Warren Buffett Invests Like a Girl -...
Transcript of Warren Buffett Invests Like a Girl -...
ThanEverChapter2-TheScienceBehindtheGirlChapter3-AQuickIntrototheOracleChapter4-TradeLess,MakeMoreChapter5-ReinInOverconfidence
Chapter6-ShunRiskChapter7-FocusonthePositivesofPessimismChapter8-ResearchExtensivelyChapter9-IgnorePeerPressureChapter10-Learn
fromMistakesChapter11-EmbraceFeminineInfluencesChapter12-MaintainConsistent,PersistentResultsChapter13-ValuePeopleandRelationshipsChapter14-
QuestiontheMastersChapter15-ActFairlyandEthicallyChapter16-FoolishInvestingPrinciples101
AppendicesAQuickGuideRecappingthe
FemaleInvestor’sTemperamentandWhatBuffettCanTeachUsInterviewwithValueInvestorLisaO’DellRapuano,CFA,FounderofLaneFiveCapitalManagementInterviewwithValue
InvestorLaurenC.Templeton,FounderofLaurenTempletonCapitalManagementInterviewwithValueInvestorsCandaceKingWeirandAmeliaWeirofParadigmCapitalManagement
InterviewwithValueInvestorBillMannoftheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmericaFundFurtherReading:BooksforInvestorsofAllLevelsWhoWanttoLearnMore
(CourtesyofMotleyFoolInsideValue)AcknowledgementsNotesIndex
AbouttheAuthorsAlsofromtheMotleyFoolCredits
Foreword
Thisisabookforinvestorsaboutinvesting.Itfocusesonthefactorsthatwillbestdetermineifyouwillmakeorlosemoney,andwhether
you’llbeatthemarket.Youmightnaturally
assume,then,thatyou’llbereadingabouthowtopickstocks—sothatyoubuyGEICOinsteadofBankofAmerica.Howtoevaluateacompany’sprofitability—sothatyouinvestinSteveJobs’Apple,notDonaldTrump’sTrumpEntertainmentResorts.Howtodigdeepintoafinancialstatement.Howto
findthenextcompanypoisedtorise10,20,or100timesinvalue.
But,no.Instead,thisbookwill
analyzewhatwillmakeorbreakyourperformanceasaninvestor—yourbrain,youremotions,yourpersonality.Ifyouharnessthem,yourinvestmentreturnswillleadyoutofinancialfreedomintheFoolishfieldsof
opportunity.Butiftheyharnessyou,closeyoureyesbecausethechiliwon’tstophittingthefan.You’llsellwhenyoushould’vebeenbuying.You’llbelievewhatyoushouldhavedoubted.You’llshoutwhileyoushould’vebeenlearning.You’lltradewhenyoushouldalwayshavebeeninvesting.
Ifyouwanttosustainablymakemoreandmoremoney
inthemarket—usingcommonstocksormutualfunds—you’llhavetolearnhowtomasteryourtemperament.Afineplacetostartishere,inthesepages,asLouAnnLoftonrevealshowWarrenBuffettparlayedthesmallinvestmentsofateenagerintothelargestandgreatestinvestmentportfolioinhumanhistory.
It’saworthwhilecase
study!Butupuntilnow,the
master’sstudentshavelookedforhisvirtuositymostlyinthewrongplaces.They’vedreamedincomplexvariableswhiletryingtounearthBuffett’svaluationmodels.They’vequizzedtheinnercirclesofhisinnercircleand,withoutdiscretion,haverootedthroughthemostpersonalmaterialofhislife.
They’vespentdecadesoverlookingwhatmattersmostbut,hey,atleastthey’vetried!
OveronWallStreet,atthedesksofmachotradersandsalesmen,theyignoreBuffett.TheseguyshavedonetheirbesttotaketheTripleCrown:(1)destroyinginvestorportfolios,(2)sinkingthebalancesheetsoftheiremployers,and(3)
levelingtheworldeconomy.Andthey’vedoneitallinthenameofbigcommission-drivenbonuses.Theirgameisnotaboutinvesting,it’saboutscalpingprofitwhileyoutakealltherisk.
Ifyouwanttoknowhowtomakemillionsinvestinginstocks,justdotheexactoppositeofwhat’sonofferinthehigh-octaneworldofWallStreet,wheremenwillbe
men,rightupuntiltheyasktaxpayerstobailthemout.Turnthepage,dearFool,andyouwillseewhatmostoftheworldhasoverlookedorignored.It’ssimple,really:WarrenBuffettinvestslikeagirl.
—TomGardner,December2010
September2008.BritneySpearspreppedforatriumphantreturntoMTV’sVideoMusicAwards,followingalackluster2007VMAperformance.CyclistLanceArmstrongannouncedhe’dcomeoutofretirementtocompeteinthenextTourdeFrance.HurricaneIkehadbecomethefifthhurricaneoftheAtlantichurricaneseason.DelegatesattheRepublican
NationalConventionnamedArizonasenatorJohnMcCainastheircandidatefortheNovemberpresidentialelections.ActorMickeyRourkewasbackinthespotlightthankstothemovieTheWrestler,whichpickeduptheawardforbestfilmattheVeniceFilmFestival.RogerFedererwonanastonishingfifthconsecutivetennistitleattheU.S.Open,
whileSerenaWilliamspickedupherthirdoverall,andfirstsince2002.BritishrapperM.I.A.hadahitonherhandswith“PaperPlanes,”asdidAtlanta’sownT.I.with“WhateverYouLike.”FansofNBC’sTheOfficeeagerlyawaitedthepremiereofthefifthseasontoseewhatkindofhijinkswouldensuewithMichaelScottandtherestoftheDunderMifflinteam.The
defendingSuperBowlchampionNewYorkGiantsbeattheWashingtonRedskins16–7intheNFL’sseasonopener.
Then,lessthantwoweeksintothemonth,theworldchanged.Forever.
Afinancialpanicengulfedstockmarkets,individualinvestors,andworldgovernmentsalike.Andpanicwasindeedthe
perfectwordforwhathappenedinthefallof2008.Writinginthenineteenthcenturyaboutmarketpanics,YaleprofessorWilliamGrahamSumnerdefinedoneas“awaveofemotion,apprehension,alarm.Itismoreorlessirrational.Itissuperinduceduponacrisis,whichisrealandinevitable,butitexaggerates,conjuresuppossibilities,takesaway
courageandenergy.”1We’dseenapreviewof
thismadnessearlierthatsameyear,asescalatingleverageandaslowinghousingmarketcrippleddebt-richcompanieslikeinvestmentbankingfirmBearStearns,whichwasforcedtosellitselfundermuchduresstoJPMorgan(whichhadthebackingandsupportofthefederalgovernmentforthepurchase)
inMarch2008forabargainprice.2Thehousingboom,fueledbysubprimeborrowingandbackedbybanksandWallStreetcompanieslookingtocashinonit,begantounravel.Andasitdidso,itquicklybecameclearthatthecreditmarkets,andthebalancesheetsofjustabouteverybankandfinancialfirmunderthesunandmoon,werefilledwith
horridloadsofbaddebt.Indeed,itwasa“realandinevitable”crisis.
BearStearns’demisespookedthemarketandinvestorsinMarch.Theworldthenwatchedasonetroubledbankandhedgefundafteranotherrevealedthatthey,too,weresufferingundertheweightofbadloans,leadinguslimpingintoSeptember,whenthe
bankruptcyfilingofthestoriedanddebt-ladenfinancialfirmLehmanBrothers(thegovernmentrefusedtostepinhereastheyhadwithBeartomakesureasaleofthefirmhappened)sentthemarketsoveracliff.Thecreditmarkets,bothbetweenbusinessesandbetweenbusinessesandindividuals,groundtoahalt.Nooneknewwhowashiding
whatintheirfinancialstatements.Nooneknewwhichbalancesheetsyoucouldtrust,andwhichyoucouldn’t.Itseemedsafertoassumetheworst,anditseemsthat’swhatjustabouteverybodydid.
Asonefamoussagehassaid,“Youonlylearnwhohasbeenswimmingnakedwhenthetidegoesout.”3Inthefallof2008,WallStreet
wasavirtualnudistcolony.Andpeople,itwasn’tpretty,asifIneedtoremindyou.
Stockmarketsdroppeddramatically,leavinginvestorstohangonfordearlife.Volatilitywasthewordoftheday,withtheso-called“fearindex”reachingnewheightsasthemarketsreachednewlows.Consumerconfidenceandinvestorsentimentplummetedright
alongsidestockprices.Theveryfutureoftheeconomywasuncertainfromoneminutetothenext,withoneestablishedfinancialcompanyafteranotherataprecipice,danglingovertheedge,notsurewhatwasahead.
Hello,panic.ByOctober6,2008,the
DowJonesIndustrialAveragefellbelow10,000
pointsforthefirsttimesince2004.Threedayslater,itwoulddropbelow8,600.Thatsameday,October9,theStandard&Poor’s500index(whichtracks500ofthelargestcompaniesintheUnitedStates)markeda42percentdeclineoverthepastyear,easilywipingawaygainsthathadtakenyearstobuild.Thismilestonecamelessthanfourshort,painful
weeksaftertheLehmanBrothersbankruptcy.
Itwasatimethattestedthemettleandtriedthenervesofeventhemostseasonedinvestor.Iwatched,wide-eyedandwithnosmallamountofhorror,asmyportfolio(containing,insomecases,sharesofcompaniesI’downedformorethantenyears)shranktojustawispofitself.Howlowcouldit
ultimatelygo?Well-runcompaniesthathadnothingtodowiththebanks’orfinancialinstitutions’troubleswereslaughteredrightalongsidethem.Youwouldhavethoughtpopularconsumerbrandandretailcompanieshadsuddenlystarteddabblinginmortgage-backedsecuritiesversussellingtheirsoftdrinksandleggings.
Flippingonthetelevisioneachmorningbecameanactofdesperationandadventure,inastrangesense.Ifeltcompelledtolook,toseewhathadhappenedovernight,toseewhatnewfreshawfulthingwasgoingtobeinflictedonusthatday.Tocompareittoacarwreck,whereyouhonestlydon’twanttolookbecauseyoufearwhatyou’llsee,butyouseem
unablenotto,isapt.Onlyinthiscase,there’s
acrucialdifference:Wewereallinthiscartogetherasitcrashed,leavingusinamangledheap.
Thehair-raisingdropsandsheerpanichadbreathlesscommentatorsstrugglingtokeepup.Newswasbreakingsofast,itwasnearlyimpossibletoknowthelatest,mostup-to-date
information.ImportantpeopleinfancycarsandfanciersuitsinplaceslikeManhattan,Washington,D.C.,andLondonwerecomingandgoingfrommeetings,theirentriesandexitsbroadcastontelevisionasiftheywerecelebrities.(Meanwhile,BritneydidjustfineattheVMAs,secondtimearound,thankyouverymuch.)
Throughitall,amansat
farremovedfromthehubbubofNewYorkCityandWashington,D.C.,intheMidwest,inquiet,placidOmaha,Nebraska.Hewatched,ashe’dwatchedsomanytimesbefore,astheworldwasseeminglycomingtoanend.HeheardtheshrillvoicesonTVandevenheprobablycouldn’tescapethedaily,evenhourly,delugeofphotographsofWallStreet
traderslookinghorrified,frazzled,orjustplainresignedtoitall.
Then,hedidwhatanyrationalpersonshouldhavedoneinthefaceofsomuchfear.Hetookadeepbreath,steadiedhimself,andstartedbuyingstocks,putting$20billiontoworkincompanieslikeGoldmanSachsandGeneralElectric.Ittookcourage,fortitude,andan
abilitytolookpastthecurrentcrisistotheeventualrecoveryofAmericanbusinessesandtheworldeconomy.
Ittooktherighttemperament.WarrenBuffett,ourmaninOmaha(andthe“famoussage”quotedearlier),didn’tpanicandsell.Heremainedcalm,andheassessedthesituation.Andwhenhedid,heactedfromaplaceofcertitude,backedup
byyearsofexperience.Heencouragedotherstodothesame,remindingthemthatwe’dbeenthroughtoughtimesbeforeandwe’dcomeoutaheadeachtime.Healsoremindedinvestorsthatthebesttimetobuystockswaswheneveryonewasfleeingthemarket,leavingbargainsgalorereadyforthetaking.
Tosaythatthiswasaneasymindsettoadoptduring
thisfrenziedtimeperiodisanunderstatementofcolossalproportions.It’sdemoralizingtowatchyour401(k)growsmallerbytheday,bythehoureven,forweeksonend.It’sexhaustingandincrediblydishearteningtowatchyournestegg,yourretirementaccount,orthekids’collegefundallevaporate.It’slikewewerealljustbeingbeatovertheheadrepeatedlyand
wecouldn’tescapeit.Thehits,theyjustkeptcomingandcoming.
ImanagedtobuckupandactuallybuysomemoresharesofafewcompaniesIalreadyownedontheTuesdayafterLehmanfiledforbankruptcy.AndIamnotexaggeratingwhenIsaythatwasoneofthehardestthingsininvestingI’deverdone.Actuallymakingthat
decision,thatchoicetowillinglypushmyselfbackintoamarketthatwasalready,evenatthatearlystage,leavingmebloodiedandbruised,wassodifficult.ItwasascarytimeandittookeveryounceofwillpowerIhadtoclickthelittle“buy”buttononmybroker’swebsite.Everythinginmybodywastellingmenotto.Luckily,myheadknewbetter
andoverruledthestarkfearcoursingthroughme.
OnceIboughtthoseshares,though,thepainreallybegan.Ihadnoideathatweeksandmonthsofawhipsawingmarketlayaheadofme,testingmyabilitytohunkerdownandholdon.Ineversold,though.Iwaiteditout.Andnow,lookingatthereturnsontwoofthethreestocksIboughtmoreofthat
day(AppleComputerandChipotleMexicanGrill),I’mhappyIdid.Asforthethird?Well,theycan’tallbewinnersnow,canthey?(Cough,ChesapeakeEnergy,cough.)
WarrenBuffetthasbuiltalongandenviablecareerinthefinancialbusiness,withatrackrecordmostinvestorsandmoneymanagerscanonlydreamof(andwould
probablykillfor).Fornearlyfivedecades,he’sbeenanalyzingcompanies,investinginthebestofthem,andbuildingwealth.Heisabsolutelywithoutparallel.Hisabilitytopickstocksandinvestincompaniesthatprofitandendureisnexttonone.AndyetwhattrulydefinesBuffett,whatmakeshimtheinvestorheistoday,whatseparateshimfrom
everyoneelse,fromallthoseotherinvestorsovertheyears,ishisremarkabletemperament.
TheAmericanHeritageDictionarydefinestemperamentas“themannerofthinking,behaving,orreactingcharacteristicofaparticularperson.”4Intheworldofinvesting,temperamentmanifestsitselfinwhetheryouareruledby
emotionswhenyoumakedecisions,causingyou,forexample,tobuyandthenfreakoutandsellbeforeyoushould.Whetheryoutakeontoomuchrisk.Whetheryou’refreneticallymovingintoandoutofstockswithouteverhavingaclueastowhatthebusinessbehindthemactuallydoes.Whetheryouletyourselfgetrattledbymarketmovementstoa
paralyzingpoint,orwhetheryoulookatdecliningpricesandseeopportunities.
Buffetthimselfhastalkedabouttheimportanceoftemperament,saying,“Themostimportantqualityforaninvestoristemperament,notintellect....Youneedatemperamentthatneitherderivesgreatpleasurefrombeingwiththecrowdoragainstthecrowd.”5
He’salsosaid,“Successininvestingdoesn’tcorrelatewithIQonceyou’reabovethelevelof125.Onceyouhaveordinaryintelligence,whatyouneedisthetemperamenttocontroltheurgesthatgetotherpeopleintotroubleininvesting.”6
Talkabout“trouble,”indeed.Wecansurelypointtotemperament—thewrongkind,thatis—whenlooking
forsomeoftherootcausesofthefinancialcrisis:
•Short-termthinkinginabundance•Risktakinginridiculousexcess•Debtlevelsthatwerecompletelybeyondreason•Theirrationalbeliefthatthegreed-filledmoneymakingwouldn’tstopanytimesoon
•Theinabilitytoseethelong-termconsequencesofsuchpoordecisionmaking•Thecynicalprofiteeringoffthenextrubearoundthecorner
Solongastherewassomeonefoolishenoughtoselltoatanever-higherprice,whetherwe’retalkinghousesorstocksorpackagesof
subprimeloanscouchedassafeinvestments,theraucouspartyjustkeptongoing.
Now,granted,lotsofotherfactorswerealsoinplayhere,leadinguptothefinancialcrisis.Wecan’tblameitfullyandsolelyontemperament.It’sanenormouslycomplexsituationthatbuiltupoveryearsandyears.Incentivesplayedasignificantrole,as
didtheregulatoryenvironmentandloosemonetarypolicy.CompetitionamongWallStreetfirmswassofiercethatinordertojustkeepupwithoneanother,tradersandfinanciersincreasinglywereunabletosaynotoanything.Ifafirmdidn’twanttohandleadealbecauseitwasworrieditwouldturnoutbadly,therewasalwaysanotherplace
downthestreetthatwould.However,temperamentdidindeedhavearole.
Lookingback,faultytemperamentscanbediscoveredatalllevelsoftheunfoldingcrisis,startingwiththosefolkslookingforasliceoftheAmericandream:thehomebuyersthemselves.Now,ofcourse,therewereresponsiblepeoplewhosomehowgotensnaredinthe
subprimemess,orworseyet,weretrickedintotakingonloanstheyneverhadasolidchanceofactuallymakinggoodon.Butmanyfolksdeliberatelytookonextremeamountsofdebttobuymorehousethantheyneededorcouldafford(and,insomecases,morehousesthantheyneededorcouldafford),oftenintheformofinterest-onlyoradjustableratemortgages,or
sometimescombinationsofboth.Itwasknownthatthesemortgageswouldeventuallyreset,possiblyatmuchhigherrates,meaningthepaymentsonthemcouldrisedramatically.Thehopeformanytakingonthisriskwasthatthehousingbubblewouldcontinuetoinflatewithoutpause,andthathomevalueswouldcontinuetoriseintothestratosphere,
allowingasafe,swiftexitbeforethemortgagerateresetbecameanissue.
Alas,itwasnottobe.Homevaluesstartedto
tumble,mortgagesbegantoresetatuntenablerates,andeventuallythemonthlyinterestpaymentsstartedchokingthosewhohadsoenthusiasticallytakenthemoninthefirstplace.Missedpaymentsledtodefaultsand
baddebtbegantorise.Thisgrowingtrendsuffocatedhomeowners,thenthebanksandfinancialinstitutions,thenthecreditmarketsandstockmarketbothhereandworldwide,infectingtheglobaleconomyfromthegroundup.Andallbecausenotenoughpeoplerealizedthatlong-termthinkingandprudentrisktakingarevirtues,notcurses.
Ontheothersideoftheaislestoodthebankersandthefinancialinstitutions—thetitansofWallStreet—dirtiedwithevenmoretemperamentalfilththantheshortsightedhomebuyer.Theymaynothavebeentheonestakingoutthesubprimeloans,buttheysureweremintingaprofitfromthemandencouragingtheirrationalbehaviorbehindthemto
continue.Andthankstotheirwillingnesstoleveragethemselvesatlevelsnoreasonablepersoncouldeversupportorunderstand,orhardlyevenfathom,theythenspreadtheproblemscreatedbyacollapsinghousingmarketfarandwide.
Questionsbegantoariseabouthowreliableandsolidthecollateralofanybankactuallywas,sinceeveryone
hadthistoxicstuffontheirbooks.That’swhatcausedthecreditmarketstostartseizingup.Nobankswantedtolendtooneanother,becausetheycouldn’ttrustthatthecounterpartywouldactuallybeabletopaythemback.Theycouldn’ttrustthattheirbooksdidn’thidedirtysecretslikeeveryoneelse’sdid.Whenlendingnearlystoppedbetweenfinancial
institutions,individualsweren’tfarbehind.
Panic,ouroldfriend.Onceagain,wesee
temperamentatthesceneofthecrime.ThewrongtemperamentwaspervasiveonWallStreetandwaslikegasolineonafire.Anysenseofacceptableriskwentrightoutthewindow,asthemoneykeptpouringin.Thecultureofthedaybecame
overburdenedwithmacho,me-first,make-money-no-matter-whatcutthroatattitudes.Tradersweremakingmillionsthankstomassiveoverleveragingandevermorecomplexderivatives,manyofwhichwerebasedonnotmuchmorethanlies.Risktaking,alackofconsequences,andshort-termthinkingruledtheday.
Evenmostofthevery
peoplepropellingthemessforwardknewitwouldn’tlastforever.Itsimplycouldn’t.Butinsteadofrealizingthatthegoodtimeswouldn’tlastandtakingsmartstepstoinvestwithalonger-termoutlook,theoverridingreactionbymostoftheplayerswastojustgetasmuchastheycouldwhiletheycould—whocaredabouttheconsequences?
Notonlywasflawedtemperamenttoblameinpart,then,fortheunfoldingcreditcrisis,thanksbothtohomebuyerstakingontoomuchdebtandWallStreetfollowingbehind,doingthesame,eagertomakeaquickbuck,butitalsomadetheresultantfinancialpanicthatmuchmorepronounced.Thestockmarketdropped,investorsfled,cashingout
theirstocksattheabsoluteworsttime;thestockmarketdroppedagain,investorsfled...Lather,rinse,repeat.Meanwhile,Buffettsatcalmly,waitingtomakehismove,waitingtobuysharesofgoodcompaniesatattractiveprices,averymodeloftherighttemperament—thatofaninvestorandnotaspeculator.
Here’sthegoodnewsfor
us—wecanlearntoadoptamorelong-term-focusedtemperament.Wecanbecomecalmerinvestors.Wecanshiftourselvesfromspeculatorstoaninvestmentmindset.Wecantampdownourrisktaking.Andifwedon’teverwanttoseethemistakesofthefinancialcrisisandpanicof2008repeatedagain,itseemssmarttodoso.
YourowninvestmentresultswillimproveasyoulearntocontrolyouremotionsandadoptaBuffett-liketemperament.WemightnotbeabletogeteverypersonworkingonWallStreettofocusonimprovingtheirtemperaments,althoughthatwouldundoubtedlymakeourfinancialsystemstrongerandlesserratic,butwecanstarthere,witheachother,
withourownbehavior.Now,here’swherethings
getevenmoreinteresting,foratleastonesegmentofreadersandinvestors.Wecanallworktoimproveourtemperaments,yes,butonegroupinparticularneedstoworkabithardertodoso.Andthey’retheoneswhoneeditthemost.
Men,I’mlookingatyou.Itmustbesaidthatthe
majorityoftradersonWallStreet,themajorityofboardmembersatfinancialcompanies,andthemajorityofexecutivesatinvestmentbanksshareoneverynotablequality—aYchromosome.WallStreet,atleastatthetop,atleastwhenitcomestodecisionmakingandthepowertoaffectthings,isstillaboys’club.7Andwhilehomebuyers,bothmaleand
female,sharetheblameforthefinancialcrisis,itwasprimarilymenrunningthebigmoneyonWallStreetwhoexportedtheproblemandmadethesituationexponentiallyworse.
Sure,therewereahandfulofwomentobefoundonWallStreetinpositionsofpower.ErinCallan,chieffinancialofficeratLehmanBrothersintheheadysummer
of2008,comestomind(althoughitmustbepointedoutthatshecameintothatpositioninSeptember2007,wellafterabigchunkoftheleverageatthefirmhadbeenpiledon).8Butbyandlarge,itwas,anditremains,aman’sworld
So-called“feminine”qualitieslikerelationshipbuilding,patience,andcollaborationweremarkedly
absentduringthemostrecentmarketmania.HadtherebeenmoreofthattemperamentaroundWallStreet,andindeedmorewomenonthetradingfloorsandintheboardrooms,it’spossiblethingswouldn’thaveturnedoutastheydid.Andifthingshadn’tturnedoutastheydid,wewouldallhavelargerportfoliosandfewersleeplessnightsbythispoint.
Men,you’vegotsome’splainin’todo.
Studieshaveshownthatwomenhaveadifferentapproachtoinvestingthanmendo.Theythinklong-termanddon’ttradeasmuch.Theyeschewriskmorethanmendo.They’rebetterabletothinkforthemselvesandnotbendtopeerpressure.Andtheyhavemuchlesstestosterone,whichaffects
marketsinwayswearestilldiscovering,thankstonewdevelopmentsinthefieldofneuroeconomics.Thewaythatwomentendtoapproachinvestingishealthierandcalmer,andit’sthewayweshouldallapproachinvesting,bothmenandwomenalike.
THE
aswhathappenedinthetinynationofIceland.Thecountry,just300,000citizensstrong,sawitselftransformed,nearlyovernight,fromasmall,humblefishingnation
intoahotbedofinternationalfinancialactivity.Formerfishermenweretradingderivatives,somethingthey’dprobablyneverevenheardofbefore2003.Thecountry’sdebt
gotsooutofhandthatatonepointitwasanastonishing850percentofitsgrossdomesticproduct.9Risktakinginexcess,carriedoutlargelybyaggressivemalebankers,drovethislittle
countryvirtuallystraightintobankruptcy,withnothingbutacollapsedcurrencyanddasheddreamstoshowfortheirtrouble.
So,whowascalledintosavetheday?
Yes,women.Tocorrectcourse,femaleIcelandicpoliticians,bankers,andbusinessmindstookchargeofthecountry’sfalteringeconomy.Afemaleprimeministerwas
elected,andwomeninprominentfinancialpositionsfoundnewaudiencesamongfrustratedIcelanderseagerforchange.
MostnotableamongthemareHalla
TómasdóttirandKristinPetursdóttir,whotogetherfoundedAudurCapitalin2007,beforetheeconomytherewenttopieces.Theircompanywasfoundedon“femininevalues”and
survivedtheIcelandicfinancialcrisisintact—arealfeat,lookingatthefinanciallandscapetheretoday.
Tómasdóttirdescribedherthinking,andAudur’svalues,inaFebruary
2009article:10“Wehave
fivecorefemininevalues.First,riskawareness:wewillnotinvestinthingswedon’tunderstand.Second,profitwithprinciples—welikea
widerdefinitionsoitisnotjusteconomicprofit,butapositivesocialandenvironmentalimpact.Third,emotionalcapital.Whenweinvest,wedoanemotionalduediligence—
orcheckonthecompany—welookatthepeople,atwhetherthecorporatecultureisanassetoraliability.Fourth,straighttalking.Webelievethelanguageoffinanceshould
beaccessible,andnotpartofthealienatingnatureofbankingculture.Fifth,independence.Wewouldliketoseewomenincreasinglyfinanciallyindependent,becausewith
thatcomesthegreatestfreedomtobewhoyouwanttobe,butalsounbiasedadvice.”
ThestoryofIcelandisstillunfolding,asthecountry’sfinancialwoescontinueto
hauntityearslater.Itfinallyemergedfromthe2008recessioninthethirdquarterof2010,thoughitstroublesaren’tcompletelyover.11Butcouldthistinynationleadthewayintoamore
enlightenedfinancialfuturefortheworldeconomy?Onecanonlyhope.
Luckilyforallofus,wehaveanoutstandingmodeltoguideusinthesearchforthedesiredinvestingtemperament:WarrenBuffett.
Whencomparedtotheresearchonmen’sandwomen’sinvestingstyles,andthedifferencesbetweenthem,Buffett’sinvestmentstylelooksverysimilartothosestrategiesemployedbywomen.Histemperament,thatwhichdefineshimandmakeshimthemasterinvestorheis,ismorefeminine,ifyouwill,thanmasculine.
Andifthere’sanydoubtastothevalidityofthisstyleandtemperamentversussomethingabitmore,say,macho,allowmetopointyouinthedirectionofhisreturnsversusthoseoftheinvestmenthousesonWallStreetin2008andbeyond.Buffett’sbeenBuffettfordecades,buildinghiswealthovertime,whiletheboysonWallStreetdestroyedtheirs
—andours,too!—injustseveralshortmonths.Buffett’scompoundedannualbookvaluegainhasbeenmorethandoublethereturnoftheS&P500formorethanfortyyears,whiletheydashedour401(k)sandsenttheeconomyintoaspiral.
Therecanbenoquestionastowhichisthemoresustainablepath,whichisthesmartestwaytocreatewealth
overthelongterm,whichisthebestwayforus—forallofus—toinvestforabrightfuture.It’stimeforachange.It’stimetoembracethefeminine.
It’stime,quitesimply,forallofustoinvestlikegirls,rightalongsidethegreatestinvestorofalltime,WarrenBuffett.
So,here’showthingswillgofromhere.We’llstartwith
alookattheresearchonthetopicofwomenandinvesting.(Youdidn’tthinkwe’dletthatjustslide,didyou?)Fromtherewe’llspendachunkoftimelookingathowWarrenBuffettexemplifiestheideal,feminineinvestingtemperament.We’llthenlearnsomeFoolishinvestmenttenetstohelpyouonyourwaytobecomingan
investor,ortoimprovingyourcurrentinvestmentreturnsifyou’realreadyinvestingonyourown.Andwe’llclosewithappendicesthatarenottobemissed:interviewswithseveralinvestorswhoaremodelsoftemperamentthemselves,alongwitharecapofwhatwelearned,andareadinglistforthoseofyouwhowanttolearnevenmore.
So,gatheryourthings,get
comfortable,grabadrink,andsettlein.Onceyou’redonereadingthisbook,youwillbereadytoinvestwithatemperamentthatwillhelpyoubesuccessful.Oh,andyou’llhavefunalongtheway.Investingshouldbefun,afterall.Buffetthimselfsayshetap-dancestoworkeachmorning.Bytheendofthis,you’llbetap-dancing,too.
andinfluenceofmeninoureconomyappearstobeshrinkingjustatthetimethatwomen’sroleandinfluenceisexpanding.Menwere,byandlarge,muchmoreaffectedbyjoblossesintherecentrecession.Alookattheindustriesattherootoftheproblem—housing/constructionandfinance—explainswhy.Womennowactuallymake
upthemajorityoftheUnitedStates’workforce,markingthefirsttimeinourcountry’shistorythatthat’sbeenthecase.1
Morewomenarealsobecomingmoreeducated,withwomenearningalmost60percentofundergraduatedegrees.Thatsamepercentage,60percent,holdsformaster’sdegreesaswell.2Andforthefirsttimeever,
womennarrowlyedgedoutmeninearningPhDsinthe2008–2009academicyear.3It’ssafetosay,then,thatwomen,morethanmen,areequippingthemselvestothriveandprosperintoday’seconomyandbeyond.
Willweseewomentakingovermorefinancialjobs,too?It’spossible.Womencurrentlyearn42percentofthecountry’s
MBAs.4Andlookingattheoverallshiftthatseemstobetakingholdafterthecrisis,andtheincreasedvaluethatwillcontinue(hopefully)tobeplacedoncalmertemperaments,it’sprobablethatmorewomenwillgravitatetoWallStreet.
Sothen,ifwebelievethatmenandwomenadoptingamore“feminine”attitudetowardinvestingcould
changetheworldoffinanceforthebetter,andatthesametimefattenourindividualbrokerageaccounts(it’snotallaboutmerephilosophizinghere),we’dbetterbackupourclaims,right?Afterall,basingourassumptionsonso-called“femaleintuition”wouldbedownrightsexist.
Luckyforus,academicresearchersandbehavioraleconomistshavebeenputting
inthelonghoursandhardworknecessarytoteaseoutthedifferencesbetweenhowmeninvestandhowwomeninvest.Thestudiesandsurveysgobackyearsandcovernearlyeveryaspectofinvesting—decisionmaking,riskassessment,tradingfrequency,andconsistencyofresults,justtonameafew.
Researchershavealsostudiedthedifferencesamong
professionalinvestors,bothmaleandfemale,highlightingthefactthatthesevariationsintemperamentaren’tlimitedjusttotheuniverseoftheindividualinvestor.Andsomeofthemostinterestingrecentstudieshavejustbeguntouncovertheroleoftestosteroneininvesting,risktaking,andtrading.You’renotshockedtohearithasone,areyou?
GIRLSWILLBEGIRLS
BradM.BarberandTerranceOdeanoftheUniversityofCalifornia(DavisandBerkeleycampuses,respectively)publishedwhatislikelythemostfamous(orinfamous,insomecircles)andgroundbreakingstudyongenderdifferencesininvestingwiththeirFebruary2001QuarterlyJournalof
Economicspaper,“BoysWillBeBoys:Gender,Overconfidence,andCommonStockInvestment.”5(Gottalovethattitle,right?)
Bysurveying35,000discountbrokerageaccountsoveranearlysix-yearperiod,BarberandOdeanfoundseveraldistinctdifferencesbothintemperamentandperformanceformenversuswomen.Theirpaperwas
predicatedonpriorresearch,whichhadshownthatmentendtobemoreoverconfidentthanwomeninso-called“manly”pursuits(ofwhich,wecanstill,sadlybutnotsurprisingly,countfinance).Putsimply,menthinktheyknowmorethantheydo.Womenaremorewillingtoadmitthattheyknowwhattheydon’tknow.They’remorewillingtoownuptothe
factthattheydon’tknoweverything.
So,howdoestheissueofoverconfidenceplayintoinvestingbehaviorandresults?Well,becauseoftheiroverconfidence,itwasassumed—correctly,asitturnedout—thatmenwouldtrademorethanwomendo.Andwhatdoesmorefrequenttradingdotoyourinvestmentresults?Itdragsthemdown,
runninguptransactioncostsandactingliketheproverbialalbatrossonwhatmightotherwisebesmartinvestmentdecisions.
BarberandOdeanfoundthatmentradedthestocks(alsoknownas“securities”)intheiraccounts45percentmorethanwomendid.Forty-fivepercent!Thisexcessiveflip-floppingofsecuritiesreducedtheirnetreturnsby
2.65percentagepoints,comparedtothe1.72percentagepointswomendingedtheiraccountsbytrading.Singlemenwereevenworseoffenders,trading67percentmorethansinglewomen.
