Back in February students from business schools were invited to come visit Warren Buffett for a Q&A session.
Here are some excerpts from notes taken during the visit including, among other things, a formula for value that goes back to 600 BC:
Buffett:
When I do invest, I don't care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. Avoid debt. I decided early on that I never wanted to owe more than 25% of my net worth, and I haven't…
Well, at least not since the early days. Buffett prefers to always be in a strong position and too much debt can get in the way of that.
Buffett:
The formula for value was handed down from 600 BC by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out. When interest rates are 20%, you need to get it out right now. When rates are 1%, you have 10 years. Think about what the asset will produce. Look at the asset, not the beta. I don't really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price. I don't care if they close the NYSE for 5 years. I care more about the business than I do about events. I care about if there's price flexibility and whether the company can gain more market share. I care about people drinking more Coke.
I bought a farm from the FDIC 20 years ago for $600 per acre. Now I don't know anything about farming but my son does. I asked him, how much it cost to buy corn, plow the field, harvest, how much an acre will yield, what price to expect. I haven't gotten a quote on that farm in 20 years.
Check out the notes in their entirety.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, November 12, 2009
Wednesday, November 11, 2009
Why Buffett's Not a Big Fan of Gold
Warren Buffett said this about investments in gold during an interview with Becky Quick on CNBC in March:
"I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it's a lot–it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset."
In the long run, a productive asset like a good business (or shares of) is likely to create more value over time than a non-productive asset like a chunk of yellow metal.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything
"I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it's a lot–it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset."
In the long run, a productive asset like a good business (or shares of) is likely to create more value over time than a non-productive asset like a chunk of yellow metal.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything
Tuesday, November 10, 2009
Miscellaneous Munger Quotes
"I don't have too much interest in teaching other people how to get rich. And that isn't because I fear the competition or anything like that — Warren has always been very open about what he's learned, and I share that ethos. My personal behavior model is Lord Keynes: I wanted to get rich so I could be independent, and so I could do other things like give talks on the intersection of psychology and economics. I didn't want to turn it into a total obsession." - Charlie Munger
"We only want what success we can get despite encouraging others to share our general views about reality." - Charlie Munger
"For society, the Internet is wonderful, but for capitalists, it will be a net negative. It will increase efficiency, but lots of things increase efficiency without increasing profits." - Charlie Munger
"When technology moves as fast as it does in a civilization like ours, you get a phenomenon which I call competitive destruction. You know, you have the finest buggy whip factory and all of a sudden in comes this little horseless carriage. And before too many years go by, your buggy whip business is dead. You either get into a different business or you're dead—you're destroyed. It happens again and again and again. And when these new businesses come in, there are huge advantages for the early birds. And when you’re an early bird, there's a model that I call 'surfing'—when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows..." - Charlie Munger
"...there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers." - Charlie Munger
"We only want what success we can get despite encouraging others to share our general views about reality." - Charlie Munger
"For society, the Internet is wonderful, but for capitalists, it will be a net negative. It will increase efficiency, but lots of things increase efficiency without increasing profits." - Charlie Munger
"When technology moves as fast as it does in a civilization like ours, you get a phenomenon which I call competitive destruction. You know, you have the finest buggy whip factory and all of a sudden in comes this little horseless carriage. And before too many years go by, your buggy whip business is dead. You either get into a different business or you're dead—you're destroyed. It happens again and again and again. And when these new businesses come in, there are huge advantages for the early birds. And when you’re an early bird, there's a model that I call 'surfing'—when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows..." - Charlie Munger
"...there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers." - Charlie Munger
Friday, November 6, 2009
The Way of the Dodo
Some excerpts from Grantham's latest letter:
Nobel
"I can't tell you how surprised, even embarrassed I was to get the Nobel Prize in chemistry. Yes, I had passed the dreaded chemistry A-level for 18-year-olds back in England in 1958. But did they realize it was my third attempt? And, yes, I will take this honor as encouragement to do some serious thinking on the topic. I will also invest the award to help save the planet. Perhaps that was really the Nobel Committee's sneaky motive, since there are regrettably no green awards yet. Still, all in all, it didn't seem deserved." - Jeremy Grantham from the 3Q09 Letter
Rational Expectations and Efficient Markets
"Rational expectations and the efficient market hypothesis are as dead as dodos, yet their baleful and painful influence lives on...
