Hot on the heels of the first 5 excerpts from Part 1 of 3, which focused on Buffett's thoughts and life principles, I am happy to share the next 5 tips from this 800+ pages biography.
The next few points are focused on investment tactics Buffett holds dearly to.
Buffet uses the analogy of a bird in hand is worth two in the bush.
During the dot.com bubble, people were paying huge sums to buy the birds in the bush, because interest rates were low. Nobody wanted cash (the bird in the hand) at such low interest.
"There were only 3 ways the stock market could keep rising at >10% a year. One was if interest rates fell and remained below historic levels. The second was if the share of the economy that went to investors, as opposed to employees, government and other things, rose above its already historically high level. Or, the economy could start growing faster than normal." Buffett called these "wishful thinking".
"Some people were not thinking that the whole market would flourish. They just believed they could pick the winners from the rest. Although innovation might lift the world out of poverty, people who invest in innovation historically have not been glad afterward."
Buffett then showed a 70-page list of auto companies. "There were 2000 auto companies: the most important invention, probably, of the 1st half of the 20th century. It had an enormous impact on people's lives. You would think 'This is the place I must be.' But of the 2000 companies, only 3 companies survived till the 2000's."
"It is wonderful to promote new industries, because they are very promotable, even with losses, because there's no quantitative guideline. It's very hard to promote investment in a mundane product."
Buffett also shared a story of an oil prospector who met St. Peter in heaven.
"An oil prospector died, went to heaven and met St. Peter. And St. Peter said, 'well I checked you out, and you meet all the qualifications. But there's one problem. The pen for oil prospectors are full and there is no room for you'. And the oil prospector said 'do you mind if I just say four words?' 'Sure'. 'Oil discovered in hell!'. And of course, the lock comes off the cage and all the oil prospectors start heading straight down. When St. Peter invited this oil prospector inside, he actually said 'No, I think I'll go along with the rest of the boys. There might be some truth to that rumour afterall.' So people are mindless enough to drill oil in hell."
The next few points are focused on investment tactics Buffett holds dearly to.
Investing is quite a stressful job - But it becomes bearable when you have genuine interest
6. The bathtub memory
The ability to handle stress,
negativity and bad days is crucial.
Buffet will still occasionally lose sleep, feel stress, but is able to put away unwanted
distraction like flushing the water in the bathtub. After the dirty water is discharged he gets back to
routine.
We can all complain and feel sorry for ourselves. It brings us nowhere. Only the brave and strong-willed people will succeed.
7. Defining risk.
Buffett and Munger considered
defining risk as volatility to be "twaddle and bullshit". They
defined risk as not losing money. To them, risk was "inextricably bound
up in your time horizon for holding an asset". Someone who could hold
an asset for years could afford to ignore its volatility, but someone who was
leveraged can't.
In the 1950’s, Buffett worked
for Ben Graham, his teacher. When Ben Graham and Jerry Newman invited Buffett
to become Junior Partner at Graham-Newman, he declined and helped to wind down
the partnership. He went back to Omaha, taking a risky decision to work on his
own outside New York City.
This was a contrast as most
businessmen worked for big companies and competed with polished ferocity for
the best paying job on the steady climb up the ladder of success, trying not to
break a sweat of golf club along the way.
“Betting on volatility seem to
make sense when the market rose as predicted. When enough time passes and
nothing bad happens, people who are making a lot of money tend to think it is
because they are smart, not because they are taking a lot of risk.”
Though Wall Street changed its ways
in the 60's to 70's, Buffett's own habits had changed little.
“When you invest, you have to
take some risk. The future is always uncertain. I think a group of these
(Korean) stocks will do very well for several years. Some of them may not do
well, but as a group, they should do very well. I could end up owning them for
several years.”
8. Greed factor, and casino society makes corporate
raiders rich
In the late 80's, Buffett routinely
railed against Wall Street. "I never talked to brokers or
analysts. You have to think about things yourself... Wall Street is the only
place people ride to in a Rolls-Royce to get advice from people who take the
subway."