Marriedmenfaredworsethanmarriedwomen,buttheyweren’tasbadoffasthesingleguys.Thiswasn’tsurprisingtoBarberand
Odean,giveneverythingtheyknewaboutoverconfidencestudies.It’spossiblethatwiveswereinfluencingtheirhusbandshere,helpingthemtonedowntheiroverconfidence,andthatinturnhelpedtheirinvestmentreturns.
Now,itshouldbenotedthatBarberandOdeanfoundthatbothsexeshurtthemselvesbytradingtoo
frequently—menjusthurtthemselvesmore.Unnecessarytradingistherealdevilhere.
Here’swhereoneofthemostinterestingoutcomesfromBarberandOdeancomesintoplayforourpurposes—women’soutperformanceoverthemenwasn’trelatedtobetterstockpickingortomarkettiming.Itwasn’tthatwomenwere
findingtheperfectstocksattheperfecttime.BarberandOdeanemphasizethisagainandagainintheirpaper.
Thekeyhereisthatwomen’stradinghurttheirperformancelessthanmen’s,thankstomen’sgreateroverconfidence.Thedifference,then,ismorerelatedtotemperamentthanitistoskill.Youcanbethesmartestsecuritiesanalyst
around,butnothavingthecorrectmindsetcanabsolutelysinkyouasaninvestor.Alltheknow-howintheworldcan’tcorrectforbadhabits.Temperamentmatters,plainandsimple.
BarberandOdeanalsopioneeredtheinsightthat“womentendtoholdlessriskypositionsthanmenintheircommonstockportfolios.”Priorsocial
scienceresearchhadshownthatwomen,onaverage,aremoreriskaversethanmen,butthis(accordingtotheauthorsthemselves)wasthefirstbitofdocumentedevidencethatwomenwerechoosingsafersecuritiesthanmenwere.
Thestudymeasured“risk”fortheinvestors’portfoliosmultipleways(wecanboilitdownto
“volatility”forourpurposeshere),andacrossthemall,menexposedthemselvestomoreriskthanwomendid,with(whoelse?)singlemenexposingthemselvestothemost.Higherriskexposureshouldresultinhigherreturns—that’swhatcompensatesinvestorsfortakingit,afterall.Ifyoudidn’tthinkyou’dberewardedforforgoingasurethingforalesssure
thing,youwouldn’tdoit,right?
Butherethat’snotthecase.Despitetheirwillingnesstogoforriskwithgusto,themaleinvestorsinBarberandOdean’sstudysimplytradedtheirprofitsaway.Onceagain,we’reface-to-facewithtemperament.
SofromBarberandOdeanwecanseethat
becausemenareoverconfidenttheytrademore(muchmore)thanwomendo,andasaresult,women’sreturnsarehigher.Wealsohavelearnedthatwomentendtoholdlessriskysecuritiesthanmendo.Tradeless,whiletakinglessrisk.Sofar,scoretwoforthegentlersex.
TAKETHEMONEYANDRUN
MutualfundpowerhouseVanguardanalyzedthemovementsin2.7millionofitsinvestors’IRAaccountsduringthefinancialpanicof2008and2009,andwhattheyfoundshouldn’tsurpriseanyonewhoknowsaboutBarberandOdean’sresults.6
Yesindeed,womenweremorelikelythanmentostayputduringtheherky-jerkymarketantics,nottouching
theirportfolios.Morementendedtofreakoutandselltheirstocksrightatpreciselythewrongtime—thebottom.Theylockedinundoubtedlyhugelosses,andontheflipsidelikelymissedoutonthemarket’srecoveryaswell.Men’soverconfidenceapparentlyledthemtotradewhentheyshouldn’thave,whenthebestcourseofactionwouldhavebeento
standpat.Remembertheharrowing
scenesIdescribedinchapter1,withthemarketcollapsingallaroundus?Itwasadifficulttimetobesteadyanddotherightthing,whichwas,ofcourse,tonotsell.Theabilitytobecalmandnotmakerashdecisionsinthefaceofsuchchaosisanincrediblyimportantcharacteristicofsuccessful
investorsoverthelongterm.It’salsooneofthemostdifficulttomaster.Atthetime,itfeelslikeabsolutehell.Trustme,Irememberhowitwasthatfall.Iremembermystomachturning,watchingasmyportfoliogotredderandredderdaybyday.ButIalsoknewthatI’dfeelworsewhenevertheworldfinallystoppedendingifI’dthrown
myhandsupintheairandsoldeverything,versusjusttakingadeepbreathandbeingstill.BasedonVanguard’sdataatleast,itappearsthatinthismostrecentinvestmentstorm,women,morethanmen,demonstratedthisvitalabilitytobepatientandwaititout.
WHENOPTIMISMISN’T
OPTIMAL
Sofarwe’velearnedthatwomentendtotradelessthanmen,takelessrisk,andaremorelikelynottosellattheworstpossibletime.Nowwe’lllookatapositiveaspectofpessimism,ascounterintuitiveasthatmightsound.
Inherpaper“FemaleInvestorsandSecurities
Fraud:IstheReasonableInvestoraWoman?”JoanMacLeodHeminwayoftheUniversityofTennesseeCollegeofLawpresentsaconcisehistoryofmuchoftheresearchonmaleversusfemaleinvestinghabits.7Oneinterestingpointshehighlightsisthatfemaleinvestorsmaybelessoptimisticthanmaleinvestors—andIthinkthat’sagood
thing.Whileoptimisminmost
partsofourlivesissomethingtostrivefor,ininvestingitcanpoisonyourjudgmentandoutlook.Optimiststendtooverstatetheirabilitiesandinvestmentacumen(hello“overconfidence”fromBarberandOdean),takemorerisks,andcansometimespayattentiononlytoinformationthatispositiveandsupports
conclusionsthey’vealreadycometo.Becauseoftheirsunnyoutlook,theytendtoassumeonlythebestcanhappentotheirstocks,andtheydon’twanttohearotherwise.
Pessimists,ontheotherhand,tendtobemorerealistic,andininvesting,clear-eyedrealismbeatspie-in-the-skyoptimismanydayoftheweek.Women,thanks
partlytothefactthattheylackthesameconfidencelevelsasmen,andalsoratetheirinvestingknowledgebelowwhatmenbelieveabouttheirowninvestingskill,tendtoreactmorerealistically.They’rebetterjudgesabouttheirpotentialreturnsandabilities,evenifthatmeanstheytendtodoubtthemselvesmore.Overconfidenceand
optimismcankillreturns,sointhiscase,alittleself-doubtcanactuallyworkinwomen’sfavor.
GIRLSJUSTWANTTOHAVEFUNDS
Weknownowthatfemaleindividualinvestorstendtobelessoptimistic,arelesslikelytopanicandsellwhen
themarket’scrashingaroundthem,andtendtotradelessandtakelessrisk.Butwhataboutprofessionalinvestorswhohappentobewomen?Dothesedifferencesstillhold?
StefanRuenziandAlexandraNiessenconductedastudyonthedifferencesbetweenmaleandfemalemutualfundmanagersthatverifiedsomepastfindings
anduncoverednewones.8ThepairanalyzedreturnsforallU.S.mutualfundsrunbyindividuals(versusteams)fortheperiodfromJanuary1994toDecember2006.Intheend,theauthorsstudied15,170funds;about10percentofthoseweremanagedbywomen.Whilethedifferencesforthissubsetofinvestorsweren’taspronouncedastheywerefor
retail(orindividual)investors,theynonethelesshighlightedkeytemperamentadvantagesforwomen.
Again,femaleinvestorswereshowntobemoreriskaversethanmaleinvestors.Thenewspinhereisthatthefemalefundmanagerschosetoinvestusing“significantlylessextremeinvestmentstyles”thandidthemalemanagers.Notonlythat,but
womenstucktotheirinvestmentgunsmorethanmen;theydidn’tseeaneedtobechangingupinvestmentstyleswilly-nilly.Andonceagain,femaleinvestorstradedlessfrequentlythanmalesdid.Yes,evenamongprofessionals,thatdifferencestillheld.
What’sinterestinghere,however,isthattherewasnotaperformanceadvantagefor
womenovermenthankstotheircalm,patienttemperaments.Performancebetweenthetwogroupswasaboutequal.Butperformanceisn’teverything.Consistencyand“performancepersistence”(ortheabilitytogeneratesteadyreturnsyearafteryear)matter,too.
RuenziandNiessendemonstratedthatthankstostayingtruetotheir
investmentprocessandphilosophyandnotswitchingupinvestmentstylestochasethenexthotthing,andthankstotheirseeminglynaturalwillingnesstoinvestusing“lessextremeinvestmentstyles,”thefemale-managedmutualfundsinthestudyachievedmoreconsistentreturnswithmorepersistentperformance.Inshort,therewerefewerwildperformance
swingsinthefemale-managedfundsthaninthemale-managedfunds.Toquotethestudy’sauthors,“Thesefindingsshowthatpastperformanceisabetterindicatoroffutureperformanceforfemalemanagedfundsthanformalemanagedfunds.”9
Whiletheremaynothavebeensignificantperformancedifferencesbetweenmaleand
femalemutualfundmanagers,recentstatisticsabouthedgefundmanagersrevealexactlytheopposite.Ahedgefundisaspecialtypeofinvestmentfundavailablealmostexclusivelytohigh-net-worthindividualsandinstitutionalinvestors.Typically,themanagersofthefunds“hedge”positionswithintheirportfolios,goingbothlongandshortstocks
(thatis,theyarebettingthatsomestockswillgoupinvalueandsomewillgodown).Inmanycases,ahedgefundcanberiskierthanyouraveragemutualfund.
HedgeFundResearch,Inc.,asourceofinformationanddataonthehedgefundindustry,trackedtheannualizedperformanceoffemale-managedhedgefundsfrom2000toMay2009.10
Theydiscoveredthatfundsmanagedbywomenhave,sinceinception,returnedanaverage9.06percent,comparedtojust5.82percentaveragedbyaweightedindexofotherhedgefunds.Asifthatoutperformanceweren’timpressiveenough,thegroupalsofoundthatduringthefinancialpanicof2008,thesewomen-managedfundsweren’thurtnearlyas
severelyastherestofthehedgefunduniverse,withthefundsdropping9.61percentcomparedtothe19.03percentsufferedbyotherfunds.So,theyperformedbetterontheupsideandlostlessonthedownside.Whilethisstudydidn’tgetintotheparticularsofthereasonsforthissuperiorperformance,wecantakeaguessthatitprobablyhadsomethingtodo
withwhatwe’veseenintheotherstudies.
PUTTINGPEERPRESSUREINITSPLACE
Allright,sofarwe’vebuiltanimageinourheadsofthefemaleinvestorasonewhotakeslessrisk,tradesless,tendstobemorerealistic,andwithstandswhipsawing
marketsbetterthanmaleinvestors.We’vealsolearnedthatfemaleinvestorstendtoproduceresultsthataremoreconsistent,andinthehedgefundworld,female-managedfundsperformbetteronboththeupsideandthedownsidethandomale-managedfunds.Butthere’smoretodiscoveryetaboutthetemperamentandtendenciesofwomenintheworldofinvesting.
ArecentreportoutfromtheNationalCouncilforResearchonWomen,11imploringthefinancialindustrytoaddmorewomentofund-managementpositions,highlightedmanyofthestudiesandsurveysaboutwomenandinvesting.Ofcourse,thecouncilhasastrongpointofview,andthereportseekstopersuadetheindustrythataddingmore
womenwillresultinbetterinvestmentreturns,lessrisktaking,andthebenefitsthatcomefromhavingdiversityofthought.Lookingatwhatwe’vealreadylearned,seemsthey’vegotapoint.
What’sinterestinghere,though,aretwospecificfindingshighlightedinthereport:Womenresearchtheirinvestmentdecisionsmorethoroughlythanmendo,and
second,theyarelesslikelytobendtopeerpressure.
Thereportpointstoa2002studyintheInternationalJournalofBankMarketingthatshowedthatwomendigdeeper,analyzemoreinformationanddetails,andaremorelikelytoconsiderallinformationrelatingtoapossibleinvestment,evenifitcontradictstheirinitial
research.Inshort,theywanttoknowasmuchastheycanandtheytakethetimetolearnit.Men,ontheotherhand,tendtotakeshortcutswithinformation,lookingatthebroadestfactorsandskippingdatathatgoesagainsttheirinitialthoughts.Inotherwords,menkeepitsimpleandmoveahead;womenliketogetintothenitty-grittyandtaketheir
time.Thismakessensewhenweconsiderthedifferingattitudestowardriskwe’vealreadydiscussed.
Thenextfindingisevenmorefascinating.A2008UniversityofCalifornia,SantaBarbara,studyfoundthatwhenmenarebeingobservedandjudgedbyothermentheyconsiderofequalstatus(or,theirpeers),theytendtomakeriskierdecisions
thannecessaryintimesofstrifeorloss,inanattempttoassertdominance.Worsestill,evenwhentheoutcomewouldhavebeenexactlythesamehadlessriskbeentaken,theguysstillchosetheriskierpath.
Womendidn’thavethissamereaction;theychosethesamepathregardlessofwhowasobservingthem.Theyseembetterabletoavoid
posturingandmakedecisionsbasedonthefactorsathand,versustryingtoone-upaperceivedcompetitor.Thinkingaboutthispeerpressureeffectinthecontextofthefinancialcrisis,wheretradingfloorsandboardroomswerefilledwithmentryingtooutdooneanother,isfascinating,andalsotroubling.Itjustgoestoshowthatpeerpressureisn’t
justanissueforthirteen-year-oldgirlsbattlingitoutonthemeanstreetsofthesuburbanjuniorhighschool(“Seriously?Shesaidwhataboutme?”).
YOUMUSTBEMISTAKEN
Helpingcharacterizeourfemaleinvestor,whomwe’vealreadydiscoveredtendsto
tradeless,takelessrisk,bemorerealistic,withstandthetemptationofpanickedmovesinmomentsofmarketmayhem,conductmorethoroughresearch,andresistpeerpressure,isthisbitofdataaboutlearningfrommistakes.MerrillLynchInvestmentManagers,nowapartofBlackRock,conductedanationwidetelephonepollin2004ofathousand
investors(500menand500women).12Yetagain,somekeydifferencesintemperamentbetweenfemaleinvestorsandmaleinvestorscroppedup.
TheMerrillsurveyfoundthatmenweremorelikelytobuya“hotinvestmentwithoutdoinganyresearch”(24percentversus13percent).Ofthemenwhoadmittedtothismistake,63
percentcoppedtodoingitmorethanonce.Forty-sevenpercentofwomenwhocommittedthesameerrordiditagain.Weshouldn’tbesurprisedtolearnthatmen,whenaskedinthesurveyaboutwhichemotionsplayedapartintheirinvestmenterrors,citedgreed,overconfidence,andimpatiencemuchmorethanwomendid.
Recognizingthatyou’vemadeamistakeandthentakingthestepstolearnfromitsothatyoudon’trepeatitisimportantforinvestors.Aswe’llseelater,WarrenBuffettisespeciallygoodatthis.Andatleastbasedonthissurvey,andgivenwhatwe’velearnedsofaraboutoverconfidenceandtheeffectitcanhaveonclearthinking,itappearsthatwomenhave
theedgehere,too.
BLAMEITONTHEHORMONES
Behavioraleconomicshasshownusthatwomenaremoreriskaversethanmen,thattheytradelessandtheirportfoliosperformbetter,thattheyaremorerealistic,thattheyaremoreconsistent
investors,andthattheytendtoengageinmorethoroughresearchandignorepeerpressure.ThankstoyearsofworkinbehavioraleconomicsandfinancebypeoplelikeTerranceOdeanandBradBarber,wehaveagoodgraspofwhatmakesfemaleinvestors’temperaments,onthewhole,moredesirable.
Recentstudiesfromtheemergingfieldof
neuroeconomicsshowussomethingelseentirely:Women’srelativelackoftestosteronecomparedtomenmeanstheymayactuallybehardwiredtobecalmer,moredisciplinedinvestors.(Sorry,guys.)Neuroeconomics(thetermwasreportedlycoinedbyProfessorPaulZakofClaremontGraduateUniversity)seekstocombine“methodsfromneuroscience
andeconomicstostudyhowpeoplemakedecisionsinvolvingrisk,aswellasstrategicdecisionsinvolvingrelationshipswithothers.”13Bylookingatthewaychemicalswithinthebodyaffectourbrainsandthinkingpatterns,thisexcitingareaofstudyopensupaworldofnewpossibilitiesforunderstandingfinancialdecisionmakingandrisk
taking.JohnM.Coates,ofthe
UniversityofCambridge,shooktheworldoffinancein2008whenhereleasedthepreliminaryresultsofastudyhedidinvolvingtestosterone,cortisol,andtradingprofits.14Coates,alongwithcoauthorJoeHerbert,gatheredsalivasamplesfromseventeentradersinLondontwiceadayforeightdays,andtracked
thetraders’testosteroneandcortisollevels.Coatesthenfolloweduphisearlierstudybycoauthoringanother,moredetailedstudy,basedonthefindingsinvolvingthoseseventeentradersandtheirtestosteroneandcortisollevels.15That’sthestudywe’lldigintohere.(Don’tbeafraid—sciencecanbefun,Ipromise.)
Thesetraderswere
involvedwithhighlyactivespeculation,holdingmostlyfuturescontractpositions(acomplexformoffinancialinstrumentthatinvolvesbettingonthefuturepriceofacommodityorstockindex),insomecasesformereseconds.Wearen’ttalkingaboutyourtypicalindividualstockinvestorshere,butnonetheless,thefindingsarefascinatingandhave
potentiallybroadimplications.
(Incaseyouneedahighschoolbiologyrefresher,testosteroneandcortisolarebothnaturalsteroids[atypeofhormone]thathelpourmindsandbodiesininstinctualsituationssuchasfightorflight,andpropelustomateaswellasstriveforsuccessandstatus.)
Relyingontwoprior
theoriesabouttestosterone,the“challenge”hypothesisandthe“winnereffect,”thescientistssetouttomeasurehowtestosteroneaffectsfinancialrisktaking.The“challenge”hypothesissuggeststhatinmales,testosteronelevelsinitiallyrisejustashighasareneededforsexualactivity;theyrisehigheronlywhenthemaleisconfrontedwithathreat,
creatingaggression.However,the“challenge”
hypothesishasbeeneasiertofindevidenceforinanimalstudiesthaninhumanstudies,owinginparttothefactthatourhighlydevelopedbrainscanovercomemoreoftheeffectsofhormonesthanotherspeciescan.Further,it’shardtopindownexactlywhateachstudymeansandhoweachstudymeasures
rathernebuloustopicslike“aggression.”ThisisonereasontheBritishscientistswereoptimisticabouttheirstudy—it’seasytoquantifyandmeasureatrader’sprofitsandlosses,forinstance.Notmuchwiggleroomthere.Also,whilemaletradersmaynotbecome“aggressive”tothepointofpickingfightsandgettingphysical,a“challenge”stillexistsfor
themintheformofcompetitionwithoneanotherforeverhigherreturns.(Remember,too,whatwelearnedearlierabouttheeffectsofpeerpressureonmen.)
The“winnereffect,”ontheotherhand,iswelldocumentedinboththeanimalkingdomandintheworldofsports.Basically,itdescribestheway
testosteronelevelsworkincompetitors,eitherinabattlebetweenanimals,orabattlebetweenathletesorsportsteams.Putsimply,testosteronelevelsriseinanticipationofaconfrontationorcompetition.Thewinninganimalorathlete,however,comesoutontheothersidewithhighertestosteronelevels,andtheloserwith,well,youguessed
it—lowertestosteronelevels(andundoubtedlyhistail,figurativelyorotherwise,betweenhislegs).What’sevenmoreintriguingisthatwinningleadstohighertestosterone,whichleadstomorewinning,whichcreatesafeedbackloopofvictoryandheightenedtestosteronelevels.Hencethe“winnereffect.”
Sobyframingtheir
researchwiththe“challenge”hypothesisandthe“winnereffect,”theauthorswantedtoseeiftherewasacorrelationbetweentestosteronelevelsandthetraders’mostprofitabledays.Theydiscoveredthatondayswhenthetraderswerethemostsuccessful,andmadethemostmoney,theyindeedexhibitedthehighestlevelsoftestosterone.
Visionsofbulgingneckveins,redfaces,andsweating,screamingtradersaside,thisresearchsuggeststhathigherlevelsoftestosteronemayhavehelpedthesetradersbettersortthroughlotsofinformationinaquickerperiodoftime.Italsolikelyhelpedthemmakefast,riskydecisions.Thestyleof“high-frequency”tradingtheseguyswere
engaginginwastheperfectexpressionoftestosterone’sbenefits.Theauthorssharedabeliefthatforother,moremeasuredstylesofinvesting,testosterone’sbenefitsmayactuallyhurtresults.Theyalsonotedthatthiskindoffrenetictradingactuallyhasaphysicalcomponenttoitaswell,whichmayalsohavebenefitedfromthepresenceofincreasedlevelsof
testosterone.Theotherhormonein
playhere,cortisol,risesinstressfulsituations.Thusthescientistsbelieveditwouldjumpwhentradersstartedlosingmoney.However,that’snotwhattheyfound,exactly.Cortisollevelsdidrise,butitwasn’trelatedtotraderslosingmoney.Instead,risesincortisolshowedacorrelationwithrisesin
marketvolatility.Cortisolhelpsusprepare
fortheunexpectedandtheuncertain,andmarketvolatilitycreatesscenariosthatarehighlyuncertain.Quotingfromthestudy,“Ourresultsraisethepossibilitythatwhiletestosteronecodesforeconomicreturn,cortisolcodesforrisk.”16Sowhenmarketsaregoinghaywire,andtradersaren’tsurewhat’s
comingnext,theircortisollevelsjump,preppingthemtobereadyfortheunknown.
Allright,soifweknowthathighlysuccessfultradershaveincreasedlevelsoftestosterone,andweknowthattheirbodiesrespondtomarketvolatilityanduncertaintybyproducingmoreofthestresshormonecortisol,what’sitallmeanforbothfemaleandmale
investorsandthefinancialmarketsatlarge?Well,it’stheflipsideofthesepositiveeffectsoftestosteroneandcortisolthatcanharmindividualresults,andpossibly,whenlookedatfromamacroperspective,evenharmourfinancialmarkets.
Takingalookatcortisolfirst,thestudyfindsthatwhencortisolreachescertain
levels,itcanactuallystarthurtingperformancebymakingtradersirrationallyriskaverse.Theyseedangerbehindeverymarketmovement,boogeymenbehindeverytickersymbolorflickeronthescreen.Whencortisollevelsaretooelevatedfortoolong,andtheconditionbecomeschronic,itcanbecomeanearlyself-fulfillingprophecy,with
tradersunwillingtoactevenwhenit’sthesmartthingtodo,andevenwhenit’sintheirbestinteresttodoso.Fearsettlesin,anxietytakeshold,andcortisol’sgripissecure.
Atamacrolevel,thismentalparalysiscanpossiblyresultinamarketdownturnbecomingmoreprotractedthanitotherwisewouldbe.Volatilitybegetscortisol
whichbegetsfearwhichbegetsevenmorevolatilityandonandon.Itcanpotentiallyaddtoanalreadyplummetingmarket,makingascarydropevenworse.
Testosterone,aswementionedearlier,canhelptraderstakerisksandmovefast,makingloadsofmoneyinthemeantime.Buttoomuchtestosteronefortoolongcanencouragetoomuch
risktaking,andtheprofitabletestosterone-ladentraderoftodaycanendupreversingcoursetomorrow.Throwinsomemarketvolatilityandwefindthatablazingrisktakercanquicklybecomenervousaboutrisk,effectivelythrowingthemarketonitshead.Thestudy’sconclusion,then,isnotnecessarilythatmarketbubblesandcrashesare
causedbyhormones,buttheydosuggestthat“hormonesmayexaggeratemovesonceunderway.”17
Further,theauthorssuggestthathavingmoregenderandagediversityinthefinancialmarketscouldgreatlyhelpmarketstability.Theypointoutthatwomenhaveonly5–10percentofthetestosteronelevelsthatmendo,and,aswe’vejust
learned,somestudiesshowthattheyarelesslikelytosuccumbtothestressandpeerpressurecreatedbycompetitivesituationsthanmen.There’sreasontobelieve,then,thataddingwomentotradingfloors,boardrooms,andothermale-heavystrongholdsinthefinancialworld(whichisstilljustaboutallofthem)would,thankstowomen’snaturally
occurringlackoftestosterone,“helpdampenhormonalswingsinthemarket.”18(Insertyourownjokehere.)
Sowouldtheworldwidefinancialpanicinthefallof2008havehappenedorbeenasseverehadmorewomenbeenmoreinvolvedintheworldofhighfinance,theirlackoftestosteronemediatingtheeffectsofthemale
hormone,lesseningthehighsandlows,calmingthetempest?Ofcoursenoonecansaywith100percentcertainty,butallindicationspointtoagreaterdiversityofnotonlygender,butofthought,experience,andworldview,potentiallyleadingtoadifferentoutcome.
PORTRAITOFAFEMALEINVESTOR
Thehardworkingscientistsandacademicsintheworldsofbehavioralfinanceandneuroeconomicswillundoubtedlycontinuetostudythedifferencesininvestmentbehavior,attitudes,andoutcomesbetweenmenandwomen.It’sneverdull,sometimescontroversial,andalways
enlightening.Puttingtogetherwhatwe’velearnedherepaintsapictureofwhatasuccessfulinvestmenttemperamentlookslike,andit’sawfullyfamiliar.ButbeforegettingintothetraitsfemaleinvestorssharewithWarrenBuffett,whatmakeshimthegreatestinvestorofalltime,andwhatwecouldalllearnfromhistemperament,let’srecap.
Femaleinvestorstendto:
1.Tradelessthanmendo2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,whilewomenaremorelikelytoknowwhattheydon’tknow
3.Shunriskmorethanmaleinvestorsdo
4.Belessoptimistic,and
thereforemorerealistic,thantheirmalecounterparts
5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangleanddetail,aswellasconsideringalternatepointsofview
6.Bemoreimmunetopeerpressureandtendtomakedecisionsthesameway
regardlessofwho’swatching
7.Learnfromtheirmistakes8.Havelesstestosteronethanmendo,makingthemlesswillingtotakeextremerisks,which,inturn,couldleadtolessextrememarketcycles
Asaresultoftheirdifferentapproachtoinvesting,andtheir
temperaments,femaleinvestorsalsoproduceresultsthataremoreconsistentandpersistent.Youcancounton’em.Andinthehedgefundworld,female-managedhedgefundsoutperformcomparablemale-managedhedgefunds,andtheirresultsdon’tsufferfrommarketdropsasseverely.
Theaboveeighttraitsrepresentaninvesting
mindsetthatallinvestors—menandwomenalike—shouldadopt.Andweallcan—it’spossible.Itwon’tbeeasy,it’lltakepracticeandhardwork,andwe’llslipupfromtimetotime,butit’spossible.We’remorelikelytoreachthesamesuperioroutcomesasfemaleinvestors—andWarrenBuffett,aswe’llsee—ifwedoso.
It’salsoimportantthatwe
try.WeneedtoburytheoldWallStreetattitudeofyore.Aswe’veseenwiththefinancialcrisis,eventuallyitallcatchesuptothoseinvolvedandeventhosewhoaren’t.Justabouteveryoneendsupthepoorerforit.Soreadonasweuncoverhowthegreatestinvestorofalltimeisactuallymoreintunewithhisfemininesidethanyoumighthaverealized,and
WarrenBuffett’s“feminine”temperamentasaninvestor,let’slearnalittlebackgroundonthemanwhommanydubthe“OracleofOmaha.”
WarrenEdwardBuffettwasbornAugust30,1930,inhisbeloved,bucolicOmaha,Nebraska.Notsurprisingly,givenallthatweknowaboutthemanhewastobecome,hewasaprecociouschild,showinganearlyinterestin
andaptitudefornumbers,details,andmoneymaking.Buffettwasclearlybrightanddriven,andmadehisfirstforayintotheworldofcommerceatagesix,sellingpacksofgum.1Hewentontomakemoneyallkindsofwaysasachild,fromsellingCokesatamarkuparoundtheneighborhood,tosellingusedgolfballstogolfersatalocalgolfcourse.
WhenBuffettwastwelve,hisfatherwaselectedtoCongress,forcingthefamilytomovefromOmahatoWashington,D.C.Buffettwasn’tthrilledwiththemove,andhadtroublemakingfriendsandfittinginathisnewschool.Hisloveforbusinessandhardworkwasrewarded,though,whenhestartedhisbelovedpaperroutedeliveringthe
WashingtonPost.Throughthisearlyexposuretothenewspaperbusiness,Buffettdevelopedaloveaffairwiththeprintedwordthatremainsstrongtothisday.
Inhighschool,Buffettcontinuedhispaperroutesuccess,andstartedadditionalbusinessesthankstothemoneyhemadedeliveringallthatnewstoallthoseWashingtonians.He
actuallyboughtaforty-acrefarminNebraska,aboutanhourawayfromOmaha,andletafarmerworktheland,splittingtheprofitswithhim.2(Remember,thisisahighschoolstudentwearetalkingabout!Rememberwhatyouweredoinginhighschool?Ibetitwasn’tbuyingfarmsinNebraska.)
Buffettfirstlearnedaboutstocksandinvestingfromhis
father,whowasastockbrokerinOmahabeforebecomingacongressman.Heboughthisfirststockatageeleven,investinginCitiesServicePreferred.HeboughtthreesharesforhimselfandthreeforhissisterDoris,at$38ashare.Unfortunately,ashortwhilelater,thestocktanked,dropping29percentto$27ashare.Buffettheld,buttheeleven-year-oldwasbothered
bythefactthathe’dlosthissistermoney.Hehatedlosingmoneyhimself,ofcourse,butknowingthathe’ddraggedhissisteralongforthedepressingridetroubledhim.WhenCitiesServiceroseagain,to$40,Buffettsold,takinga$5profitforthembothcombined.Then,naturally,CitiesServiceskyrocketedto$200ashare.3Fortheyoungeventualguru,
thisincident,andhisapparentlackofpatience,wasn’tsomethinghe’dsoonforget.
THEEARLYBIRDGETS
THERETURN
ThinkBuffett
startedinvestingyoung?Well,valueinvestorandownerofLaurenTempletonCapitalManagement,LaurenTempleton(great-nieceofrenowned
internationalvalueinvestorSirJohnTempleton),startedevenyounger.ShesaidinaSeptember2010interview:
“[B]ecauseIgrewupintheTempletonfamilyweare
reallyafamilyofvalueinvestors.IstartedbuyingstockswhenIwassevenoreightyearsold.MydadwouldallowmetobuyoneshareamonthofanystockIwanted.Hewouldbuyit
forme.Andthenhewouldtakethestockcertificate,becauseatthetimetheymailedyouanactualcertificate,andhewouldmatandframethestockcertificateandhangiton
thewallsofmyroom.SowhenIwasachild,myroomwasliterallywallpaperedwithstockcertificates.
“Atfirst,likeanychildwould,Iboughtveryfamiliarcompanies—
likeDisney,Wal-Mart,theGap...Itwasveryimportanttohavethesestockcertificateshangingonthewallsofmyroombecauseallofasudden,Ireallydid,asachild,thinkof
myselfasanownerofoneofthesecompanies.Icanremembertellingfriendsontheplaygroundthat,yes,IdidownpartofDisney.Andtheycouldn’tbelieveit.”4
Now,I’mnotsuggestingyou’resunkifyoudidn’tstartinvestingatelevenasBuffettdid,oreightasLaurenTempletondid,butstartingasearlyaspossibleisakeytoinvesting
success.Youmayhavemissedthepreteeninvestingboatyourself,butsurelyyouknowchildrenwhohaven’t,beitasonordaughter,anieceornephew,orthe
youngprogenyofafriend.Withoutadoubtit’sachallengetogetchildreninterestedininvesting,especiallygiventheridiculousnumberofdistractionsintheworldtoday,butit’swortha
try.Makeitfun
bypointingouttheproductsofcompaniesyou’veboughtsharesofatthegrocerystoreorshoppingmall.MotleyFoolcofoundersandbrothersDavidandTom
Gardnertalkaboutseeingchocolatepuddingatthegrocerystorewiththeirfatheraskidsandbeingtoldthattheyownedthecompanythatmadeit,astatementthatmadequitean
impressiononthem.Believeitornot,tyingtheesotericideaof“investing”tosomethingtangiblelikechocolatepuddingcanreallyhelpyourbuddingfinancialwhiz’sinvestingcareer
getofftoanearlybeginning.
AfterfinishinghisundergraduatedegreeattheUniversityofNebraska,BuffettsethiseyesonbusinessschoolatHarvard.However,fateintervened,andBuffettwasrejectedfromHarvard(inadecisionsortof
likeDeccaRecordsrejectingtheBeatlesin1961)andendedupatColumbiaBusinessSchool.Therehewouldmeetthemanwhowouldbecomehisbiggestinfluenceandmentor,themasterofvalueinvestinghimself,BenjaminGraham,whoatthattimewasaprofessoratColumbia.DavidDodd,whoco-wrotethetextbookoninvesting,
SecurityAnalysis,withGraham,wastheheadofColumbia’sdepartmentoffinanceandaprofessor.SoherewerebothGrahamandDodd,inonespot,atoneschool.ThiswastheplaceforBuffetttobecomeBuffett.
BuffetthadrecentlyreadGraham’ssecondbook,TheIntelligentInvestor,andinithefoundhiscallingasaninvestor—hewastobea
“value”guy.AndhewasabouttolearnfromGrahamhimself,anexperiencethatcan’tbeunderestimatedforBuffettandhisfuture.HadHarvardsaidyes,theworldstillwouldhavebeenblessedwithaquirkyintellectualnumbersguy,runningmyriadbusinesses,undoubtedlyinterestedinstocks,perhapsstillbecomingavalueinvestingdisciple.Butthanks
tohisowntemperament,hisexperienceatColumbia,andGraham’sdirectinfluenceonhim,wewereinsteadgiventhegreatestinvestorofalltime.
