Charlie MungerInvestment PhilosophyThink DifferentlyWarren Buffett

Two Berkshire Takeaways and Thoughts on Competitive Markets

On a morning run a few weeks ago, I was listening to a talk by Alice Schroeder, author of the outstanding Buffett biography Snowball. She was discussing some things she learned from Buffett in front of an audience of Microsoft employees. Schroeder is always someone I like listening to. She’s an excellent storyteller, she has a thorough understanding of both business and investing, and she has had more access to Buffett’s files than any other outsider. The combination of these attributes resulted in her magnum opus on Buffett, but it’s often interesting to hear her interviews because even though the book was extensive, it still is likely a small fraction of the information she gathered up during her thousands of hours of time she spent with Buffett.

In the talk referenced above, the following clip stood out to me. Here’s Schroeder talking about why Buffett doesn’t use a computer much:

“What he’s really done is he’s created this immense, vertical filing cabinet in his brain of layers and layers and layers of files with information that he can draw on from more than 70 years of data. He’s like a human computer. He’s wonderful at math. He can recall phone numbers from his childhood, and populations of cities from his childhood. He can do square roots in his head. He does present values and compound interest in his head… The biggest thing he’s done is to learn and create this cumulative knowledge base in his head. So one reason he doesn’t use a computer is because, in a sense, he is one.”

Last week I was in Omaha for the Berkshire annual meeting, and while I sat there in the CenturyLink arena, I was thinking about Schroeder’s description while listening to Buffett rattle off trade deficit data from 1970 off the top of his head in response to a question. His mind is an incredible machine, and it appears to be working as well as ever.

I also got to thinking how unique Buffett is and how unlikely it is for anyone to really replicate the scale of his success. This thought reminded me of how important it is to focus on your own skillset, your own opportunities, and to think independently. I think it goes without saying that it is imperative to learn from Mr. Buffett and Mr. Munger. Their common sense, investing skills, and business acumen that they share freely with the public are critical building blocks for the rest of us. But I also think it’s important to keep in mind that — in addition to the God-given gift of having a mind that works like a Microsoft Excel spreadsheet, and a Peyton Manning-like focus on his craft that has been maintained over decades — a big part of Buffett’s success was that he and Munger were very independent thinkers. They have always done things their own way. They made independent choices and followed paths based on the unique situations and opportunities that they faced throughout their careers. They learned from Ben Graham, but did things very differently than Graham did.

So it’s obviously important for investors to study Buffett and Munger, but I think it’s also helpful to keep in mind that we each have our own set of opportunities, and the situations we face and the opportunities we come across will be much different than the ones Buffett and Munger (or anyone else) encountered.

This general idea of independent thinking dovetails with the first of my two main takeaways from the weekend in Omaha:

  1. There are a lot (and I mean a lot) of people out there doing what I’m doing (running an investment firm and trying to produce market beating results)
  2. Patience is still underrated and remains a real advantage for those who are able and willing to utilize it (even the market average produces a stunning result over a long enough time horizon)

Neither of these points are groundbreaking. Both are obvious, and well-cited. Everyone knows that the market is extremely competitive. Everyone knows that patience is a critical component of great investment results.

However, it has dawned on me over the last few years that the former (the extreme competitiveness) has actually led to an aggregate squandering of the benefits of the latter (patience). In other words, as competition in markets has dramatically increased over the years, time horizons and patience levels have significantly decreased. I actually think that the two are not only inversely correlated, but I think one has caused the other. Growing competition has caused people to think in shorter time horizons.

Is Beating the Market Harder Now? 

Last year I wrote a summary of the 2017 Daily Journal meeting with Charlie Munger, where I discussed some of my own thoughts on Munger’s view that the markets are harder today because of intense competition. I think it’s nearly impossible to win the way they won, which is why I think it’s crucial to keep their principles at the core of an investment philosophy, but be independent-minded about the way you deploy those principles. And one of the key things to understand today is something I’ve mentioned frequently in the last few years: I believe the information advantage that Buffett and Munger exploited in the early days is gone, which makes it imperative for investors to extend their timeframe. And extending the timeframe means focusing more on the quality of the business, its return on capital, and its durability and staying power. Those attributes become more important to the success or failure of an investment than finding a piece of hidden information that the market doesn’t see. 

