Charlie Brown and the Retail Investors Trying to Mimic Buffett

reminiscences of a stock operator pdf

Charlie Brown and the Retail Investors Trying to Mimic Buffett

Last week I tweeted:  Professional investors would be sad if retail left the market. Lucy would feel the same if Charlie Brown gave up trying to kick the football.

Now, I don’t like being cynical, but there is smart money and dumb money.  Some of the smart money is retail.  My mother and my late Father-in-law would qualify as “smart money.”  Most retail investors do not qualify as smart money.

Alice Schroeder spoke to the Baltimore CFA Society last week, on 11/7, and talked about Warren Buffett and his thought processes on investing, and the degree of focus he brings to his work.

No, average people can’t do what Warren Buffett does.  99.9%+ of people can’t do what Buffett does.  Buffett leads the league in terms of the number of dollars of excess return he has created.

Most retail investors would be better off outsourcing to an investment advisor running separately managed accounts, which is more tax-efficient than mutual funds, and letting them brave the vicissitudes of the markets.

It is not that the investment advisor will beat the averages, but if he has a long enough time horizon and does not give in to panic and greed as most retail investors do, he will provide value to his clients.  He protects them from human nature.

That said, many investment advisors are subject to the same pressures, because they fear the reactions of their clients, if they underperform.

You might argue, “But I can buy index funds, lower my expenses, and live with modest underperformance, rather than greater underperformance on average from active managers.”  If you can do that, and control your emotions, good.  Most can’t.  They sell in a panic at the bottom, and allocate more near the top.  People can argue over rebalancing, but it does help people make better investment decisions, on average.

Though I am not fully happy with my performance for my clients, I have not changed my methods that worked so well for me in the past.  My methods that have worked well will work well again.

What I can say is that toward the end of a fiscal year, I sell one significant loser.  My clients gain the tax benefit of a long-term capital loss.  I may buy it back after the wash sale rules expire.  If I buy it back, it will be after significant study.  I don’t fall in love with stocks, though I usually hold them for three years on average.

As it is, whatever my clients get, I get.  I am the the single largest investor in my ideas, and clients get a clone of my portfolios, whether stocks or bonds.

Those who invest with me get my slowness to act.  My portfolio turnover is around 30%/year, versus 120% for most mutual funds.  Most investment decisions take time to work out, and retail investors leave before the workout occurs, and after disappointment.

I am not asking you to invest with me.  I am encouraging you to think more long term with your investments, and also consider how you can incorporate a margin of safety in your investing.

Aim for “pretty good” investing, and you might succeed.  Aim for “best” investing, and you will likely fail.  That’s the way of the market, on average.

And if I were Charlie Brown (who reminds me of my father) I would say to Lucy, “Okay, hold it there!”  And then, I would walk home, hug Snoopy and Sally, and get a good night’s rest in bed, and let Lucy suffer from holding the ball.

By David Merkel, CFA of Aleph Blog

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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