Being Like Buffett: Easy to Say, Hard to Do

[KinAlberta]

Nothing special here, but a good read.

 

I still think good advice is for people to put half of all equity savings into a broad equity index and use that as a benchmark for one's direct equity share purchases. If they are good, soon that indexed portion will mean nothing opinion comparison to the overall gains anyway.

 

Being Like Buffett: Easy to Say, Hard to Do

 

 

http://news.morningstar.com/articlenet/article.aspx?id=771949

 

[rb]

Kin, I'm sorry to day this, but you're so right that you're wrong. Btw, I don't think that was Buffett's idea, I remember reading it in the Intelligent Investor.

 

The reason why I disagree with you is the human condition. The person that is capable of that level of discipline and introspection to benchmark his or her investments against an index is the person able to beat that index. The ones who don't have that capability are the ones who are not. Hence, it becomes a moot point.

[Jurgis]

Kin, I'm sorry to day this, but you're so right that you're wrong. Btw, I don't think that was Buffett's idea, I remember reading it in the Intelligent Investor.

 

The reason why I disagree with you is the human condition. The person that is capable of that level of discipline and introspection to benchmark his or her investments against an index is the person able to beat that index. The ones who don't have that capability are the ones who are not. Hence, it becomes a moot point.

 

rb, that's a https://en.wikipedia.org/wiki/No_true_Scotsman fallacy.  8)

[KinAlberta]

You'll notice on sites like this and say gurufocus, etc. that while the sites were conceived to learn and track the masters, the focus of users/posters/article submitters is often very much on their own picks and not on what the masters are doing.

 

It seems to me that everyone wants to be like them without really studying or following them, or even investing directly with them.

[KinAlberta]

Kin, I'm sorry to day this, but you're so right that you're wrong. Btw, I don't think that was Buffett's idea, I remember reading it in the Intelligent Investor.

 

The reason why I disagree with you is the human condition. The person that is capable of that level of discipline and introspection to benchmark his or her investments against an index is the person able to beat that index. The ones who don't have that capability are the ones who are not. Hence, it becomes a moot point.

 

No, I didn't mean to imply that it was Buffett's idea. That's my own thinking, which I posted on here a while back.  I don't even recall reading such advice in the Intelligent Investor. If it is, then I just stole the idea without realizing or remembering it. Either way, it seems pretty basic, like putting money with different brokers to see how each one does over time. Today you have indexes and ETFs to match the near unbeatable index. If you're an average investor you'd still do well over time by being saved by your index allocation.  One's losses could even serve as a means to reducing the eventual tax on the indexed funds.  :-)

[rb]

It seems to me that everyone wants to be like them without really studying or following them, or even investing directly with them.

I know. For a while I used to be one of those people. I felt that handing out money to BRK is kinda like cheating and that to be trully great I have to match or beat the great performance on my own or some nonsense like that. Then I woke up from my stupidity, figured that Warren is a genius and is willing to work for me for free I must be an idiot to turn him down. So when BRK got to a really good price I backed up the truck and haven't looked back. :)

[rb]

Kin, I'm sorry to day this, but you're so right that you're wrong. Btw, I don't think that was Buffett's idea, I remember reading it in the Intelligent Investor.

 

The reason why I disagree with you is the human condition. The person that is capable of that level of discipline and introspection to benchmark his or her investments against an index is the person able to beat that index. The ones who don't have that capability are the ones who are not. Hence, it becomes a moot point.

 

No, I didn't mean to imply that it was Buffett's idea. That's my own thinking, which I posted on here a while back.  I don't even recall reading such advice in the Intelligent Investor. If it is, then I just stole the idea without realizing or remembering it. Either way, it seems pretty basic, like putting money with different brokers to see how each one does over time. Today you have indexes and ETFs to match the near unbeatable index. If you're an average investor you'd still do well over time by being saved by your index allocation.  One's losses could even serve as a means to reducing the eventual tax on the indexed funds.  :-)

I know. What you say makes perfect sense. I think i came across the wrong way. I didn't mean to disagree with your premise or argument. I just meant to say that an investor who realizes that and/or employs that strategy is way above an "average" investor.

[KinAlberta]

A direct link to the above referenced article...

 

September 26, 2016

Comments on investment philosophy - part one of hopefully a few...

 

When I was starting out in the investment game I read Warren Buffett's letters from inception, Ben Graham, Phil Fisher, anything I could on Charlie Munger and the rest of the standard investing canon.

 

One thing that had a profound effect on me was Warren Buffett's twenty punch card. (Quoted here...)