It is extremely difficult to separate yourself from the crowd as an investor, especially if you are focused on trying to make investment decisions based on how you think securities will perform in the next few quarters (which despite what most people in the investing community say, is really what they are doing). As I flew back from Omaha, I was thinking about the events I attended, the talks I listened to, and the conversations I heard at restaurants and hotel lobbies. Everyone was telling everyone about their favorite stocks. I was too. We all are talking about our ideas, in the hopes that our ideas are the ones that will separate us from the average.

Of course, there is nothing wrong with discussing investment ideas. It’s a lot of fun, and a big reason why I love going to these events. I like talking about stocks with other investors as much as the next person. But it did become very evident to me while I was observing – and contributing to – the cacophony of investment pitches, that the unspoken truth is that most investors seem very focused on what the stock they own will be doing in the next six months, and much less focused on what the business underlying that stock will be doing in the next five years. No one says this, and there is no hard and fast evidence I could produce if I were forced to prove this, but it was a palpable observation I had over the weekend.


Buying a Farm Based on Next Year’s Rain Forecast

It’s interesting to look at Berkshire’s largest equity investment as an example. It is notable that a stock like Apple, as widely followed as it is, happens to be up about 100% from where it was valued two years ago. I think Apple is a great example of the potential advantage that can be garnered from time horizon arbitrage – basically looking out a few years when so many people are focused on the short-term.

I recently heard an analyst – prior to Apple’s recent earnings report – who was telling investors to “be cautious into the print”. (The “print” is Wall Street lingo for the earnings report).

What was interesting is that the analyst hedged that comment by saying that any dip from earnings would be a buying opportunity. In other words, “we wouldn’t buy the stock here, but if it falls 3% or 4%, it’s a buy”. The fact that someone’s opinion of the attractiveness of a security can be so different between just a few percentage points is a microcosm of how short-sighted most market participants are.

Buffett gave an interview before the meeting last week where he summarized the basic principles of thinking of a stock like a business in a manner that he’s done many times before, and in a response to a question from Becky Quick regarding his view on Apple’s recent quarterly results, Buffett said:


Dissecting the results of suppliers or analyzing the fluctuations in iPhone channel inventory might be helpful to know if you want to predict the next quarter’s EPS number, but it’s largely just noise if you’re hoping to form an opinion about what Apple’s business will look like five years from now.

Obviously, most value investors have timeframes that are much longer than the average, but I still think a lot of the language and discussion points I hear are very focused on short-term data points, events, or catalysts that have lots to do with where the stock price might go in the next few months, but little to do with the long-term value of the business.

There is nothing inherently wrong with trying to focus on short-term catalysts in hopes of increasing the velocity and turnover of your capital. It’s just that I think this is an extremely competitive and crowded approach, which makes it very tough. There is a reason why investors focus on the short-term. In addition to our general human nature, the simple fact is that we’d all rather make money today over tomorrow, if given the choice. So, most of the emphasis and effort is focused on making money sooner rather than later.

There are some investors who are exceptions to this general pattern of short-term focus, and I talked with a number of people this weekend who I consider to be exceptional. One of the things I’ve learned from those exceptional investors, and from Buffett and Munger as well, is the importance of thinking independently.

The irony of attending an event with 40,000 like-minded investors was not lost on me! But it did reiterate the importance of doing your own work.

Compounding Plus A Long Runway

My favorite part of the entire meeting was when Buffett put up some slides showing newspaper headlines from early March, 1942. The mood was pessimistic. Pearl Harbor was attacked a few months earlier, Europe was at war, and the US was in the midst of preparing for conflict both in Europe and in the Pacific. The Dow was hovering around 100. Warren Buffett just bought his first stock (he was 11 years old).

Buffett then referenced that a $10,000 investment in a broad swath of American stocks in March of 1942 – a low point in sentiment – would be worth $51 million today. Compounding, combined with patience, is an incredible force over time.

I think Buffett is right that the vast majority of investors who are trying to jump in and out of ideas (even every few years) will have a very difficult time beating someone who just buys a basket of American stocks and does nothing for a few decades.

I know that terms like patience, “long-term thinking”, and the general idea of buying stocks and ignoring short-term prices are words and phrases that get thrown around by all of us in the investing community. But I think that while we probably overuse the verbiage, we continue to collectively underutilize the concepts to our advantage. People yawn when Buffett talks about indexing and “buy and hold”, but I’m convinced that the simple logic of value investing, long-term thinking, and patience can go a long way toward trying to produce great investment results over time.