UpongraduatingfromColumbia,Buffett,whohadsoakedupeverybitofGrahamandDoddhepossiblycould,wantedevenmore,andthatmeantworkingforGraham’sinvestment
firm,Graham-NewmanCorporation.HeinterviewedwithGrahamandwasturneddowncold.Atthattime,thebigWallStreetinvestmenthousesdiscriminatedagainstJews,andGrahamlikedtokeepthefewspotsavailableathisfirmopenforthem.Buffettwassentpacking,backtoOmaha.
Oncehome,hegotajobathisfather’sbrokerage
house,wherehe,likeeveryotherstockbrokerworkingthereandelsewhere,calledpeopleupandtriedtoconvincethemtobuysharesofcertaincompanies.Thejobwasmoreaboutmarketingthanactualresearchandanalysis.Buffettwassuccessfulwiththepeopleheknew;afterall,hisfamilyandfriendsknewhowsmarthewasandtrustedhim.But
outsidethatgroup,hestruggled.5
BuffettstayedincontactwithGraham,andafewyearslaterwasindeedgivenhisshottoworkforhismentor.HeleftOmahaonceagain,movedtoNewYorkCity,andwenttoworkatGraham-Newman,analyzingcompaniesandsuggestingundervaluedonesforthefirmtoinvestin.Hewasmuch
happierasananalystthanhehadbeenas,essentially,asalesmanathisfather’sbrokerage.ThisplayedtoBuffett’sstrengthsandstudiousnature,allowinghimtoshine.
Buffett’sGraham-Newmanheydaydidn’tlastlong,though.In1956,afterBuffetthadbeenthereonlyabouttwoyears,Grahamdecidedtoleavehisfirmand
retire.ThatwasitforBuffettaswell.Despitebeingofferedtheopportunitytobecomeapartnerinthefirm,Buffettstruckoutonhisown.HestartedBuffettAssociates,Ltd.,aninvestmentpartnershipsimilartotheoneGrahamhadoperated.Inthebeginning,thepartnershiphadjustsevenpartners,amixoffamily,friends,andBuffetthimself.Theinitialstakes
were$100fromBuffettand$105,000fromtheothersixpartners.
AfterhelpingGrahamshutdownhisfirminNewYork,BuffettreturnedtoOmahaforgood,wherehecouldcreatethelifehewanted,workingfromhome,spendingallhistimereadingandresearchinginvestments.Grahamhimselfsuggestedtosomeofhisformerclients
thattheyinvestmoneywiththeyoungupstartinNebraska,theonenoone’deverheardof.Butthatanonymitywouldn’tlastlong.Withoutsizedreturns,andafeestructurethatrewardedBuffettonlywhenhemadehispartnersmoney,itwasjustamatteroftimebeforewordgotaroundthatsomethingspecialwashappeninginOmaha(ofall
places).Andspecialitwas.Atthe
timeofthepartnership’sclosingin1969,Buffett’spartnershadearneda32percentaverageannualreturnbeforefees.That’ssimplyunheard-of;itwasthenandremainssotoday.
In1962,BuffettbeganbuyingsharesforthepartnershipofasmallNewEnglandtextilemaker,
BerkshireHathaway,whichhebelievedwasundervalued.Buffetthopedthatthecompany’sthenpresidentwouldbuybackhisshares;he’dneverintendedtokeepthecompanyforgood.Afterall,thetextileindustrywasindecline,andBerkshirehadputupnineyearsoflosses.Buffettbelievedhecouldbuysharesonthecheapandthensellthembacktothe
companyatahigherprice.However,Berkshire’s
presidenthadadifferentidea,andafterasomewhatnastyaffairwhereinBuffettbelievedhe’dbeenpromisedonepriceforhissharesandthenofferedanother,he(Buffett)decidedheinfactwantedallofBerkshireHathaway.Andthoughhewouldlatercometoregretit,callingit“thedumbeststockI
everbought”andestimatingthatitcosthim$200billioninopportunitycost,heeventuallygotit.6
Aftertryingunsuccessfullytomakethecompanycompetitiveandprofitable,BuffettshutdownBerkshireHathaway’stextilebusinessin1985.Buthekepttheactualcompany,transformingitintotheinvestmentpowerhousewe
associatewithhimtoday.Alongwithhislongtimefriendandbusinesspartner,CharlieMunger,BuffetthasbeenabletoturnBerkshireHathawayintowhatisknownasaholdingcompany—thatis,itownswholebusinessesorpartsofbusinessesinanarrayofindustries,everythingfromCoca-ColatoGEICOInsurancetoSee’sCandiestoDairyQueentothe
WashingtonPostCompany.Buttherealoriginal
geniusofBerkshireHathawaycanbefoundintheconceptknownas“float,”aby-productoftheinsurancebusiness.Putsimply,whenyoupayaninsurancecompanyapremiumforyourcarorhome(forinstance),thecompanygetstokeepthatmoneyfromyou—andfromthemillionsofother
policyholderswhouseitsservices—untilithastopayoutforclaims.Thatmoneyisavailableforinvestment,andBuffettexploitsthissourceofexcesscashlikenoother,usingittotackonadditionalbusinesses,buystockinothercompanies,andgenerallyletthepowerofcompoundinterestworktohis,andhisshareholders’,advantage.
It’sworkedbeautifully.
From1965to2010,BerkshireHathaway’scompoundedannualgaininper-sharebookvaluehasbeenaremarkable20.2percentversustheS&P500’spaltry-by-comparison9.4percenttotalreturn,includingdividends.(ThereturnsforBerkshireareactuallyunderstated,becauseBuffettinsistsonreportingtheminBerkshire’sannualreportsasafter-tax,whilethe
S&Preturnsaregivenaspretaxfigures.)
NowthatwehavealittlebackgroundonBuffett,let’sgetintowhatcreatedthoseresults,andwhatmakeshisinvestingstyleandphilosophyso,well,girly.Butfirst,becauseit’llcomeinhandytokeeptheseinmindaswegoforward,aquickrefresheronthefeminineinvestingtraitswe
learnedaboutearlier:Femaleinvestorstendto:
1.Tradelessthanmendo2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,whilewomenaremorelikelytoknowwhattheydon’tknow
3.Shunriskmorethanmaleinvestorsdo
4.Belessoptimistic,andthereforemorerealistic,thantheirmalecounterparts
5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangleanddetail,aswellasconsideringalternatepointsofview
6.Bemoreimmunetopeerpressureandtendtomake
decisionsthesamewayregardlessofwho’swatching
7.Learnfromtheirmistakes8.Havelesstestosteronethanmendo,makingthemlesswillingtotakeextremerisks,which,inturn,couldleadtolessextrememarketcycles
Thankstotheseeighttraits,aswesawinchapter2,
womenproduceresultsthataremoreconsistentandpersistent.Aswe’llsee,Buffettmanagestoprovideuswithexamplesofallthesetraits,andwithatrackrecordlikehis,itwouldbesillyforallofusnottogetalittlegirlyrightalongsidehim.
(IfyounowhaveanimageinyourheadofWarrenBuffettputtingonlipstickandcarryingapurse,I’msorry.)
forever,”Buffettreallyisthekingofthe“tradeless,”buy-and-holdschoolofthought.1Infact,heissovehementlyopposedtoshort-termtradingthatheonceadvocated(perhapssarcastically)foradrasticchangeintaxpolicy—onethatwouldtaxprofitsgainedfromshort-termtrades(definedasanyholdingboughtandsoldunderayear)at100percent.2Regardless
ofhisseriousnessaboutthe100percenttax,BuffettdidsignanAspenInstitutepetitioninSeptember2009callingforthetaxcodetorewardlong-terminvestmentversusshort-termspeculation.3ThisisanissuethatBuffett’sbeenpassionateaboutforyears.
HoldingontothecompaniesyouinvestinisimportanttoBuffettbecause
helikestoemphasizethatwhenyoubuyastock,youaren’tjustbuyingathree-or-four-letterticker,dancingacrossthescreenlikesomemythicalsecretcode.No,you’rebuyingapieceofaliving,breathingcompany.Understandingthis—thatyouarebuyingintoanactualbusiness—isaninvestingtruthBuffettlearnedandtooktoheartfromhismentorBen
Graham.There’snodifferencein
Buffett’seyes,norshouldtherebeinyours,betweeninvestinginapubliclytradedcompanyandbuyingoutright,forexample,thesandwichshopdownthestreet.Theyeachrepresentownershipofabusiness;thedifferencejustcomesdowntohowmuchyouown—thewholething,orapart.(Althoughperhapsas
theownerofthesandwichshop,you’dgetadiscountonthatdeliciousturkeysubyoulikesomuch—shareholdersaren’tguaranteedsuchspecialtreatment.Ontheotherhand,thatsandwichshopprobablywon’tpayyouadividend,whichalotofpubliccompanieswill.Everything’satrade-off,isn’tit?)
Owningstockinacompanyrepresentsan
importantdecision,andonethatshouldn’tbetakenlightly.TheimagewehaveinourheadsofWallStreettraders,yellingandfranticallymakingbuysandsells,flippinginandoutofonestockafteranother,ispreciselytheoppositeofthemanWarrenBuffettis—calculated,thoughtful,measured,andpatient.It’spossiblethatsomeofthose
traderscouldn’teventellyouanythingaboutthecompaniestheyjustchurnedintoandoutof,besidestheirtickersymbols.Theyprobablycouldn’ttellyouwhatindustrythecompany’sin,whatgoodorserviceitsells,howlongit’sbeenaround,orwhoitsexecutivesare.
Buffett,ontheotherhand,firstdiscoveredhisfondnessforinsurancecompany
GEICOwhenhewasingraduateschoolatColumbia.Heboughtsharesthen,andwouldeventuallybuythewholecompanyforBerkshireHathaway.SincehewasaboythrowingpapersinthemistyearlymorninghoursinD.C.,he’slovednewspapersandtheWashingtonPost(whichhe’sbeenalargeshareholderofsincethe1970s).He’sownedhis
sharesofsoftdrinkgiantCoca-Colasincethelate1980s.Buffettunderstandsthatheisanownerofanactualbusiness,andaffordsthisthegravityitdeserves.
Buffett’sfeelingsonthisextendtoBerkshireHathawayanditsshareholders,too.InBuffett’sso-called“Owner’sManual,”whichhewrotetoillustratehisandCharlieMunger’s
philosophiesfortheirshareholders,theveryfirstprinciplepreachestheimportanceofrealizingthatyouarea“partowner”ofanactualbusiness.Assuch,theyhopethatBerkshireshareholderswon’tselltheirstock,justasBerkshirewouldn’tabandonlongtimeholdingsCoca-ColaandAmericanExpress,twoexamplesBuffettgives.
QuotingfromtheManual,“Infact,wewouldnotcareintheleastifseveralyearswentbyinwhichtherewasnotrading,orquotationofprices,inthestocksofthosecompanies.”4
BerkshireshareholdersappeartohavegottenBuffett’smessage.TheturnoverinsharesofBerkshireisremarkablylow,withsomeshareholderseven
willingtheirsharestofuturegenerationsinanefforttokeeptheirheirsfromsellingafterthey’regone.Fromthegrave,even,itseemsBuffett’sadviceresonates.
Buffettalsolikestoencourageinvestorstothinkoftheirinvestmentdecisionsasrepresentedbyapunchcardcontaining“justtwentypunches”meanttolastalifetime.“Withevery
investmentdecisionhiscardispunched,andhehasonefeweravailablefortherestofhislife.”5Buffettadds,“You’llneveruseupall20punchesifyousavethemforgreatideas.”6
Thinkingofyourinvestmentdecisionsthiswayishelpful,althoughitcanbeabitunrealistic.InvestorswithoutBuffett’sseeminglyunlimitedamountofcash
mayhavetodecidetosellcertaincompaniesinordertobuyothers—decisionsBuffetthimselfwasfacedwithearlyoninhisinvestingcareer,and,indeed,continuestoencounterwhenmakinglargeacquisitions.There’snoshameinthat.However,thinkseriouslyaboutinvestingyourmoneyinacompany.Whatyouareessentiallysayingwhenyoupushthatlittle
“buy”buttononyouronlinebrokerageaccountscreenisthatthecompanyyouareinvestinginisthebestplaceatthatprecisemomentforyourmoney—otherwise,you’dinvestthemoneyelsewhere,right?AsBuffetthassaid,“Ifyouaren’twillingtoownastockfortenyears,don’teventhinkaboutowningitfortenminutes.”7
Inanemailinterview,
PremJain,professorattheGeorgetownUniversityMcDonoughSchoolofBusinessandauthorofBuffettBeyondValue:WhyBuffettLookstoGrowthandManagementWhenInvesting,saidofBuffett’suniquepointofview,“WarrenBuffett’smostimportantquality,Ibelieve,ishisfocusonthelongterm.Hedoesnotpaymuchattentiontowhatthe
so-calledexpertsarepredictingaboutthenextyearortwo.Mostpeopleinthemarketareseekingshort-termreturns.Whenthereissomebadnews,fartoomanypeoplereactnegativelyandthestockmarketgoesdown.Similarly,peoplebecomeeuphoricenmassefromtimetotime,whichoftenproducesbubbles.Buffett’slevelheadedtemperament
allowshimtoweatherthesefluctuations.
“Havingalong-termviewbecomesatremendousadvantageinaworldwheremostothersareshort-termoriented.Whentheherdofshort-terminvestorsmovesthemarket,theindependent-mindedlong-terminvestorscantaketheoppositesideandeventuallyearnsuperiorreturns.”8
Buffett’spatienceisanotherimportantcharacteristicthatdefineshisinvestingstyleandtemperament.He’swillingtowait,sittingatoppilesofcash,untilhefindstheperfectopportunitytoinvest.Thiscanmeanenduringfrustratingperiodsofwatchingthemarketscreamtoevernewheights,whileyousitontheproverbialsidelines,waiting
forgoodcompaniestobecomemorefairlyvalued,andwatchingyourpileofcashstruggletokeepupwithinflation.
Butyou’vegottohavethefortitudetodoit.Buffetthasslipped(hey,heishuman)acoupleoftimesinhishistory,investingincompaniesthatweren’tuptohisusualstandardsbecausethepickingswereotherwise
slim,andeachtimehecametoregretit.USAirways,whichBerkshireinvestedinin1989,isonenotableandnotoriousexampleofthis.(We’lltalkmoreaboutBuffett’sUSAirwaysdebacleinthechapteronmistakes.)
We’reallindangerofmakingmistakeslikethis,butifyoudo,justlearnfromitasBuffettdidandmoveon.Insteadofbeatingyourself
up,you’vegottofocusonlearningtobepatient,tostayput,andtowaituntilthemarketmakesitworthyourwhiletoinvestyourhard-earnedcashinacompany.AsBuffettsaidatBerkshire’sannualmeetingin1998(atimewhenhewasbeingcriticizedfornotparticipatinginthemarket’srise),“We’renotgoingtobuyanythingjusttobuyit.Wewillonlybuy
somethingifwethinkwe’regettingsomethingattractive....Youdon’tgetpaidforactivity.Yougetpaidforbeingright.”9
Buffettlikestotalkaboutwaitingforthe“fatpitch”tocomeandthefreedomthatgivesinvestorstoavoidmistakes.InaninterviewwiththeNewYorkTimesin2007,heexplainedhisthinkingthisway:“What’sniceabout
investingisyoudon’thavetoswingatpitches.Youcanwatchpitchescomeinoneinchaboveoronceinchbelowyournavel,andyoudon’thavetoswing.Noumpireisgoingtocallyouout.Youcanwaitforthepitchyouwant.”10
Luckilyforus,unlikebaseballplayersunderpressurefromcoachesandtheirfanstoswing,wehave
theluxuryofwaitingwithoutanyonegettingimpatientbutourselves—andthatimpatienceissomethingwecanlearntotackle.Itcanbetemptingtojumpinwhenyouseestocksrise(andthat’smadealltheworsebylisteningtofinancialmediahooplaandnonsense),butdon’t.Exerciserestraint.Yourportfoliowillbethericherforit.
alsobelievesinandemploysthislong-termmindsetinherbusiness.AsshesaidinaSeptember2010interview,“Iamverygoodatignoringnoise,theday-to-daystuffjustisn’timportant,andI
willgomonthswithouttrading.I’mnotsurehowpeoplewhotradeeverydayandarelookingatshort-termtrendsandoptimizingtradingstrategiesandthingslikethat
sleepatnight.Forme,it’spatience,it’slowactivity,it’sthoughtful,it’smovingmoredeliberately.Idon’tknowwhyIhavebeenparticularlygoodatdoingthat,butIdo
knowthatit’sanadvantagethatIhaveoveralotofpeople.Ijustdon’tfeeltheneedto‘dosomething’alotoftimes.”11
Buffetthimselfwaspatientduringthelastseveral
years,lettingaround$44billionincash(yes,that’swithab)sitonBerkshire’sbalancesheetduring2004,2005,2006,and2007.12Buffettwaitedandwaitedforhisfatpitchandfinallyfounditwhenthemarketdroppedinthefallof2008amidthefinancialcrisis.Hejumpedin,spending$20billionsnatchinguppiecesofGeneralElectricand
GoldmanSachs,andencouragingotherstostaredownpanicandfearandtakeadvantageofthegreatopportunitiesthemarketwaspresentingthematthattime.Ashe’softenquotedassaying,inoneofhismostfamousandenduring(andendearing)turnsofphrase,“Begreedywhenothersarefearful,andfearfulwhenothersaregreedy.”
Patienceisalsoimportantonceyou’vemadetheleapandactuallyinvestedinacompany.Sometimesthingsgowrongandjustafteryou’vepurchasedyourstock,itfalls.It’sinevitablethatthiswillhappentoeveryinvestoratleastonce,immediatelymakingyoudoubtyourdecision-makingprocess.Perhapsthemarketasawholeswoons,orperhapsit’s
justyourparticularinvestmentthatseemstohaveforgottenthatyouboughtitsoitwouldincreaseinvalue,nottheotherwayaround.Eitherway,itcanbeincrediblydishearteningtowatchwhatyouweresurewasa,well,surethingturnoutseeminglyotherwise.
Butyoucan’tjustpanicandsell.Ifyoudoyourhomeworkandstandbyyour
investmentconvictions,you’vegottostickitout.You’vegottobepatient,andnotfallintoatrapoftradingawayanyshotyou’vegotatlong-termsuccess.
BuffettfacedasimilarsituationwhenBerkshirestartedbuyingsharesoftheWashingtonPostCompanyin1973.Rightoffthebat,inthemidstofahorriblebearmarketsecondonlytotheone
wejustendured,thestockdropped20percentandhoveredthereuntil1976—threewholeyears!Ittookuntil1981forthePosttoreachthevalueBuffettbelieveditdeserved.13
Andnow?Buffett’sheldontohissharesofthePostthroughrecessionsandrecoveriesandmorethanafewAmericanpresidenciesandit’soneofhismost
successfulinvestmentsofalltime—atrue“primary”holdingthatBuffettintendstokeep“permanently”forBerkshire.14Hadheboltedatthefirstsignofmarketturmoil,hewouldhavemissedoutonagiganticwinner.Patiencecanbepainful,butit’sworthitintheend.
Beingasuccessfulinvestorisn’teasy.Itrequires
fortitude,strength,preparation,andawillingnesstoavoidactingjustforthesakeof“doingsomething.”Togetthere,keepthefollowinginmind:
•Rememberyou’rebuyingapieceofanactualbusiness.•Takethelongview.•Bepatient.
anotherofBuffett’smostfamousanddefiningcharacteristicsishisinsistenceonstayingwithinhiscircleofcompetence—orknowingwhatheknowsandknowingwhathedoesn’tknow.ForBuffett,it’scriticalthatyouknowwhatitisyou’reinvestingin.You’reanownerofabusiness,afterall,andyouwouldn’tthinkofopeningupacompanyor
buyingapartofoneyoudidn’tfullyunderstand,right?
Buffett’smostnotoriousforhisavoidanceoftechnologycompanies,citingthemovertheyearsaslyingoutsidehis“sphereofunderstanding”(despitehisclosefriendshipwithMicrosoftcofounderBillGates).1Thoughhemaytrytoargueotherwise,it’snotsomuchthatBuffettlacksthe
abilityorinsighttounderstandwhateverytechnologycompanydoes,andhowtheymakemoney(ordon’t,asthecasemaybe).Sure,theremaybetheoddsupertechnicaladvancedmumbo-jumbocompanythatwouldbebeyondBuffett’scomprehension,butthat’snottherealissueforhimwithtech.
It’smorethathedoesn’t
considerhimselfabletopredictthecompetitivelandscapefortechnologycompanies.He’snotablewithenoughcertaintytomakehimselffeelcomfortable,togetagrasponthefutureeconomicsofthetechnologyindustry.Herecognizesitasfastmoving,everchanging,andpotentiallydeadlytotheaverage,orevenabove-
average,investor.Therearetoomanyvariablesinvolved,toomanyunknowns,thatcanrenderawell-thought-outinvestmentdeadandgoneinwhatseemslikemeremoments.
Rememberhottechnologycompaniesfromthelate1990sandearly2000likeWebVan,Pets.com,andBoo.com?Anyoneknowwheretheyarenow?The
landscapeforthesecompanieschanged,andchangedfast.BecauseBuffettcan’tpredicthowthecompetition’sgoingtolookforatechnologycompanyfiftyyearsfromnow,hewon’tbother.Therearelotsofothercompaniesouttherethathecanunderstandfully,feelingconfidentintheirprospects.
Twokeysto
understandinghowBuffettinvestsaretherelatedconceptsof“economicmoat”and“sustainablecompetitiveadvantage.”Thinkoftheideaofamoatjustasyouwouldthetraditionalfairy-talemoataroundacastle,keepingaprettylong-hairedgirlprotectedfromhungrydragonsandlustfulprinces.Amoat,inthebusinessworld,protectsthecompanyandits
profit-makingpotentialfromhungryandlustfulcompetitors.It’sanythingthatseparatesacompanyandgivesitanadvantageoveritscompetition,resultinginhigherprofitsforlongerperiodsoftime.
AcompanylikeCoca-Colaisprotectedbyitsbrand,forexample,givingitacompetitiveadvantageBuffettcanunderstandand
reliablycountoninthefuture.ItwouldbeincrediblydifficultforanupstartsodaoutfittocomeinandcompeteeffectivelyenoughwithCokeatthispointtoinflictseriousinjuryonit.Thecompany’smoatistoowide,itsreachtoofar,anditsproductsenjoyedbytoomanypeopletheworldover.Buffettcanlookahead150yearsinthefutureandhecanimaginepeople
teleportingallacrosstheglobe,downloadingmusicdirectlyintotheirbrain,andallthewhilehappilyputtinga$5billintoaVend-o-trontosynthesizeanddrinktheirfavoriteCokeproduct.ThestrengthinCoke’sbrandandbusinessmakesitso.
It’svital,too,thatthecompetitiveadvantagesbe“durable”or“sustainable.”QuotingBuffetthimself
talkingin1999aboutthestateofthestockmarketandtheinsanepricesfortechnologycompanies(whichhecomparedtootherrevolutionaryyetultimatelymoney-losingsocietaladvanceslikeautosandairplanes),“Thekeytoinvestingisnotassessinghowmuchanindustryisgoingtoaffectsociety,orhowmuchitwillgrow,butrather
determiningthecompetitiveadvantageofanygivencompanyand,aboveall,thedurabilityofthatadvantage.Theproductsorservicesthathavewide,sustainablemoatsaroundthemaretheonesthatdeliverrewardstoinvestors.”2
ThisiswhatislackingintheworldoftechnologyforBuffett.Hecan’tseethemoats,andhecan’tpredict
justwhichcompaniesaregoingtosurvive,muchlessthrive.Inotherwords,heknowswhatheknows,andwhathedoesn’tknow,andhestickstoit.
Buffett’saversiontoinvestingintechnologydidn’tjusthappeninthe1980sor1990s,though.HepassedonachancetoinvestincomputerprocessinggiantIntelinthe1960s,thenjusta
weestart-up,eventhoughheknewandtrustedoneofitsfounders.3Hesimplycouldn’tbesureheunderstoodthecompanyanditsprospectswellenoughtoputhismoneybehindit.(Itwasacostlychoice,buthisconvictiontostaywithinhiscircleofcompetenceisadmirable,nonetheless.)
Andinalettertohispartnersin1967,whenthe
marketaroundhimwasjumpingwithpopularnewtechnologyinvestments,leavingBuffettlookingforideashefeltcomfortableinvestingin,hestayedtruetohimself,saying,“Wewillnotgointobusinesseswheretechnologywhichiswayovermyheadiscrucialtotheinvestmentdecision.Iknowaboutasmuchaboutsemi-conductorsorintegrated
circuitsasIdoofthematinghabitsofthechrzaszcz.”4
Thelessonforinvestorshereisn’tnecessarilythatweshouldavoidtechnologyjustbecauseBuffettdoes,butratherthatweshouldunderstandandabidebyourowncirclesofcompetence.Maybeyouworkintheworldofhigh-tech,andarethereforeuniquelypositionedtohaveinsightsintothe
flashycompaniesBuffettwouldn’tevenentertaininvestingin.Orperhapsyou’reinthehealth-careindustry,anotherareathatcanbecomplicatedanddifficulttounderstand,andyoucanrattleoffthenamesandcompetitiveadvantagesofpharmaceuticalstocksgalore.Ifso,excellent—don’tbeafraidtousethatknowledge.Ifnot,though,don’tworry
aboutstickingtoyourknitting,thingsyouknowandunderstand.Buffettprovesyoucanmakeaprettygoodlivinginvestinginlesscomplexcompanies.
UNDERSTANDINGTHEKEYTOVALUATION
InaninterviewconductedinSeptember2010,valueinvestorLaurenTempletonagreedthatstayingwithinyourcircleofcompetenceisthesmartstrategy.She
said,“Asavalueinvestor,ifIcan’tvalueit,Ican’tinvestinit.Sothatkeptusoutofalotoffinancialstocksthatwereshowingupinourscreensduringthefinancialcrisis.Wecouldn’tget
ourarmsaroundthebalancesheetssowecouldn’tinvestinthem.Howdoyouvaluesomethingifyoureallydon’thaveatransparentviewofthebalancesheet?
Ofcoursethatkeepsusoutofbiotechandindustrieslikethatwherethere’sjustnogoodwayforustovaluethecompany.Soifwecan’tvalueit,wecan’tinvestinit.”5
Aslongashe’sbeeninvesting(andthat’sbeenquiteawhile—heboughthisfirststockwhenhewaseleven,remember?),Buffett’sfocusedoncompaniesandindustriesheunderstands.Infact,thingshelovedasachildsometimesshowupamonghisinvestmentideaslater,meaningthatinsomecasesheestablishedhiscircleofcompetencequiteearlyin
hislife.Heevensaidinhis1982shareholderletter,tonguenodoubtincheek,“nostalgiashouldbeweightedheavilyinstockselection,”citingGEICOandtheWashingtonPostCompany.6
SpeakingofthePost,asmentionedearlier,hedevelopedalovefornewspapersingeneral,andtheWashingtonPostinparticular,earlyinhislife.
Afterexercisinghisarmhurlingallthosenewspapersontoporchessolongago,henowownsabout20percentoftheWashingtonPostCompany,whichhestartedbuyingwaybackinthe1970s.He’salsoownedothernewspapersovertheyears,includingthenow-defunctOmahaSunandthestill-goingBuffaloNews.
Takerailroads,too.
Buffetthaslongbeenfascinatedwithrailroads,andhadasmallelectrictrainsetwhenhewasaboy.Heexpandedittoalargeroneinhisatticlateronandlovedshowingitofftofriendsandcolleagues.In2007,BerkshirebeganbuyingsharesoffreightrailcompanyBurlingtonNorthernSantaFe,andin2009madeasuccessfulbidtobuythe
companyoutright.NowBuffettcanbenefitfromwhatheseesasanenergy-efficient,low-costwaytoshipgoodsintheUnitedStatesandcanownarailroadthat’swaybeyondjustatoytrain.(Ah,everylittlebuddingcapitalist’sdream.)
ManyofBuffett’s,andBerkshire’s,investmentsovertheyearshavebeenconsumerbrandsthatareeasytofollow,
easytounderstand,andeasytoimagineenthusiasticallyowningapieceof.Insomecases,Berkshireownstheentirecompanyoutright;inothersitownssharesjustlikeanyotherinvestor(althoughnaturallyitownsmuch,muchmore).
BerkshireownsDairyQueen,See’sCandies,andFruitoftheLoomoutright,forexample.Sowe’re
lookingatburgersandBlizzards,chocolateandundies—alleasytograsp.BerkshirealsoownstheNebraskaFurnitureMartandBorsheim’sFineJewelry,addingagiantfurnitureretailerandafancybaublesshoptothelist.Andaswementionedearlier,BerkshireownsachunkofCoca-Cola,andatonetimeoranotherhasownedsharesofNike,
Costco,Wal-Mart,KraftFoods,andProcter&Gamble(makerofCresttoothpaste,Gilletterazors,Bountypapertowels,Duracellbatteries,andTidedetergent,justtonameafew).Thesearebig,recognizablecompanies,producinggoodsandprovidingservicesmostofushaveusedoratleastencounteredinourlifetime.
Allthesebusinessesare
signatureBuffett.Theyhavewidemoatsandstrongcompetitiveadvantages,makingiteasyforBuffetttoanalyzethemandpredicttheirfutures.They’reeasytounderstandandgetyourheadaround.And,whilelesstangible,ithastobesaidthatthey’refuntoownandfollow.Whodoesn’tlikeseeingOreosatthegrocerystore,forinstance,and
thinking,“Hey,IownsharesofKraft—thereforeIownthecompanymakingthosecookies!”Itmakesinvestingrelatablewhenyoucanlookaroundandseetheevidenceofyourmoneyatwork.Buffettenjoysthisaspectofinvesting,aswell.(Ontheflipside,it’sjustnotasjazzytosay,“Hey,Iownthecompanythatappliesthecoatingoftheoxidelayers
ontothealuminumelectrolyticcapacitorsofthisverycomputer’smotherboard!”)
Buffett’scircleofcompetencealsoincludesinsuranceandfinancialcompanies.GEICO,theinsurancecompanyperhapsbestknownforitsclevercommercials(doyoupreferthecavemenorthegecko?),isasignificantpartof
BerkshireHathaway,asareother,smallerinsurancecompanies.Aswetalkedaboutearlier,theyprovideBuffettwith“float”orexcesscashthathecanputtoworkinvesting.Berkshire’salsoownedsharesofAmericanExpressforyears,andhasinvestedinbankslikeWellsFargo,U.S.Bancorp,andGoldmanSachsaswell.
Maybeyourowncircleof
competencedoesn’tincludebanksandinsurancecompanies.That’snoproblem.Thekeylessonhereistorecognizewhatyoudoknowandunderstand,andtoleavetherestalone.Behonestwithyourselfandremembertheperilsofoverconfidence.Anotherpointtorememberisthatjustinvestingwithinyourcircleofcompetencewithoutdoing
anyfurtherresearchisn’tenough.Youstillhavetodoyourhomeworkonthecompaniestobesurethey’llmakegoodinvestmentsforthelongterm.BasinganinvestmentdecisiononlyonknowingthatyouloveStarbuckslatteswon’tfly,forinstance,butit’sagoodstartingpointforyourresearch.
Investingincompanies
youunderstandisimportant,soremember:
•Buffett’s“sphereofunderstanding”maybedifferentfromyourown.•Thinkaboutandlearnwhatyourowncircleofcompetencecovers.•Sticktoit,nomatterwhat.
willresultinwealthforsmartinvestors.Thisviewiscomplementedbyhisrisk-aversenature.Allinvestinginvolvesrisk,naturally.Thereareunknownsinherentinmakingthechoicetotradeyourmoneyforapieceofacompany—thefutureisnevercertain,afterall.ButBuffettbelievesthattobeassuccessfulaspossible,youshoulddoeverythingyoucan
tolimityourrisk,andthereforelessenthelikelihoodthatyou’llloseall-importantcapital(ormoneyyoucaninvest).Hebelievesintiltingthescalesasfaraspossibleawayfromspeculationandtowardanownership-mindedinvestingframework.
We’vealreadylearnedaboutmoatsandcompetitiveadvantages,sonow’sthetimetoembracetheconceptthat
Buffetthascalled“thecornerstoneofinvestmentsuccess.”1Thatimportantconceptiscalled“marginofsafety.”
Likemuchofhisinvestingphilosophy,BuffettlearnedabouttheideaofmarginofsafetyfromBenGraham.ThisprinciplewaskeytoGraham’svalueinvestingschoolofthought,andtheconceptevengetsits
veryownchapterinTheIntelligentInvestor.Withoutgettingtoomuchintofinancialnitty-grittyhere,amarginofsafetyrepresentstheleewayinvestorsgivethemselveswhenpurchasingsharesofacompany.Grahambelievedthatbecauseinvestorscan’twithprecisecertaintyknowhowmuchacompanyisactuallyworth(abestestimateisstilljustthat
—anestimate),youshouldreduceyourriskofbothbeingwrongandofbeingsubjectedtothemarket’svagariesbygivingyourselfanappropriatemarginofsafety.
Forexample,let’ssayyoubelieveABCcompanyisworth$100ashare,andit’scurrentlytradingat$75apop.Buyingsharesatthatpricewouldgiveyouamarginofsafetyof25percent
(somevalueinvestorsinsistonatleasta40–50percentmarginofsafety).Institutingamarginofsafetyforyourstockpurchasesisawayofmanagingtheriskinvolvedwithinvesting,andthewiderthemargin,themoreprotectionyougiveyourself.Youcanevenadjustyourrequiredmarginofsafetytobehigherwithcertainindustries,suchasmore
volatileorunpredictableones,andlowerwithbigger,moreestablishedandreliablecompanies.Thegoalistolimityourlosses,noteliminatethepossibilityofthemaltogether—thatwouldbeideal,ofcourse,yetimpossible.