...[investment] committee members by and large buy into the idea that portfolio composition should not change and should be fixed as closely as possible to the policy benchmark, which certainly would make sense in that parallel universe where markets really are efficiently priced. This means that you cheerfully own just as much equity in 2000 at 35 times earnings as you did in 1982 at 6 times. This is not a good idea unless you derive enormous personal utility from a display of discipline, perhaps better viewed as inflexibility in this case." - Jeremy Grantham from the 3Q09 Letter
Check out the letter in its entirety.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Nobel
"I can't tell you how surprised, even embarrassed I was to get the Nobel Prize in chemistry. Yes, I had passed the dreaded chemistry A-level for 18-year-olds back in England in 1958. But did they realize it was my third attempt? And, yes, I will take this honor as encouragement to do some serious thinking on the topic. I will also invest the award to help save the planet. Perhaps that was really the Nobel Committee's sneaky motive, since there are regrettably no green awards yet. Still, all in all, it didn't seem deserved." - Jeremy Grantham from the 3Q09 Letter
Rational Expectations and Efficient Markets
"Rational expectations and the efficient market hypothesis are as dead as dodos, yet their baleful and painful influence lives on...
...[investment] committee members by and large buy into the idea that portfolio composition should not change and should be fixed as closely as possible to the policy benchmark, which certainly would make sense in that parallel universe where markets really are efficiently priced. This means that you cheerfully own just as much equity in 2000 at 35 times earnings as you did in 1982 at 6 times. This is not a good idea unless you derive enormous personal utility from a display of discipline, perhaps better viewed as inflexibility in this case." - Jeremy Grantham from the 3Q09 Letter
Check out the letter in its entirety.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, November 5, 2009
Warren Buffett on Consumer Franchises: Berkshire Shareholder Letter Highlights
From Buffett's 1983 Berkshire Hathaway (BRKa) shareholder letter:
In 1972 (and now) relatively few businesses could be expected to consistently earn the 25% after tax on net tangible assets that was earned by See’s – doing it, furthermore, with conservative accounting and no financial leverage. It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.
Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price.
The line "pervasive favorable reputation with consumers based upon countless pleasant experiences" is the foundation of an economic moat. The moats of great consumer franchises reside between the ears of their customers. If someone is loyal to a particular beverage because of the taste, for example, they are probably not going to sweat paying 40 cents versus 25 cents (a 60% higher price) for some generic alternative.
On the other hand, if you are some buyer of computer chips for Raytheon, or whatever, you will sweat bullets over a 60% difference in price. This difference in behavior helps explain the reliable premium rates of return for Coca-Cola. The same, give or take, can be said for Wrigley's, Pepsi and other great consumer franchises.
Each are durable wide moat businesses with high returns on capital.
In addition, an established consumer franchise with pricing power (and, as a result, superior returns on capital) can use the extra cash coming in to build stronger distribution and buy more advertising. Over time that stronger distribution and bigger ad budget reinforces the strength the of the brand(s) and widens the moat. It's more generic competition with lower margins can't afford to invest as many $'s in product, distribution, and advertising so over time the gap tends to widen. The interplay of these forces makes most of the larger consumer franchises nearly impossible to displace.
Adam
Long BRKb
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
In 1972 (and now) relatively few businesses could be expected to consistently earn the 25% after tax on net tangible assets that was earned by See’s – doing it, furthermore, with conservative accounting and no financial leverage. It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.
Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price.
The line "pervasive favorable reputation with consumers based upon countless pleasant experiences" is the foundation of an economic moat. The moats of great consumer franchises reside between the ears of their customers. If someone is loyal to a particular beverage because of the taste, for example, they are probably not going to sweat paying 40 cents versus 25 cents (a 60% higher price) for some generic alternative.
On the other hand, if you are some buyer of computer chips for Raytheon, or whatever, you will sweat bullets over a 60% difference in price. This difference in behavior helps explain the reliable premium rates of return for Coca-Cola. The same, give or take, can be said for Wrigley's, Pepsi and other great consumer franchises.
Each are durable wide moat businesses with high returns on capital.
In addition, an established consumer franchise with pricing power (and, as a result, superior returns on capital) can use the extra cash coming in to build stronger distribution and buy more advertising. Over time that stronger distribution and bigger ad budget reinforces the strength the of the brand(s) and widens the moat. It's more generic competition with lower margins can't afford to invest as many $'s in product, distribution, and advertising so over time the gap tends to widen. The interplay of these forces makes most of the larger consumer franchises nearly impossible to displace.