This weekend didn’t generate any new groundbreaking insights for me, but it did reinforce some principles that make up the bedrock of my investment approach that I think are crucial to success. This is a competitive game, but I think that investors who can actually implement those principles, while simultaneously possessing the wherewithal to avoid groupthink, will have the best chance to succeed over time.

Disclosure: John Huber and clients of Saber Capital Management own shares of AAPL. 



13 thoughts on “Two Berkshire Takeaways and Thoughts on Competitive Markets

  1. Thanks for the insights. It certainly made me reflect on my investment analysis approach. It’s difficult to ‘crystal ball’ out five years on an individual company basis, but easier to do so when looking at the industry as a totality.

  2. Great post John! It’s very obvious when listening to conference calls that basically all analyst are just trying to model next year’s and quarter’s numbers . Do you still read or listen to conference calls when you’re researching companies ?

    1. Hi Will,

      I do read the conference call transcripts when I’m researching a company. There is a lot of unnecessary or irrelevant (at least to me) information, but there is some information that can be useful or even quite valuable. So you can read through it, pick out what you need, and discard what you don’t.

  3. Great comment John. Thinking in this way allow us focus in the main attributes of the companies and not losing our sight with short term movements.

  4. “The irony..was not lost on me.” But it is. Value investors tout a divergent view, a contrarian streak and yet they coat-tail ideas, publish them to online forums, blogs, present them to like minded audiences. It seems all very herd like behaviour to me.

    1. I think what you say is generally correct. And it’s why opportunities exist in markets. Value investors are human, and therefore we are not immune to the realities of human nature.

  5. John – How much does the overlay of a very low world wide interest rate environment over the past several years factor into how we should analyze the recent out-performance of passive vs. active as well as the denigration of long term buy and hold investors ? And, when the reversion to the mean happens, how severe will be the overshoot? A collective subset of the population, who is now gaining control of an increasing amount of investing capital, has been exposed to a market that has only gone straight up. So, the mindset has been to question why one needs to pay a manager for doing something that has seemed so simple to execute without the need to pay for such a service. And as sure as God makes little green apples, people will be burned. But with the market being so synced, even the previous so called capital preservers are at risk of a large draw down. How do you and your brethren justify existence in such a world?

  6. Although I am a big fan of indexing, I also find the idea of always trying to match or beat the market to be rather suspect.

    Let us suppose I have like the usual person some assets and liabilities such as e.g. some investment capital and some debt, e.g. student loans or a mortgage. Then what I really care about is whether over some reasonable span of years (e.g. 5 years) the after-tax return on the investment capital in the vast majority of scenarios exceeds a hurdle rate, where the hurdle is some mixture of inflation and the average carrying cost of the debt (depending on which asset has been matched to which liability). That is, what I really care about is the statistically likely after-tax absolute returns. If the statistically likely absolute returns do not exceed that hurdle then it is better to spend the money, pay down debt, or find some other mixture of spending or investment (e.g. real estate).

    Now I am not saying it is easy to hire an active manager to achieve such targeted returns, or that it is easy to achieve such targeted returns on one’s own. I am just saying that absolute returns is a natural lens to view the world through, and serves as an appropriate “benchmark.”

    Now with an index, we could have the index go down (like the Nikkei 225 for the decade after 1989), or sideways (like the Nikkei 225 for the last couple decades and a lot of European stock indices for the last decade), or up, for decades. But moreover, even if we use statistical forecasting methods based on e.g. valuation metrics (P/E, Shiller P/E, the “Buffett Indicator”, etc) we still might get that say the index in expectation is most likely to go sideways for a decade. For example, Jack Bogle (RIP) predicted index funds (I am guessing he meant some U.S. index fund) might give about 4% annually over the next decade [1]. But according to some websites, these other valuation metrics predict the S&P 500 could give real return rates of around zero for the next decade.

    I guess what I am arguing is that indexing makes sense in most scenarios of reasonable valuation, but becomes dangerous in bubblish scenarios, when active management also becomes quite challenging (look at Buffett and his cash pile): both ought to have statistically likely rates of return forecasted, and then be benchmarked against alternative uses for capital.

    Although in my view such a benchmarking ought to be common behavior among investors, it probably is less common because investment funds are not legally allowed to forecast returns (and even if they could do so legally they should not for liability reasons).


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