I added a few links to the Investment Collection segment. Here are some new links:
Check out our H2 hedge fund letters here.
- David Einhorn’s Speech at Value Investing Congress 2006 (PDF)
When people ask me what I do for a living, I generally tell them “I run a hedge fund.” The majority give me a strange look, so I quickly add, “I am a money manager.” When the strange look persists, as it often does, I correct it to simply, “I’m an investor.” Everyone knows what that is.
When people ask me what I did on my summer vacation, I generally tell them “I played in the World Series of Poker.” Nobody gives me a strange look.
So I am at the World Series of Poker in Las Vegas and it is time for a break between rounds. A fellow comes up to me as says, “I am from CNBC and we’d like to interview you.” I ask, “About poker or investing?” The fellow looks at me like this is the strangest thing anyone has asked him in a long time; I realize he obviously picked me out due to my large chip stack or, according to my wife, due to my great looks. “About poker” he says as nicely as he can.
Today, I will discuss both. But for this group, who I bet all know what a hedge fund is, I will mostly discuss investing. Investing and poker require similar skills.
Different people approach poker different ways. Loose aggressive types play lots of hands – virtually any two cards – and try to win lots of small pots. They are the day traders of the poker tables. Others play any Ace or any King or any two high cards. They play too many hands, but don’t play them well. These folks can do fine for a while, but get outplayed after the flop by the loose aggressive types who eventually wear them down so that they wind up in a desperate spot playing a decent hand against a strong hand for the remainder of their chips. I would compare them to long-only closet indexers who trade too much. Then there are the rocks. These folks sit around waiting for premium hands – high pocket pairs or an Ace, King. They fold and they fold and they fold. They are going to wait until they know they have a huge advantage. Then they bet as much as they can. It is very hard to beat a player like this. They can last a long time. Once people figure them out, nobody will play them when they do play. So they don’t get the chance to get enough chips in when they have a large advantage. Could this be what is becoming of Berkshire Hathaway?
I will tell you my poker style. It is close to the patient players waiting for a big advantage. I don’t play a lot of hands. But I don’t just wait for the perfect hand. They don’t come up often enough. I try to pick out one or two people at the table I want to play against or who I sense don’t want to play against me. When the situation feels right, I put in a big, aggressive raise with a marginal holding. It is very hard to describe how I know the “feel” and sometimes I get it completely wrong. But to do well in a poker tournament, you have to recognize a few non-traditional opportunities and you need to get people to sometimes fold the better hand. I think we invest similarly. By this I mean that most of our investing lines up nicely in the disciplined, traditional value camp – very low multiples of book value, revenues, earnings, etc., but occasionally we are opportunistic and invest in situations that are difficult to justify under traditional criteria but for one reason or another we believe to be better situations than they first appear.
People ask me “Is poker luck?” and “Is investing luck?”
The answer is, not at all. But sample sizes matter. On any given day a good investor or a good poker player can lose money. Any stock investment can turn out to be a loser no matter how large the edge appears. Same for a poker hand. One poker tournament isn’t very different from a coin-flipping contest and neither is six months of investment results.
On that basis luck plays a role. But over time – over thousands of hands against a variety of players and over hundreds of investments in a variety of market environments – skill wins out.
- “Trying too hard”by Dean Williams SVP at Batterymarch Financial. Keynote speech at Financial Analysts Federation Seminar, August 9, 1981 (PDF)
- Transcript of Google Talk by Francois Rochon (PDF)
Saurabh Madaan: Hello and welcome, everyone. We have a very special guest with us here today, all the way from Montreal. Chances are, if you've enjoyed the writings of Warren Buffett, if you've heard Chuck Akre speak here, you are very likely going to enjoy the message that Francois Rochon has to share with us today. He is one of the investors whose letters I highly admire. I love reading all of your communications. I love the clarity in your thoughts.
The special thing for us, as Googlers, is, this is one of the most successful value investors in the world today who started off as an engineer. So without giving away too much, I'd like to welcome Francois Rochon.
François Rochon: Thank you very much for inviting me. I'm really honored to be here. I wanted to do a presentation, and I call it "The Art of Investing." Yes, I was trained as an engineer. I also had a very big passion for art, so when I started Giverny Capital, probably you've guessed that Giverny is the name of the city where Claude Monet lived, and so you see a little painting of Claude Monet on the first slide. The Art of Investing, I call it "the art of going beyond the numbers."
I got the idea, really, by reading Peter Lynch's book "One Up on Wall Street." He said that investing in stocks is an art, more than science, and people that were trained to think very rigidly to quantify everything, it's a big disadvantage when you invest in the stock market. So we're going to start with that.
As an engineer, I was trained with a scientific education. We're trained to develop a rational mind. We need to understand numbers. I think it's a big advantage, because there was a lot of financial beliefs that people that are trained in the finance business, I think they learn things that I believe are not really scientific, and we don't need to unlearn those things.
But at the same time, scientific education, I think, has some of disadvantages when it comes to the stock market. We're trained to look at past numbers on the belief that the future will be similar. Humans, sometimes, they don't behave like atoms. So you have to understand that the financial world is a very strange world and when you train to think very rigidly, it's hard, sometimes, to understand what's happening.
As a scientific, we're trained not to judge, but to gather facts. And judgment is a big part of the stock investing process. Also, we're trained to be very precise and right. But investing is about being imprecise and also accepting that you will be wrong 30%, 35%, 40% of the time, and that's a good ratio.
I wanted just to put a quote by one of the great engineers of all time, Nikola Tesla. He said that, "Instinct is something that is important in science. It transcends knowledge." I think that's a very interesting quote. But at the same time, there's a big difference between art, science and alchemy. You know, during many centuries, alchemists tried to change lead in gold, and that's not really science. This idea that "I have a great feeling about that stock," that's not really art. Neither it is investing. It's really just being lazy.
- Primer on ROIC Valuation Framework (PDF)
- More Moats, More Profits by Morningstar
Article by Brian Langis