ForBuffett,theconceptofmarginofsafetyisintegraltotheactofinvestingasawaytomanagerisk.He’s
oftenquotedassaying,“RuleNo.1:Neverlosemoney.RuleNo.2:NeverforgetRuleNo.1.”2It’sunfortunatelyacertaintythateveryinvestorisgoingtolosesomemoneyatsomepoint,butBuffett’spointhereistofocusondoingwhatyoucantoavoidlosingmorethanyouhaveto.Soundseasy,yes,butthetruthisthatmakinghastydecisionsandpayingmore
foracompanythanyoushouldcansaddleyourportfoliowithlossesthatcantakeyearstoundo,aswellasshrinkyourpreciouscapital.Preservingthecapitalyouhavetoinvestisofparamountimportance,andyoushoulddoeverythingyoucantoguardagainstthelossofthiscapital.Buyingwithamarginofsafetyinplacehelpslessenthispossibility.
Backinthe1970s,aswementionedbefore,BerkshirestartedbuyingsharesoftheWashingtonPostCompany.Afteranalyzingit,Buffettbelieveditsassetswereworthatleast$400million,yetthemarketwasgivingitapricetagoflessthan$100million.3Thisrepresentedamarginofsafetyof75percent—asteal!Berkshireboughtsharesandheldon,thoughBuffett
wasn’tinitiallyrewardedforhisprescience.Aswealsodiscussedearlier,rightafterBuffettinvestedinthePost,sharesdroppedandremainedbelowwhatBuffettthoughttheywereworthforthreeyears.
Thisillustratesanotherimportantpointaboutmarginofsafety—Buffetthaddonehishomeworkandwascertainthemarketwas
mispricingthePost,woefullyso,infact.Hecouldbecomfortablebeingpatientandholdingontohisshares.Hewasconfidentenoughinhisanalysisthathebelievedhewouldeventuallybeprovencorrect,andhe’dboughthimselfenoughwiggleroom(morethanenough,infact)towaitforthemarkettorewardhim.However,hadheboughtwithnomarginofsafety,
overpayingforhissharesofthePost,he’dbemuchlesscertainthatanyeventualreturnhemightearnontheshareswouldbethankstoanythingmorethanblindluck—orothersuckerswillingtopaymorethanhedid.Andthatwouldmakewaitingmuchmorenerve-racking.
Calculatingacompany’sintrinsicvalue,whichyouneedtodobeforeyoucan
startthinkingaboutwhetherthere’sanacceptablemarginofsafety,isacomplextask,andonethatwewon’ttacklehere.However,thereareampleresourcesavailableonwww.fool.comshouldyouwanttoinvestigatefurtherandlearnhowtoputthisintoaction.ThemainpointfornowistounderstandwhatitrepresentsandhowBuffettemploystheconceptof
marginofsafetytolimithisrisk.Advancedinvestorsandvaluehoundsdothesame.Perhapsyou’renowintriguedenoughtojointhem.
AnotherwaythatBuffettshunsriskisfoundinhisattitudetowarddebt.Givenhiscautiousnature,it’snotsurprisingthathe’snotabigproponentofdebt,whetherwe’retalkingaboutpersonaldebtordebtthatBerkshireor
othercompanieshaveontheirbooks,becauseoftherisktoomuchdebtcanbring.Theproblemwithdebtisthatitsoverusecanbedisastrouswhentimesgetrocky.Buyingstocksonmargin(thatis,usingborrowedmoneyfromyourbroker),forexample,cancreatetroublewhenstocksplummet,becauseyournervousbrokerisgoingtowantitsmoneyback.
Thinkaboutcreditcarddebt—theprinciple’sthesame.Whentimesareflush,youcanuseyourcreditcardsensibly,youhavenotroublekeepingupwithyourpayments,andyoucanusethecreditasitwasintended—asatoolbutnotacrutch.However,onelostjoborbiguncoveredmedicalbilllater,andit’seasytogetbehindifyou’veoverreliedoncredit
andrunupanunwieldyamountbuyingfaux-minkneckwarmers,goldcoffeetables,andafleetofhot-airballoons.Itcanturnabadsituationintoamuchworseone(butatleastyouhaveyourneckwarmersto,youknow,keepyouwarm).
Thesamegoesforbusinessesthatborrowmoney,whethertofinancenewventures,buildor
improvebuildingsorplants,orpaytemporaryoperatingcosts.Alittledebt,managedwell,normallywon’tcreatehavoc.Butbewarepilingiton.Darktimescanmeanmissedpayments,whichforacompanyneedingloansinthefuturecanmeandoubtsaboutitscreditworthiness.Andthosedoubtsregisterwithinvestors,too,whomayfleedebt-ladencompaniesfor
othermorecash-richoutfits.Buffettlikestokeep
Berkshireascashrichaspossible.Inhis2008lettertoshareholders,hewrote,repeatingthoughtshe’dsharedbefore,“However,Ihavepledged—toyou,theratingagenciesandmyself—toalwaysrunBerkshirewithmorethanamplecash.Weneverwanttocountonthekindnessofstrangersinorder
tomeettomorrow’sobligations.Whenforcedtochoose,Iwillnottradeevenanight’ssleepforthechanceofextraprofits.”4
It’stellingthatamasterinvestorsuchasBuffettrefusestoallowBerkshiretotakeonsignificantamountsofdebt.Ifhedoesn’ttrustit—andwearetalkingaboutthegreatestinvestorofalltimehere,amathematical
mastermindlikenoother—thenhowshouldtherestofusbeapproachingthequestionofdebt?It,withoutadoubt,raisesyourrisk.Thesafestthingtodo,whenpracticable,istoavoiditlikeBuffettdoes.
Buffettalsolimitshisriskexposurebystayingwithinhisso-called“sphereofunderstanding,”aswediscussedinanearlier
chapter.Bystickingtowhatheknows,Buffettlowershisriskofapoordecisionbasedonfaultyknowledgeandassumptions.That’snottosaythemannevermakesmistakes(we’llgettosomeofhismostnotableoneslateron),buthedoeswhathecantomakeasfewaspossible.
BuffettfurthermanageshisriskbyinvestingmostlyincompaniesbasedinAmerica
versusbuyingforeignstocks.Berkshire’sownedsharesofvariousinternationalcompaniesovertheyears,includingtheIrishbeerbusinessGuinness,theChineseoilcompanyPetroChina,andacoupleofIrishbanks.BerkshirealsoownstheIsraeliautomatedtoolmakerIscaroutright,andhasrecentlyownedsharesofBYD,aChinesecompany
thatmakesbatteries,electriccars,andmobilephones.Butforthemostpart,Buffetthasstuckclosetohome.
Therearegreatadvantagestoinvestingoverseas—youcanownsharesofnewer,faster-growingcompaniesinnewmarkets,foronething.Buttherearerisks,too.Knowingthegeopoliticalclimatebehindeverymarket,aswell
asdifferingaccountingrules,addsalayerofcomplexitytoinvestmentdecisions.ForBuffett,forthemostpart,that’sariskhe’schosentopasson.
Allinvestinginvolvesrisk.Thequickeryougetusedtoandcomfortablewiththisfact,thebetter.However,there’snoneedtotakeonmoreriskthanisnecessary.FollowBuffett’sleadhere:
•Insistonanappropriatemarginofsafety.•Avoiddebtasmuchaspossible.•Staywithinyourcircleofcompetence.•Doyourhomeworkbeforeinvestingoverseas.
Buffett’snotoriouslyoptimisticaboutAmerica,ourabilitytoovercomehardships,andourfuture.Whenthemarketswereroilinginthefallof2008,andfearandpanicwereattheirheight,Buffettbecamesomethingofanationalcheerleader.Hewroteanop-edfortheNewYorkTimescalled“BuyAmerican.IAm,”inOctober2008.Inthe
article,hewrotethatamidthechaos,goodAmericancompaniesweresellingforsuchinexpensivepricesthathewouldbebuyingthemforhisownpersonalportfolio—notBerkshire’sportfolio,mindyou,whichalreadyheldmanygreatAmericancompanies,buthisownaccount,wherebeforethishe’downedonlygovernmentbonds.1
WhywouldBuffettsoboldlydeclarethis“BuyAmerican”sentimentatsuchaperiloustime?Becausehebelieved,inhiswords,that“fearsregardingthelong-termprosperityofthenation’smanysoundcompaniesmakenosense.”2Buffettwasdecidedlynotmakinga“marketcall,”norpredictingthatthestockmarketwasgoingtoturn
aroundanytimesoon.Heveryclearlyindicatedthathehadnoideawhenthemarketwouldturnaround,onlythat,eventually,itwould.Andwhenitdidyouwantedtobeamongthebraveinvestorswhoboughtwhentimeslookedbleakest.
Buffettiswithoutadoubtanoptimistatheart,buthe’ssmartlyrecognizedandexploitedthefactthat
pessimistictimescancreatescenariosthatleadtogreatwealthforinvestorsinthelongterm.ThatwilllikelyturnouttobethecaseforinvestorswholistenedtoBuffett’sadviceandboughtstockswhenitseemedthewholeworldwasfallingapartaroundtheminthefallof2008(andIcertainlyhopetobeinthatnumber).AshesaidinhisNewYorkTimespiece,
echoingthoughtshe’ssharedbefore,“badnewsisaninvestor’sbestfriend.ItletsyoubuyasliceofAmerica’sfutureatamarked-downprice.”3He’salsosaid,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”4
Inhis2009lettertoshareholders,Buffetthammeredthispointagain,writing,“Aclimateoffearis
their[investors’]bestfriend.Thosewhoinvestonlywhencommentatorsareupbeatenduppayingaheavypriceformeaninglessreassurance.Intheend,whatcountsininvestingiswhatyoupayforabusiness—throughthepurchaseofasmallpieceofitinthestockmarket—andwhatthatbusinessearnsinthesucceedingdecadeortwo.”5
Buffett’scarefulnottolethisinherentoptimismcloudhisjudgment.Heremainseven-temperedabouthisinvestments,andaboutthemarket’supsanddowns.HismentorBenGrahamtalkedandwroteaboutafictionalcharacternamed“Mr.Market,”whowasavailabletodobusinesswithyoueachday,offeringtobuyyoursharesfromyouorsellyou
newones,atvaryingprices.6Ifyousaidnotohimoneday,itwasnoproblem—he’djustreturntomorrowwithyetanotheroffer.Buffettlikesthisanalogyandhasshareditovertheyears,remindinginvestorsthattheyremaininchargeofMr.Market—nottheotherwayaround.Youcan’tgettooworkedupabouthiswishy-washymovementsonewayortheother.
ThisattitudeisalsowhatletsBuffettavoidperiodsofhypeandhysteria,likethe1990stechnologyboom.TheunlimitedoptimismthatinvestorssawintechnologyatthattimeescapedBuffett.Ashewroteina1979articleinForbes,“Thefutureisneverclear.Youpayaveryhighpriceinthestockmarketforacheeryconsensus.Uncertaintyactuallyisthe
2010,BillMannoftheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmericaFundtouchedontheissueofoptimismandpessimismasitappliestovalueinvestors:
“Whenyoulookedatacompany[tovalueit],yousaid,‘Well,itearnedadollarthisyearandIamgoingtomuddleitoutat10percentgrowthgoingonforXperiodoftime.’
WheneverIwasdoingsomething,therewassomethinginthebackofmymindthatalwayssaid,butwhatifitdoesn’t?Ithinkthatthatisoneofthecoreattributesof
valueinvestors.“Ifyou
thinkaboutthestockmarket,thestockmarketisanexerciseinoptimism.Itisalmostanirrationaloptimismbecauseyouaresaying
wheneveryoubuysomething,thatyouaresmarterthantherestofthemarket.Youknowmore.Youhavebetterinsightthan100millionpeoplewhoarewillingtobuyorsellstocks.Ithink
thatisaprettyboldstatementforalotofpeople.Itisaboldstatementforeverybody.
“Sotocomeintowhatisanoptimisticpursuitandbepessimisticaboutwhateveryouarelooking
at,Ithinkitisaprettyinterestingmindset,butIdon’tknowthatIhaveseentoomanypeopleinthestockmarketgetintroublebybeingtoopessimistic.Generally
speaking,youseetheothersideofthecoin.Peoplesay,‘Well,thiscompanyisgrowingat40percent,itisgoingtokeepgrowingat40percent,orifIwanttobeconservative
aboutit,itisgoingtojustgrowat36percent.’Wellyouknow,whatifitdoesn’t?Whathappensthen?Whatisyourprotection?
“Ithinkthatthatisreallytheessenceofa
valueinvestor—someonewhoentersintosituationswherehesees,evenifhehappenstobewrongbecauseit’snotlikevalueinvestorshavesomegreaterinsightonthefuture,butthey
seesomesortofdefensivestance,beitjustintheutterlylowlevelofthestockprice,orthereissomethingaboutthecompanythattheythinkpeoplearemissing.But
youstillgothroughtheprocessofbeingapessimisticoptimist,Iguesswouldbetheleastawfulwaytoputit.”8
Graham’sinvesting
philosophywasactuallybuiltonpessimism,somethingthatBuffettmovedslowlyawayfromovertheyears.Dubbed“cigarbutt”investing,theideawastofindthecheapeststockpossible(say,acompanysellingforbelowwhatallofitsassetswouldfetchintheopenmarket),andbuysharesinit,hopingtosnagafewfinalpuffsfromitasyoumightadiscarded
cigaryoucameacrossonthestreet.(Yes,yuck.)Thisschoolofthoughtdidn’ttakeintoaccountthequalityofmanagement,orthecompany’sfutureprospects,orthestrengthofitsbrandorcompetitiveadvantage.Itwasstrictlyabout“marginofsafety,”aswetalkedaboutinthepreviouschapter.
Graham’sstylewaspessimisticinthesensethat
youweren’tlookingforbusinessestoinvestinfortherestoftheirlives,andyourlife,benefitingfromtheirmoatsandappreciatingtheirabilitytoflourish.No,insteadyouweremerelywalkingaroundwithyourheaddown,lookingforonepuffhereandonepuffthere,withnoeyetothefuture,nohopeforthebusinesstomorrowandthefollowingday.
Thanksinparttotheinfluenceofhisbusinesspartner,CharlieMunger(we’lldelveintothismoreinalaterchapter),Buffettbeganlookingpastthispessimism,andlookingforbusinessesthatwerestrongenterpriseswithbrightfutures.Nonetheless,hedidnotallowhimselftobecomeblindedbyoptimism.Heremainssteadfastlyrealisticwhen
analyzingcompanies,hopingforneitherpiesinthesky,norcigarbuttsinthegutterwithoneremainingpuffinthem.
Tomakesureyoudon’tgetcaughtupinunwarrantedoptimism,remember:
•Belevelheadedaboutyourinvestmentsandthemarketatlarge.Learnnottobeexcitedbymarketswingstotheupsideor
devastatedbymarketdrops.•You’reinchargeofMr.Market.Don’tlethimbossyouaround.•QuotingBuffett,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”
about,andmaybeevenexperiencedourselves,deliciouspig-in-blanketinhand.OrperhapsyourGreat-UncleIrvisalwayswhisperinginyourearaboutthat“surething”heheardaboutfromhisbrokerwhilefittingineighteenholesattheclub.Andthere’scertainlyneverashortageofexpertlycoiffed,smartlydressed,andsometimessmart-sounding
guysandgalsontelevisiontellingyouwhattheythinkyoushouldbeinvestingin.Whileitmaybetemptingtolistentoanyorallofthemandjumpintoastockyouknowlittletonothingabout(whenhasUncleIrveversteeredyouwrong?),resist!
Buffettbelieves,andyoushould,too,thatyouneedtoputinampleresearchtimebeforebuyingsharesofa
company.It’snotenoughjusttoknowatickersymbol;youneedtounderstandwhatthecompanydoes,howitmakesitsmoney,andjustwhoisrunningtheshow.Thislevelofreconnaissanceisaproductivemeansforfiguringoutifyou’relookingatanenterprisewithadurablecompetitiveadvantageandstrongmoat,orjustanotherhere-today-gone-tomorrow
pretender.Youcan’tknowallthatwithoutdoingthework,folks.(Asasidenote,it’samusingtothinkabouthowmuchresearchsomeonewilldobeforebuyinganewcomputerorcarorrefrigerator,butwhenitcomestoinvestingtheirhard-earnedmoneyinpubliccompanies—inbuyingapartofabusiness,remember—manypeoplearecontentto
listentoothersanddoaslittleaspossiblethemselves.)
Luckily,we’vegotthingsawholeloteasierthanBuffettdidbackwhenhefirststartedreadingaboutandresearchingcompanies.ThankstotheInternet,thequick,largelyfreeaccesswehavetodaytofinancialinformationisseeminglylimitless.BuffetthadtogoinpersontotheSecuritiesandExchange
Commissiontoseecompanyfilings.“Thatwastheonlywaytogetthem,”he’ssaid.1ItwasasimilarstoryforsomeMoody’sandStandard&Poor’sreports.He’dhavetoshowupandrequestthedocumentshewantedonspecificcompaniesfromtheirlibrary,andthensit,goingthroughthembitbybit,takingnotesforhimself.Hedidn’tevenhavethebenefit
ofacopymachine!2Whenhewasn’thanging
outatMoody’s,Standard&Poor’s,ortheSecuritiesandExchangeCommissioninperson,BuffettwashaulingaroundthosegiantMoody’sandStandard&Poor’smanuals.HestartedthishabitwhenhewasinbusinessschoolatColumbia,learningfromhismentorBenGrahamtodigforpotential
investments.Thesearen’t100-page
paperbackswe’retalkingabout,either.Think10,000pagesforthehardcoverMoody’sManuals,coveringjustabouteverypubliccompanyunderthesunandmoon.BuffetthassaidhewentthroughalltheMoody’sManualstwice—all10,000pages—whenhewasworkingasastockbrokerathis
father’sOmahafirm,lookingateachandeverybusiness.3
Buffettalsowasn’tabovevisitingcompaniesinpersontolearnmoreaboutthemandtalktomanagementface-to-face.HefirstdidthiswithGEICO(nowownedinfullbyBerkshireHathaway)whenhewasagraduatestudent.HavingheardthatGraham’sinvestmentfirmlikedthecompany,Buffett
decidedtoinvestigatefurther.HeshowedupatGEICO’scorporateofficesonaSaturdayandbeforelong,foundhimselfquizzingavicepresidentaboutthecompany’sfinancialsandprospects.Shortlythereafter,BuffettinvestedasubstantialchunkofhismoneyinGEICO’sstock.
Buffett’sinsatiabledesiretolearneverythingandread
everythinghecangethishandsonislegendary.He’sanabsolutesponge,soakingupfarmoreinformationthanseemshumanlypossible.Hedevoursannualreports,businessmagazines,andbooksaplenty.Hereportedlyreadsatleastfivenewspapersaday,andhasbeenreadingtheWallStreetJournaldailysincehewasincollege.4Infact,oncehewaslivingand
workingbackinOmahahearrangedtohavetheJournaldeliveredearlytohisofficeeachmorning,sohe’dhaveajumponeveryoneelsewhenitcametothelatestfinancialnews.5
Buffett’sdaysinhismodestOmahaofficeareusuallyspentreading,fromthetimehegetsinuntilthetimeheheadshome.Hereadsaboutsevenhundredannual
reportsayear,takingforty-fiveminutestoreadeachonecovertocover.Talkaboutusingyourtimewisely!Hehasoptimizedthistime-consumingprocessperfectly.Giventhathe’smostlyjustsittingaroundreadingallday,he’stalkedbeforeabouthowboringhistimeattheofficewouldlooktoanoutsider.(AlthoughIhavetosay,assomeonewhoabsolutely
lovestoread,thissoundsprettyheavenlytome.)
Hisnightstypicallyaren’tthatdifferent.Histhreeadultchildrenhavetalkedabouttheirfather’sreadinghabitswhentheyweregrowingup;he’dgouptohisstudyupstairsaftersupperandreaduntilhewenttosleep—theyknewnottodisturbhimunlessabsolutelynecessary.6Buffettissimplydrivento
absorbasmuchknowledgeandinformationashecan.
Onebenefitfromthisisthathecanoftenmakecomplexfinancialdecisionsfasterthanmostofus—mathwhizzesorno—wouldfeelcomfortabledoing.Becausehe’sspentsomuchtimelearningindetailaboutthefinancialsofnearlyeverycompanyhemightfeasiblybeinterestedinowning,hecan
quicklyassesspotentialdeals.Abouthisongoingprepwork,Buffetthasreportedlysaid,“NoahdidnotstartbuildingtheArkwhenitwasraining.”7BuffettreadstostayreadyfornewbusinesspropositionsinadditiontokeepingupwiththefinancialsofBerkshire’scurrentholdings.
Buffett’smindisrazorsharpandhispowertorecall
informationisastonishing.AndrewKilpatrick,authorofOfPermanentValue:TheStoryofWarrenBuffett,saysthat“heisinfactageniusandtherestofusmortalscan’trelatetothat.Ifyoutellpeoplehecanreadandabsorbabookinonesitting,peopledon’tbelieveitbecausetheycan’tdoit.”8
Butwhileitcertainlyhelps,youdon’thaveto
possesshisremarkableintellectandnear-perfectmemorytosucceedasaninvestor.(Thankgoodness!Mostofuswouldbesadlyoutofluckwerethesetraitsnonnegotiablerequirements.Andremember,too,whatBuffetthimselfsaidabouttemperamenttrumpingIQininvesting.)
Youdoneedtocraveknowledgeashedoes,
though.It’snotnecessarytorequestearlydeliveryoftheWallStreetJournal,orreadfivenewspapersaday,orspendyoureveningsathomeholedupwithastackofannualreports.You’velikelygototherthingstoattendto,right?Buttobecomeabetterinvestor,you’vegottobecomealoverofbusinessesandabetterscholar.
You’vegottolearnthe
basicsofaccounting,soyou’llknowyourwayaroundabalancesheet,forinstance,andwon’tbeflummoxedwhensomeone’stalkingaboutaccountsreceivableorgoodwill.You’vegottoreadaboutdifferentbusinessmodels,tounderstandhowtheymakemoney.
HowisdiscountgiantWal-Mart’sapproachdifferentfromjewelrystore
Tiffany’s,forexample?They’rebothretailers,buttheypracticeverydifferentapproachestobusiness.Theanswer?Wal-Martsellsawholelotofthingswithverylittlemarkup,ahighvolume/lowmarginstrategy,whileTiffanychoosestosellfewer,higher-qualityitemsbutmakesmoremoneyoffeachone.(Oh,andnaturally,there’sthefactthatWal-Mart
doesn’tusethosecutelittlerobin’seggblueboxesanddoesn’thavealegendarymoviewithitsnameinthetitlestarringtheoneandonlyAudreyHepburn.ButIdigress.)
You’vegottobecomecomfortablewiththepeculiarlanguageofbusiness,andtogetthere,you’vegottoembracereadingaboutit.Havingahealthycuriosity
abouttheworldaroundyouhelps.Buffett’seternallycurious,andthisisahugeassetforhim.Youcanneverbesurewhereyournextgreatinvestmentideaorpossibilityisgoingtocomefrom.Beingopentolearningaboutanythingandeverythingprovidesyouwiththementalmakeuptoembracenewideas.
Management,hasasoneofherfirm’scorevalues,“Learnandreadwidely.”InaSeptember2010interview,sheelaboratedonwhythisissoimportant:
“Itmattersbecausethe
worldiscomplexandtheworldisadaptive.Idon’tknowwhythisis,Idon’thaveatheologicalorepistemologicalfoundationforthis,butithascometomyattentiontime
andtimeagainthattherearepatternsintheworldthatrepeatacrossseeminglyunrelatedsystems.Sotherearethingsaboutthemarketsthatappeartometobeverysimilar
tothewaythatbiologicalsystemswork.Orthereareanalogies,therearerecurringpatternsthataresimilar,andwesureknowalotmoreaboutbiologicalsystemsthanwedoaboutthe
markets,andsoifIcanstudybiologicalsystemsandtheycangivemeanylittleinsightintohowthisworks,that’shelpful.Andit’sreallyindirect,soIdon’twanttomakeitsound
like,‘WellIstudynervesystemsandIfigureoutthatthisworksthatway.’It’sreallyveryindirectandveryamorphous.
“There’salsotheelementofhistoricalpatterns,not
justsystems,butevents,suchasthewaythatwarshappen,thewaythatculturesevolve,thewaythatdemographicshaveaffectedcountries,thewaythatnaturaleventshaveaffected
countries—again,amorphous,indirect,buttheyprovidegreaterconnectionsinyourbrain,yourbrainbecomesmorerobust,andthepatternrecognitionmachine
becomesbetter.Youmakeconnectionsthatotherpeoplemightnotmake.That’sataverybroadlevel.
“Atamorepracticallevel,acuriouspersonismorelikelytouncoverthe
pieceofinformationthatwillbetheevidenceyouneedtohavehigherconfidencethanthenextguythatisnotcuriousenoughtoberesourceful.Youknow,
someonewho’sbasicallylike,‘Igetthis.Iunderstandhowthisworks.Idon’tneedtothinkaboutitallthatmuch.’Whereassomeonelikeme,orthepeoplewhoworkforme,
arealwaysasking,‘HowelsecanIthinkofthat?WhatamImissing?Whatelseishappening?WhatelsecouldIdo?HowelsecouldIturnthisonitshead?WhatelsecouldIresearchto
figureoutifthisisrightornot?’
“Now,youhavetobecarefulwiththat,becauseyoucouldworkononethingtwelvehoursadayfortherestofyourlifeandstillnothave100percent
information.Butit’sthedrivetobecurious,andthepersonwhonaturallywantstolearnandreadwidelyismorelikelytobeabetteranalyst.Then,secondly,theactofreading
widelyandbroadlyprovidesyouwithamorerobustsetofpatternsandconnectionsandnetworksthat,atthemargin,Ithinkhelpyouunderstandhowtheworldworks.”9
Now,thisisn’ttosaythatBuffett’sgoingtospendalotoftime—norshouldyou—readingaboutandfollowingindetailthecompaniesthatlieoutsidehiscircleofcompetence.Aswetalkedaboutearlier,heveryclearlydefineswhichindustriesandtypesofcompaniesfallintohiscircleandthenhesticksto
it.Thankstohiscuriosity,it’snotastretchtoimaginehimkeepingupwithsomecompaniesthatfalloutsidehiscircleinaperipheralkindofway,butnotwiththesamedepthandintensityhedevotestothecompanieshefullyunderstands.
Aswefoundearlier,becauseofthefast-movingandever-changingnatureoftechnology,forexample,
Buffettdoesn’tfeelcomfortabletryingtopredicttheirfuturecashflows.It’sunlikely,then,thathe’sspendingasignificantamountoftimereadingabouttechcompanies,outsideofsomeofthebiggiesthatweknowfascinatehimlikeMicrosoftandGoogle.Hisresearchtimeandbrainpowerarebetterfocusedelsewhere.Thisisalessonforus,as
well.Unlessyouarecertainthatdivingdeepintonewareasisgoingtobringthemwithinyourcircleofcompetence,youareprobablybetterservedbycontinuingtolearnasmuchasyoucananddeepeningyourknowledgeabouttheindustriesandcompaniesyouarealreadycomfortablewith.
AnotherkeyassetforBuffettishisabilitytoavoid
what’sknownas“confirmationbias,”theveryhumantendencytoseekoutonlyinformationthatconfirmsaconclusionwe’vearrivedat,versuschallengingit.10We’rebiasedtowardnewsthatpleasesus;questionus,andnotsomuch.It’sthegrown-upequivalentofstickingyourfingersinyourearsandyellingnonsensewhenyoudon’twanttohear
whatsomeone’stellingyou.However,avoiding
negativeinformationcanbedeadlyforinvestors.Lettingconfirmationbiasruleyourinvestmentdecisionscancompoundmistakes,becauseitcanmakeyouunwillingtoadmityoumadeoneinthefirstplace.Aswe’llseelaterinourchapteronmistakes,Buffettisuncannilygoodatadmittinghe’smadethem.It
mayhurthisego,itmayupsethim,butwhennewinformationpresentsitselfthatdisprovessomethinghebelieved,heanalyzesitandacceptsit.WritingaboutapurchasehemadeofoilcompanyConocoPhillipswhenoilpricesweresky-highandthensubsequentlyplummeted,hesays,“sofarIhavebeendeadwrong.Evenifpricesshouldrise,
moreover,theterribletimingofmypurchasehascostBerkshireseveralbilliondollars.”11
Whenyoudon’ttakethetimetoquestionyourthinking,toconsiderwhatcouldgowrong,tonoodleonwhatyoucouldbemissinginyouranalysis,youautomaticallyincreaseyourrisk.AndweknowthatBuffettbelievesyoushould
doeverythingyoupossiblycantoreduceyourrisk.Makingsureyou’veconsideredalternatepointsofviewhelpsyoudothis.Youwon’tbeperfectatit;nooneis.Buttryingtothinkaboutallpointsofview—notjusttheonesthatindicateyou’reright—istremendouslyhelpful.
Writinginhis2008lettertoBerkshireHathawayshare-
holdersaboutthehumaninclinationtowantapprovalforone’sinvestmentideas,Buffettsaid,“Approval,though,isnotthegoalofinvesting.Infact,approvalisoftencounter-productivebecauseitsedatesthebrainandmakesitlessreceptivetonewfactsorare-examinationofconclusionsformedearlier.Bewaretheinvestmentactivitythatproduces
applause;thegreatmovesareusuallygreetedbyyawns.”12
So,inordertogetthemostoutofthetimeyouspendresearching(arealnecessitytobecomingagreatinvestor):
•Read,read,read.(Youcanchecktheappendixinthebackforalistofbooks,ifyouwantaplacetostart.)
•Don’tforgetaboutyourcircleofcompetence.•Avoidconfirmationbias—activelyseekoutinformationthatcontradictsyourconclusions,notonlyinformationthatreinforcesthem.
earlyinlife,thankstohismentorBenGraham.ThoughBuffettevolvedhisthinkingsomewhatovertheyears,incorporatingideasaboutmorequalitativeinvestingfrombusinesspartnerCharlieMungerandgrowthinvestingpioneerPhilipFisher(we’llgetintothisfurtherlateron),oncehe’dformedhisphilosophicalfoundation,heneverwaveredfromit.
Buffettwouldencountertryingperiodsforhisintellectualstrengthandpsychologicalfortitudeinjustabouteverydecadehe’sbeeninvestingin.He’sbeenseenas“outofstep”(hisownwordsina1967lettertohispartners)orpasthisprime,timeandtimeagain.1Punditshavederidedhisoppositiontotechnologyinvestments,declaringhimwashedup,his
styleofinvestingnolongersuccessful.
Beforehewasthewell-knownBuffettofmagazinecoversandbooktitles(ahem),hefacedpricey,irrationalmarketsthatlefthimlittlechoicebuttowaitwithcashburningaholeinhisproverbialpocket.Throughitall,throughthecriticism,throughthefrustrationofseeinggoodcompanies
simplysellingfortoohighaprice,Buffettstayedtruetohimself,certaininhisbeliefs.HedidnotabandonhisGraham-basedideology,andhedidnotdoubtthatthewayhewasinvestingwasthebestandmostsensiblewaytogoaboutthings.
InatelevisedNovember2009CNBCinterviewBuffettparticipatedin(alongwithBillGates)atColumbia
University,hesaid,“Havingsoundprinciplestakesyouthrougheverything.AndthebedrockprinciplesthatreallyIlearnedfromGrahamandDodd,Ihaven’thadtodoanythingwiththem.Theytakemethroughgoodperiods,theytakemethroughbadperiods.Intheend,Idon’tworryaboutthembecauseIknowtheywork.”2
TheBuffettpartnership
beganin1956,andhequicklyandeasilyfoundundervaluedplacestoinvesthispartners’money.However,asthe1960sprogressed,dubbedthe“Go-Go”yearsbymarkethotshotsmakingfast,easymoney,Buffettfoundhimselffrustrated,withtoomuchmoneytoinvestandtoofewopportunitiestodoso.Indeed,in1966heclosedhispartnershiptonewinvestors.
Atthetime,predatinganothertechbubblethatwouldseeBuffett’slogicquestioned,investorsweresnappinguptechnologyandelectronicscompanieswithoutpausingtoaskexactlywhatthesecompaniesdidorhowtheymademoney.
Buffettrefusedtoparticipateinthemadness,tellinghispartnersintheaforementioned1967letterto
them,“Whenthegameisnolongerbeingplayedyourway,itisonlyhumantosaythenewapproachisallwrong,boundtoleadtotrouble,etc.Ihavebeenscornfulofsuchbehaviorbyothersinthepast.Ihavealsoseenthepenaltiesincurredbythosewhoevaluateconditionsastheywere—notastheyare.Essentially,Iamoutofstepwithpresentconditions.On
onepoint,however,Iamclear.IwillnotabandonapreviousapproachwhoselogicIunderstandeventhoughitmaymeanforgoinglarge,andapparentlyeasy,profitstoembraceanapproachwhichIdon’tfullyunderstand,havenotpracticedsuccessfullyandwhich,possibly,couldleadtosubstantialpermanentlossofcapital.”3(Itshouldbe
pointedout,however,thatthankstohisearlierpurchases,thepartnershipperformedverywellinthe1960s.Heclosedthepartnershipin1969,havinggivenhisluckypartnersa32percentaverageannualreturnbeforefees.)
Fromthispointearlyinhiscareer,Buffetthadtobestrongandnotbendtomobrule.Sure,hecouldhave
followedalltheother“investors”(Buffettlikelywouldn’tagreewiththatcharacterizationofthem)intothemarket,hoppingintostocksthathedidn’tunderstandbutwereneverthelessgoingupbecauseeveryoneelsewasinafrenzy,butthatisnotwhoheisorhowheoperates.Hebelievesinbeingsystematicandhavingasetapproach,a
framework,andonceyouknowwhoyouareasaninvestorandwhatyou’relookingfor,yousticktoit.ChangingwitheverymarketwhimandspeculativewindthatblowsthroughWallStreetisnotthewaytobuildwealthoverthelongterm.
