes. See you next month.


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