Friday, December 7, 2012

Buffett: The Long Run Trumps Quick Returns

From this recent article by Andrew Ross Sorkin:

"If somebody bought Berkshire Hathaway in 1965 and they held it, they made a great investment — and their broker would have starved to death." - Warren Buffett

For Buffett, the Long Run Still Trumps the Quick Return

Sorkin sat down with Warren Buffett and journalist Carol Loomis last week for lunch right before the two were about to do an interview on "The Daily Show With John Stewart."

Buffett and Loomis on "The Daily Show" - Part I
Buffett and Loomis on "The Daily Show" - Part II

Buffett is well known for buying businesses (or pieces of businesses via marketable stocks) with the idea of owning them for the long run. Not surprisingly, he sees the increased emphasis on trading these days as being unfortunate. More from the article:

The argument that the markets are better off today because of the enormous amount of liquidity in the stock market, a function of quick flipping and electronic trading, is a fallacy, he said.

He also said that the high volume turnover in stocks and liquidity in the markets "means that to a great extent, it's a casino game..."

Buffett and Loomis have been doing a series of interviews to discuss the new book, Tap Dancing to Work.

Tap Dancing to Work by Carol Loomis

They were both recently also on Charlie Rose, CNBC, and other media outlets.

Buffett and Loomis on Charlie Rose
Buffett and Loomis on CNBC - Part I
Buffett and Loomis on CNBC - Part II

Buffett was asked if there was anyone in the private equity business that he admired.

...he flatly replied: "No."

Buffett also added that but generally thinks the investor class of this generation is less capable:

"They're not as good as the old ones generally. The field has gotten swamped..."

He doesn't seem to think much of most hedge fund managers, but did say he liked Seth Klarman.

The article also covers Buffett's thoughts on:
- Hedge fund compensation
- Why shorting stocks is "too hard"
- Pension fund performance

These days, Warren Buffett thinks of himself as just as much a business manager as an investor. He's focused on building the business and spends less time on purely investing.

Yet, though too few seem to do so, many of the principles and ideas behind his investing success can be learned and put to effective use by those willing to do the necessary work.

In her new book, Carol Loomis points out Berkshire's stock was selling for $ 22/share in 1966, the first time she mentioned Buffett's name in Fortune (and spelled his name incorrectly). The stock is selling for roughly $ 131,000/share as write this.

A more than 20% annualized return -- and just under a 600,000% cumulative return -- over a 46 year or so period.

To get these results, there was no clever trading of Berkshire's stock required. In fact, as is pointed out in the quote at the beginning of this post, not trading the stock eliminated the associated frictional costs. It also eliminated the possibility of making dumb (and expensive) trades along the way.

When an investor finds attractively valued shares of a good business*, trading it is likely to just hurt long-term performance. That was true many years ago. It remains true today.

I don't expect a significant proportion of market participants to be convinced of this anytime soon.

Instead of putting sound long-term investing principles to work, many still try to get results by actively trading whatever is on their radar. They do this despite overwhelming evidence that a highly active approach is unlikely to produce satisfactory long run results.

Somewhat amazing, but an opportunity for anyone who's willing to adopt a more sensible long-term investing approach, and lucky enough to have a long investing horizon.

Check out the article in its entirety.

Adam

* Ideally, run by honest and capable managers, of course.
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