 

Buffett has often said, "I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better."

 

Buffett is right. That would be a really good way to run your private investments - you would, I think, be very rich by the time you were old. And indeed ...

 

 

 

 

http://brontecapital.blogspot.ca/2016/09/comments-on-investment-philosophy-part.html

 

 

 

 

 

[Jurgis]

Maybe not the best thread to post this, but it came to my mind while reading Kin's advice.  8)

 

My index adventure.  8)

 

I have 401k that can only buy limited set of mutual funds. I allocated it 80% stocks, 20% bonds (a bit over Graham 75%-25% suggestion). Except that I split stocks 40% US indexes, 40% International. 5+ years later (adding money each year): the performance of international stocks is close to performance of US bonds. So in toto I have performance of 40% stock, 60% bond portfolio. Clearly way below 100% US stock index or even 80% US index, 20% bond index.

 

And that's the story of someone who is dedicated and steadfast enough to put money into index(es), keep it there, and not waver from the course.  ::)

 

Some people might say "why the heck you put 40% into international", which is a great question, but IMO points in the wrong direction. ;)

[Guest longinvestor]

It seems to me that everyone wants to be like them without really studying or following them, or even investing directly with them.

I know. For a while I used to be one of those people. I felt that handing out money to BRK is kinda like cheating and that to be trully great I have to match or beat the great performance on my own or some nonsense like that. Then I woke up from my stupidity, figured that Warren is a genius and is willing to work for me for free I must be an idiot to turn him down. So when BRK got to a really good price I backed up the truck and haven't looked back. :)

+1 same here.

 

In all of the comparative performance of BRK versus index, it's more than likely that the typical BRK shareholder reaped at least the reported performance numbers shown in the Morningstar report. Because if you are a 10 year holder you likely held it for longer. Plus if you backed up the truck in 2009 ish you got better than that. Index investors similar? Don't know because I'm not one. How many people backed up to index in 2009?

[Vish_ram]

Like most people here, I've read everything about Buffett and admire him greatly for his acumen and philanthropy.

 

The one thing that is just plain stupid is this "20 punches for lifetime" thing. It is ok if you take the spirit of it and not take it literally.

 

If you are a passive investor without any investing knowledge, how will you implement it? You are most likely to pick crappy stocks and lose it all. Even if you are lucky enough to pick some good ones, what are the chances of those companies doing well over your lifetime? Look at the turnover of stocks in S&P 500 index. Very few survive in this day and age.

 

If you are an active investor, then are you supposed to sit tight after making those 20 punches? What if those companies prospects change? Look at how many publicly traded stocks that Buffett has bought and sold.

 

This is one of those "do what I say and not what I do" type of advice. I think for one of his near/dear, the advice he gave was to put the 90% in S&P 500 and 10% in treasuries.

 

[TedKord]

Buffet's advice itself has changed over the years. I suggest partially from greater experience and partially from the sheer size of the company he has to run. The Buffet Partnership didn't make incredible returns investing in the S&P 500. Nor did the Partnership only buy stocks to hold forever. For every American Express there was a Kaiser Aluminum. A private investor, who runs a few million bucks in a private portfolio andwho can afford to put in serious elbow grease, doesn't need to run his portfolio like CALPERS. Not that CALPERS and investors without extra time wouldn't benefit from Buffet's advice. For most of us on the board, their has been plenty of excess returns in FELP and SCX (thank you Picasso), that truly are too small for BRK nowadays, but would have easily fit into the Buffet Partnership.

[Ballinvarosig Investors]

It is ok if you take the spirit of it and not take it literally.

Of course Warren didn't mean for the 20 punches to be taken literally. I mean really, if you found yourself owning the likes of Valeant, it was your 20th punch and it was steadily going down the crapper and you knew it, you'd hardly say to yourself "well, I am out of punches, so I'll just have to holding onto  my stock hope for the best".

 

What Buffett is saying is that over the course of a year, we're likely to only be presented a handful of excellent investment opportunities. He's saying instead of constantly dipping in and out of mediocre stocks, we should be waiting for the fat pitch.

