Charles T MungerLearnings from the GiantsWarren Buffett

Attitude towards investing > your investing approach

One thing that never stops surprising an experienced investor has to do with divergent perspectives which people operate within the markets. And this is despite the fact that all of these participants have one common objective – to earn adequate returns while minimizing the risks, overtime.

There are believers of ‘technicals’ who earn money through reading stock price movements and then there is this broad group of ‘fundamental’ investors who differ amongst themselves with respect to the horizon one employs. All of these fellows wholeheartedly believe what they do is best way of earning money within their defined circumstances.

A mutual fund manager who earns a fixed fee over assets under his management tries to attract as many investors as possible. And given that most of these lay-investors go by near term performance for choosing between the wide array of funds, fund managers take upon themselves to ‘maximize’ their short term performance. Key thing to note is that such fund managers make money off their investors and not necessarily for their investors. Making sustainable above average returns, while controlling for risks, deploying a myopic focus on near term results is just improbable. This has what experience and in-depth studies conducted over a long periods have shown.

Differing attitudes towards long term investing

It would be unfair to say that investing approaches differs only with respect to their horizons. In fact, within the long term bucket, there are further multiple classifications depending upon willingness and patience levels of the practitioner. Not every long term investor would feel good about owning something (or atleast evaluating) with a 5-7 years kind of horizon.

Add to this the fact that each investor has his own sweet spot where some may be comfortable with just 7 securities in the portfolio while others may feel safer with 20-25 names. Preferences of such type has a significant impact on ones security selection process. Hence, expecting a ‘consensus buy’ within the like-minded group of people is little too much. But one needs to be cognizant about where does the differences lie. You don’t want to end up owning companies run by crooks just because it is trading at inexpensive terms. Here, chances are one may under estimate risks since they aren’t as clear as the returns which the excel sheet is showing.

Another place where investors with similar horizons and portfolio concentration could differ is with respect to one’s preference for good ‘quality’ companies over others. Quality would mean companies which makes 20%+ return of networth, has high free cash generation, enjoys some sort of a competitive advantage and are governed ethically.

Here, quality seekers would be more wiling to pay up a fair price for such businesses versus an average business which is trading at a substantial discount to its fair value. And it sometimes seems as if they are content with the moderate internal growth compounding which these established companies usually do. But such an approach helps them to keep chances of permanent loss of capital to its minimum.

Which of these approaches is the best?

Answering this question with the approach one practices regularly would be like deluding oneself!

More than any specific approach, what would help an investor is to keep an open attitude towards investing. This is to say that investing is an art which only improves with complete dedication, over time. If you see something work really well that you initially believed would not, it might help to stop and introspect. Was it luck? or was it a low probability event kicking up? or just a temporary outcome of an irrational market? But if someone with a very long track record of doing things you thought is not possible, it might help to learn something from him or her. Proponents of efficient market hypothesis still consider Berkshire’s track record as an ‘outlier’ thereby allowing themselves to ignore the methods with which it has earns those exceptional returns

Personally, I had a notion early-on that investing into equities is inherently speculative. But after coming across Buffett’s biography accidentally, it showed me its not. And given the generosity of Mr Buffett with respect to sharing his learning through his talks and letters, in a short span in time one moves from being a dis-believer to become a disciple of life long learning.

Studying the duo Buffett & Munger would tell one the intellectual openness they have applied all through their career. Munger thought that he could be a more successful investor than a lawyer and he switched despite coming from a background which would suggest otherwise. And in their initial years, both of them started as ‘bargain hunters’ i.e. looking to buying companies trading at below its book value and then selling it off over a couple of years. It was only after a decade long practice when the bargain pool dried up and they were almost like shutting down shops (Buffett had actually shut down his partnership firm) they realized that investing into companies with competitive advantages could be even better than bargain investing. Imagine how it is to believe in something totally opposite to what you have done every day till the age of 40!

And if these are too old an example, here is another one which suggests that they haven’t impaired their openness even today. Berkshire is a major investor in US airlines and Apple despite the duo saying on record almost for a half a century that airlines are the worst assets to own and most of the technology companies are not investible for someone with 5-10 year kind of horizon given the inherent intensity of change in tech. They were even successful to convince Bill Gates into this line of thought 2-3 decades back!

Its not to say that these are not well thought of investments or that Berkshire is ‘barrel scratching’. Each of these decisions have seen some deeper thoughts go into the same. Of course, they could be wrong in their thesis but the key to learn from this is to never stop, as Mr Munger would say, ‘killing your own best ideas’.

Ideas or approaches are not something to be treasured – they ought to be challenged from time to time. And if they still pass those harsh tests of time, only then are they worth committing to yourself!

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