By: Greg Speicher
#4 Go Back to Buffett
In his classic book Mastery (which I highly recommend), George Leonard provides a road map to long-term success and mastery of your craft. It’s relevant to our subject because, if you want to consistently beat the market, you must pursue investment mastery.
The first of Leonard’s five keys to mastery is instruction. Leonard states, “For mastering most skills, there’s nothing better than being in the hands of a master teacher.”
There is none better than Buffett: not only is he the best investor of our era but also he has shared an enormous amount of his thinking.
My advice is to carefully go back and read or re-read all Buffett’s output. Study it like a chemistry textbook. Study it like Eddie Lampert did. Take careful notes. Let it deeply inform your investment process.
Start with the partnership letters and then work through all the Berkshire shareholder letters. Get a hold of the meeting notes from Outstanding Investor Digest going back to the 80’s. (They may be available through some good libraries. Order back copies if you have to.) They are pure gold. Move on to the speeches and videos. The 1991 speech at Notre Dame is a gem.
Then move on and go through the best of the secondary literature. Don’t miss Seeking Wisdomand Of Permanent Value.
Of course, no study of Buffett would be complete without also going back through Munger’s body of work, starting with the excellent Poor Charlie’s Almanac.
This will take some time. Enjoy the process. Consider it your own post-graduate program in successful investing. Turn down the noise and turn up the wisdom.
Finally, I’ve heard people say that you don’t want to slavishly follow Buffett. They say to seek your own voice. That’s true to a point. Those who master a subject must first master the fundamentals and trace the path forged by the great ones. This takes time and dedication. Only then are you really ready to cut your own path.
#5: Remember the Single Most Important Thing
Howard Marks has written a book called The Most Important Thing: Uncommon Sense for the Thoughtful Investor. The book has been well received. Marks is well known for his client memos which are considered must reading by investors. They receive high praise from the likes ofWarren Buffett and Seth Klarman.
The most important thing turns out to be numerous important things. The table of contents lists twenty.
However, in his July 1, 2003 memo, Marks stated, “The most important thing – above all – is the relationship between price and value.”
If you want to beat the market, you need to consistently buy securities that are cheaper than the market. This means that what you get in return for putting out your cash – the present value of the sum of all current and future earnings – is greater than what you would get if you bought an index fund or ETF.
Investing is not so much like scientific research where you are constantly pushing the boundaries of knowledge through the application of the scientific method, as it is like basketball where the best players spend countless hours in the gym honing fundamentals – shooting, dribbling, passing, conditioning – which are substantially similar to what players were working on thirty or forty years ago.
Buying cheap is the sine qua non of investing fundamentals.
Too many investors look for their edge in some special insight into a given security rather than patiently waiting for Mr. Market to offer it on the cheap. Stock investment websites spew forth investment ideas by the truckload. Truly great investment ideas are hard to find.
Here’s Marks again from the same memo quoted above, “During the course of my 35 years in this business, investors’ biggest losses have come when they bought securities of what they thought were perfect companies – where nothing could go wrong – at prices assuming that degree of perfection . . . and more.”
Discipline yourself to buy cheap. Unless there is a compelling reason, why not wait until a security you like shows up on the 52-week low list? Also, have some dry powder to buy more if it goes even lower. Mr. Market frequently way overshoots the mark when he gets in a lousy mood. Walter Schloss – who averaged 20% (before fees) for five decades – liked to buy stocks trading near the low of the past few years.
Don’t compromise on price or you will lock your capital up in mediocre investments. This is not a formula for beating the market. Most of the time, the market’s prices are reasonably well aligned with business values. Have the patience to wait for those times when the gap between price and value is screaming. A feeling of revulsion – if not by you, at least by the crowd – is usually a pretty good tell.
#6: Focus on What Is Knowable and Important
It is useful to think about the world in terms of a four-quadrant matrix where the horizontal dimension comprises what is knowable and unknowable and the vertical dimension comprises what is important and unimportant.
It should be obvious that you should not spend any time on what is unknowable and unimportant.
The trick is steering clear of the Unknowable/Important box and the Knowable/Unimportant box.
The Unknowable/Important box is very tempting. Lots of people pretend to have something worthwhile to say about things that fall into this quadrant. This is where most macro forecasts live and discussions about timing and short-term price movements. Promoters like to set-up shop here. This is the domain of unfounded opinions where the prognosticator’s incentives almost never align with your interests.
The Knowable/Unimportant box is also tempting. An example is useful here. Buffett pointed out that it was knowable quite early on that automobiles and airplanes were destined to rise and become a central part of modern life. These insights were not particularly useful to investors because a) it was impossible to handicap the eventual winners in those emerging industries and b) even if you could, they were unattractive investments given their reliance on massive low-return capital investments.
The trick is to focus on what is important and knowable. For example, it is very important to try to understand where a prospective business investment will be in ten years, even if it cannot be done with precision. It’s equally important to limit the time you invest thinking about investments to those businesses where this is actually possible. You can’t do this very often, but this is what you should be looking for.
Focus on spending your day in this quadrant. This is where meaningful decisions are made. This is where you can gain an edge over those who are unwittingly wasting time on the unknowable and the unimportant.
The temptation to be drawn to these time wasters is real and strong. It is deeply grounded in human nature. The Internet only exacerbates this tendency.
Challenge yourself. Examine your day and resolve to improve where you’re spending your time and what questions you are asking.