"In that book Father, Son & Co. [subtitle: My Life at IBM and Beyond] you may have read, that Tom Watson Junior recently wrote, he quoted his father as saying “I’m no genius. I’m smart in spots but I stay around those spots.” And that’s all there is to it in investments – and business. I always tell the students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision they used up one of those punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five, or three, or sever, and you can get rich off five, or three, or seven. But what you can’t get rich doing is trying to get one every day. The very fact that you have, in effect, an unlimited punch card, because that’s the way the system works, you can change your mind every hour or every minute in this business, and it’s kind of cheap and easy to do because we have markets with a lot of liquidity – you can’t do that if you own farms or [real estate] – and that very availability, that huge liquidity which people prize so much is, for most people, a curse, because it tends to make them want to do more things than they can intelligently do."

[scorpioncapital]

The 20 punch card method is tied at the hip with skill. Presumably, a modestly skilled investor would never add Valeant to 1 of the 20 punches. I have to say, I was never tempted by it and that other so called value investors bought it just suggests they were not following the 20 point system or did not have even a basic level of skill.

[LC]

The 20 punch card method is tied at the hip with skill. Presumably, a modestly skilled investor would never add Valeant to 1 of the 20 punches. I have to say, I was never tempted by it and that other so called value investors bought it just suggests they were not following the 20 point system or did not have even a basic level of skill.

 

no hubris there

[Guest longinvestor]

It is ok if you take the spirit of it and not take it literally.

Of course Warren didn't mean for the 20 punches to be taken literally. I mean really, if you found yourself owning the likes of Valeant, it was your 20th punch and it was steadily going down the crapper and you knew it, you'd hardly say to yourself "well, I am out of punches, so I'll just have to holding onto  my stock hope for the best".

 

What Buffett is saying is that over the course of a year, we're likely to only be presented a handful of excellent investment opportunities. He's saying instead of constantly dipping in and out of mediocre stocks, we should be waiting for the fat pitch.

"In that book Father, Son & Co. [subtitle: My Life at IBM and Beyond] you may have read, that Tom Watson Junior recently wrote, he quoted his father as saying “I’m no genius. I’m smart in spots but I stay around those spots.” And that’s all there is to it in investments – and business. I always tell the students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision they used up one of those punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five, or three, or sever, and you can get rich off five, or three, or seven. But what you can’t get rich doing is trying to get one every day. The very fact that you have, in effect, an unlimited punch card, because that’s the way the system works, you can change your mind every hour or every minute in this business, and it’s kind of cheap and easy to do because we have markets with a lot of liquidity – you can’t do that if you own farms or [real estate] – and that very availability, that huge liquidity which people prize so much is, for most people, a curse, because it tends to make them want to do more things than they can intelligently do."

o

+1

 

If one considers the 75 year(age 11 onwards)investing career, Buffett has bought relatively few securities. Plus under Munger 's guidance he started concentration. The wholly owned subsidiary is in a sense a practice of unnecessary trading. Avoidance that is.  Think it's a big stretch to say that Buffett is preaching something he doesn'tp practice

[Ballinvarosig Investors]

The 20 punch card method is tied at the hip with skill. Presumably, a modestly skilled investor would never add Valeant to 1 of the 20 punches. I have to say, I was never tempted by it and that other so called value investors bought it just suggests they were not following the 20 point system or did not have even a basic level of skill.

 

no hubris there

Thank you for saying so. You've actually hit the nail right on the head. There is a severe lack of hubris in many market participants today. I find it remarkable that only 8 years after the worst of the last crisis, so many of the lessons of that debacle have already been forgotten. It seems like there is a new mantra of fake value investing that has gained acceptance in today's market.

 

Some of the common themes from this mantra are.

• Concentration is key
  
• Never sell a compounder
  
• Don't worry about overpaying for a great business
  
• Growth is value
  

 

I am not saying any of the above statements are wrong, I am just saying they are being taken to ridiculous extremes in today's market. I have intelligent value investing friends who are just getting giddy at their 50x earnings stocks making new highs month on month. They know themselves that the valuation is detached from reality, but they just cannot bring themselves to sell. It actually takes me back to 2000 when I was still in college and working in a tech. company that was at an astronomical valuation. Regular members of staff would come in each day to find their million dollars worth of company stock were just going up, and up and up. Any one of them could have retired, but none did.

 

FYI, I am not calling a market top here, I am just choosing to play in the value part of it, ignoring the frothy growth part.

[Guest ajc]

 

Thank you for saying so. You've actually hit the nail right on the head. There is a severe lack of hubris in many market participants today. I find it remarkable that only 8 years after the worst of the last crisis, so many of the lessons of that debacle have already been forgotten. It seems like there is a new mantra of fake value investing that has gained acceptance in today's market.

 

Some of the common themes from this mantra are.

