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Tag: Warren Buffett

Searching for a Narrative

I love the webcomic XKCD. Not only is it incredibly nerdy, its surprisingly on-point in terms of its take on reality. I found the comic below to be a good example of this:

sports

But whereas I find sports commentary to be somewhat plausible (because its about a specific person or small group of individuals that you might be able to interrogate and make inferences about), I think this is especially true on press describing the stock market.

Take the recent massive market downturn which occurred on Thursday, Aug 4th. Almost immediately, every press outlet had to have an explanation – people talked about fears of a Eurozone crisis, fears that the US and Chinese stimulus which have propped up global demand would vanish, fears that the US would be downgraded, and even talks that this was the media’s fault or the role of greedy banks using flawed computer systems.

The question that you never hear the press answer but which may be more relevant than all these narratives: is it even possible to know? You can’t ask the market what its thinking in the way that you might be able to ask a sports player or even a sports team, and its hard to run controlled experiments in the way a scientist might. And, while the psychology of the buyers and sellers certainly plays a big role, I think the simple truth is this: there is no real way to know, and its not only pointless to speculate but possibly counterproductive to try to explain the market’s movements. We’re all  hardwired to want a reason for something which is insightful and reveals something – but the fact of the matter is that trying to find reasons that aren’t necessarily there or even possible to validate pushes people into investing time and energy trying to control or understand things they can’t.

In my mind, its far better to take Warren Buffett’s approach: don’t waste your time on things you can’t predict or control or understand, take what you can get (the price of a stock or an asset) and make a decision based on that. Who cares why someone is offering to sell you something for $100 that is worth $200 – just make the right choice.

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The Making of an American Capitalist

buffettIf you’re interested in investing, regardless of your investment philosophy/strategy, you should be interested in Warren Buffett, potentially the most successful investor of our time. And, if you’re interested in Warren Buffett and investing, you should read Roger Lowenstein’s biography: Buffett: The Making of an American Capitalist.

Lowenstein’s biography is not “official” in the sense that Buffett did not go out of his way to authorize or support it. But, despite this (and maybe even because of this), it does a great job of delving into the psychology of the “Oracle of Omaha.” It doesn’t pretend to fully grasp the inner workings of Buffett’s mind (otherwise, I believe Mr. Lowenstein would be better suited investing full time in the stock market rather than writing biographies! :-)), but by diving into Buffett’s childhood and by closely examining what the individuals/companies who interacted with Buffett had to say, the book does a great job at painting with broad strokes a hint at Buffett’s character and thinking style.

Rather than the image of an entitled baron or a megalomaniac with a god complex that one might expect from someone with Buffett’s investment record, the biography portrays an insecure and, at times, painfully awkward person who lived in the same house for decades, seemed to subsist entirely on Cherry Coke, hamburgers, and steaks, was (and probably still is) a remarkable cheapskate, and found it difficult to communicate with his family. And yet, what is particularly inspiring is that these very human, “Main Street” traits seemed to have been at the core of his success. Where “more sophisticated” investors chased new gimmicks involving leverage and options and forecasts, Buffett stuck with very simple ideas, like making sure you have a “margin of safety” before making an investment, being patient, and not venturing out into things he did not understand. And, while those other “more sophisticated” investors came and went, Buffett has stuck through year after year delivering impressive results.

More so than that, while Lowenstein doesn’t paint Buffett out to be a saint – he is interested in making money after all – I was amazed by the degree to which Buffett has seemed to retain a moral character that so many financiers have not. Case in point: the end of the book covers Buffett’s takeover of Salomon Brothers after it was embroiled in a Treasury bond scandal that could have seen the firm collapse. Buffett played a major role in helping to save the company, instituting practices which many in the industry (and even at the firm) viewed as naïve – such as bonuses tied to actual performance, a willingness to be truly open book with regulators, and a desire to not just “not cross the line” by employing huge legal teams, but to genuinely stay “way, way away from the line.”

Heck, I’m still shocked Buffett does all of his own taxes!

But, coming back to what I took away from the book as the reasons for Buffett’s success, I saw four overarching themes:

  1. Keep it simple. Buffett’s entire investment philosophy seems to break down into three fairly simple ideas: (1) companies have an intrinsic value that their stock prices will ultimately reflect, (2) the market can be thought of as a manic-depressive named Mr. Market – on his manic days, he quotes very optimistic prices, but on his depressed days, he quotes very pessimistic prices – who doesn’t take offense if you ignore him, and (3) its hard to precisely determine a company’s intrinsic worth, but when that number and the number Mr. Market quotes are far apart, you have a “margin of safety” to make a decision. None of these ideas are particularly complicated or require extremely sophisticated analysis, and the allegory of “Mr. Market” feels more folksy than Ivy League-MBA-quant-heavy-investment-guru. Yes, there is certainly sophisticated thinking and math behind evaluating intrinsic worth, but in reading the book and even in reading Buffett’s essays, you find that his thinking often boils down to other folksy tenets like when he explained one of the main reasons he invested in Coca-Cola, “if you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”
  2. Be consistently honest and moral. I think the book, and the general investing community, focus too little on this. One reason Buffett was able to buy (or at least buy large stakes) in so many companies and inspire loyalty from those who worked with him was that people liked him because they knew he was consistently honest and moral. Its how he was invited on the board of the Washington Post despite the CEO’s initial fear of him as an investor who wanted to take over the company. Its how, in the 1980s, he was able to get into companies who wanted to avoid the aggressive and hostile overtures of the corporate raiders of that generation. And its how he was able to maneuver through the handful of times he or one of his acquisitions had to deal with legal trouble. Hard to dig up skeletons when there aren’t any, and its hard to mistrust someone who will probably always be straight with you.
  3. Be patient. If there’s one thing I’ve observed its that Buffett is remarkably patient. Many of the assets he buys/invests in, he holds for years (and in some cases, he has never let go of or sold). He is also willing to take the time to thoroughly understand a business before jumping in rather than simply jump in on a “hot stock tip” or because the stock price seems to be on an upward trend. But, and what is potentially the most important, he is willing to wait until all the conditions are right before jumping in. In the case of Buffett’s Coca Cola investment, although the stock price had been cheaper before Buffett bought in, Buffett was waiting for the right management with the right focus on growing shareholder value to be set in to invest.
  4. Read everything. One thing which Lowenstein referred to over and over again was the degree at which the CEOs Buffett invested in were surprised at how well Buffett understood the underlying business and the issues facing it. Granted, Buffett seemed to read financial reports and statements for fun, but I think the key takeaway there is that nothing can replace solid fundamental research.

If you’re interested in investing or a biography of one of the world’s most fascinating and successful people or just want a cool look at the inside of a few decades of business, I’d highly recommend the book.

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The Essays of the Oracle of Omaha

image I recently finished reading The Essays of Warren Buffett: Lessons for Corporate America, a great collection of some of multibillionaire Warren Buffett’s greatest writings on business as collected and introduced by Lawrence Cunningham, and would highly recommend it to anyone who wants to know a bit more about investing or business or both.

The book is organized into 8 “chapters”, with each chapter containing a series of excerpts from Warren Buffett’s writings, which as far as I can tell are mostly from the annual reports that Warren Buffett prepares for his company Berkshire Hathaway (I wonder if he writes personal financial reports…). The chapters discuss Buffett’s views on a number of topics, ranging from corporate governance to mergers and acquisitions to accounting to discussions of how investing should work.

Reading the book will give you an interesting look at the mind of one of the most successful investors of all time, but while I valued that insight, I think I was most impressed by three things:

  1. I was amazed at how approachable and “folksy” Buffett’s writings are. Instead of relying on complex jargon and consultant-speak, he speaks in plain English, oftentimes using funny analogies or stories (and sometimes even Biblical/literary parables) or extremely nerdy puns to make very simple points. Case in point, to explain the irrationality of some companies who seem to always pursue that “one magical acquisition” which will take them to success, Buffet writes:

    “In the past, I’ve observed that many acquisition-hungry managers were apparently mesmerized by their childhood reading of the story about the frog-kissing princess. Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations. Initially, disappointing results only deepen their desire to round up new toads. Ultimately, even the most optimistic manager must face reality. Standing knee-deep in unresponsive toads, he then announces an enormous ‘restructuring charge’. In this corporate equivalent of a Head Start program, the CEO receives the education, but the stockholders pay the tuition.”

  2. It was interesting to see how consistent Buffett’s principles have been. It’s rare to find a politician, let alone a businessman, who has had the consistency of values and strategy that Buffett has had. You can take any essay from any chapter of this book, regardless of when it’s from, and, other than mentions of specific years or specific political/cultural references, you would not be able to tell what year that essay had been written. His core message and beliefs on corporate governance, mergers & acquisitions, and especially his investment philosophy have not changed.
  3. I was especially impressed at Buffett’s humility. Most executives seem to desperately crave the spotlight and credit for positive things which have little to do with them and to deflect blame for things which are. I can’t fault them for that, as their salaries and jobs are dependent on the perception that they are capable stewards. But, Buffett takes a markedly different approach. In many an essay about Berkshire Hathaway’s success, Buffett attributes the credit to the managers of the businesses Berkshire owns, oftentimes noting that his job is only to pick good businesses to own and that it is the managers and the businesses themselves that drive success. In essays about Buffett’s missteps, he freely owns up to them. In multiple essays, he has owned up to holding on to his textile business for too long or not exiting General Re’s derivatives business fast enough. Buffett even goes so far as to explain mistakes that he had made which nobody outside of Berkshire’s leadership team would know about (i.e. investment opportunities he could have made but passed on).

While I definitely learned a great deal about business and how Buffett thinks of the market, I think the most important learning that I took away from the book is what Buffett calls the “Noah principle”, and it is something I will aim to try to adhere to for the rest of my life:

“Predicting rain doesn’t count, building arks does.”

(Image credit – Book cover from Amazon)

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