The Warren Buffet Way How He Really Invests For Those He Cares Most About
The following commentary from Fred Taylor is certainly worth a read
I always read, with interest, the annual Berkshire Hathaway annual report to shareholders (www.berkshirehathaway.com). Aside from the “obvious” financials that one finds in all annual reports, it highlights the folksy style that Buffet writes in, is very short on typical corporate financial obfuscation and very long on common sense (more on this aspect later). I highly recommend to all a visit to their website and taking some time to peruse the report to absorb not only some of it’s flavor, but also the illumination on the technique and rationale that he and his partner, Charley Munger, use in the investment process — and, by the way, Charley gets enormous respect (well deserved) from Buffet while at the same time is hardly known to the general public. He is every bit the investor that Buffet is.
One feature, that is a not to be missed section which tends to appear in each report and with which I’m very familiar going back to around 1977. What is quite remarkable and generally not expected from an investor of his well-deserved reputation is the consistency of his advice — which I’ll opine on and reveal a little bit later.
Before I reveal Buffet’s “secret” to successful investing, let me digress for a moment and comment upon not only him, but others who would similarly be considered in the pantheon of truly great investors. Men such as Buffet, Sir John Templeton, Phillip Carret, George Soros, Richard Rainwater, Jim Rogers, Roy Neuberger, Max Heine, Benjamin Graham, Julian Robertson, John Neff and many others. I’ve had the honor to have been associated with some of these gentlemen and even appeared on programs with a few and they are not only impressive, but inspiring as well.
In his book: The Money Masters (not currently in print, but available from Amazon at an astronomical price) Train profiles many of these great investors. Subsequently, he followed it up with a revised and updated edition that included several more and this book is currently available in paperback at Amazon (and probably other sources as well): Money Masters of Our Time. For those interested in investing and learning some of the “secrets” (which I’ll reveal next), this is a worthwhile investment of your time and money.
In reading both of these books, not only was I looking for insights into some of the great investment minds of our time, but also, given just how inordinately successful these individuals were, was there some sort of common denominator of success in investing — something that not only I but others could emulate.
What is particularly interesting about investment “how to” books is that while those investors who write about their process of investing (Peter Lynch of Fidelity Magellan fame comes immediately to mind and someone currently whose name I refuse to mention) while they reveal their “secret” technique(s) of investing, those who buy the books far more often than not do not even come close to the success of the authors.
Train’s books provide the answer as to why. In reading about all of these individuals, I found that, regardless of the techniques that they used, there were three prime characteristics that all had in common:
1. They were all supremely intelligent. It is readily apparent that “most” investors would not fall into this category. Most would surely not admit to not quite measuring up in this aspect, but this is much like all of the children of Lake Woebegon being “above average!” We all tend to think very highly of ourselves and our intelligence, but…!
2. They had inordinate amounts of common sense. For me, I believe that common sense very well may be the rarest coin of the realm. Having a high I.Q. does not necessarily translate into having a high degree of common sense. We’re all familiar with the case of the absent minded professor and we’ve all known highly intelligent people who didn’t have an ounce of common sense. In investing, common sense is probably the most under-appreciated characteristic of highly skilled and successful investors.
3. They were all extremely disciplined. Each had a specific strategic vision of what they were looking to accomplish and how they wanted to go about accomplishing it. In most cases, it was a long-term strategy and regardless of any events or news of the moment, they stuck with their strategy through thick and through thin. As Templeton once said to me: he was perfectly willing to look dumb in the short term in order to look really smart in the long-term. All of them had this discipline that enabled them to stick with their methodology through the inevitable bad times that would periodically occur and also, which is something that most investors cannot avoid — not get swept away in the euphoric emotions swirling during the periodic good times and manias that we often see as “bubbles” emerge. This discipline enabled them to do that simplest of techniques required for investment success: buy low and sell high. Oh, so simple to know and so difficult to do!
So what does this have to do with Buffet and his now not so secret investing advice for those he really cares about? In the mentioned annual report (2013), in his annual section on investment advice for individuals (see it excerpted below) he reveals what he has been consistently recommending (for individual investors), for decades in his annual report but only now does he reveal that he is putting his money where his mouth is! This is advice that all investors should take very seriously as this is a man who has not only made the successful record that he has, but also from one who has studied under and worked with one of the great investment icons of any generation, Benjamin Graham, who, by the way, also opined similarly in an interview in the Financial Analysts Journal just a few months before his death in 1976 (Graham, for those unfamiliar is the father of modern security analysis.).
Read this excerpt carefully and let it help you to overcome some preconceptions and beliefs in the myths that there are those out there who can consistently beat the market or predict the future or offer advice to investors that will enable them to do so:
“…My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions that I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.).
My advice to my trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P500 index fund… I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals who employ high-fee managers….”
Now while Buffet was recommending a low fee index fund, such as the one offered by Vanguard, which is often favored by the “do it yourself” types, Vanguard just recently publicized:
What is a competent financial adviser or coach worth to the investment process? “…a concrete answer is 3 percentage points… Advisers as behavioral coaches can act as emotional circuit breakers by circumventing clients tendencies to chase returns or run for cover in emotionally charged markets….” Hmmm!
–Investment News March 17, 2014.
Copyright (c) 2014
Frederick C. Taylor
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Permission granted to share or distribute with attribution.
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