• Concentration is key
  
• Never sell a compounder
  
• Don't worry about overpaying for a great business
  
• Growth is value
  

 

I am not saying any of the above statements are wrong, I am just saying they are being taken to ridiculous extremes in today's market. I have intelligent value investing friends who are just getting giddy at their 50x earnings stocks making new highs month on month. They know themselves that the valuation is detached from reality, but they just cannot bring themselves to sell. It actually takes me back to 2000 when I was still in college and working in a tech. company that was at an astronomical valuation. Regular members of staff would come in each day to find their million dollars worth of company stock were just going up, and up and up. Any one of them could have retired, but none did.

 

FYI, I am not calling a market top here, I am just choosing to play in the value part of it, ignoring the frothy growth part.

 

 

TL;DR The people you're talking about might have a point if they've selected the right companies using a sound, growth investment methodology.

 

 

My view is this thinking is all wrong. The real question here is one of sizing up the market opportunity for those companies. Let's say that you're back in the 90's. I had left school a few years before the bubble burst. You're back there though and you've found the next Microsoft. Theoretically. Let's assume you're a smart individual who looked at what Phil Fisher did with Motorola and a few other businesses and you worked out how to apply that to the first internet boom, and you understood that Microsoft was definitely going to be one of a handful of corporations that would completely change the world and had a good operating model too.

 

What do you do?

 

I mean, you're arguing that the hubris now is as pervasive as it was around the worst part of the Dotcom bubble and yet, the evidence points far more to the opposite conclusion. Recently, there was a well-publicized correction in the private market values of many tech unicorns sometimes of about 25% or more. This happened less than a year ago. The vast majority of those companies though got right back to what they were doing before and continued growing revenues. Furthermore, most of these companies are genuine businesses with functioning models and positive unit economics. Unlike most companies in the late 90's which had no sales or customers.

 

Here are a few more things to note if the recent big correction in the values of those companies and the fact that they mostly have real customers, revenues, and decent unit economics is not enough....

 

Back in the 90's, you couldn't turn around without bumping into someone who was heading to Silicon Valley in order to become an instant millionaire. This wasn't just people you knew, or things you heard about, this was a mania so big that every major news channel and every big newspaper was running documentaries and stories about this stuff on a weekly basis where it was reported as being completely normal and great. Nothing could go wrong in the view of 99% of the entire country. This included coffee barristers, most CEOs, teachers, everyday people from all over, VCs, experienced fund managers, the list goes on and on. To say that what we're experiencing now in the market, daily life, and the media is anything like the late 90's is to misremember those days completely.

 

Where are the constant headlines about the next amazing, guaranteed-hit IPO? Where are the TIME Person of the Year awards for hot stuff tech CEO's? In the last 5 years of the 90's there were 2 (Grove of Intel and Bezos of Amazon), in the last 5 years since 2011 there have been zero. Stories of day traders making millions after having been working at some crappy job for years were a dime a dozen on major networks. Regular workers in boring old economy companies like Enron, AT&T, and others were seeing the value of their 401k's soar year after year for the entire decade of the 90's. Guys like Bill Miller were featured in magazines and on TV on a consistent basis and could do no wrong. Name one fund manager today that invests heavily in tech who the whole country knows?

 

There's more though on the valuation side. I don't think most people appreciate the changes that've occurred since then and because of that there's a good chance they're underestimating the potential that a company like the next Microsoft might have. Look at it this way.... at the start of 1999 near the height of the Dotcom bubble there were about 150 million internet users. Today, there are over 3 billion. By 2020, that number will be around 5 billion according to estimates. On top of that, the global average of GDP per capita since 1999 has more than doubled. So what you have is a global user base that'll be over 30 times bigger by 2020 and about 2.5 times richer. If you want to do a back of the envelope calculation based on Microsoft's $600 million market cap at the height of the Dotcom bubble then the most valuable technology company in the world if 2020 was going to be the next peak would be worth $50 trillion. Even if you were conservative and said you should only use Microsoft's post-crash valuation, you'd still end up with a $25 trillion dollar market cap - all things being equal (even if they're not).

 

That's why I think it matters where we are today. If you had the knowledge and methodology to identify Microsoft anytime before 1995 you were going to earn incredible returns. Even if you bought it anytime before 1998 you lost none of your principal. The question of environment then becomes one of whether we're in a 98, 99, or 00 situation. My own perspective is that we're not that close. Recent private market corrections have been substantial, there are almost zero weekly headlines ramping up the paradigm-shifting, world-conquering nature of the biggest new technology companies, and if anything their CEOs are more feared and reviled than lauded and put on a pedestal. The NASDAQ's new highs are boring news and they're definitely not raved about fanatically.