In his 2002 shareholder letter,
Buffett called derivatives “toxic and a time bomb”. In his 2003 report, Buffet
wrote of derivatives as “financial weapons of mass destruction”.
General Re, a company BRK bought, also had this problematic derivative division which was a headache.
"There were only 3 ways the stock market could keep rising at >10% a year. One was if interest rates fell and remained below historic levels. The second was if the share of the economy that went to investors, as opposed to employees, government and other things, rose above its already historically high level. Or, the economy could start growing faster than normal." Buffett called these "wishful thinking".
"Some people were not thinking that the whole market would flourish. They just believed they could pick the winners from the rest. Although innovation might lift the world out of poverty, people who invest in innovation historically have not been glad afterward."
Buffett then showed a 70-page list of auto companies. "There were 2000 auto companies: the most important invention, probably, of the 1st half of the 20th century. It had an enormous impact on people's lives. You would think 'This is the place I must be.' But of the 2000 companies, only 3 companies survived till the 2000's."
9. Investing principles
Estimate an intrinsic value,
handicap its risk, buy using margin of safety, concentrate, stay in the circle
of competence, let it roll as compounding did the work.
Anyone could understand these
simple ideas, but few could execute them.
Munger always say: “Invert,
always invert.” Turn a situation or problem upside down. Look at it
backward. What’s in it for the other guy? What happens if all our plans go
wrong? Where don’t we want to go, and how do you get there? Instead of looking
for success, make a list of how to fail instead – sloth, envy, resentment,
self-pity, entitlement, all the habits of self-defeat.
Tell me where I am going to die, that is so I don’t go there.
Tell me where I am going to die, that is so I don’t go there.
Munger’s other favourite theorem
accused everyone “man with a hammer syndrome” – A man who thinks everything is
a nail - A pitfall.
"It is wonderful to promote new industries, because they are very promotable, even with losses, because there's no quantitative guideline. It's very hard to promote investment in a mundane product."
Buffett also shared a story of an oil prospector who met St. Peter in heaven.
"An oil prospector died, went to heaven and met St. Peter. And St. Peter said, 'well I checked you out, and you meet all the qualifications. But there's one problem. The pen for oil prospectors are full and there is no room for you'. And the oil prospector said 'do you mind if I just say four words?' 'Sure'. 'Oil discovered in hell!'. And of course, the lock comes off the cage and all the oil prospectors start heading straight down. When St. Peter invited this oil prospector inside, he actually said 'No, I think I'll go along with the rest of the boys. There might be some truth to that rumour afterall.' So people are mindless enough to drill oil in hell."
10. Value investing and
Compounding
"We're not going to buy anything just to buy it,"
he said at Berkshire's annual general meeting in 1998. "We will only buy
something if we think we're getting something attractive."
“Stocks are the things to own
over time. Productivity will increase and stocks will increase with it. There
are only a few things you can do wrong. One is to buy or sell at the wrong
time. Paying high fees is the other way to get killed. The best way to avoid
both of these is to buy a low-cost index fund, and buy over time. Be greedy
when others are fearful, and fearful when others are greedy, but don’t think
you can outsmart the market.”
“If a cross-section of American
industry is going to well over time, then why try to pick the little beauties
and think you can do better? Very few people should be active investors.”
It's far better to buy a wonderful
company (and management) at a fair price than a fair company at a wonderful
price - Charlie Munger.
"Valuing is not the same as predicting. In the short term, the market is a voting machine. In the long run, it's a weighing machine. Weight counts eventually, but votes count in the short term. And it's a very undemocratic way of voting."
"When you invest, you are deferring consumption and laying money out now to get more money back at a later time. Only 2 questions: How much are you getting back, and when."
~~~
NYSE (Mar 2019)
To be continued... At:
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