Adam
Long BRKb
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, November 4, 2009
Long-term Competitive Advantage...
"...in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There's no rule that you have to invest money where you've earned it. Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return." - Warren Buffett in the 2007 Shareholder Letter
Tuesday, November 3, 2009
16 Rules
Good recent post on Walter Schloss.
Excerpt:
In the value investing world, Walter Schloss is a legend. He did not attend college and was initially hired at the age of 18 as a runner on Wall Street in 1934. He took investment courses taught by Graham at the New York Stock Exchange Institute. He eventually went to work for Graham in the Graham-Newman Partnership, at about the same time Warren Buffett worked in the firm.
In 1955, Schloss left Graham's company and started up his own investment firm, eventually managing money for 92 investors. By maintaining a manageable asset size, Schloss averaged a 15.3% compound return over the course of five decades, versus 10% for the S&P 500.
Schloss closed out his fund in 2000 and stopped actively managing others' money in 2003.
Warren Buffett named him as one of The Superinvestors of Graham-and-Doddsville, who disproved the academic position that the market was efficient, and that beating the S&P 500 was "pure chance".
Warren Buffett had this to say about Schloss:
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything
Excerpt:
In the value investing world, Walter Schloss is a legend. He did not attend college and was initially hired at the age of 18 as a runner on Wall Street in 1934. He took investment courses taught by Graham at the New York Stock Exchange Institute. He eventually went to work for Graham in the Graham-Newman Partnership, at about the same time Warren Buffett worked in the firm.
In 1955, Schloss left Graham's company and started up his own investment firm, eventually managing money for 92 investors. By maintaining a manageable asset size, Schloss averaged a 15.3% compound return over the course of five decades, versus 10% for the S&P 500.
Schloss closed out his fund in 2000 and stopped actively managing others' money in 2003.
Warren Buffett named him as one of The Superinvestors of Graham-and-Doddsville, who disproved the academic position that the market was efficient, and that beating the S&P 500 was "pure chance".
Warren Buffett had this to say about Schloss:
He knows how to identify securities that sell at considerably less than their value to a private owner: And that's all he does. He owns many more stocks than I do and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That is one of his strengths; no one has much influence on him.Check out his investing rules.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything
Monday, November 2, 2009
Grantham on Quality Stocks
From Jeremy Grantham's most recent quarterly letter:
Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.
Grantham later added...
In the long run, quality stocks have proven to be the one free lunch: you simply have not had to pay for the privilege of owning the great safe companies, as plain logic and established theory would both suggest.
For examples of what Grantham specifically means by "quality stocks" check out the top 25 holdings from one of GMO's mutual funds (GMO is Grantham's investment management firm). The fund has an intuitive name: GMO Quality (GQETX).
Adam
Related posts:
Best Performing Mutual Funds - 20 Years
Staples vs Cyclicals
Best and Worst Performing DJIA Stock
Defensive Stocks?
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.
Grantham later added...
In the long run, quality stocks have proven to be the one free lunch: you simply have not had to pay for the privilege of owning the great safe companies, as plain logic and established theory would both suggest.
For examples of what Grantham specifically means by "quality stocks" check out the top 25 holdings from one of GMO's mutual funds (GMO is Grantham's investment management firm). The fund has an intuitive name: GMO Quality (GQETX).
Adam
Related posts:
Best Performing Mutual Funds - 20 Years
Staples vs Cyclicals
Best and Worst Performing DJIA Stock
Defensive Stocks?
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, October 29, 2009
Superinvestors: Galileo vs The Flat Earth - Berkshire Shareholder Letter Highlights
Warren Buffett wrote this about one of the "Superinvestors" in the 2006 Berkshire Hathaway (BRKa) shareholder letter:
Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.
Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. Walter and Edwin never came within a mile of inside information. Indeed, they used "outside" information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, "How would you summarize your approach?" Edwin replied, "We try to buy stocks cheap." So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.
Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It's particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It's safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.
I first publicly discussed Walter's remarkable record in 1984. At that time "efficient market theory" (EMT) was the centerpiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expected to overperform the stock market averages using only publicly-available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.
And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter's performance and what it meant for the school's cherished theory.
Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope.
Tens of thousands of students were therefore sent out into life believing that on every day the price of every stock was "right" (or, more accurately, not demonstrably wrong) and that attempts to evaluate businesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it's helpful to have all of your potential competitors be taught that the earth is flat.
Maybe it was a good thing for his investors that Walter didn't go to college.
Over the last 50 years, there are been quite a few examples of investors - each with varying interpretations of Graham and Dodd - who have produced excellent long-term results. So fortunately it's not one size fits all. These investors developed their own approach building upon the same basic principles. Consider how much different Walter's approach is from Buffett's even though they both worked for and learned from Graham. My read is that Walter focused on buying companies that: 1) sell at a substantial discount to book value (his focus was buying assets at a discount...not earnings so you'd find no Coca-Cola's in his portfolio), 2) have a high percentage of the stock owned by management, and 3) have strong balance sheets. Long-term earning power and economic moats do not seem to come into the equation at all. At the core of Buffett's style is concentration while Walter held many more stocks at any given point in time.
Of course, what they do have in common is an outstanding long-term track record.
Adam
Long BRKb
Related post:
Max Planck: Resistance of the Human Mind
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.
Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. Walter and Edwin never came within a mile of inside information. Indeed, they used "outside" information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, "How would you summarize your approach?" Edwin replied, "We try to buy stocks cheap." So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.
Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It's particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It's safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.
I first publicly discussed Walter's remarkable record in 1984. At that time "efficient market theory" (EMT) was the centerpiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expected to overperform the stock market averages using only publicly-available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.
And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter's performance and what it meant for the school's cherished theory.
Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope.
Tens of thousands of students were therefore sent out into life believing that on every day the price of every stock was "right" (or, more accurately, not demonstrably wrong) and that attempts to evaluate businesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it's helpful to have all of your potential competitors be taught that the earth is flat.
Maybe it was a good thing for his investors that Walter didn't go to college.
Over the last 50 years, there are been quite a few examples of investors - each with varying interpretations of Graham and Dodd - who have produced excellent long-term results. So fortunately it's not one size fits all. These investors developed their own approach building upon the same basic principles. Consider how much different Walter's approach is from Buffett's even though they both worked for and learned from Graham. My read is that Walter focused on buying companies that: 1) sell at a substantial discount to book value (his focus was buying assets at a discount...not earnings so you'd find no Coca-Cola's in his portfolio), 2) have a high percentage of the stock owned by management, and 3) have strong balance sheets. Long-term earning power and economic moats do not seem to come into the equation at all. At the core of Buffett's style is concentration while Walter held many more stocks at any given point in time.
Of course, what they do have in common is an outstanding long-term track record.
Adam
Long BRKb
Related post:
Max Planck: Resistance of the Human Mind
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, October 27, 2009
Graham-And-Doddsville
Below are excerpts from an article, based upon Warren Buffett's now well-known Columbia University speech, The Superinvestors of Graham-and-Doddsville, from back in 1984.
It's a speech that was given to commemorate the fiftieth anniversary of Security Analysis.
The "superinvestors" mentioned by Warren Buffett include: Walter Scloss, Tom Knapp (Tweedy Browne), Ed Anderson (Tweedy Browne), Bill Ruane (Sequoia Fund) , Rick Guerin, Stan Perlmeter and, of course, Charlie Munger (plus two funds managed by multiple managers). What they have in common is long-term investing track records practicing their own version of Graham and Dodd:
Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses. Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value. - Warren Buffett
[Stan] Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth? - Warren Buffett
There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper. - Warren Buffett
The above link does not include the tables. This version of The Superinvestors of Graham-And-Doddsville has those tables.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything
It's a speech that was given to commemorate the fiftieth anniversary of Security Analysis.
The "superinvestors" mentioned by Warren Buffett include: Walter Scloss, Tom Knapp (Tweedy Browne), Ed Anderson (Tweedy Browne), Bill Ruane (Sequoia Fund) , Rick Guerin, Stan Perlmeter and, of course, Charlie Munger (plus two funds managed by multiple managers). What they have in common is long-term investing track records practicing their own version of Graham and Dodd:
Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses. Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value. - Warren Buffett
[Stan] Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth? - Warren Buffett
There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper. - Warren Buffett
The above link does not include the tables. This version of The Superinvestors of Graham-And-Doddsville has those tables.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything
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