Buffettwouldbetestedagainintheearly1970s,asmutualfundmanagerspouredmoneyintoagroupofbig
companiesknownasthe“NiftyFifty.”ThefactthateveryonewasdoingitwasnotenoughreasonforBuffetttojointhem,andhesetoutonhisown,snappingupcheapsharesofcompaniesotherinvestorswereignoring.Thestockmarketswoonedin1973–74,anddespitehiscurrentinvestmentslosingvalue,Buffettwasexcitedaboutthechancetopickup
companieshebelievedinforever-lowerprices.Themoredismalthestockmarketbecame,thehappieritmadeBuffett.
The1960sandthe1970swere,together,periodsthatexemplifiedoneofBuffett’smostfamoussayings:“Befearfulwhenothersaregreedy,andgreedywhenothersarefearful.”Inthe1960s,therehadbeen
euphoriaandgreedgalore,andBuffettpatientlywaitedonthesidelines,hesitanttojointhesure-to-endparty.Then,asthemarketcollapsedinthemid-1970s,andmostinvestorswereallfilledupwithfear,Buffettwasgreedilyaddingtohisfavoritepositionsandinitiatingnewones.
WheninterviewedbyForbesmagazinein1974,
andaskedhowhefeltaboutthestockmarketatthatparticulartime,Buffettsaid,“Likeanoversexedguyinaharem.Thisisthetimetostartinvesting.”(OK,soclearlyBuffettdoeshavesometracesoftestosterone.)Headded,“Nowisthetimetoinvestandgetrich.”4Thisattitudeandabilitytoremaincoolinthefaceofpanicandmarketdeclinesisatraitthat
separatesBuffett;it’salsosomethingyou’vegottolearntodevelopinordertobeabetterinvestor.
SpeakingofBuffettandhisremarkabletemperament,RogerLowenstein,authorofBuffett:TheMakingofanAmericanCapitalist,andmorerecently,TheEndofWallStreet,saidinaninterviewpublishedonFool.com,“Howmanytimes
haveweheardhe’sthrough?Weheardthatinthedot.comeraandwehearditinthemortgageeraagain.Justbubbleafterbubble,hestandsonthesidelinesandletsotherpeopletakewhatseemtobeeasygainsuntiltheycomecrashingdown.Itsoundseasyinretrospect,butitjusttakesanawfullotofself-confidence.”5
Lowensteinalsosaid,
“Thekeytohistemperamentisthatheiscomfortablefollowinghisowninstinctsandjudgmentandignoring(whenhedisagreeswithit)thatoftheconsensus.Thishasenabledhimtoavoidmany,manyinvestmentfadsandperilsoverthecourseofhiscareer,fromtheGo-Gostocksofthe’60stotheNiftyFiftyoftheearly’70s,tothedot.comsofthelate’90sand
themortgagebubbleofrecentyears.”6
Itcanbeincrediblyscarytogoagainstwhatotherinvestorsaredoing.Tobecontrarianissodifficult.Theconvictioninyourownanalysisandbeliefsisparamount.Otherwise,youmightaswellgivein,giveup,andresignyourselftoafuturefollowingtheso-calledherd,investinginwhat
everyoneelseis,destinedtodoonlyaswellastheydo.
DON'TWAVER
FROMYOURCONVICTIONS
Inaninterview,valueinvestorand
founderofParadigmCapitalManagementCandaceKingWeirsaidofthechallengeofstayingtruetoyourself,“youhavetohaveacertainsetcourageofyourown
convictions,becauseoftenyoucanbewrongforweeksormonths.It’snotthatyoureallywerewrong,butyouappeartobewrong....Soyoudohavetohavethecourageofyour
convictions,Ithinktobegood.Youreallyhavetobegrounded.
“Ithinkwehadaprettyfabulousyearin’09,justbecausewestucktoourknittingwhenotherpeople
werejustfrozenintheground.We’djustcomeinandwe’dtalktoourcompaniesandifwethoughtthatthingswerereallyoutrageouslyoutofwhack,thenwewouldbuyalittle
more,butfundamentallyweareverydisciplined.Ithinkdisciplineisreallycritical,too.Youdohavetoshowupeveryday,nomatterthedaysyouhateit.Yousay,‘Ican’tbearit.’You
can’tbeartoloseanymoremoney.Itakeitverypersonallyalways,butifyoudon’tshowup,youdon’tgettoplaythegameandeventuallyyouarejustoutofthegame.”7
Let’snotfoolourselves.Overcomingthistendencyisridiculouslyhard.Recentresearchevenshowsthatwhenweconform,theareasofourbrainthatareactivatedarethesameonesassociatedwithpleasure.8So,truly,pilinginbehindotherinvestors,andhavingthempileinbehindus,actually,literallyfeelsreallygood.Butremember,asBuffetthas
said,“Approval...isnotthegoalofinvesting.”9
Instead,acarefullycalculatedweighingofthefacts,andofyouranalysisofthecompany’sfutureprospects,iscalledfor.Wheneveryoneinthemarketbelievessomething’strue,askyourselfwhatthey’remissing.Questiontheconclusionsofpundits.Don’tassumethattheyknowmore
thanyoudo,orknowsomethingyoudon’t.Thebestplacetolookforpromisinginvestmentsisoftentheveryplacemostinvestorshaveturnedtheirbackson.Lookwhereothersaren’tlooking.
WhenBuffettwasjustayounggraduatestudentandvisitedtheWashington,D.C.,headquartersofGEICOinpersonandendedup
investingthree-quartersofhisportfoliointhecompany,hedidsobasedonhisownanalysisofthecompany.Hedidn’tlistentoanyoneelse.EvenhismentorBenGrahamwouldhavebelievedhewasoverpaying,andyetBuffettsotrustedhimselfthatheforgedahead.10Hedidn’tletself-doubttakeover.
Developingthisabilitytocontrolyouremotionstakes
timeandwork.ForBuffett,itseemstobeinnate,thoughhe’shadtoendureridiculetimeandagainformissingoutonbigmarketmovements.Thedramaticlate1990s–early2000riseinthemarketatlarge,andintechnologyandInternetcompaniesinparticular,wasonesuchtime.
In1999alone,theDowJonesIndustrialAveragerose
25percent,whilethetech-heavyNasdaqrocketedaheadaremarkable86percent.Meanwhile,Buffettsatonthesidelines,certainthatthemarket’srisewasfoundedonnothingmorethanunicorns,rainbows,andthatlittlepuppydogsockpuppetfromPets.com.HemostcertainlydidnotpurchasesharesofInternetcompaniesforBerkshire,leavingtheeasy
moneytoeveryoneelse,andhewasquestionedforit.Buffettendureddoubtsabouthisinvestingabilitiesandmethodforseveralyearsduringthisperiod.Berkshire’sstockpricesuffered,too,givingevenmoreammunitiontothemediaproclaimingBuffett’sbestdaysbehindhim.Thecriticismwasloudandunrelenting.
It’snoteasybeingmisunderstood,orworse,mocked,buttheOraclestoodstrong.Talkinginaninterviewaboutthattime,Buffettsaid,“Youcan’tdowellininvestingunlessyouthinkindependently.Andthetruthis,youareneitherrightnorwrongbecausepeopleagreewithyou.You’rerightbecauseyourfactsandreasoningareright.Inthe
end,that’swhatcounts.”11And,ofcourse,intheend
Buffettwasright.Investinghadn’tchangedovernight.Valuestillmattered.Thewaytobuildwealthoverthelongtermwasn’t,infact,foundbythrowingmoneyatanythingandeverythingendingina“.com.”ButitwasmostlikelytryingforBuffetttohearandabsorbtheblows.Itwillbetryingforyou,too,at
times,butifyou’vedevelopedyourinvestingphilosophyappropriately,you’vegottoalsodeveloptheself-confidence—andthickskin—tostickwithit.
STAYTRUETO
YOURSELF
LisaRapuano,founderofLaneFiveCapitalManagement,understandshowdifficultitcanbeforinvestorstoshutoutcriticism.InaSeptember2010interview,she
said,“Whenyou’renotdoingwell,intheshorterterm,whichcanhappentoanyone,sometimesit’sbecauseyou’remakingmistakes,sometimesit’sbecauseyou’re
notapplyingyourprocesscorrectly,butsometimesyouareandyoustillaren’tdoingwell.Youhavetocombinethesetwothingsofbeingadaptive,open-minded,andbeingalearning
machinewithalsonotchangingyourstripesorchasingthelatesttrend.It’sareallyfineline,areallydifficultlinetowalk.”12
Buffetthasdemonstratedhisabilitytowithstandpeerpressureatothertimes,too.Duringthemarket’s22.6percentone-daycrashinOctober1987,Buffettdidn’tbowtofearandrunawayfromstocks.Thesamegoesfortheperiodinlate2001andearly2002whennewsofthemassiveaccountingfraudatEnronandothercompaniesbroke,creatinginvestors’
distrustinmanagementandreportedfinancialresults.Suddenlyeverypubliccompanyandexecutivewassuspect.Buffettlookedattheconditionscreatedbyallthatnervousnessandtookadvantageofit.He’ssaid,“Cashcombinedwithcourageinacrisisispriceless.”13
Morerecently,andaswetalkedaboutearlier,Buffettagainshowedhiscouragein
thepanic-riddenfallof2008asthemarket,andseeminglytheworld,tumbledaroundhim.Hebecamethereassuringvoiceinthedarknightthatinvestorsneeded,publishinghisNewYorkTimeseditorialtoencourageotherstobebraveandtakeastandashewas.14Buffettwouldfollowthroughonhiswords,too,investinginGoldmanSachsandGeneral
Electricatthistime,althoughitmustbesaidthathedidnegotiateveryfavorabledealswhenhemadethesetwoinvestments,settingthemupaspreferredstockdealsthatensuredBerkshireacertainreturn.Mostinvestorscouldn’thavegottenthedealsonthesecompaniesthatBuffettdid(indeedit’shardtoimagineanyonebutBuffettexactingthetermshedid),
butthatdoesn’tdiminishthefactthathewasactingasamodelofinvestmenttemperamentatthetime.
It’spossibletopracticebeing“greedywhenothersarefearfulandfearfulwhenothersaregreedy”bothwhenthemarketasawholeisindecline,andattheindividualcompanylevel.Buffetthasdoneitbothways,targetingcompaniesthatare
temporarilydownbecauseinvestorsmisunderstandordoubttheirfutureearningpotential(ashedidwhenhepickedupsharesoftheWashingtonPostinthe1970swithagenerousmarginofsafety)orjumpingintothemarketandsnappingupsharesofmanydesirablebusinesseswheneveryoneelseseemstohaverunoff,leavingcheapstocksscattered
aboutlikeabandonedtoys.AnotherwaythatBuffett
assertshisindependenceandwon’tbowtopeerpressureishisstanceondividendsandstocksplits.Asidefromone$0.10persharedividendpaidbyBerkshirewaybackin1967(Buffettjoked“Imusthavebeeninthebathroom”whenthedecisionwasmadetopayadividend),15Buffetthasdeniedpayinganything
outtoBerkshirestockholders.Thereason’ssimple:HebelievesthatBerkshireshareholdersarebetterservedbyhimhangingontothemoneyandinvestingitbackintoBerkshire’sstableofwhollyownedandpartiallyownedcompaniesversuspayingthemoutadividend.Therearealsotaximplicationswithpayingdividends,bothatthe
companylevelandattheindividualshareholderlevel,butthat’snotBuffett’sprimaryconcern.
ToBuffett,thewayabusinesschoosestoallocateitscapitalisthemostimportantthing.Ifyoucanefficientlyandeffectivelyallocateyourcapitalintoprofitablenewlinesofbusinessorinimprovingexistingbusinesslines,then
youshouldn’tbepayingadividend.Butthat’sabigif.Ifabusinessismatureandnotgrowingrapidly,andmanagement’sabilitytoallocatecapitalisconstrained,shareholdersdeservetohavethatmoneypaidouttothemtocompensateforthelikelylackofgrowthinthestockprice.
InBerkshire’scase,though,wecanagreethat
Buffettisamastercapitalallocator,andit’saprettysafebetthathecandomorewiththeexcessmoneygeneratedbythecompany’sinsuranceoperationsthanhisshareholderscould.Heis,afterall,WarrenBuffett.Nevertheless,certaininvestorsandsegmentsofthemarketcravedividendsforincomeandhavebeendisappointedwithBuffett’s
stance.It’slogical,though,andisfullyconsistentwithhisbeliefs.
Ofcourse,thereisalwaysthepossibilitythatBerkshire’simmensesizewilltrulycatchupwithitandcreateasituationwherepayingoutadividendactuallydoesmakemoresensethanretainingalltheearnings,butsofar,thathasn’thappened.Buffett’s
beenwarningaboutthedragBerkshire’ssizehasonitsresultsforyears,andatsomepointthatcouldmakehiscurrentstandondividendsmoredifficulttorationallydefend.We’llsee.
Buffetthasalsolongheldthebeliefthatstocksplitsarepointlessandawasteoftime,money,andenergy.Inastocksplit,theoverallamountyoursharesareworthdoesn’t
change,butthenumberofsharesyouowndoes.So,forinstance,ifyouowned5sharesat$4eachofBigAl’sCorndogEmporiumandthecompanysplitsitsstock2-for-1,you’dthenown10sharesat$2pershare.Eitherway,yourinvestmentisworth$20(andthosedarndogsaresodeliciousit’slikelytokeepgoingup).
Companiessplittheir
stockforallsortsofreasons,noneofwhichareparticularlycompellingtoBuffett.Somesayit’stohelpcreatemore“liquidity”andmakeiteasierformoreinvestorstopurchasethecompany’sshares.ThishascertainlybeenanargumentpresentedasareasonBuffettshouldsplitthe“A”sharesofBerkshireHathaway.Tradingatapriceofaroundorabove
$100,000foroneshare(!)ofstock,Berkshireisoutofthereasonablepricerangeformanyinvestors.
Buffett,though,doesn’tbelievesplittingBerkshire’sstockwouldhaveanypositiveeffectonthecompanyoritsownersandindeed,couldevencreateagroupofshareholdersthathedeemsundesirable.BuffettwantsBerkshiretohavelong-
term-focusedshareholders(hereferstothemas“partners”),andhewantsBerkshire’spricetoreflectthecompany’sintrinsicvalueascloselyaspossible.Splittingthestockwouldcreatethepotentialforirrationalstockmovementscausedbynewspeculativeshareholdersfocusedontheshortterm.
However,Buffett’shand
wasforcedonthestocksplitissueinthemid-1990s.Investmenthouses,wisetothefactthatmorepeoplewantedtoownapieceofBerkshireHathawaythancouldaffordone,plannedtobuysharesofBerkshireanddivvythemup,sellingthemassmallerunitstothepublic,andchargingfatfeesfortheprivilege.Toavoidwhathesawasanexpensiveand
unfairwaytoprofitfromBerkshire’ssuccessattheexpenseofsmallinvestors,BuffettcreatedasecondclassofBerkshiresharesin1996,the“B”shares,whichwerevaluedat1/30ofan“A”shareandhadvotingrightsof1/200ofan“A”share.
TheBerkshire“B”shares,however,wereactuallysplit50-to-1inearly2010,tohelpshareholdersofBurlington
Northern,whichBerkshireannounceditintendedtopurchaseinfullattheendof2009.BurlingtonshareholderscouldchooseeithercashorBerkshirestock,sobymakingthesharepricelowerforthem,Buffettmadeiteasierforthemtochoosethestockversusthecash(andavoidanynastytaximplications).ThismovealsoopenedthedoorforBerkshire
toreplaceBurlingtonNorthernintheS&P500(canyoubelieveitwasn’talreadyinthere?).
Youhavetobelieve,though,thatBuffett’sthinkingonthesillinessofstocksplitshasn’tchanged.UnusualcircumstancesforcedhimtobothcreatetheBsharesbackinthe1990sandthensplitthemmorerecently.Hisdesiretohavelong-term
shareholders/partnersremainsasrealtodayasever.HedidwhathedidwiththeBsharesbecausehewaslookingoutforthebestinterestsofsmall,individualinvestors,notbecausehesuddenlydecidedeveryonewasrightaboutstocksplits.
ReputationisasignificantmatterforBuffett,whichisanotherreasonheisunlikelytobendtopeerpressure.If
there’sariskitcouldsullyhisreputation,Buffettwon’thaveanypartofit.Heoncefamouslytoldhisoldestson,“Ittakestwentyyearstobuildareputationandfiveminutestoruinit.Ifyouthinkaboutthatyou’lldothingsdifferently.”16
Buffettbelievesinsomethinghe’sdubbedthe“InnerScorecard.”17Essentially,it’saframework
forlivingyourlifeaccordingtoyourownrulesandyourownbeliefs,andnotactingaccordingtowhetherornototherpeoplewillapproveofyou.ForBuffett,naturally,thisencompassesfinancialdecisionmaking.YouhavetobeabletotuneouttheworldandlivebyyourInnerScorecard.
Tobeagreatinvestor,you’vegottogoitalone,at
leasttoacertainextent.Youcanlearnfromthemasters,asBuffettdid(and,well,asyouarenowdoingreadingthisverybook),butintheend,you’vegottodevelopyourownsystemforinvesting.Andthenyou’vegottosticktoit.Don’tabandonyourbeliefswhentimesgetharrowing.Askthehardquestions.Askthenextquestion.Andthenact,or
don’tact,asappropriate.Buffett’shadalongtime
toperfectthispartofhistemperament,anditiskeytowhathasmadehimassuccessfulashe’sbeen.Sokeepatit,staystrong,andgoyourownway.Keepthefollowinginmindasyoucommenceyourjourney:
•Bewillingtobecontrarian,as
uncomfortableasitmaybe.•TakeBuffett’swordstoheart:“Begreedywhenothersarefearful,andfearfulwhenothersaregreedy.”•LivebyyourownInnerScorecard.
perfect.Hemakesmistakesjustliketherestofus,andhe’sremarkablygoodaboutadmittingthemandanalyzingthemafterthefacttoseewhatcanbelearned(typicallyinhisownveryfunnyandself-effacingwayinhisannualshareholderletters).He’sabletosetegoasideforarationallookatwhatwentwrong.
Thistraitisinvaluableforinvestors;knowingwhatyou
didwronganddoingeverythingyoucantoavoidrepeatingithelpspreservepreciouscapitalandimproveyourreturnsoverthelongterm.Therearetimeswhereyou’regoingtodoyouranalysis,makeyourdecision,andeithersomethingchangesthatrendersyourconclusionnull,oryouwillhavesimplymadeamistakesomewhereinyourthinking.Ithappensto
everyone.Likerisk,mistakesareanunavoidablepartofinvesting,soit’sbesttolearntoembracethelessonsthatcancomefromthem.
Buffettbreaksdownhismistakesintomistakesofcommission,meaningactionshetookthatdidn’tturnoutashe’dhoped,andmistakesofomission,oractionsthatheregrettednottaking.Buffetthassaidthathe’smore
botheredbyhismistakesofomissionthanthemistakeshe’sactuallymade,however.
OnemistakeofomissionBuffetthascoppedtoinvolvesretailgiantWal-Mart.Inthe1990s,becausehewantedtobuysharesofWal-Martataparticularpriceanddidn’twanttobudgefromthat,heletaone-eighth-of-a-pointuptickinthecompany’sstockprice
preventhimfrompurchasingit.Overthelongrun,heestimatesthatonemistakecosthim$10billioninpotentialprofits.1Ouch.That’squiteanexpensiveomissionindeed.
BuffetthassaidthatthefirstmistakeofhisinvestingcareerwastheactualpurchaseofBerkshireHathawayitself.Whenhefirststartedbuyingsharesof
thecompanywaybackin1962,itwasatextilemill,hangingontoitslastgaspsasafunctioningenterprise.Affectedasmanymanufacturerswerebycheapoverseascompetition,Buffettwouldtryunsuccessfullytoturnthebusinessaround,untilhefinallycloseditstextileoperationsaltogetherin1985.Bythatpoint,he’dalreadybegunhisstrategyofbuying
insurancecompaniesandusingtheassociatedfloattoinvest,undertheumbrellaofBerkshire,sothetransformationofthecompanywaswellonitsway,despitetheflounderingmanufacturingbusiness.
ThefrustrationBuffettmayhavefeltaboutBerkshire,andtheopportunitycostofhavinghismoneytiedupintryingto
savealosingenterprise,areunfortunate,butthisisonemistakethatheendedupmakingright.Berkshiremaynothavebeenprovidingmuchinthewayofsuitlinings(oneofitsmainofferings)bythetimeBuffettcamealong,butitendedupprovidinghim,andhisshareholders,aninvestingvehiclethatremainsunparalleled.Andbesides,the
namesWarrenBuffettandBerkshireHathawayjustfitsowelltogether,don’tthey?Canyouimagineitanyotherway?
AnotherofBuffett’smostfamouserrorsisonethatprovideshimthechanceinhisshareholderlettersandininterviewstofloghimselfforhis“Air-aholism.”ThatmistakeisinvestingintheairlineUSAirways.Buffett
investedinthecompanyin1989,buyingwhatareknownas“convertiblepreferredshares.”Basically,thismeansthatBerkshirewaspromisedafatdividend,andcouldconvertitspreferredsharesintocommonstockifitsochoseatacertainprice.Atthetimeoftheinvestment,USAirwayswasthreatenedbyatakeoverattempt,soBerkshiresteppinginand
investingmoneyinthecompanywasseenasaformofprotectionforit.
However,nearlyfromtheget-goUSAirways(whichwasofficiallynamedjust“USAir”until1996)plaguedBuffett.Hewasbluntabouthismistakeinhisletterstoshareholdersovertheyearshewasinvestedinit,callinghisanalysisofit“superficialandwrong”2andreferringto
hisdecisiontoinvestasan“unforcederror.”
Buffetthaswrittenoftheinvestment,“Beforethispurchase,Isimplyfailedtofocusontheproblemsthatwouldinevitablybesetacarrierwhosecostswerebothhighandextremelydifficulttolower.”3Andhe“overlookedthecrucialpoint:USAir’srevenueswouldincreasinglyfeeltheeffectsof
anunregulated,fiercelycompetitivemarketwhereitscoststructurewasaholdoverfromthedayswhenregulationprotectedprofits.Thesecosts,ifleftunchecked,portendeddisaster,howeverreassuringtheairline’spastrecordmightbe.”4
ThereareseveralinterestingthingsaboutBerkshire’s,andBuffett’s,
investmentinUSAirways.OneisthatitcameaboutatatimewhenBuffettwashavingtroublefindingotheropportunities,sohemadethemistakeofessentiallyloweringhisstandardstoinvestinit.5Onemistakebegatanother,youcouldsay.
Next,whiletheinvestmenttroubledhimandworriedhim,Berkshireactuallyendedupmaking
moneyonthedeal,thanksbothtothereturnfromthedividendsandthefactthatsharesofUSAirwayseventuallygotbacktoaboutwherehe’dinvested,sohecashedout.Now,granted,hadBuffettchosentodeployhiscapitalelsewhere,hemightwellhaveearnedahigherreturn,butUSAirwaysdidnot,intheend,turnouttobethesupreme
disasteritlookedlikeitmightbe.
AnadditionalandimportantpointforushereisthatdespitethefactthatBuffettultimatelymademoneyonUSAirways,hestillrecognizesitasamistake.Hisoutcomemightnothavebeenbad,buthisthinkingandhisdecision-makingprocesswere.Heisable,then,toseparatethe
“outcome”fromthe“decision.”Manyinvestorsstrugglewiththis,believing,forexample,thattheirworst-performingstocksrepresenttheirworstdecisions,andviceversa.Butabaddecisiondoesnotalwaysturnintoabadoutcome,andsometimesgoodoutcomesareactuallybornofbaddecisionmaking.BuffettneverfooledhimselfintobelievingthatUS
Airwayswasanythingotherthanamistake,goodoutcomeorno.
Finally,whileBerkshireHathawayisnolongerinvestedinUSAirways,itstillhasapieceoftheairtravelindustrywithitswhollyownedsubsidiaryNetJets.NetJetsallowspeopletobuyapartofaprivatejet(knownas“fractionalownership”)sothatyougetthebenefitof
havingaplanealltoyourselfwithoutthecostof,well,maintainingaplaneallbyyourself.However,NetJetshasn’tproventobeabigwinnerforBuffett,andhe’swrittenaboutitmuchashedidUSAirways,notingthatheshouldhavecalledthe“Air-aholicshotline”beforeinvestinginit.He’salsosaid,hilariously,thatsomeonewouldhavedonecapitalistsa
favorifthey’djustshotdowntheWrightbrothersinKittyHawkthatfatefulday(becauseoveritshistorytheairlineindustryhasreportedzeroprofitsintheaggregate).6Inhis2009shareholderletter,heagainrevisitedthetopic,expressinghisfrustrationwithNetJetsbutpointingoutthathe’dmadeamanagementchangeatthetophewasoptimistic
couldcorrectcourseforthetroubledcompanyandturnarounditsyearsoflosses.7
OnelessonherefortherestofusisthatevensomeoneastalentedasBuffettnotonlymakesmistakes,butsometimesmakesthemmorethanonce.Whenitcomestothisparticularone,Buffetthassaid,“IfonlywomencouldbeCEOsofcompaniesthat
flewplanesIthinkitwouldbealotbetter,”afterhecametotheconclusionthattestosteronewasresponsiblefor“Air-aholism.”8
InBuffett’searlydays,hepartneredwithCharlieMungertobuyaBaltimoredepartmentstorethathadseenbettertimes.ThestorewascalledHochschild-Kohn,andreturningittoitsformerglorywasanexpensiveand
likelyimpossibletask.AswithUSAirways,Buffettinvestedinthisbusinesswhenhewassittingoncash,impatientlylookingforstockstobuyinamarketthatwasrunningawayfromhim.9Prettyquickly,bothBuffettandMungerrealizedthatthey’dmadeamistakeandthatretailwasnoeasyfeat.Afterthreeyearsofgivingitago,theysubsequentlysold
Hochschild-Kohntoanotherbuyerforroughlywhattheyhadpaid,torelievethemselvesoftheburden.WhileBuffettandMunger’sfirstdealtogetherlookedlikeaninauspiciousbeginning,they’vecertainlymanagedtoovercomethisearlystumblewithimpressiveforce.
TheUSAirwaysmistakeandtheHochschild-Kohnonehavetwothingsincommon.
First,asmentioned,Buffettinvestedinbothofthesecompaniesduringperiodswherehewashavingtroublefindinggoodcompaniessellingatreasonablepricesthathewantedtobuy.Insteadofbeingpatient,helethistriggerfingergetthebestofhim,andsoheendedupjumpingintobusinessesheotherwiseshouldhaveavoided.Itcanbechallenging
evenforhimtodotherightthing,whichistowaititout.
NOBODYESCAPESMISTAKES
Yes,evensuccessfulvalueinvestorslikeLisaRapuano
makemistakes.Wealldo.It’sjustpartandparcelofinvesting.It’ssomethingyou’vegottolearntodealwithinordertobesuccessful.
InaSeptember2010interviewabout
thelessonsshelearnedfromone2008tradegonebadinvolvinganautocompany,Rapuanosaid,“ThetwothingsIdidinthatmistakethatabsolutelydrivemetodistractionare
No.1,Inormallysavemyselffrommassiveerrorslikebankruptcyandthingslikethatbyavoidingbusinesseslikecarbusinesses.Iwilldoturnarounds,Iwilldomessythings,butI
don’tusuallydothat.AsIlookbackonit,Ithinkprobablybecausethingsthatappearedcheaptomeatthatpointwerefewandfarbetween,atthebeginningof’08,Ioverdiditonthisone.I
putwaytoomuchofmyportfolioinitbecauseitwassocheapanditwassoeasilyexplainable.Soitwasputtingtoomuchinit,inabusinessthatwasn’tagoodbusiness,sowhenyouare
wrongyoudon’tgetsavedbythegoodnessofthebusiness.
“Andhere’stheadditionallesson—probablytheonethat’sgoingtobetheeasiestnevertorepeatagain—Igotsomuchpositive
feedbackonthisone.Everyonesaiditwasbrilliant.IpresenteditattheValueInvestingCongressandthewholeworldwaslike,‘OhmyGod,that’sthebestidea.’I’dtalkaboutit
inclientmeetingsandthey’dbelike,‘Ohit’ssogreat.It’ssowonderful.You’regoingtomakealotofmoneyonthis.’Itwastooeasybyhalf.
“Lettingyourconfidence
beaffectedbyotherpeople’sreactiontoitshouldhavebeenagiantredflagbecausenormallywhenIinvestinsomething,especiallyatthebeginning,notafteritstartsworking,
everyonethinksI’mwrong.Nooneevertellsmehowgreatitis.
“There’salotoflittlelessonsinthere,butthebigoneIthinkisthatexternalreinforcementoftheidea
doesn’tmakeitbetter.AndthereforeIprobablydidn’trecognizetheimperfectionsofit.Igotoverconfident.Andwejustdidterribly.Itwasawful.Evenifithadn’tbeengoinginto2008
—solet’stakethatpieceoutofit,whichisawhole’nothercanofworms—[therewas]theoverconfidenceinabadbusinessandtoolargeaposition.Partofourprocessisavoidingthe
thingswhereifyou’rewrong,thebusinessdoesn’thelpyou,andactuallyhurtsyou,thenatureofthebusinessitselfhurtsyou.Itwasjuststupid.”10
AsBerkshirehasgrowninsizeatanastoundingrate,Buffett’sbeenfacedmoreandmorewiththisproblem—heoftenhastoomuchcashandtoofewplacestoputit.(Oh,weshouldallbesotortured,eh?)Themarket’soverallbehavioractuallydoesn’tevenmatterthatmuchforBerkshireatthispoint.Certainlyit’sbetterforBuffettifstocksaretrading
forrationalprices,butit’sBerkshire’scashcoffersthatmakeitdifficultforhimtoinvestwhenandwherehewants.Berkshire’sjusttoobigforhimtobuymeaningfulamountsofstockinanycompaniesbuttheverylargestonesatthispoint,becauseforthemtohaveanyeffectonoverallresults,hecan’tjustnibblehereandthere.
Asasidepoint,thisisanenormousadvantagethatyou,asanindividualinvestorwithouttheburdenofbillionsofdollarsinyourbankaccountandonyourbalancesheet,haveoverWarrenBuffett.Youcanfindthesmall,undiscovered,undercovercompaniesthatBuffettwouldn’tbeabletotouch,andyoucanpurchaseasmanysharesofthemas
youwant.Youcangoplaceshecan’tinthemarketandlookatopportunitiesheonlywisheshecouldownapartof.So,see,beingabillionaireandholdingaspotonForbes’srichestpeopleintheworldlist(atop5spot,toboot)isn’tallthatgreatafterall.(Ha.)
ButbacktoBuffett’smistakes.ThesecondthingthatUSAirwaysand
Hochschild-Kohnhaveincommonisthatneitheroneseemsparticularly“Buffett-like.”NeitheroneseemstohavethetraitsweassociatewithBuffetttodayandhavealreadytalkedabouthere.There’snomoattospeakofineithertheairlinebusiness(canyousay“theverydefinitionofcommodity”?)orthedepartmentstorebusiness.Therearenosustainable
competitiveadvantageswitheitherone.USAirwayswasalsoaverycapital-intensivebusiness,andwhileHochschild-Kohnwaslessso,whenBuffettandMungerinvesteditstillneededlotsofimprovementstoitsstorestohaveanyhopeofremainingrelevantandcompetitive.Bothofthebusinessescanbedescribedascash-hungry,notcash-producing.AndBuffett
isallaboutthecash-producingcompaniesintheworld.
Sowhenhewasimpatient,andwantingtoinvesthismoneysomewhere,Buffettbothloweredhisstandardsandhechose,inthesetwocases,companiesoutsidewhatwethinkofasidealBuffettinvestments.USAirwaysandHochschild-KohnarehardlyCoca-Cola
orGEICOorSee’sCandiesorAmericanExpress.Stayingpatientandwaitingforthefamed“fatpitch”issoimportant.ButevenBuffettisfalliblehere.Shouldyoumakeasimilarmistake,don’tpanic.Remembertorecognizethatyouactedwhenyoushouldn’thaveandthendoyourbesttosticktoavownottodoitagain.
Buffettmadetwomore
recentmistakes,bothofwhichcouldbeconsiderederrorsinhisanalysisofthecompaniesandtheircurrentandfutureprospects,andbothofwhichcostBerkshiremoney.Aswementionedearlier,in2008heinvestedinoilgiantConocoPhillips,thinkingthatthepriceofoilwouldrise.Instead,thanksinparttothefinancialpaniclaterinthatsameyear,the
priceofoildropped,andalongwithit,ConocoPhillips’stockprice,whichwasdown37percentattheendof2008fromwhereBuffettpurchasedshares.11
AroundthesametimethatBerkshireinvestedinConocoPhillips,italsoboughtsharesoftwoIrishbanks.Buffettneverdisclosedpubliclypreciselywhichoneswerepurchased,
buthisthinkingbackthenwaslikelythatIrishbanksweren’texposedtoasmuchsubprimemortgageriskasU.S.bankswere,andsotheyweresaferbetsatatimewhenmanyAmericanbanksweregoingtopieces.Buffettwaswrong,andmanyIrishbankswereabsolutelyslaughteredinthemarket,withtheIrishgovernmentevennationalizingsomeof
them.Hefesseduptohisshareholdersaboutit,disclosingthatBerkshirehadtowritedownthevalueofthosetwotradestothetuneofan89percentloss.12(ImyselfsuccumbedtothefaultythinkingaboutIrishbanksaroundthissametime,andwatchedasthesharesIpurchasedinoneofthem—perhapsoneoftheveryonesBuffettbought—plummeted
aboutthesameamountBerkshire’sdid.Blimey!)
HerewehavetwocasesofthemacroeconomicpicturechangingsoquicklythatBuffett’sanalysiswasturnedonitshead.Sometimesyourthinking,analysis,andobjectivelookatthefacts,andyourprojectionsforthecompany’sfuture,canberight,butyourinvestmentscanstillturnoutwrong.