 

Of course, the question of whether it's possible to figure out with a reliable degree of accuracy which companies will win and which won't is a big part of the equation but it's also another discussion. However, until we start seeing valuations of at least $5 trillion for the newest big tech companies and a media and social environment where everyone and their brother is losing it over how technology is going to make everyone rich overnight and change our lives instantly and for the better, I'd say we're not too near the top for the Web 2.0 boom. That's not to say there can't be a correction or volatility as there always is, but I think the criticisms of this current growth stock environment might be misguided and there are some pretty strong arguments out there which represent the contrarian view.

 

 

 

[Jurgis]

Nice post, ajc.

[LC]

It seems like there is a new mantra of fake value investing that has gained acceptance in today's market.

 

Some of the common themes from this mantra are.

• Concentration is key
  
• Never sell a compounder
  
• Don't worry about overpaying for a great business
  
• Growth is value
  

 

Yes but I think a lot is driven by interest rates. But we all play to the tune of interest rates.

 

The 5-year treasury yields 1.2%.

What should the blue-chip compounding companies (CPGs, Microsoft, etc.) yield in this type of environment?

3.5%? 4%? 5%? 

 

I think the bigger question is should interest rates be this low, and for how long?

Is there a legitimate, economic reason that rates should be low for a long period of time in the US?

 

If you think the answer is yes, then I think you can invest with an intellectually-clean conscience at these prices.

 

For example, my portfolio is in my signature. There's some companies in there trading at some high (>20x) earnings ratios. But I have argued for a while now on this board that the real cost of capital has been steadily decreasing due to improvements in global education, global travel/transportation, physical resource allocation, the internet/service economy, and other reasons.

 

Take a look at the economics behind real estate: it is cheaper, faster, and easier to build a home today than ever before. Parts and people are readily available. All the major aspects have become standardized (plumbing, electrics, etc.) where it's practically "plug-and-play". The point is, the human, intellectual, and physical capital required have become much easier to manage. So in this case, the risk underlying this asset has been greatly decreased, and so should the associated interest rate.

 

Most other businesses I've looked at or worked in have illustrated the same general theme. Therefore, I think you can at least make the argument for the case of long-term low interest rates.

[rawraw]

 

Yes but I think a lot is driven by interest rates. But we all play to the tune of interest rates.

 

The 5-year treasury yields 1.2%.

What should the blue-chip compounding companies (CPGs, Microsoft, etc.) yield in this type of environment?

3.5%? 4%? 5%? 

 

I think the bigger question is should interest rates be this low, and for how long?

Is there a legitimate, economic reason that rates should be low for a long period of time in the US?

 

If you think the answer is yes, then I think you can invest with an intellectually-clean conscience at these prices.

 

Have you seen Damadoran analysis of interest rates? It's a pretty compelling case that rates should be low until things pick up IMO

[LC]

 

Yes but I think a lot is driven by interest rates. But we all play to the tune of interest rates.

 

The 5-year treasury yields 1.2%.

What should the blue-chip compounding companies (CPGs, Microsoft, etc.) yield in this type of environment?

3.5%? 4%? 5%? 

 

I think the bigger question is should interest rates be this low, and for how long?

Is there a legitimate, economic reason that rates should be low for a long period of time in the US?

 

If you think the answer is yes, then I think you can invest with an intellectually-clean conscience at these prices.

 

Have you seen Damadoran analysis of interest rates? It's a pretty compelling case that rates should be low until things pick up IMO

 

Could you link the one you are referring to? I see a few on his blog from various times, not sure which you're referring to.

[rawraw]

 

Yes but I think a lot is driven by interest rates. But we all play to the tune of interest rates.

 

The 5-year treasury yields 1.2%.

What should the blue-chip compounding companies (CPGs, Microsoft, etc.) yield in this type of environment?

3.5%? 4%? 5%? 

 

I think the bigger question is should interest rates be this low, and for how long?

Is there a legitimate, economic reason that rates should be low for a long period of time in the US?

 

If you think the answer is yes, then I think you can invest with an intellectually-clean conscience at these prices.

 

Have you seen Damadoran analysis of interest rates? It's a pretty compelling case that rates should be low until things pick up IMO

 

Could you link the one you are referring to? I see a few on his blog from various times, not sure which you're referring to.

http://aswathdamodaran.blogspot.com/2015/09/the-fed-interest-rates-and-stock-prices.html