Peering into the Warren
Exploding Myths About The Sage Of Omaha
April 2018
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger, Vice Chairman of Berkshire Hathaway
In early May I am making the trek to Omaha, Nebraska, USA to attend the Berkshire Hathaway annual meeting. For many, Warren Buffett (Chairman) and Charlie Munger make up the finest investment team of our times. Since Buffett, at 87, is the younger of the two (Munger is 95), I wanted to take the opportunity to see them in the flesh and experience firsthand the “Woodstock of Capitalism”.
Buffett’s popularity has never been greater (notwithstanding criticism from cryptocurrency true believers upset at his characterisation of investing in Bitcoin as “gambling”; the last time he was dismissed so roundly as out-of-touch and anachronistic was when he sat out the 1995 to 2003 Dotcom boom – and bust).
His popularity is well-founded on an astonishing investment track record. For me, however, the lasting legacy of Buffett and Munger will be the richness, clarity and humanity of their communication. Unfortunately, as a consequence, everyone seems to think they know the “Buffett way”. Companies love pumping out Buffett “quotes” (even if some turn out to be apocryphal) as if the lessons from a 65 year investment career can be captured in 140 characters.
This gives rise to several common myths about Buffett and Munger.
Myth 1: We all know how to invest like Warren Buffett
Possibly the most insidious myth to arise from our familiarity with Buffett is the idea that we can all do it. It is well-known that Berkshire Hathaway stock has compounded at over 20% per year over several decades. What is less well-considered is the fact that it has fallen by more than 35% four times, including falls of 49%, 50% and 59%, during that period, as Warren Buffett reminds investors in his 2017 letter (page 10 of the letter):
There are not many investors with the temperament not only to endure such moves but to be unfazed by them and to stick to their strategy. We see this in today’s markets as many who may describe themselves as ‘long-term investors’ are rattled by recent down moves of 5% or 10%. Experiencing a 30% portfolio loss is destabilising; losing 50% is extraordinarily challenging. Discipline and rationality are hard to maintain in this situation especially while under the public gaze.
Yet that is what Buffett has done, remaining relentlessly constructive and upbeat even in the hardest times. That’s because he understood that to achieve long-term double digit returns, he must be prepared to remain patient through periods of panic; and also because he understood his time horizon, which was (and is) measured in decades, not years. If you want long-term, double digit returns like Buffett, you need to be able to stomach 30%, 40% or 50% drops at some point along the journey without throwing in the towel. Few are able to do so.
Myth 2: Identifying great investment opportunities is easy for Buffett.
This is at the heart of so many misconceptions about the wisdom of Buffett and Munger. The homespun manner and facility of Buffett’s annual letter to shareholders should not be confused for the ease of his actual investment process.
For there is an iceberg of skill, knowledge and temperament beneath the simplified narrative presented to us. This encourages incomplete and lazy imitation in an attempt to capture “secrets” in the form of simple rules: “Buffett runs a concentrated portfolio”; “Buffett never sells”; “Buffett never buys tech” and so on.
The urge to find shortcuts to his investment mastery reminds me of the time I went to buy a tennis racket in New York, not long after Roger Federer won his fifth consecutive US Open title at Flushing Meadows. I asked the sales guy which racket was the most popular? He pointed to the Wilson Pro Staff, Federer’s racket of choice, and then sighed. “Many bring it back, though. They say there’s something wrong with the racket as their tennis is far worse now.”
Myth 3: Buffett sticks to one style of investing and keeps things simple.
It is rarely remarked upon that Buffett and Munger have always ranged across a variety of investment styles and instruments to achieve their goals, far beyond the “value / quality” box in which they are often (lazily) placed. Reading back through the full set of letters and investor reports shows that Buffett was a keen practitioner of merger arbitrage back in the 1960s; he called them ‘workouts’ and used them to smooth out returns. This application of lowly-correlated multi-strategy portfolio methods was forward-thinking.
Buffett has also been heavily involved in derivatives and debt investment at various stages. For a long time, his insurance operations were the bedrock of his success by providing cheap finance for his investment operations (see here and here). His audacious and, eventually, profitable transaction with Goldman Sachs in the teeth of the great financial crisis further belies the notion of Buffett as a one-trick pony. Observation of what he has done, alongside what he has said or written, reveals a level of sophistication and willingness to engage in complex financial engineering that is overlooked.
What I take away from studying Warren Buffett and Charlie Munger
Thinking through these common misconceptions in preparation for my trip, a modern pilgrimage of sorts, the most important lesson I take away is this: the journey matters. Two clients may have the same goal but different temperaments and time horizons. How they get to their goal will be – in fact, must be – different, because it if it is not tailored to their emotional needs and how far ahead they are planning, there is a high chance they will be derailed along the way.
In that sense, I find, there is no “Buffett way”; there is an “Esenbel way”, a “Sheikh way”, a “way” for each individual; and only through striving to realise this will we create investment portfolios that stay the course. If I return from Omaha more fiercely committed to solving our clients’ problems in this way I will deem the trip a success.