That’sdisheartening,yes,butit’salsojustarealityofinvestingyouneedtoprepareyourselffor.Youwon’talwaysbeperfect,evenifyouranalysisis.Youcan’tknoweverysinglethingthereistoknowaboutacompany,andyoucan’tpredictthefuturewithabsolutecertainty—notevenBuffettcan.(Theworld’sjustacold,cruelplace,isn’tit?)
WritingofhislearningcurveinanannuallettertoBerkshireshareholders,Buffettsaid,“It’sfarbettertobuyawonderfulcompanyatafairpricethanafaircompanyatawonderfulprice.Charlie[Munger]understoodthisearly;Iwasaslowlearner.Butnow,whenbuyingcompaniesorcommonstocks,welookforfirst-classbusinesses
accompaniedbyfirst-classmanagements.Thatleadsrighttoarelatedlesson:Goodjockeyswilldowellongoodhorsesbutnotonbroken-downnags.”13
EvenBuffetthadtolearnfromhismistakesovertheyears,andhe’sstilllearningtoday.Thelearningneverstops,ofcourse.Togetthemostoutofyourmistakes,anddoyourbesttoensure
theywon’thappenagain,remember:
•You’regoingtomakemistakes.Wealldo.Sodon’tbeatyourselfupwhenyouslipup.•Assesswhathappened.Didyoumisssomething?Ordidmarketconditionschange?•Thinkaboutwhatyoucanreasonablydodifferently
Welearnedinchapter2aboutthescientificstudiesshowingthedifferencesinthewaywomenandmenapproachinvesting,andwediscoveredthatthereareevendifferencesattributabletotestosterone,ortherelativelackthereof.Thislackoftestosteronetendstomakewomenlesswillingtotakeextremerisks,whiletheherdbehavioroftestosterone-ladenmencanpossiblymake
dropsinthestockmarketevenmorepronounced.
ItmayseemastretchtoclaimBuffetthasthetestosteronelevelsofawomanandnotaman(rememberthe“oversexedguyinaharem”comment?).And,well,asmuchasbreakingthenewsthatBuffett’sactuallyawomanmightbefun,we’vegottoadmitheis,infact,aman
completewith,yes,testosterone.(And,we’recertainlynotgoingtogoaboutthevariouspossiblewaystoverifythis,that’sforsure.)However,itistruethathe’ssurroundedhimselfwithacadreofsmart,strongwomenovertheyears.Perhapstheinfluenceofthosewomenhasresultedinhisfemininesideshiningforth,aswe’veseen.Let’sget
acquaintedwithsomeofthemostimportantones.
ThelateSusanBuffett(knownasSusietoherfamilyandfriends)washisfirstwifeandoneofthebiggestinfluencesonBuffett’sadultyears.TheymetwhenBuffettwasayoungman,andshewasthereforthebeginningofallthatwouldbecomelegend—Buffett’searlyjobwithhisidolBenGrahaminNew
York,hisreturntohisbelovedhometownofOmaha,thestartofthepartnership,thepurchaseandsubsequenttransformationofBerkshireHathaway,andtheriseofherhusbandtotheranksoftherichandpowerful.
Throughitall,Susiewashisprotectorandtirelesssupporter.Shemadeitsothathecouldfocusonwhathe
wantedto,asmuchashewantedto.Notsurprisingly,forBuffettthatmeantstudyingannualreportsandreadingupinhisstudyeverynight,whileSusielookedaftertheirthreechildren.Buffettdependedonher,andshe’sundoubtedlyabigpartofthereasonhewasabletobecomethemanheistoday.Sadly,shepassedawayin2004ofastrokefollowinga
boutwithcancer.JournalistCarolLoomis
andbridgechampionSharonOsbergarebothclosetoBuffett,forverydifferentreasons.Loomishasbeenalongtimefriendofhis,sincemeetinghiminthe1960s,whenshewasaninvestingcolumnistforFortune(sheremainsassociatedwithFortunetoday,asaneditor-at-large).Buffett’sreferredto
Loomisashis“bestfriend,”otherthanCharlieMunger,ofcourse.1
BuffettandLoomishititoffandbecamefastfriends.AndwehaveLoomistothank,inpart,fortheclarityandwitBuffetthasdemonstratedovertheyearsinhisletterstoshareholders.Theearliestlettershewrotehadbeenmorelikebare-bonesfinancialreportingand
muchlessliketheexpansive,expressive,folksylettersweenjoytoday.In1978,though,Buffettdecidedhewantedtostartusingtheletterstoeducatehispartnersontheimportantbusinessissuesoftheday,aswellasteachthemtimelessinvestinglessons.
BuffetttappedLoomisforthejobofhelpinghimediteachyear’soffering,andthelettersremaintodayan
incrediblyusefulresourceforanyonewantingtolearnaboutinvestingfromthemanhimself.Hisvoice,temperament,andhomespunwisdomshinethroughineachandeveryone.Inwhichothergiantpubliclytradedinsurance-basedholdingcompany’sannuallettertoshareholdersareyougoingtobegracedwithquotesfromthelikesofMaeWest,
WoodyAllen,andjustabouteveryoneinbetween?Whichotherexecutiveswilltakethetimetoteachyou,andwillbehumbleenoughtoadmittheirmistakesyearafteryear,inclearlanguage?Justone,folks—Buffett.Ifyouhaven’tyettakenthetimetoreadhisshareholderletters,makethetimeforit.Youwillnotbedisappointed.(Afteryoufinishthisbookfirst,of
course!)BridgechampionSharon
OsbergmetBuffettthroughCarolLoomisin1993atabridgetournamentandbecameanotherclosefriendofhis,aswellasoneofhisfavoritebridgepartners.(Inadditiontohisvoraciousreading,oneofBuffett’sotherlovesinlifeisthecardgamebridge.)ThroughplayingwithOsberg,
Buffett’sgameimproved,andhisadorationofthegame,andofher,deepened.HerrelationshipwithBuffetthasblossomedwellbeyondthecardgame,andsheisatrustedfriendandally,aloyalmemberofhistight-knitgroupoffriends.Osberghassaidofhim,“WarrenBuffettismybestfriend.Wetalkeveryday.”2ADecember2009profileofBuffettand
Osbergagainconfirmedthattheyremainclose,talkingseveraltimesaday,oftenwhileplayingbridgeonline.3
BuffettmetKatharineGraham,thewidowedowneroftheWashingtonPostCompany,in1973,whenhefirstbecameinterestedininvestinginit.Grahamwasinchargeofrunningthebusinessfollowingherhusband’sdeath,andshewas
tentativeinitiallyaboutBuffett’sintentions.Shedidnotcomefromabusinessbackgroundandwasnervousaboutlosingthebusiness,orjustgenerallyaboutmakingmistakeswhileshewasincharge.
Buffetthadnotaboneofillwillinhisbody,though,andsetaboutteachingGrahamaboutbusinessandfinances,helpingherlearn
andshowingherthatshehadtheabilityandself-confidencetodoagreatjobandbeaneffectiveleader.Remember,too,hischildhoodpaperroute,deliveringtheWashingtonPostintheD.C.areawhilehisfatherwasinCongress.He’dlonglovedthecompany,andhadnothingbutadmirationforit,andforGraham.Theybecamedearfriendsandwerecloseuntil
herdeathin2001.InGraham’sPulitzer
Prize–winningautobiography,PersonalHistory,shewritesofBuffett’sinfluenceonherintheearlydaysofherleadershipatthePost:“Mybusinesseducationbeganinearnest—heliterallytookmetobusinessschool,whichwasjustwhatIneeded.HowluckyIwastobeeducated—
totheextentpossible—byWarrenBuffett,andhowmanypeoplewouldhavegivenanythingforthesameexperience.Itwashardworkforbothofus—WarrenadmittedIneededwhathecalled‘alittleremedialwork’—butabsolutelyvitalforme.”4
Forallthoseyears,since1973,Berkshire’sownedachunkoftheWashingtonPost
(about20percentatlastglance),currentlymakingBuffett’scompanythelargestshareholderofthevenerablenewspaperandmediaoutfit.Buffettalsoservedsince1974onthePost’sboardofdirectors(minusaneight-yearperiodwhenhewasservingonCapitalCities’board),markingdecadesofservicetotheorganization.ThePostannouncedinJanuary2011
thatBuffettwouldberetiringfromtheboardandwouldnotbenotseekingreelectionforhisseatwhenhistermexpiredinMay2011.5Hehasacknowledgedinrecenttimesthatthenewspaperbusinessisdifficultinthiscurrentageofreadilyavailablefreeonlinecontent,sayinghewouldn’tinvestinanotherone,buthisdevotiontothePostandtotheGrahamfamilyare
steadfast.6HisretirementfromthePost’sboardshouldnotbereadashisloyaltywavering,butasamovetosimplifyhislifeandfocusexclusivelyonrunningBerkshireHathaway.Infact,inclassicBuffettform,hesaid(atthetimeoftheannouncement)ofBerkshire’sinvestmentintheWashingtonPostCompany,“We’regoingtokeepevery
shareofstockwehave.IwouldneversellashareofthePost.”7
AnotherwomanwhoinfluencedBuffetttremendouslywasentrepreneurRoseBlumkin,adiminutiveRussianimmigrantwhoarrivedinAmericaattwenty-threein1917speakingnoEnglishandhavingnoformaleducationofanysort(wearen’ttalking
nocollegeeducationhere—wearetalkingnoeducationofanykind,ever,period,fullstop).Despitewhatlookedlikelongodds,shestartedandrantheNebraskaFurnitureMartinOmaha,buildinganempirefrom$500.8
Withaninnatebusinesssense,andafocusonvalueandneverspendingevenacentmorethanshehadto,
Mrs.B,asshewasknowntoeveryoneinOmahaandeventuallytoeveryBerkshireHathawayshareholder,endearedherselftoBuffett.WhenhetalksaboutMrs.BintheBerkshireshareholderletters,it’smuchlikethelowlypupilordisciplerespectingthemaster.Youcantellthathisadmirationandrespectforheraresimplyimmense.Hespeaks
frequentlyofherhardworkanddedication,sayingyearafteryearthatshewasinthestore“sevendaysaweek,fromopeningtoclose.”9Andthiswaswhenshewasinhernineties!Imaginehowshemusthavebeenforthedecadesanddecadespriortothat.It’seasytoseewhyBuffettwasinspiredbyher,andit’simpossiblenottobeinspiredourselves.
In1983,heboughtherbusinesswithouteverdemandinganauditorinsistingonseeinganinventorycount.Thismayseemcounterintuitive,giventhatweknowBuffettresearchessodeeply,butitinfactreflectstherespecthehadforMrs.B.Hejusttrustedherword,plainandsimple;shehadthatmuchintegrity.Shewasalsoafiery
personalityandfiercecompetitor,withthemotto“Sellcheapandtellthetruth.”Mrs.Bworkedwellpasttheagewhenmostofuswouldconsiderretiringbecause,likeBuffett,shetrulylovedandwasobsessedwithrunningherbusiness.Shediedatage104in1998.
TwocurrentfemalebusinessleadersBuffetthasrecentlysharedhisadmiration
for(choosing,asheoftendoes,theBerkshireshareholderletterashisvehicleforlavishingpraise)areSusanJacquesofBorsheim’sandCathyBaronTamrazofBusinessWire,bothsubsidiariesofBerkshireHathaway.OfJacques,Buffettsaid,“SusancametoBorsheim’s25yearsagoasa$4-an-hoursaleswoman.Thoughshelackeda
managerialbackground,IdidnothesitatetomakeherCEOin1994.She’ssmart,shelovesthebusiness,andshelovesherassociates.ThatbeatshavinganMBAdegreeanytime.”10
HefollowedupwithhisthoughtsonTamraz,saying,“AnotherofourgreatmanagersisCathyBaronTamraz,whohassignificantlyincreased
BusinessWire’searningssincewepurchaseditearlyin2006.Sheisanowner’sdream.Cathy,itshouldbenoted,beganhercareerasacabdriver.”11
Allofthesewomen’sinfluenceonBuffettisasvariedastheirrolesinhislife.Heappreciatesandrespectsthem,though,whetherit’sfortheirbusinesssense,theirjournalistic
acumen,theircompetitivespiritatthebridgetableandonthefloorofthefurniturestore,ortheirlovingandgivingnature.Wecan’tsayforcertainthatBuffettwouldnotbetheinvestorheistodaywithoutknowingandhavingrelationshipswiththem,butitisasafebetthathe’sahappiermanforit.
Whilereadersofthisbook,bothmaleandfemale,
probablydon’thavethebenefitofknowingthesewomenasBuffetthas,wecanstilllearnfromtheirexamplesaswell.Whodoesn’treadaboutMrs.Bandmarvelatherabilitytoovercomeobstacles,workhard,andbuildastore—andalegacy—thatendures?OrthinkhowimpressiveitisthatKatharineGraham,goingintoadifficultanduncertainsituation
withouttheknowledgesheneeded,startedfromthegrounduptolearnaboutbusiness,andeventuallygrewintoamightyfigureinthepublishingworld?Anyonewho’sreadBuffett’sshareholderlettersmustbegratefultoCarolLoomisforhelpinghimfind,define,andtweakhisremarkableanduniquevoiceovertheyears.Thesewereinfluencesfor
Buffett—andviceversa,naturally—butwecan,andshould,alsoembracetheirstories,appreciatingwhatthey’vemeanttohimovertheyears.
Thisisn’tatraitoffemaleinvestorsandtheirtemperaments,butit’sanimportantoutcome,andonewe’dberemissnottotalkabout.Afterall,withoutsomethingtoshowforallthatdisciplineandcalmfocus,what’sthepoint,right?
WarrenBuffett’sbeeninvestingsincehewasamereelevenyearsoldandmanagingmoney
professionallyonhisownsince1956(whenhewasjusttwenty-fiveyearsold).Duringthetimewecanmosteasilytrackhisresults(thatwouldbetheBuffettpartnershipandBerkshireHathaway),he’sputtogetheranimpressiverecord,oneuntouchablebyanyoneelseoverthatlengthoftime.DuringtheyearsBuffettwasrunningthepartnership,from
1956to1969,herackedupanastounding32percentaverageannualreturnbeforefees.Thatmeansforevery$10,000someluckyand/orprescientpersoninvestedwithBuffettatthebeginningofthatperiod,heorshehadroughly$300,000whenheclosedthepartnershipdown.1
Lookingatwhathe’sdonewithBerkshire,thecompoundedannualgainin
per-sharebookvaluefrom1965to2010is20.2percent.Um,nottooshabby.That’sforty-fouryearsofevidence,forty-fouryearsthatBuffett’sbeensuccessful,throughrecessionsandheedlessmomentsofmarketeuphoria,throughwars,throughnineU.S.presidents,throughdisco,punkrock,newwave,hairmetal,grunge,boybands,andallflavorsofhip-
hop,throughbell-bottomsandplatformsthefirst,second,andthirdtimesaround,throughFonzie,J.R.Ewing,ALF,theFreshPrince,andcountlessridiculousreality“stars.”
HadyouinsteadchosentojustinvestyourmoneyinanindexfundtrackingtheS&P500,youraveragereturnwouldhavebeen9.4percent,orlessthanhalfofBuffett’s
averageyear.TheoverallgainforBerkshire’sbookvaluefrom1964to2009is490,409percentcomparedtotheS&P’s6,262percent.No,that’snotatypo.Itreallyis490,409percent.
GivenhowremarkablygoodBuffetthasbeenatallocatingcapitalformorethanfortyyears,it’stoughtoarguethathe’sbeenanythingbutconsistentandpersistent,
thathe’sabletodosomethingspecial.Andyet,beginninginthe1970sandcontinuingintothe1980s(andeventoday),that’spreciselywhatsomeacademicstriedtoargue,dogmaticallyteachingthatBuffettisamereanomaly,andthatthemarketcan’tbebeaten.Theprevailingtheoryatthetime,bouncingalongthehallsofbusinessschoolsnearandfar,isknownasthe
“efficientmarkettheory.”Withoutgettingtooprofessorialaboutthings(althoughthetweedcoatandleatherelbowpatchescancertainlybeadorable):Thetheoryholdsthatthemarketfullypricesinallavailableinformation.That,inturn,meansthatastock’sfullvalueisalwaysreflectedinitsprice,andthereforethereisnosuchthingasabargain,or
anunderpricedormispricedsecurity.
Thatalsosuggests,ontheflipside,thatsupposedmarket“bubbles”reallyaren’t.Ifinformationisalwaysperfectandpricesarealwaysright,thatmeansthatsharesofInternetcompanyYahoo!,forinstance,tradingatasplit-adjustedhighof$108.17inthefinalweekof1999(comparedtothemid-
teensbothoneyearandtenyearslater),wasappropriateandrational.Um,OK.
So,then,theyearsthatBuffett,andGrahambeforehim,spentsearchingforcompaniessellingatareasonablemarginofsafetywerejustfutileefforts,accordingtothebelieversoftheefficientmarkettheory.Howsillyforthemtothinkthatthemarket—whichis,
don’tforget,drivenbyhumansandalltheirvariousemotions,alongwithsomegiantsupercomputersprogrammedandcontrolledbyhumans—couldeverbewrong,couldeveroverreact.Infact,youmightaswelljustthrowdartsatapagefromtheWallStreetJournaltackeduponyourwallthanwasteanothermomentanalyzingacompany.Themarkethadno
inefficiencies,sotherewasnopointintryingtodiscoverandexploitthem.
ButwhatofthefactthatBuffetthadproducedyearsuponyearsofmarket-beatingreturns,thatheobviouslyknewhowtofindcompaniesthatwereundervalued,thathe’dimplementedalogicalsystemforfindingthem,andthathewassodarnsuccessful?Ohhim.He’sjust
afluke,theacademicsargued.He’slucky.Nothingtoseehere...movealong.
BuffetttookgreatjoyduringthattimeinrefutingtheEMTtheorists.Hegavealegendaryspeechin1984athisbusinessschoolalmamaterColumbia,whereinheskeweredtheefficientmarkettheoryproponentsbyprovidingexampleafterexampleofsuccessful
investorswho’dbuiltstrongtrackrecordsusingaBenGrahamandDavidDodd–likeapproachtoanalyzingcompanies.Naturally,heincludedhimselfinthisnumber,dubbingthemall“TheSuperinvestorsofGraham-and-Doddsville.”2
Inthespeech,whichwasreprintedinHermes,themagazineforColumbia’sbusinessschool,hesaid,“I’m
convincedthereismuchinefficiencyinthemarket.TheseGraham-and-Doddsvilleinvestorshavesuccessfullyexploitedgapsbetweenpriceandvalue.Whenthepriceofastockcanbeinfluencedbya‘herd’onWallStreetwithpricessetatthemarginbythemostemotionalperson,orthegreediestperson,orthemostdepressedperson,itishardto
arguethatthemarketalwayspricesrationally.Infact,themarketpricesarefrequentlynonsensical.”3
Theefficientmarketdebatecontinues,althoughthegrowingfieldofbehavioralfinanceisunderminingthetheory’svaliditybitbybitbyshowingthatmanytimes(orperhapsmosttimes),marketactionsaren’tdrivenbyrational
peoplemakingrationaldecisions.Itissafetosay,though,thatthemarketis,infact,moreefficientthanitwaswhenBuffettstartedout.It’snotperfectlyefficient,butit’scloser,thankstotwocomplementaryfactors.First,thesheeravailabilityofinformationonlinetodaymakesitmuch,mucheasierforsmallinvestorstodigthroughfinancialstatements
fromtheirownstudiesandhomeoffices,huntingforundervaluedcompanies.AndthepopularityofsomeonelikeBuffettmeansthatmoreinvestors,youngandold,arelearningabouthismethodsandputtingthemintoplayinthemarkets.Soyou’vegotallthesefolkslookingforsimilartypesofstocksandsituations,usinglotsofthesamereadilyavailableinformation.
Therewillcontinuetobemispricedstocks,andtherewillbesuperiormoneymanagersandinvestorslikeBuffett;it’sjustgoingtotakealittlebitmoreefforttogetthere.LuckilyfortheGraham-and-Doddsvilleinvestorsofthefuture,there’salsonoshortageof“smart”peopleonWallStreetfindingthenextnew“surefire”waytoinvest,tellingtherestofus
that“it’sdifferentthistime.”Buffetthasalsopointedouttheupsideofteachingefficientmarkettheorytosomanystudents,sayinginhis1988lettertoBerkshireshareholders,“Inanysortofcontest—financial,mental,orphysical—it’sanenormousadvantagetohaveopponentswhohavebeentaughtthatit’suselesstoeventry.Fromaselfishpointofview,
GrahamitesshouldprobablyendowchairstoensuretheperpetualteachingofEMT.”4
Now,weknowBuffett’sperformedwell,loggingincrediblegainsoverhiscareer,butit’salsointerestingtonotethatBerkshireHathawayhas,duringtimesofmarketdeclines,performedbetterthantheS&P500.Thatis,itsshareshaven’tfallenasmuch,percentagewise,asthe
S&Pdidduringthoseperiods.ThisqualitymakesBerkshire’sresultsevenmorecompelling.
Buffettpointedthisoutinhis2009lettertoshareholders,writing,“wehaveneverhadanyfive-yearperiodbeginningwith1965–69andendingwith2005–09—andtherehavebeen41ofthese—duringwhichourgaininbookvaluedidnotexceed
theS&P’sgain.Second,thoughwehavelaggedtheS&Pinsomeyearsthatwerepositiveforthemarket,wehaveconsistentlydonebetterthantheS&Pintheelevenyearsduringwhichitdeliverednegativeresults.Inotherwords,ourdefensehasbeenbetterthanouroffense,andthat’slikelytocontinue.”5
So,keepthefollowing
factsinmindwhenthinkingaboutperformance:
•Ignoreanyonewhotellsyouthrowingdartsatanewspaperisthesameasintelligentanalysis.•Agooddefenseisjustasvaluableasagoodoffense.•Sticktoasystemthat’slogicalandworks,andyou,too,couldbuilda
researchaboutfemaleversusmaleinvestorsexceptionallywell,andhecertainlyisashiningexampleofmarket-beatingperformance.Butwecan’tsumhimupthateasily.We’vegottoaddthreeadditionalprinciplestofullyunderstandwhatmakesBuffettBuffett,whatmakeshimtick,whatmakeshimspecial,andwhatmakeshimthemasterinvestorheis.
Afterall,ifwearetobecomebetterinvestorsourselves,andthat’scertainlythegoalhere,weneedtoknoweverythingwecanaboutwhatmakesBuffettdothethingshedoesandactthewayheacts.
OurfirstBuffett-centricprinciple,then,istovalueandcultivateyourrelationshipswithpeople.ThisissomethingBuffettconsiders
vitaltogoodbusiness.Buildinglastingrelationshipswiththepeopleyouareworkingwith,orinvestingyourmoneywith,orgoingintobusinesswith,isimportantforlong-termsuccess.Buffettplacesapremiumonpeople,evensometimesputtingthemaheadofthepotentialformoreprofit,andhespeaksproudlyofthisfact.
Inalettertohispartnerswaybackin1968,Buffettsaid,“WhenIamdealingwithpeopleIlikeinbusinessesIfindstimulating(whatbusinessisn’t?),andachievingworthwhileoverallreturnsoncapitalemployed(say,tentotwelvepercent),itseemsfoolishtorushfromsituationtosituationtoearnafewmorepercentagepoints.Italsodoesnotseemsensible
tometotradeknownpleasantpersonalrelationshipswithhigh-gradepeople,atadecentrateofreturn,forpossibleirritation,aggravation,orworseatpotentiallyhigherreturns.”1
Andinhis1989Berkshirelettertoshareholders,Buffettechoedthisthought,saying,“Wehavefoundsplendidbusinessrelationshipstobesorareandsoenjoyablethat
wewanttoretainallwedevelop.Thisdecisionisparticularlyeasyforusbecausewefeelthattheserelationshipswillproducegood—thoughperhapsnotoptimal—financialresults.Consideringthat,wethinkitmakeslittlesenseforustogiveuptimewithpeopleweknowtobeinterestingandadmirablefortimewithotherswedonotknowand
whoarelikelytohavehumanqualitiesfarclosertoaverage.”2
GiventhatweknowBuffettisconcernedwithallocatinghiscapitalthemostefficientwayhecan,thefactthatheplacesahighenoughvalueonhisrelationshipstoforgothepotentialforhigher-profitendeavorsinfavorofcontinuingtoworkwithpeopleheknows,likes,and
trustsshowsushowmeaningfulthisistohim.Now,granted,heundoubtedlyhopesandwishesthatthistrade-offwon’tbenecessary,andhe’llideallyfindsituationswherehe’sbothmakingasmuchmoneyashepossiblycanandlikesthefolkshe’sdoingitwith.Andinfact,Buffett’sbeenadeptatfindingthismixoverhislongcareer.
SpeakingofBuffett’sfocusonthe“people”sideofinvesting,NellMinow,editorandcofounderofTheCorporateLibrary,anorganizationthatfocusesoncorporategovernance,said,“Ithinkoneofthemostimpressivethingsabouthimisnotthewayhelooksatstocks,althoughgoshknowsheisverygoodatmath,butthewayhelooksatpeople.
Hehasbeenanexcellentjudgeofpeopleallthewayalong.”3
LookatsomeonelikeRoseBlumkin,whomwetalkedaboutearlier.ShewasasdedicatedtorunningNebraskaFurnitureMartasBuffettistoinvesting.Headmiredherandcountedheramongthegreatestbusinessmindshe’deverknown.Heknewhedidn’tneedtohelp
Mrs.Brunherstore;sheknewquitewellwhattodo.Inturn,shekeptworkinghardforhim,growingherbusinessasifshe’dneversolditinthefirstplace.Andthat’sexactlyasBuffettwantsit.
WhenBuffettbuysacompanyforBerkshire,unlikemanyotheracquirers,hedoesn’trunrightinandstartimplementingnewrules,
changingmanagement,andgenerallystirringuptrouble.Hebuysacompanywhenhebelievesintheexistingmanagementandwiththecurrentwayacompany’sbeingrun—otherwise,he’dlookelsewhereforopportunities.Buffettdoesaslittleaspossibletoupsetthestatusquo,leavingthemanagementteamalonetokeepdoingwhatthey’re
doing.Heprovidesguidanceandsupportasneeded,buthemostlyjuststaysoutoftheway.
Hefeelscomfortableoperatingthiswaybecauseofthevalueheplacesonworkingwithgood,smart,motivatedpeople.Itmakesiteasiertosleepatnightwhenyoutrustthepeopleyou’reinbusinesswith,whetherthatmeansbuyinganentire
companyoutright,orinvestinginsharesofone.ForBuffett,quitesimply,peoplematter.
WritingintheBerkshire“Owner’sManual,”BuffettsaysofthemanagersofBerkshire’ssubsidiarybusinesses,“Mostofourmanagersareindependentlywealthy,andit’sthereforeuptoustocreateaclimatethatencouragesthemtochoose
workingwithBerkshireovergolfingorfishing.Thisleavesusneedingtotreatthemfairlyandinthemannerthatwewouldwishtobetreatedifourpositionswerereversed.”4
Forus,wemaynotbethinkingaboutbuyingwholebusinessesoutright(yet),butthepeoplefactorstillisimportant.Knowingwho’sinchargeofacompanyyou’re
thinkingaboutbuyingsharesofiseverybitascrucialasitiswhenBuffettgetstoknowthepeoplerunningabusinesshewantstoown.
Now,obviously,it’salittlebiteasierforBuffetttogetfacetimewiththosepeoplethanitwouldbeforusto,say,callameetingwiththefolksinchargeofCoca-Cola.Butyoucanstilldoresearchandlearnasmuchas
youcanaboutjustwhoitisyou’reentrustingwithyourmoney.Andthatisthebestwaytothinkaboutit.Ithelpskeeptheimportanceofhavingsolid,trustworthymanagementfrontandcenter.
KEYSTOASSESSING
MANAGEMENTInanemail
interview,PremJain,professorattheGeorgetownUniversityMcDonoughSchoolofBusinessandauthorofBuffettBeyondValue:Why
BuffettLookstoGrowthandManagementWhenInvesting,offersthefollowingsuggestionsforindividualinvestorstryingtoassessthequalityofmanagementontheirown:
“EvaluatingcompanymanagementoraCEOisnoteasybecausedifferentindividualqualitiescanengendersuccessindifferentcircumstances.ButIcan
certainlytellyoutwofundamentalquestionstoask.First,arethemanagementteamandthecurrentCEOcompetent?Second,aremanagementincentives
properlyalignedwithshareholderinterests?
“Toanswerthefirstquestion,Ireviewthecompany’sperformanceoverseveralyears.Forexample,when
IevaluatedJohnson&Johnsonanditsmanagement,Iexaminedthecompany’searnings,thereturnonequity,andtheallocationofcashflowsformorethan25years.Iprefer
evaluatingacompany’sperformanceoveralongperiodtodiscoverwhethermanagementteamscandeliverpositiveresultsunderdifferentCEOs.Whileitis
importanttoevaluateseveralmetrics,acarefullycomputedreturnonequityratioisprobablythemostimportantmetricfordeterminingmanagementcompetence.I
foundconsistentlygoodperformanceovertheentireperiod,andIdidnotspotanyincongruentacquisitions,largeequityissuances,oregregiousethical
violations.Tome,theresultsreflecteddisciplinedmanagement.IalsoreadalloftheCEOWilliamWeldon’sletterstoshareholderssincehewasappointedin
2002.“Toanswer
thesecondquestion,IcheckthenumberofsharesheldbytheCEOandothertopmanagersinthecompany.IamsuspiciousofCEOswhoare
awardedalargenumberofstockoptionsbutholdonlyasmallnumberofshares.Inaddition,IpreferCEOswhohavebeenwiththecompanyforalongtimeandarepromoted
fromwithin.Theyshouldattheveryleasthaveexperienceinthesameindustry.Finally,Itrytolearnabouttheirlifestyle.ACEOwithanextravagantlifestyleislesslikelytobe
prudentwithshareholders’moneythanaCEOwholivesmoremodestly.
“SincethereisnoexactsciencetoevaluatingmanagementteamsorCEOs,itisimportanttogiveyourself
alotofpractice.Todevelopyourevaluationskills,IrecommendfindingseveralinarguablygoodCEOsandstudyingthemandtheircompanies.BeyondWarrenBuffett,Ihave
benefitedfromreadingarticlesaboutandwrittenbyAlfredSloan,JackWelch,SamWalton,JimSinegal,andseveralothers.AninvestorcanevaluateaCEOorthe
managementteamproperlyonlyifheorshehasfirststudiedmanyCEOsandmanagementregimesthatareknowntobesuccessful.Thegoodnewsisthatbecausethereis
considerableamountofartinevaluatingmanagement,theevaluatorgetsbetterwithtime.”5
It’seasytofindoutthenamesofthetopexecutivesatacompanyyou’re
consideringinvestingin.Fromthere,belikeBuffettandreadallyoucanaboutthem.Ifthecompanyhasawebsite,checkitouttoseeiftherearebiosavailableforthetopbrass.Googlethenamestoseewhatyoucancomeupwith.Readinterviewswiththemifyoucanfindany,orarticleswrittenaboutthemorthecompany.Fool.comisagood
placetostart.You’relookingtofindouthowlongthey’vebeenwiththecompany,whattheirhistorythereis,howmuchstockofthecompanythey’rerunningtheyown,andjustgenerallywhetheryoucangetafeelforwhattypeofperson’sincharge.
ThedesiredqualitiesinmanagementarethesameonesweseepersonifiedinBuffett—honesty,humility,a
passionforbusiness,loyalty,asenseoffairness,anownership-mindedoutlook,andevenasenseofhumor,ifyoucangetit.SomeonelikeJimSinegal(whomPremJainalsosingledout;seethesidebar),Costco’scofounderandchiefexecutiveofficer,isaperfectexample.Buffett’sownedsharesofwarehouseretailerCostcoforBerkshire,andit’seasytoseewhy.Not
onlyisthebusinessstrong,butit’ssmartlyrunbyaguywho’scutfromthesamemoldthatBuffettis.
Sinegalhasnopretenseabouthim.Hespeaksclearlyabouthisbusinesstoshareholdersandthemediaalike.He’shumbleandevenanswershisownphone—thisatacompanywithamarketcapnorthof$25billion.(Yes,hereallydoesanswerit!But
leavethemanalone.He’sgotabusinesstorun,forPete’ssake.)He’spassionateaboutCostcoanditsemployees,too,meaningthatpeoplealsomattertohimastheydotoBuffett.He’scommittedtotreatinghisemployeesbetterthanaverage,providingthemhealthinsurance,andpayingthemabove-marketwages.Hebelievesthatalltheinvolvedconstituenciesina
business—shareholders,employees,andcustomersalike—canwin.
Youwouldn’tevenhavetoknowthatBerkshireownedsharesofCostcotofigureanyofthisout.JustreadinginterviewswithSinegalandlearningaboutthemanhimselfwouldshowyouthathe’ssomeoneyoucanbelieveinandtrustwithyourmoney.He’snevercagey,andCostco
doesn’tplayanyaccountingshenanigans.Everysingletubeinthathundred-packofAquafreshisaccountedforandnoted.It’sastraightforwardcompanyrunbyasimilarlystraightforwardguy.
HOWTHE
PROSJUDGEMANAGEMENT
ValueinvestorsLisaRapuano,ofLaneFiveCapitalManagement,andAmeliaWeir,ofParadigmCapital
Management,alsobelievethathavingqualitymanagementinplacewhentheyinvestinacompanyiskeytosuccess.Andtheysympathizewiththeplightofsmallinvestorstryingtofigureoutif
thepeoplerunningabusinessareforrealornot.
Rapuanosays,“I’vefoundthatjustbecausesomebody’sareallysmartguyorgirl,thatdoesn’tmeanthey’reagreat
managerofacompany.SowhatI’massessingonthatsideisalmostalwaysjustwhethertheyareverygoodatcapitalallocation.That’snotjustwhetherornotyoubuyback
stockorwhatkindofdebtyouuse.That’salsowhatR&Dyoufund,howyouchoosetogrow,doyouunderstandearningexcessreturnsinyourbusiness,anddoyouunderstand
whenit’sappropriatenottoinvest.SoIjudgethequalityofmanagementalmostexclusivelyonwhethertheygetthatcapitalallocationpieceofthepie.
“Foran
averageinvestor,theycandothemathematicalthingthatIdo,whichislookattheirhistoryofcapitalallocation.That’ssomethingthatanyonecando,becauseyou
justneedthe10-Kstodothat.Buttheobjectivejudgmentofamanagementteamismuchtougher.Youcan’treallytellfromseeingaguyonCNBCifyoucantrusthimornot.
“Youcanlearnalotfromtheconferencecalls,though.Youcanlearnalotfromhowtheyanswerthequestions,whethertheyanswerthemstraightforwardlyandhowtheyframetheir
answers,whetherthey’reaggressiveorconciliatory.Butyouarealittlebitoutofluck,asanindividual,nothavingaccessnecessarilytothem.Andfrankly,evenasasmallfirm,I
don’talwayshaveaccesstoCEOsandCFOs.IusuallyhavetowinmywayintotheirheartsbyprovingthatI’vedoneallthework,andthatoftentakesalongperiodoftime.
EventuallyIgetin.Sometimesittakesalotofphonecalls,though,askingquestionsthattheIR[investorrelations]personcan’tanswer,todemonstratemyinterestandmyintegrityand
theworkthatwe’vedonebeforefinallygettingtheCEOortheCFOtopayattention.”6
Weiralsothinkstheconferencecallsareasourceofgoodinformationforindividual
investors,saying,“Toyourpointaboutindividualinvestors,ifitisacompanythatIeitherdon’tknowwellordon’tfeellikeIreallyhavemyarmsaround,andthisissomethingthatI
thinkdoesmatterfortherandompersononthestreetwhowantstoinvest,youcanlistentothereplayoftheconferencecalloryoucanreadthetranscript.Ialwaysfinditmuchmore
usefultolistentotheconferencecall.Becauseatranscriptisatranscript,ifyouarejustlookingforsomenumbersorclarification,butyoukindofwanttohearwhatthetoneis
inmanagement’svoice.YouwanttohearthemduringtheQ&Aperiod.Sometimessomeoftheanalystsaremoreaggressiveornot,butyouwanttohearwhatthat
dialogueislikeandaretheydefensiveoraretheyalittlevagueoraretheyreallyhelpful?Ithinkthatnoneofthatisanexactscience,butIthinkagain,itlendsadditionalinformationif
youarewillingtogothroughthatefforttolistentoit.”7
Inadditiontoplacingimportanceonthepeoplehedoesbusinesswith,whetherhe’sbuyingtheircompanyorinvestinginit,Buffetthasalsomaintainedclose
relationshipswithcertainpeopleforyears.Heissteadfastlyloyaltothoseclosetohim.CharlieMunger,whoservesasBerkshire’svicechairmanandBuffett’sright-handman,isthefirstandprimarypersonwhocomestomind.HeisasclosetoBuffettasanyonehaslikelyeverbeenandislikelyevertoget.
BuffettandMunger(who,
asithappens,wasalsoraisedinOmahaandevenworkedinBuffett’sgrandfather’sgrocerystoreasateenager)metin1959,andfromthebeginning,thiswasafriendshipdestinedtoendure.8Apairofbrainybookworms,theywerebothinterestedininvestingandquicklyfellintotalkingforhoursonthephone(MungerwaslivinginCalifornia,
whileBuffettwas,ofcourse,inNebraska)andseeingeachotherinpersonwhentheycould.9
Beforelong,BuffettandMungerwereinvestingtogether,doingdealsinconcert,startingwiththeaforementionedHochschild-Kohninvestmentin1966.Fromtherethey(thankfully)movedontoother,moresuccessfulventures,untilthey
finallycombinedforcesofficially.In1982MungerbecamevicechairmanofBerkshireHathaway.10TryingtoimagineBuffettwithoutMungerisliketryingtoimagineanyfamousduothroughouttimewithoutbothpartners.It’sLewiswithoutClark.CaptainwithoutTennille.HanselwithoutGretel.Chocolatewithoutpeanutbutter.
Inotherwords,BuffettwithnoMungerwouldmeanaverydifferentfutureandscenarioforbothmentoday.Itisn’tonlythatthey’repals,either.MungerhashadatremendousinfluenceonBuffett,helpingthewayhethinksaboutinvestingevolvebeyondthestrictGrahamiancigarbuttschoolofthought.We’llgetfurtherintoMunger’sinfluenceon
Buffettinournextchapter.Anotherpersonwhom
Buffettcountsasaclosefriendmightsurpriseyou,givenBuffett’spublicaversiontotechnology—that’sBillGates,cofounderofcomputersoftwaregiantMicrosoft.Thetwo,whohavesincevolleyedbackandforthinrankingsontheForbeslistofrichestpeopleintheworld,metin1991.
Theyformedaquickfriendship,builtonmutualrespectandappreciationforoneanother.BuffettgotGatestotakeuphisfavoritepastime,bridge,andevenhelpedoutwhenGateswasaskingforhiswife’shandinmarriage.(BuffettandGatestrickedMelinda,hisbetrothed,intocomingtoOmahaandthenopenedupBorsheim’s,alocaljewelry
storeBerkshireHathawayowns,forhertochooseherengagementring.)11
Thoughitbeganasafriendship,ithasgrownintoabusinessrelationship,withBuffettaskingGatestoserveontheboardofdirectorsofBerkshirein2004.InJune2006Buffettannouncedthathewouldbedonating85percentofhisBerkshireHathawaystockovertimeto
charitableorganizations,withthebulkofthatgoingtotheBill&MelindaGatesFoundation.12Morerecently,BuffettandGateshavestartedacampaigntogethertoencourageotherbillionairestodonatehalftheirmoneytocharity.13
Buffettisloyaltohisinnercircleoffriends,choosingtoworkwithandinteractwiththesamecore
groupforyears.InadditiontoMungerandGates,he’stightwithTomMurphy,whowasinchargeofCapitalCities,thecompanythateventuallyboughtthetelevisionnetworkABC,andthenwouldselltoDisney.BerkshireownedsharesofABCatthetimeitwassold,andBuffettactuallycountsnotinvestinginanearlierTVdealthatMurphywassellinghimonasoneof
hisbiggestmistakesofomission.
ThroughtheyearshewasalsoclosefriendswiththelateBillRuane,atalentedfundmanagerBuffettmetatColumbia.ItwasactuallyRuane’snewlyformedSequoiafundthatBuffettsuggestedhispartnersinvestinwhenheshutdownhispartnershipin1969.14BuffettmetWalterSchloss,another
giantofthevalueinvestingworld,atthefirstannualmeetingheeverattended,whilehewasatColumbia.15BuffettfeaturedbothRuaneandSchloss,alongwithMunger,inhis“GrahamandDoddsville”speechatColumbiaasexamplesofinvestorslikehimselfwhoselongtrackrecordsofsuccessatpickingstocksmadetheefficientmarkettheorylook
likehogwash.Buffettrealizesthatthe
peopleyouchoosetodobusinesswithandassociatewithcanhaveahugeeffectonyouroutcome.Healsoknowsthatgoodbusinessesdobetterwithgoodpeopleincharge,peopleyoucantrusttobehaveethicallyandhonestly.Themostperfectbusinessintheworld,withalarge,well-protectedmoat,
amplecashflows,andafatmarginofsafetywon’tcompelhimtoinvestunlessthepeopleportionoftheequationisjustasstrong.Andoncehe’scommittedtoabusinesswithmanagementhelikes,heisloyalandsticksbythem.
Writinginhis1986lettertoshareholders,Buffettsaid,“Weintendtocontinueourpracticeofworkingonlywith
peoplewhomwelikeandadmire.Thispolicynotonlymaximizedourchancesforgoodresults,italsoensuresusanextraordinarilygoodtime.Ontheotherhand,workingwithpeoplewhocauseyourstomachtochurnseemsmuchlikemarryingformoney—probablyabadideaunderanycircumstances,butabsolutemadnessifyouarealreadyrich.”16
Forus,thisissomethingwecanalsoputintoplayinourinvestinglives,andweshould.Keepthefollowinginmind:
•Abusinessisonlyasstrongasthepeoplerunningit.•Readuponthemanagementofcompaniesyouareconsideringinvestingin.
Lookforsmart,open,loyal,fairexecutivesyoucanadmire.•Don’tbeafraidtoputpeoplebeforeprofit;Buffettisn’t.
guru,andtheireventualmentor,ingraduateschool,butWarrenBuffettdidjustthatwhenhewenttoColumbia,hometoBenGrahamandDavidDodd,thepowerfultwosomewho’dliterallywrittenthebookonvalueinvesting.Buffettwasquicklythrustintoaworldthatwasheaventohim.Analyzingcompanies,readingeverythinghecould
gethishandson,andhavingthechancetositinclassroomsandhavediscussionsanddebateswithGrahamwaslikecominghomeforBuffett.
Hesoakedupeverythinghecouldwhilehewasthere,andmadeconnectionswithGrahamandotherlike-mindedstudentsthatwouldcarryonlongpasttheclosingschoolbell.FromGraham,he
builtthecoreofhisinvestingphilosophy:Alwaysbuywithamarginofsafety.Aswetalkedaboutearlier,inthechapteronrisk,Buffettconsidersthesethreewords—“marginofsafety”—tobethe“cornerstoneofsuccessfulinvesting.”1
BuffettalsolearnedthebasicsofvalueinvestingfromGraham.Helearnedaboutcalculatingintrinsicvalue,
figuringouthowmuchacompanywascurrentlyworth,andhowmuchitshouldbeworthinthefuture.Helearnedaboutthevagariesofthemarket,especiallythecharacterGrahamlovedtotalkabout,Mr.Market,andallhisassociatedcapriciousness.
Buffett,it’ssafetosay,idolizedBenGrahamandmostlikelycontinuesto
idolizehimtothisveryday.Buffettwouldn’thavebecometheinvestorheistodaywithoutGraham’sfoundation.
Andyet,Buffett,ashebeganhisinvestingcareerandstartedlearningmoreaboutbusinessandwhatmakescompaniessuccessful,slowlystartedshiftinghisorientation.Hewasstillsolidlyinthevaluecamp
(althoughhe’sactuallyarguedinhisshareholderlettersthatthevalue-versus-growthdistinctionisameaninglessone,asyouneedbothinorderforacompanytoturnintoawinninginvestment),buthebeganlookingatmorequalitativefactors,asopposedtothestrictlyquantitativeonesGrahamfocusedon.
Yousee,forGraham,it
wasallaboutthenumbers.Itdidn’tevenmattermuchwhatthecompanydid,orwhowasonitsexecutiveteam,orwhatitsfutureprospectsheld.Whilehefirmlybelievedinthefactthatbuyingastockwasbuyingapieceofanactual,livingandbreathingcompany,hewasalsomoreconcernedwithtallyingupacompany’sassetsandliabilitiesandseeingwhatthe
wholeshebangwasworth,andthenseeingwhatitwastradingforinthemarket.
Thiswasthe“cigarbutt”schoolofinvestingwecoveredearlier.Thegoalwastostumbleacrossacigarthathadjustonemorepuffinit,andtakeadvantageofthat.Buffett,however,wasdestinedtobecomesomethingmorethanamerecigarbuttaficionado.Hewas
toseethatjustbecausesomething’sexceedinglycheap,thatdoesn’tbydefaultmakeitgood.
ThefirstpersontoopenBuffett’seyestothiswasCharlieMunger.Mungertookmorenebulousfactorsintoconsiderationwhenheinvested.Whilehealsodidn’tlikeoverpayingforbusinesses,thefactthatsomethingwascheaperthan
dirtwasnotthebe-allandend-allforhim.Thatinandofitselfwasnotenoughofareasontobuy.
Hebelievedthatmanagementmattered,thathavingacompetitiveadvantagemattered,andthatsometimesyouhadtopayalittlebitmorethanyouwouldhavelikedtoownapieceofapromisingbusiness.Insteadofhuntingaroundfornasty
oldcigarbuttstosuckonelastpufffrom,Munger’sphilosophywas,essentially,“Whydon’twelookforgreatbusinessesrunbygoodfolksandbuythose?”2
ForBuffett,thiswassomethingofarevelation.HeslowlybegantoseethatMungerwasright,andthathecouldtakethebestofGrahamandaddinsomemorequalitativefactorstocomeup
withacomprehensiveinvestingphilosophythatwashisown.
TheworkofinvestmentwriterPhilipFisherwasalsoimportanthere.Fisherwroteahighlyinfluentialbook,CommonStocksandUncommonProfits,wherehelaidouthisapproachtoinvesting.Thisinvolvedsomethinghedubbed“scuttlebutt,”whichmeant
theresearchintoacompany’sprospectsaninvestorcouldengageinonhisown.3Itcouldmeantalkingtomanagement,oracompany’ssuppliers,oritscustomers,oritsemployees,orjustgenerallybeingalerttopickingupnewinformation.
ThisfitbeautifullywithBuffett’sfeelingsthatresearchwassomethingyounevergotenoughof.And
he’dalreadyengagedinscuttlebutthimselfbythatpoint.ShowingupasagradstudentatGEICO’sofficesonaSaturdayandtalkingtoavicepresidentjumpsrighttomind.(Scuttlebutt’ssomethingyoucando,too.It’sanexcellentwaytolearnmoreaboutyourinvestments.)
Inadditiontogivingtheworldscuttlebutt(which,
incidentally,isalsothenameofa“gentlemen’sclub”inSlidell,Louisiana),Fisher’sinvestingmasterpiecealsofocused,inlargepart,onthemorequalitativefactorsBuffettwaspickingupfromMunger.Fisher’sbookprovidedafifteen-pointlistofthingstolookforwhenanalyzingacompany.Amongthemwereseveralpointsdevotedtotheimportanceof
havingopen,honestmanagement,aswellasquestionsaboutthestrengthofthecompany’sproductlineanditsviabilityversusitscompetitors.
By1989,Buffetthadfullyturnedthephilosophicalcornerandinhislettertoshareholdersthatyearsaid,“Acigarbuttfoundonthestreetthathasonlyonepuffleftinitmaynotoffermuch
ofasmoke,butthe‘bargainpurchase’willmakethatpuffallprofit.Unlessyouarealiquidator,thatkindofapproachtobuyingbusinessesisfoolish.”4
HewentontotalkabouthisexperiencewiththeBaltimoredepartmentstoreheandMungerbought,Hochschild-Kohn,whichgavethemsuchfits.Itwascheapascheapcouldbewhen
heboughtit.Itevenhadgoodpeoplerunningit.Butthosefinefolksweren’tenoughtoovercomeplainoldbadeconomics.Asanexampleofwhypurecigarbuttinvestingdidn’twork,thatwasagoodone.
BuffettalsodifferedfromGrahamontheissueofdiversification.Grahamownedlotsandlotsofcompanies,whileBuffett
believesinfocusingonjustafew.Hebelievesthatowninglotsofstocksisasignthatyoudon’tfullyunderstandwhatyou’redoing,whileGrahambelieved(asdowehereatTheMotleyFool)thatitreducesyourrisk.
Writinginthe1993lettertoBerkshireshareholders,Buffettaddressedthispoint,saying,“CharlieandIdecidedlongagothatinan
investmentlifetimeit’stoohardtomakehundredsofsmartdecisions....Thereforeweadoptedastrategythatrequiredourbeingsmart—andnottoosmartatthat—onlyafewtimes....Thestrategywe’veadoptedprecludesourfollowingstandarddiversificationdogma.Manypunditswouldthereforesaythestrategymustberiskier
thanthatemployedbymoreconventionalinvestors.Wedisagree.Webelievethatapolicyofportfolioconcentrationmaywelldecreaseriskifitraises,asitshould,boththeintensitywithwhichaninvestorthinksaboutabusinessandthecomfort-levelhemustfeelwithitseconomiccharacteristicsbeforebuyingintoit.Instatingthisopinion,
wedefinerisk,usingdictionaryterms,as‘thepossibilityoflossorinjury.’”5
Buffett’sinvestmentinGEICOwhenhewasagradstudent,andafterhewentdowninpersontothecompany’sD.C.-basedoffice(scuttlebutt!),providesagoodexampleofthedifferencebetweenGrahamandBuffettontheissueofdiversification.
WhileGrahamownedsmallstakesofmanycompanies,BuffettwassuchaprofoundbelieverinGEICOalreadythattheyoungstudentinvestedthree-quartersofhisportfolioinit.6ConcentratinglikethisinonestockispureBuffett.
So,whileit’simportanttolearnfromthosewho’vegonebeforeyou,don’tbeafraidtoaskifthewaytheyaregoing
aboutthingsisthebestwaypossible.Remember:
•Thelearningneverstops,soevenafteryouthinkyou’vefiguredoutthebestwaytoinvest,keepstudying.•Justbecausesomeone’sanacknowledgedinvestmentguruormasterdoesn’tmeanthereisn’tabetterway.
touchedonearlierwhenwetalkedaboutwhattolookforwhenevaluatingmanagement—andthat’sfindingpeoplewhoareethicalandfair.Buffetthasalwaysconductedhimselfthisway,nearlytoafault,aswe’llsee,andit’stragicbuttruethatinthisdayandagethat’sprettyunusual.However,asBuffettdemonstrates,successcan,infact,cometothosewhoplay
nice.(Andthat’sthewayitshouldbe!)
OnesignificantwaythatBuffettembodiesthisideaoffairnessishisbeliefthatallshareholders,nomatterhowbigtheirstakeorhowtiny,deservetobeupdatedatthesametimeandinthesamemanner.Thismaysoundlikeanobvioustenet,andonenotparticulartoBuffett,butinfact,thingsonWallStreet
weren’talwaysthisway.Manycompaniesovertheyearshavegivenprecedencetothelarge,institutionalshareholdersoftheirstock,ortotheanalystsontheStreetfollowingtheircompany,essentiallyslammingthedoorinthefaceofthesmallindividualinvestor,anow-illegalpracticeknownas“selectivedisclosure.”
Infact,ArthurLevitt,
thenchairmanoftheSecuritiesandExchangeCommission,commendedTheMotleyFoolforouradvocacythatthisshadypracticeshouldbestopped.1WiththepassageofRegulationFairDisclosure,inAugust2000,itfinallywas.Theplayingfieldwas,astheysay,levelatlast.Buffettcalledselectivedisclosure“corrupt”andsaid,“Thefact
thatthisreformcameaboutbecauseofcoercionratherthanconscienceshouldbeamatterofshameforCEOsandtheirinvestorrelationsdepartments.”2
ThiswasneverthecasewithBuffettandBerkshire,however.Buffettbelievesstronglyinnotgivingadvantagestoonegroupofshareholdersoveranother.Everyoneshouldbetreated
equallyandfairly.WritingintheBerkshire“Owner’sManual,”Buffettsays,“Inallofourcommunications,wetrytomakesurethatnosingleshareholdergetsanedge:Wedonotfollowtheusualpracticeofgivingearnings‘guidance’toanalystsorlargeshareholders.Ourgoalistohaveallofourownersupdatedatthesametime.”3
Inadditiontomakingsureeveryonegetsthesameinformationsimultaneously,BuffettalsoworkshardtogivehisshareholdersjustasmuchinfoonhowBerkshire’sperformingashewouldwantwereheintheirshoes.Andhedoesitwithclearlanguageandanopennesstorevealingasmuchashefeasiblycan(withoutgivinganything
awaytocompetitors).Writingagaininthe
Owner’sManual,Buffettsays,“Wewillbecandidinourreportingtoyou,emphasizingtheplusesandminusesimportantinappraisingbusinessvalue.Ourguidelineistotellyouthebusinessfactsthatwewouldwanttoknowifourpositionswerereversed.Weoweyounoless....Wealso
believecandorbenefitsusasmanagers:TheCEOwhomisleadsothersinpublicmayeventuallymisleadhimselfinprivate.”4
Buffettholdsthenotionthathisshareholdersaremorelikefamilythanacquaintances,socommunicatingeffectivelywiththemisapriorityforhim.Whenhereferstothemashis“partners”inBerkshire
Hathaway,hemeansit.He’snotjustgivingthatidealipservice.Itgoeshandinhandwithhisstrongbeliefthatwhenyoubuysharesinacompany,youarebuyingapieceofabusiness,andyouaretrulyanownerofthatbusiness.Rememberthatanddon’tallowyourselftobetreatedasanythingless.Demandthatalltheexecutiveteamsrunningyour
companies—andtheyareyourcompanies—speakhonestlyandclearlywithyouandyourfellowshareholders.Allinvestors,bigandsmall,deservethat.
Buffett’sfoundthatbeingfaircanraisesomeeyebrows,withheandMungeroncehavingtodefendthemselvestotheSecuritiesandExchangeCommissionforoverpayingforacompany
thattheywantedtobuy.Yes,youreadthatright—BuffettandMungerwereonceinvestigatedforwillinglypayingtoomuchforacompanytheyweretryingtopurchaseinfull.Notsurprisingly,thefirmthatBuffettandMungerweretryingtobuywasn’ttheoneraisingafussabouthowmuchtheywantedtopay.Itwasanothercompany,which
wassupposedtomergewiththeirtargetforamuchcheaperprice,thatcalledfoulonthem.
Wesco,whichisnowafullyownedsubsidiaryofBerkshireandrunbyCharlieMunger,isthecompanyinquestion.Waybackinthe1970s,beforethey’dfullyjoinedforces,BuffettandMungerwereinvestingtogetherusingdifferent
companiestobuysharesofothers.Throughoneofthesecomboefforts,BlueChipStamps,they’dboughtsomesharesofWesco,whichwasaCaliforniasavingsandloanfirm.
Notlongaftertheystartedbuyingshares,WescoannounceditwasmergingwithanotherCaliforniabank,butBuffettandMungerdidn’tlikeorapproveofthe
price.Theybothbelievedthecompanywaslettingitselfgofortoolittle.Whiletheymetwithandgottoknowsomeoftheexecutivesatthecompany,theystartedbuyingWescosharesatabovewhatthestockmarketwaspricingthemat.Becausetheoriginaldealhadapparentlyfallenapart,investorsweredrivingWescosharesdown,andBuffettandMungerdidnot
wanttotakeadvantageofthisfact,especiallysinceinasense,they’dcausedit.Eventually,theyboughttherestofthecompany,alsoforabovewhatsharesweretradingatatthetime.
GovernmentinvestigatorswereconfusedastowhytwosmartandablemoneymanagerslikeBuffettandMungerwouldwillinglydothis.Munger’sentreatythatit
wasthe“rightthing”tododidn’tpersuadethem.Itwasjustunfathomablethatinvestorswoulddecidetopaymorethantheyhadto,toacquireacompanytheywanted.Intheend,luckily,BuffettandMungerescapedvirtuallyunscathedfromthelegalmorass.TheywereabletobuyWescooutright,asthey’dwantedallalong,atapricethattothemrepresented
whatwasfair.Earlierinhiscareer,
Buffetthadalsochosentostandupforwhathesawwasrightandfair.In1964,asmallsubsidiaryofAmericanExpresswasinvolvedinascandalthatcostsomebanksthathadloaneditmoneymillionsofdollars,butdidnotultimatelyaffecttheoverallstrengthofthecompany’sbrand,main
businessline,orfutureprospects.Themarketsoldthestockoff,andBuffett,everthebravesoultostepinwhereotherswouldnot,startingbuyingsharesofitforthepartnership.Tryingtomovebeyondthescandal,AmericanExpresswasponyingupmoneytosettlethebanks’claims,butsomeshareholderssued,arguingthatinsteadofpayingup,the
companyshoulddefenditself.Buffettcameoutstrongly
onthesideofAmericanExpressdoingtherightthing,whichwas,ashesawit,makinggoodbypayingthebanksoff.Hebelievedthecompanywouldbe“worthverysubstantiallymore”ifitdidrightbythebanksversusfightingthem.5AmericanExpresslistened,anditturnedoutthatBuffettwasright.
Thestockrecoveredmorethan40percentfromitslows,andremainsasignificantBerkshireHathawayholdingtoday.
OnefinalincidentrepresentsBuffett’sfeelingsabouttheimportanceofethicsinbusiness.Intheearly1990s,aroguebondtraderatSalomonBrothers,thenowlong-goneWallStreetinvestmenthouse,createda
scandalforthecompanybyengagingindubiouspracticeswhenitcametotheTreasurybondmarket.Essentially,hewascreatingfakeaccountstocornerthemarketandbuymorethanSalomon’sfairshareofbondsfromthegovernmentforresale.
BerkshireownedachunkofSalomonatthetime,althoughBuffettknewnothingaboutthemisdeedsat
thecompany.Thetopguysinchargeresigned,andBuffettwasaskedtostepinandserveasinterimchairman.Thiswasarolehedidnotrelish,buthemadethetoughchoiceandagreedtodoit.HeshookSalomontoitscorewithhisopenattitudesandwillingnesstobehonestwiththemediaandothers.
Buffettagreed,naturally,tocooperatewiththe
government’sinquiryintoSalomon’sdoings.Anditwashis1991congressionaltestimonyontheSalomonBrothersscandalthatallowedhimtoexpresshisfeelingsontheimportanceofethicsmostclearly:“Aftertheyfirstobeyallrules,Ithenwantemployeestoaskthemselveswhethertheyarewillingtohaveanycontemplatedactappearthenextdayonthe
frontpageoftheirlocalpaper,tobereadbytheirspouses,childrenandfriends,withthereportingdonebyaninformedandcriticalreporter.Iftheyfollowthistest,theyneednotfearmyothermessagetothem:LosemoneyforthefirmandIwillbeunderstanding.LoseashredofreputationforthefirmandIwillberuthless.”6
WarrenBuffetttakes
doingtherightthingveryseriously,andoverthelongterm,theevidencefromhimbearsoutthatinadditiontosimplybeingthemostkarma-friendlywaytogo,italsoleadstowealth.Doingrightbyotherpeople,beingfair,andhavingtheattitudethateveryonecanwinisagreatframeworkwithwhichtoapproachinvesting.Itallowsyoutolookforopportunities
thatcanbothmakeyoufeelgoodandmakeyourich.
So,remember:
•Youcanbegoodandberich;onedoesn’tprecludetheother.•It’spossibletofindcompanieswhereemployees,shareholders,andcustomersallwin,andthosecanmakeforwinninginvestments.
knowaboutWarrenBuffettandhis“feminine”temperament,let’stakeaminutetorecapthelessonswe’velearnedfromeachoftheeightfeminineinvestingtraitsaswellasourthree“Buffett-esque”principles.Thenwe’lltalkabouthowtotakealltheknowledgewe’velearnedsofarandapplyittoaFoolishinvestmentphilosophy.
Femaleinvestorstendto:
1.Tradelessthanmendo•Rememberyou’rebuyingapieceofanactualbusiness.
•Takethelongview.•Bepatient.
2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,while
womenaremorelikelytoknowwhattheydon’tknow•Buffett’s“sphereofunderstanding”maybedifferentfromyourown.
•Thinkaboutandlearnwhatyourowncircleofcompetencecovers.
•Sticktoit,nomatterwhat.
3.Shunriskmorethanmaleinvestorsdo•Insistonanappropriatemarginofsafety.
•Avoiddebtasmuchaspossible.
•Staywithinyourcircleofcompetence.
•Doyourhomeworkbeforeinvestingoverseas.
4.Belessoptimistic,and
thereforemorerealistic,thantheirmalecounterparts•Belevelheadedaboutyourinvestmentsandthemarketatlarge.Learnnottobeexcitedbymarketswingstotheupsideordevastatedbymarketdrops.
•You’reinchargeofMr.Market.Don’tlethimbossyouaround.
•QuotingBuffett,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”
5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangleanddetail,aswellasconsideringalternatepointsofview•Read,read,read.
•Don’tforgetaboutyourcircleofcompetence.
•Avoidconfirmationbias—seekoutinformationthatcontradictsyourconclusions,notjustinformationthatreinforcesthem.
6.Bemoreimmunetopeerpressureandtendtomakedecisionsthesamewayregardlessofwho’s
watching•Bewillingtobecontrarian,asuncomfortableasitmaybe.
•TakeBuffett’swordstoheart:“Begreedywhenothersarefearful,andfearfulwhenothersaregreedy.”
•LivebyyourownInnerScorecard.
7.Learnfromtheirmistakes•You’regoingtomakemistakes.Wealldo.Sodon’tbeatyourselfupwhenyouslipup.
•Assesswhathappened.Didyoumisssomething?Ordidmarketconditionschange?
•Thinkaboutwhatyoucanreasonablydodifferentlyinthefuture.
Ifyouboughtstockinacompanyyoudidn’ttrulyunderstand,forexample,vownottodothatagain.
8.Thankstogoodoldbiology,havelesstestosteronethanmendo,makingthemlessswillingtotakeextremerisks,which,inturn,couldleadtolessextrememarket
cycles.
Whilenotatraitofthefemaleinvestingtemperament,theoutcomeofthisinvestingstyleisimportant.Therefore,rememberthatfemaleinvestorsproduceresultsthataremoreconsistentandpersistent.Andinthehedgefundworld,female-managedhedgefundsoutperform
comparablemale-managedhedgefunds,andtheydon’tsufferfrommarketdropsasseverely.
•Ignoreanyonewhotellsyouthrowingdartsatanewspaperisthesameasintelligentanalysis.
•Agooddefenseisjustasvaluableasagoodoffense.
•Sticktoasystemthat’s
logicalandworks,andyou,too,couldbuildalengthyandimpressivetrackrecord.
AndourthreeBuffett-centricprinciples:
1.Valueandcultivateyourrelationshipswithpeople•Abusinessisonlyasstrongasthepeoplerunningit.
•Readuponthemanagementofcompaniesyouareconsideringinvestingin.Lookforsmart,open,loyal,fairexecutivesyoucanadmire.
•Don’tbeafraidtoputpeoplebeforeprofit;Buffettisn’t.
2.Learnfromthemasters,
butbewillingtoquestionthem•Thelearningneverstops,soevenafteryouthinkyou’vefiguredoutthebestwaytoinvest,keepstudying.
•Justbecausesomeone’sanacknowledgedinvestmentguruormasterdoesn’tmeanthereisn’tabetterway.
•Youaren’tcommitting
blasphemywhenyouquestionanybody,WarrenBuffettincluded.
3.Befairandoperateinanethicalmanner•Youcanbegoodandberich;onedoesn’tprecludetheother.
•It’spossibletofindcompanieswhereemployees,
shareholders,andcustomersallwin,andthosecanmakeforwinninginvestments.
•Lookforcompaniesthatcommunicateinanopen,honestway.You,asanowner,deservetobetreatedthisway.
Nowthatwe’vebrokendownthequalitiesandtemperamentthatmake
WarrenBuffetttheinvestorheis,andwe’vediscoveredtheinvestingtraitsthatfemaleinvestorstendtoshare(andusetoedgeouttheboys),whatmoreistheretoit?Well,lotsactually.TheMotleyFoolhasspentyearseducating,amusing,andenrichinginvestorsallovertheworld,andwhileyou’realreadywellonyourwaytobeingasuccessfulinvestor,
you’vestillgotmoretolearn.So,let’sjumprightin.Thefirstfewprincipleswillbefamiliartoyouatthispoint,butthey’reimportantenoughtotouchonagain.
•Buyastock,buyabusiness.•Buywhatyouknow.•Long-termbuy-to-holdisthewaytogo.•Compoundinterestisa
miraculousthing.•Savetogrow.•Investnow?•Getyourassetsallocated.•Diversify.Yes,diversify.•What,mesell?
BUYASTOCK,BUYABUSINESS.
Aswelearnedearlier,whenyoubuyashareofstock,you
areinvestinginanactualbusiness.Keepingthisfactinmindhelpsseparatethemerespeculators(boo,hiss)fromthebonafideinvestors(wildapplause).Consideryourselfabusinessowner,whetheryou’vejustponiedupfor100sharesofHersheyor10,000sharesofTarget.
TheMotleyFoolholdsthistenetnearanddear,andit’sthefoundationforour
entireinvestingphilosophy,asitisforBuffett.Don’tyouforgetit,either.Youaren’tjusttypinginthreeorfourrandomlettersintoyouronlinebroker’swebsiteandthenpushing“submit.”Youarebuyingapartofabusiness,justasifyouwentoutandboughtthelemonadestandfromthosecutekidsonthecorner(canyoubelievehowmuchtheychargefor
thatstuff?).Keytakeaway:You
aren’tbuyingsomethingabstractwhenyouinvest.You’rebecomingabusinessowner.
BUYWHATYOUKNOW.
Wealsobelieve,asdoesBuffett,instayingwithinyourcircleofcompetence.
Anotherfamousinvestmentmind,PeterLynch,whorantheincrediblysuccessfulMagellanFundforFidelityforyears,popularizedthephrase“Buywhatyouknow,”andthatworkshere,too.
Essentially,youwanttobeabletounderstandwhatyou’reinvestingin.Itfollowsbehindwhatwejusttalkedabout—ifyoubelieveyouarebuyingapieceofanactual
business(andyouare),thenyoushouldbeabletoexplainwhatthatbusinessdoes,andunderstandhowitmakesmoney.Forbeginninginvestors,thisoftenmeansbuyingsharesofcompaniesthatsellproductsyouuseorknowwell.Lookaroundyou—thereareinvestmentopportunitiesandpossibilitiesallaround.
Thedangerofgoingtoo
farafieldofwhatyoucanreasonablyunderstandraisesthechancethatyou’llinvestinsomethingyoucan’tadequatelyfollowandfeelcomfortableowningoverthelongterm.Andthat’swhatthisisallabout—long-termstockownership.
Keytakeaway:Understandwhatyou’reinvestingin.Itlowersyourriskwhenyoudoso.
LONG-TERMBUY-TO-HOLDISTHEWAYTOGO.
Speakingofthelongterm,thisisanotherfacetofBuffett’sinvestingphilosophythatwestronglybelieveinatTheMotleyFool.Buyingastockonlytosellitdayslater,orworse,minutesorhourslater,doesnotinterestus.That’sasmall-ffoolishwaytoinvest.Whenyou’rethinkinglikea
businessowner,youarethinkinglong-term.
Individualinvestorsalsohaveatremendousadvantagewhenitcomestobeingabletoeffectivelystayputandavoidtrading.Unlikemutualfundsorbiginstitutionalinvestors,whichareconstantlydealingwithwithdrawalsandarethereforeoftenforcedtosellinordertogeneratecash,thelittleguys
andgalslikeuscan,instead,affordtohunkerdownwithourstocks,keepingthemnearanddearforyearsonend.Don’tletthisimportantadvantagepassyouby.
Additionally,whenyoubuyandsellmorethanyoushould,yourackuptradingcostsandtaxbills.Evensupposingyouweregiftedwithanuncannyabilitytobeahotshotshort-termtrader,
thebitethatthosecostswouldtakefromyourreturnswouldbepainful.It’soneofthereasonswomentendtoshowbetterresultsthanmendo(sincetheytradelessthanmen).
Webelieveinlong-termbuy-to-hold.Thatdoesn’tmeanyoubuystocksandthenneverlookatthemeveragain.Wearen’tsuggestingthat.Butwiththeproper
mindsetthatyouarebuyingapieceofabusinessthatyouwilllikelyownforyears,webelieveyoushouldinsteadmonitoryourinvestmentstokeepaneyeonthemandmakesurenothingdrastichaschanged.
Ahelpfultipforputtingthisintopracticeistowritedownallthereasonsyouboughtastockatthetimeyouboughtit.Document,
document,document.Thinkaboutwhatfactorscouldleadyoutosell,andjotthosedown,too.It’sinevitablethatyouwillsellstocksinyourlifetime.Buffettdoesit;everyonedoesit.Theimportantthingisnottodoitforthewrongreasons.Therewillbetimeswhenacompany’soutlookandcircumstanceschangeenoughthatyoudecideit’stimeto
partwithyourshares,forexample.Butitcanbedifficulttorememberwhatexactlycompelledyoutobuythecompanyinthefirstplace.Ifyouhavearecordofyourthinking,youhaveaframeworktostartfrom.
Checkinonyourcompaniesatleastquarterly.Readuponhowthey’redoingandassesswhat’sgoingonwiththemversus
yourdocumentedreasonsforbuyinginthefirstplace.Ourgoal,hope,andwish,likeBuffett’s,istoholdastockforever,butthatdoesn’tmeanyoushouldcompletelyignoreitonceyouownit.Yourmoney,yourcapital,isprecious,andit’suptoyoutoensurethatit’sinvestedinthebestpossibleplaces.
Keytakeaway:Don’tinvestandthenneverglance
yourstocks’wayagain.Keepupwiththebusinessperformanceofthem—butdon’tobsessonthestockprice.That’snowaytojudgeacompany’sprogress.
COMPOUNDINTERESTISAMIRACULOUSTHING.
Anotherreasontobelong-termfocusedistheamazing
powerofcompoundinterest.Likekudzuorbacteria,compoundinterestjustkeepsgrowingovertime.Theconcept’snotcomplicated,forsomethingsopowerful.Whenyouhavemoneyinvestedandyou’reearningarateofreturnonit(so,say,yourstockportfoliogoesup6percentayear),andthenyouthinkaboutthelengthoftimeyouhaveyourmoneyearning
that,eachandeveryyeartheamountyouhaveisgrowing—sothebaseamountyouhaveforthefollowingyearisevengreater!
OK,somaybethatiscomplicated.Let’stryatable.Let’sassumeyoustartedoffwith$1,200investedfourdifferentwaysoveraperiodofyears.
Savings Money Certificate
Account(0.5%)
MarketFund(2%)
ofDeposit(5%)
Initialinvestment
$1,200 $1,200 $1,200
5years $1,230 $1,325 $1,53210years $1,261 $1,463 $1,95515years $1,293 $1,615 $2,49520years $1,326 $1,783 $3,18425years $1,359 $1,969 $4,06430years $1,394 $2,174 $5,18635years $1,429 $2,400 $6,619
35years $1,429 $2,400 $6,61940years $1,465 $2,650 $8,448*Basedonthestockmarket’shistoricalreturn
Remember,that’s$1,200youdidnothingelsewith.Youdidn’taddanymoneyovertheyears,anditgrewallonitsownto$37,691over40years.
(Thistablebringsupanothergoodpoint—
investinginstocksoverthelongtermwillbringyouamuchbetterreturnthanothervehicleslikesavingsaccountsormoneymarketfunds.Giventhatyou’rereadingabookaboutinvestinginthestockmarket,thisprobablyisn’tnewstoyou,butit’sworthpointingoutnonetheless.)
Nowlet’slookatanotherscenariothatdemonstratesthe
powerofcompoundinterest.Let’ssayyoustartwith$1,200inyourfirstyearofsavingandtheneachandeveryyear,youadd$1,200toyouroriginalstash.Wheredoyouendupnow?
SavingsAccount(0.5%)
MoneyMarketFund(2%)
CertificateofDeposit
Initial $1,200 $1,200 $1,200
Investment5years $6,091 $6,370 $6,962
10years $12,335$13,402 $15,848
15years$
18,737$
21,167$27,189
20years$
25,301$29,740 $41,663
25years $32,030$39,205 $60,136
30years $38,930$49,655 $83,713
35years $46,003$
61,193$113,804
40years $53,256$73,932 $152,208
*Basedonthestockmarket’shistoricalreturn
Wooooo,nowthat’smorelikeit!Andtoimproveuponthatcool$441,950,youcould
sockawaymorethan$1,200ayearoverthatperiod.Morethandoubleittostartingwith$2,800ayearandadding$2,800ayearandyou’relookingatamillionbucksafter40years.
Onceyoucometoappreciatethefullpowerofcompoundinterest,you’llseewhyit’ssmarttobeinvestedoverthelonghaul.Youneedtimetomakecompound
interestreallyworkforyou.Thepowerithastobuildandbuildandbuildbecomesmagnifiedonlywithtime.
Keytakeaway:Takeadvantageofthefullpowerofcompoundinterestbygivingyourinvestmentstimetogrow.
SAVETOGROW.
Inordertohavemoneytoinvestinstocks,andthusbeginbenefitingfromthejoysofcompoundinginterest,you’vegottosavesomeup.Andifyou’recarryingaroundcreditcarddebt,likesomanyAmericans(atlastchecktheaveragecreditcarddebtperpersonwasnearly$5,000),you’regoingtoneedtoaddressthatlittleissuebeforeyoustartinvesting.Yes,it
canhurt,becauseweknowyou’reitchingtobecometomorrow’sBuffett,butyouneedtogetyourfinancialhouseinorderfirst.
Thereasonwhyisthis:Theinterestrateonyourcreditcarddebtisalmostcertainlyhigherthanthereturnyoucouldearninthestockmarket.Youcouldverywellbepaying17percentinterestonyourcreditcard
debtwhileyou’retryingtoearn9percentinthestockmarket,forinstance.Thatmakesnosense.(Note:Considerinvestinginoneofthosecreditcardcompanies,becausethosefolksarerakingitin!)Andbecausejusttokeepyourdebtatbayyou’repayingoutmoreininteresteachmonththanyou’dbemakinginthemarket,you’restagnatingorevenfalling
behindoverall.Thesoundestcourseof
actionhereistocomeupwithaplantopaymorethantheminimumbalanceonyourdebteachandeverymonthuntilyougetridofthatsucker.Then,andonlythen,shouldyouconsiderinvestinginthemarket.Heck,evenifyou’renotquitereadytoinvestonyourown,payingoffyourcreditcarddebtis
stillaworthyendeavor.Thatinterestwilleatyoualive,makingthethingsyoupurchased(didyoureallyneedthatsecondpairofUggs?didyouevenneedthatfirstpair?)costwaymorethantheyshouldhave.
RememberwhatwelearnedaboutBuffett—he’snotafanofdebt.Listentohim.Heknowswhathe’stalkingabout.Out-of-hand
debtcansaddleyourprosperousfinancialfuture,makingitsomuchharderthanithastobe.
Onefinalwordonsavings—onceyou’vegotyourdebtsituationallsquaredaway(yay,you!),setsomemoneyasideinasafeplaceasan“emergencyfund.”Stuff,astheysay,happens,andyouwanttobereadyforitwhenitdoes.Broken-downcars,
homerepairs,last-minuteflightandticketstoseeU2inDublin(ahem)...allthingsthatareunanticipatedandcanbepricey.Sosavesomemoneyandkeepithandy,justincase.
Keytakeaway:There’ssometruthtothatoldsaw,“Ittakesmoneytomakemoney.”Thingis,youneedtomakesureyourmoneyisn’tbeingheldhostageby
creditcardinterestratesbeforeyoucanputittoworkforyou.
INVESTNOW?
OK,soyou’veclearedoutanycreditcarddebt,savedenoughforanemergencyfund(oh,Bono),andhavecometolove,appreciate,andrespectyournewbestfriend,
compoundinterest.You’reready,youunderstandyou’rebuyingapieceofanactualbusiness,andyouareinthisthingforthelonghaul.
Orareyou?Askyourselfhowquickly
you’regoingtoneedaccesstothemoneyyouhavesavedupandwanttoinvest.Lookingtobuyahouseintwoyearsandneedthiscashforadownpayment?Don’t
investitinthestockmarket,then.KidgoingofftogetanIvyLeagueeducation(orevenajunior-college-in-the-next-town-overeducation)nextfall?Don’tinvest.TryingtobuytheRVofyourdreamsinafewyears?Don’tinvest.
Sorrytobesonegative,butthisone’simportant—onlyinvestmoneyinthestockmarketwhenyouwon’t
needitforatleastfiveyearsormore.RememberthenatureofBenGraham’sfabledMr.Marketcharacter?Hecanbedepressedforyears,thenhappyforacoupleofmonths,thensadagain.He’sallovertheplace,thisguy.Youdonotwantanymoneyyouneedintheshorttermtobeathismercy.Don’tdoit.
Overtime,thestock
marketiswhereit’sat,butthekeyhereisthatyouhavetobecommittedtolettingyourmoneybeyankedaboutbyMr.Marketintheshortterm.Ifyouneedthatmoneysoon,stickitinasavingsaccountorotherlessriskyvehiclesomewhere,likeacertificateofdepositormoneymarketfund.
Takingthelongview,Mr.Marketlookslesscrazy.The
bumpsandcurvesandcryingfits(hecanbesoannoyingwhenhe’slikethat)allsmoothout,butittakestime.Forlongperiods,thestockmarketreallyisthebestplacetobeinvested.Youjusthavetobereadyandabletotakethebadalongwiththegood.
Keytakeaway:Don’teventhinkaboutinvestingmoneyinthemarketthatyouneedinlessthanfiveyears.
forbeginninginvestors,frompeoplewho’vebeenthere:
“Don’tborrowmoney.Debtisthefour-letterwordthatcanundoalotofgoodwork.Buffetthassaidonlyinvestinwhat
youunderstand.Besurethecompanyhasdurablecompetitiveadvantagesandbesurethemanagementistop-notch.Thinkforyourself.”1
—AndrewKilpatrick,author
ofOfPermanentValue:TheStoryof
WarrenBuffett
“Don’twatchCNBC.That’ssortofflip,buttherealmessageis,‘Youhavetofindyourownstrategy.’Youcan’tcopyorreacttoother
people.It’saveryself-analyticalprocess.Focusonwhatyoudowellandwhatyourskillsetisanddon’tworryaboutwhateverybodyelseisdoing.”2—LisaRapuano,
founder,LaneFive
CapitalManagement
“Asabeginninginvestor,Iwouldsaystartwhereyouhavesomekindofcomfortzone,sometouchstonethatmakesyouthinkthis
makessensetoyou.Maybeitisbuyingsharesinthelocalbank,ifyouhavealwaysdoneyourbankingthereorbuyingtensharesofNikebecauseyoulikeNike’srunningshoes
andyouthinkitisagoodcompany.Gosomewherewhereyouhavesomerealtangiblethoughtaboutthecompanyandnot,‘So-and-sosaidtobuythisstockbecauseitisgoingtogo
upnextmonth.’”3
—CandaceKingWeir,founder,
ParadigmCapitalManagement
“TheysaythatsomanyguitarplayersreallyburnoutbecausetheytrytoemulateJimiHendrixandso
manydrummersburnoutbecausetheytrytoemulateNeilPeart,andIthinkthatthereissomethingtobesaidaboutnottryingtobesomeoneelse.Tobeingtruetoyourselfandnottryingto
emulateevensomeonewhoisasspectacularasWarrenBuffett.Hecandividecomplexfractionsinhishead.Heisreallyatalentwithoutcompare.Heiskindofanislandunto
himself.“Ithinka
lotofpeoplejustreallytrytobethenextBuffettinsteadoftryingtobethefirstwhoevertheyare.Investingishardenoughwithoutsaying,‘Well,my
instinctsaysX,butWarrenBuffettsaysY,soIamgoingtodoY.’Ithinkthatisaveryimportantthingforpeoplewhoarejuststartingout.
“Mysecondpieceofadvicewouldbeto
takeyourtime.Thereisnorush.Somanytimeswithbeginninginvestorstheygetawfullyexcitedaboutitandbeforetheyhavestudieditforsixmonths,theyown20differentthings
with95percentoftheirmoney,andthatisscary.Itisscarybecausetheymightnotthinkitisscary.Sotakeyourtime,beyourself.Thatsoundslikeanafter-schoolspecial,butitapplies.”4
—BillMann,portfoliomanager,
MotleyFoolIndependenceFund
andMotleyFoolGreatAmerica
Fund
GETYOURASSETSALLOCATED.
Allright,soyou’verid
yourselfofcreditcarddebt,youhaveyouremergencycashsafelystashed,andthemoneyyou’reinvestingismoneyyoudon’tneedaccesstoforfiveyearsormore.There’soneadditionaltime-basedfactoryouneedtoconsider,andthat’swhat’scalledyourtimehorizon.Thinkofitasthetimeyouhavestretchedoutbeforeyoutobeinvested.Howmuch
timeyouhaveaheadofyoudetermines,inpart,howmuchofyourportfolioshouldbeinstocks.
Let’ssayyou’refreshoutofcollegeandhaveyourfirstreal“grown-up”job.AsidefromgettingusedtobeingupearlyeverydayanddressingupbeyondsomepatternedPJpantsandan“ironic”SavedbytheBellT-shirt,youshouldalsotakethis
opportunitytoinvest.Youhaveyearsandyearsandyearsofearningpotentialaheadofyou,somakethemostofit!Youcanaffordtotakemoreriskthanolderinvestorscan,whichmeansyoushouldhaveallofyourportfolio(whichislikelystillhumbleatthispoint,butthat’scool—rememberthepowerofcompounding!)instocks.Youhavethetimeto
putupwiththemarket’supsanddowns,sostartinvestingearlytotakeadvantageofyouryouth.
Orhowaboutsomeoneinherlate30sorearly40s?She’sbeenworkingforagood15–20yearsorso,savingandinvestingalongtheway.Shemayhaveachildortwo,soshe’ssockingmoneyawayfortheirfuture,aswell.Shouldshestillbe
investedinstocks?Youbet.Sheprobablywouldn’twanttohaveherentireportfolioinriskyhigh-flyinggrowthstocks(suchasthoseinemergingindustrieslikebiotechnology)evenifsheworksinthefieldandcanfullyunderstandthem.Balancingthemoutwithsomesafer,biggercompaniesmakessense.Anditprobablyalsomakessenseheretostart
consideringassetclassesotherthanequitiestobetterbalanceherrisk.Butsheshouldabsolutelystillbeinstocks.
Someoneclosertoretirementage,oralreadyretired,shouldstartshiftingmoreoftheirassetstosafer,butslower-growing,assetslikebonds.You’regoingtostartneedingtocountonthatmoneysoonerthanourfresh-
out-of-collegekid,soyou’regoingtowantittoseekshelterfromMr.Market’smania.Still,wedon’tbelieveyoushouldeverbeallthewayoutofstocks.Atthispointstartlookingforestablisheddividend-payers.Thebenefitsaretwofold:They’relesslikelytobevolatile,andyou’llgetincomefromyourdividendsinretirement.
There’sonemoreimportantpointtothinkabouthere,andthatinvolvesmakingsureyoucansleepatnight.No,wearen’ttalkingaboutinstitutinganightlysnackofmilkandcookies(mmmm,peanutbutterandchocolatechip).Instead,youneedtoconsiderhowmuchriskyoucantolerate—howmuchyoucanstandtoseeyourstocksgodown.Be
honestabouthowmuchpsychologicaldistressyouwouldbeinifyourstocksdropped10percenttomorrow,or20percentoverthenextfewweeks,or40percentnextyear(astheyactuallydidin2008).
Aswediscussedearlier,allinvestinginvolvesrisk,andit’sinevitablethatyouwilllosemoney.Youneedtobeaspreparedforthatreality
aspossible.Now,ifyouareabletokeepthefreakoutstoaminimumandmoreimportantlydon’tsell,youwon’tlockinthoselosses,butyouhavetobeabletowithstandthepressure.
AuthorWilliamJ.Bernstein,inhisbookTheFourPillarsofInvesting,providesausefultableforfiguringouthowmuchofyourportfolioshouldbein
stocksbasedonhowmuchdownsideyoucouldtolerate:5
Icantoleratelosing____%ofmyportfoliointhecourseofearninghigher
returns
Recommended%ofportfolioinvestedinstocks
35% 80%30% 70%25% 60%
20% 50%15% 40%10% 30%5% 20%0% 10%
Soifyoucan’ttakelosing20percentormoreofyourmoney,thennomorethanhalfofyourportfolioshouldbemadeupofstocks.Using
thisasaguide,alongwithyourtimehorizon,willhelpyoufigureoutthebestwaytoallocateyourassets.
Keytakeaway:Knowinghowlongyou’vegottoinvest,andhowwellyourstomachandsleeppatternscanhandlerisk,willhelpyoufigureouthowmuchofyourportfoliotoinvestinstocks.
DIVERSIFY.YES,DIVERSIFY.
OntheissueofdiversificationwedifferfromBuffett’sopinion.WhereasBuffetthaslongbelievedthatyouneedtoownjustafewstocks,andownawholelotofeachofthem,webelieveinspreadingthingsoutabitmore.Inthisway,wetendtobealittlemorelikePeterLynchorBenGrahamthanBuffett.
We’renotsuggestingyourunoutandbuysharesof1,000companies(that’showmanyLynchleftbehindinhisMagellanFundoncehe’dretired!),oreven100.There’dbenowayyoucouldkeepupwithallthosecompanies.Butwedobelievethataportfolioofatleast15–20companiesreducestheriskthatsomethinghorriblewillhappenwithoneofthemthat
couldsinkyourentireportfolio.
Buffettbelievesthatbyconcentratingonjustafewstocks,versusbuyingmany,youactuallyreduceyourriskbecauseyouaremorelikelytobuystocksyouknowalotaboutandbelieveinmorefully.Westillwantyoutobuycompaniesyouunderstandandknowasmuchaspossibleabout.We
justbelievethatit’seasiertoprotectyourpreciouscapitalwhenyoudon’thaveitsittinginsofewplaces.Thingsgowrongallthetimewithcompanies,ortheeconomy,orsomespecificindustryorsegmentofthemarket.Havingyourmoneyspreadoutamongmanyinvestmentsmeansthatifoneofthemgoesbust,theothersshould(hopefully)beabletooffset
it.Oneeasywaytoget
instantdiversificationissomethingBuffettdoesstronglyadvocate,though,andthat’sinvestinginanindexfund.Anindexfundisamutualfundthatexactlyfollowsanindexofstocks.So,forexample,anindexfundthattrackstheS&P500willincludeall500ofthevariouscompaniesheldinthe
index.Whenyoubuysharesinanindexfund,it’slikeowningasliceofallthosecompanies,andtherefore,allthosevariousindustriesandbusinesstypesandsoforth.Yougetthebenefitofbeingexposedtomanycompaniesinoneeasytransaction.
Now,themanagersofanindexfundwillnottryto“beattheindex”or“beatthemarket.”Instead,theiraimis
tomatchit.Thatmaysoundlikeayawn,butconsiderthefactthataccordingtoMotleyFoolresearchonly42percentofactivelymanagedfundsbeattheS&P500throughthefifteenyearsendingJanuary2009.Notonlythat,butindexfundsaretypicallyverylowcost,whichmeansyousavemoneyversusinvestinginanactivelymanagedfund.Soyoumakemoreandsave
morewhengoingwithanindexfund.Forsomethingthatonlyseekstomatchthemarket’saveragereturn,that’snotbad.Averageneverlookedsogood,infact.
Webelieveyoushouldsticksomemoneyinanindexfund,inadditiontoinvestinginindividualstocks.Evenifit’sjustthroughyourcompany’sretirementplan(what?youaren’tinvestingin
your401[k]?what’swrongwithyou?),anindexfundistheperfectfoundationforyourentireinvestmentstrategy.Buffettthinksso,andsodowe.
Keytakeaway:Diversification,boththroughowning15–20individualstocksandthroughowningsharesofanindexfund,isaverygoodthing.Ithelpsreduceyourriskandprotect
yourportfolio.
WHAT,MESELL?
We’vejustspentmanywordsandmanyminutesofyourtimetellingyoutoneversell,basically.Andthat’sstillgreatadvice.Buffett’sfavoriteholdingperiodisforeverandsoisours.
Butthedirtylittletruthis
thatsometimesyousimplymust.Itcanbepainfultosaygoodbyetoacompanyyou’vetakenthetimetogettoknow,butsometimesyoujusthaveto.Andherearesomesituationswherethatmakessense.
First,youwill,fromtimetotime,comeacrossbetteropportunities.Yourgoalasaninvestoristohaveeachandeverydollarmaximizedand
investedinthebestpossibleplace.Ifthatmeanssellingacurrentholding,evenforaloss,tomakethathappen,youjusthavetodoit.Sometimesyouneedtofreeupmoneyforabetteropportunity,andsellingsomethingyoucurrentlyowntoraisethecashtodosoisyourbestoption.
EvenBuffetthashadtopartwithstockshelikestobe
abletoinvestinnewopportunities.Hedidthisin2009whenhesoldsharesofJohnson&JohnsonandProcter&GambletoraisemoneyforhishugeBurlingtonNorthernacquisition.6There’snoshameinthat.Yourresourcesarefinite,afterall,sodowhatyoumusttodeploythemefficiently.
Next,youmayneedto
considersellingthankstochangesatacompanyyou’veinvestedin.Unfortunately,there’sjustnowayaroundit:Businesseschange,andsometimessignificantly.Wecouldbetalkingaboutamajoracquisition,achangeinmanagement,ashiftinthecompetitivelandscape,orachangeinthecompany’sdirectionorfocus.Whenthishappens,incorporatethenew
informationandreevaluatetoseeifthereasonsyouboughtthecompanyinthefirstplacestillholdtrue.Rememberhowwetalkedearlieraboutwritingdownthereasonsyouboughtastockinthefirstplace?That’swherethisdocumentationwillcomeinhandyforyou.PulloutthatraggedyoldnotebookwithSpongeBobSquarePantsonthecovertohelpremind
yourselfwhyyouboughtthiscompany,andtoseeifthingshavechangeddramaticallyforit.
Whenyou’rethinkingaboutthecompany,considersellingif:
•Itsabilitytocrankoutprofitsisdamagedorclearlyfading.•Managementundergoessignificantchangesor
makesquestionabledecisions.•Anewcompetitivethreatemergesorcompetitorsperformbetterthanexpected.
Youshouldalsotakeintoaccountunfavorabledevelopmentsinacompany’sindustry.Hereit’simportanttodelineatebetweentemporaryandpermanent
changes.Inadownturn,thefinancialresultsofeventhebest-runcompaniesmaysuffer.What’simportantishowthesebusinessestakeadvantageoftheeffectsontheirindustrytoimprovetheircompetitiveposition.
Thethirdreasonyoumayconsidersellingastockisforvaluationreasons.Now,granted,we’reallforlong-termbuy-to-hold,but
sometimesMr.Marketjustshowsourstocktoomuchlove.(Ourstockisshyanddoesn’tlikeallthatattention!)Whenthathappens,considersellingifthestockpricehasrunuptoapointwhereitnolongerreflectstheunderlyingvalueofthebusiness.
Ourfourthreasonstartswithawhoops.Hey,everyonemakesmistakes,as
we’veseen—evenBuffett.Sometimes,you’lljustplainmisssomething.You’llgetsomethingwrong,you’llbetooexcitedabouttheheadyprospectsforthe“nextbigthing,”oryou’lljustgenerallyslipupinsomeotherway.Ithappens.Whenitdoes,youshouldseriouslyconsidersellingifitturnsoutyourrationaleforbuyingthestockwasflawed,ifyour
valuationwastoooptimistic,orifyouunderestimatedtherisks.
Thefinalreasontothinkaboutsellingastockiswhatit’sdoingtoyourabilitytosleepwellatnight.Wetalkedearlierabouthowmuchriskyou’recomfortabletakingon,andsometimesyoucanoverestimatethat.It’stoughtoputadollarvalueonyourpeaceofmind.Ifyouhavean
investmentwhosefatehasflippedthiswayandfloppedthatwaysuchthatitnowcausesyoutolosesleep,thatcouldbeagreatcuetomoveyourdollarselsewhere.Wesaveandinvesttoimproveourqualityoflife,afterall,nottodevelopulcers.Addinginsulttoinjury,stressingaboutastockmightcauseyoutolosefocusandmakerashdecisionselsewhereinyour
portfolio.Remember,there’snotrophyorprizefortakingonriskininvesting.Stickwithwhatyou’recomfywith.7
Keytakeaway:Sometimes,youjusthavetosellastockyou’vebought.That’sOK,solongasyou’redoingitfortherightreasons.
AWORLDOFMENAND
WOMEN,INVESTINGTOGETHER.
Finally,awordofadviceforallofusinvestors,menandwomenalike.Let’stakethischancetolearnfromoneanother.
Forwomen,youcanlearnfrommentotakeaction,ratherthanwaitingtostartinvesting.We’veallheardthestatistics,right?Womenoutlivemenby5–10years
andearnlessthanmendoduringtheirworkinglife,sotheyneedtobesavingmorefortheirretirement.Notonlyarewomenstartingoutfurtherbehind,butwe’vegottomakedowithless.Andourrisk-aversenaturecanmeanweoftendon’tinvestasaggressivelyasweneedto.Soitiscriticalthatmorewomentakecontroloftheirfinancialfuturesandstart
investingontheirown.Menaremorewillingtojumpinthanweare,andweneedtoremedythat.We’vejustseenthatwomenarewiredforinvestingsuccess,sotakeadvantageofthatfact!
Now,ofcourse,we’renotsayingyoushouldstartinvestingandbegintradinglikeamadwoman.Butyou’vegottomakethemovesnecessarytogetinthe
investinggame.Findingandopeningadiscountbrokerageaccountisn’tdifficult.Therearemanythatofferlowminimumbalancesandcheaptrades.YoucancheckoutFool.com’sBrokerCenterforcomparisontablesandlinkstothem.Onceyoufindoneyoulike,ittakesonlyminutesonlinetofillouttheforms.Honestly.You’venoexcusenottodoit.
Afteryouopenyouraccount,startbybuyingoneshareofastock.Yes,justone.Makeitsomethingyou’reinterestedin,acompanyyouknowwellandcanhavefunfollowing.Thinkaboutconsumerbrandsorretailcompanies,tostart.HandbagcompanyCoach,forinstance,hasbeenastellarperformer,eventhroughtherecentrecessionarytimes.Or
warehousestoregiantCostco,whichwediscussedearlier,isanoutstandingcompany.Therearetonsofexamplesallaroundyou.Findoneyoulike—anddoit.Takeaction.
Onceyoumakeyourmove,keepreadingeverythingyoucanaboutthecompany.Trackitsquarterlyresultsandbusinessperformance.Noticehowamazingitfeelstoowna
shareofabusiness.Itcan,andshould,befun!
Now,don’tstopwithone.Keepongoing.Buildyourportfolio.Followyourholdings.Remembertokeepthepropertemperament.Andsmile.Youareaninvestor.You’vetakenholdofyourfinancialfuture,andyoushouldbeproudofthat.
Now,mencanlearnsomethingfromwomen,too.
Aswe’vetalkedaboutthroughthisentirebook,themostimportantfactorinlong-terminvestingsuccessishavingtherighttemperament.Andmen,whiletheyarelikelytotakeaction,arethenlikelytotaketoomuchofit,andsabotagetheirverychances.Men,tradeless.Takelessrisk.Tonedownyouroverconfidence.It’saffectingyourdecision
makingandcouldpossiblyevenbecausingtroubleforthefinancialworldatlarge.Youmaynotbeabletoridyourselfoftestosterone,buttrytoovercomeitswin-at-any-costeffects.Themarketswingsandbingesofthepastwillhopefullybecomelesslikelyinthefuture,ifonlymencouldlearnalittlesomethingfromthefairersex.
Ladies,you’renotoffthe
hook,though.Youcan’tjustsitbackandrestonyourgoodtemperament’slaurels.You’vegottostartinvesting,andputtingyourexcellenttemperamentstoworkforyou.Afterall,whileWarrenBuffettmaynot,infact,beawoman,hedoesinvestlikeone,aswe’venowseen.You’vegotthenaturalinclinationtofollowinhisfootsteps.Andyoucanbuild
theskillstodoso.Don’twastethisopportunity.Oneday,perhapswe’llbereadingabookaboutyourinvestingprowessandyournamewillsitalongsidetheOracle’s.It’spossible,butnotuntilyoustartinvesting.Makethatdaytoday.
Appendices
AQuickGuideRecappingtheFemaleInvestor’sTemperamentandWhatBuffettCanTeachUs
InterviewwithValueInvestor
LisaO’DellRapuano,CFA,FounderofLaneFiveCapitalManagement
InterviewwithValueInvestorLaurenC.Templeton,FounderofLaurenTempletonCapitalManagement
InterviewwithValueInvestorsCandaceKingWeirandAmeliaWeirofParadigmCapitalManagement
InterviewwithValueInvestorBillMannoftheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmericaFund
FurtherReading:BooksforInvestorsofAllLevelsWhoWanttoLearnMore(CourtesyofMotleyFoolInsideValue)
TeachUs
Femaleinvestorstendto:
1.Tradelessthanmendo•Rememberyou’rebuyingapieceofanactualbusiness.
•Takethelongview.•Bepatient.
2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,whilewomenaremorelikelytoknowwhattheydon’tknow•Buffett’s“sphereofunderstanding”maybedifferentfromyourown.
•Thinkaboutandlearnwhatyourowncircleof
competencecovers.•Sticktoit,nomatterwhat.
3.Shunriskmorethanmaleinvestorsdo•Insistonanappropriatemarginofsafety.
•Avoiddebtasmuchaspossible.
•Staywithinyourcircleofcompetence.
•Doyourhomework
beforeinvestingoverseas.
4.Belessoptimistic,andthereforemorerealistic,thantheirmalecounterparts•Belevelheadedaboutyourinvestmentsandthemarketatlarge.Learnnottobeexcitedbymarketswingstotheupsideordevastatedby
marketdrops.•You’reinchargeofMr.Market.Don’tlethimbossyouaround.
•QuotingBuffett,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”
5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangle
anddetail,aswellasconsideringalternatepointsofview•Read,read,read.•Don’tforgetaboutyourcircleofcompetence.
•Avoidconfirmationbias—seekoutinformationthatcontradictsyourconclusions,notjustinformationthatreinforcesthem.
6.Bemoreimmunetopeerpressureandtendtomakedecisionsthesamewayregardlessofwho’swatching•Bewillingtobecontrarian,asuncomfortableasitmaybe.
•TakeBuffett’swordstoheart:“Begreedywhenothersarefearful,andfearfulwhenothersare
greedy.”•LivebyyourownInnerScorecard.
7.Learnfromtheirmistakes•You’regoingtomakemistakes.Wealldo.Sodon’tbeatyourselfupwhenyouslipup.
•Assesswhathappened.Didyoumisssomething?Ordidmarketconditions
change?•Thinkaboutwhatyoucanreasonablydodifferentlyinthefuture.Ifyouboughtstockinacompanyyoudidn’ttrulyunderstand,forexample,vownottodothatagain.
8.Havelesstestosteronethanmendo,makingthemlesswillingtotake
extremerisks,whichinturncouldleadtolessextrememarketcycles.Whilenotatraitofthe
femaleinvestingtemperament,theoutcomeofthisinvestingstyleisimportant.Therefore,rememberthatfemaleinvestorsproduceresultsthataremoreconsistentandpersistent.Andinthehedge
fundworld,female-managedhedgefundsoutperformcomparablemale-managedhedgefunds,andtheydon’tsufferfrommarketdropsasseverely.
•Ignoreanyonewhotellsyouthrowingdartsatanewspaperisthesameasintelligentanalysis.
•Agooddefenseisjustasvaluableasagood
offense.•Sticktoasystemthat’slogicalandworks,andyou,too,couldbuildalengthyandimpressivetrackrecord.
AndourthreeBuffett-centricprinciples:
1.Valueandcultivateyourrelationshipswithpeople•Abusinessisonlyas
strongasthepeoplerunningit.
•Readuponthemanagementofcompaniesyouareconsideringinvestingin.Lookforsmart,open,loyal,fairexecutivesyoucanadmire.
•Don’tbeafraidtoputpeoplebeforeprofit;Buffettisn’t.
2.Learnfromthemasters,butbewillingtoquestionthem•Thelearningneverstops,soevenafteryouthinkyou’vefiguredoutthebestwaytoinvest,keepstudying.
•Justbecausesomeone’sanacknowledgedinvestmentguruormasterdoesn’tmeanthereisn’tabetterway.
•Youaren’tcommittingblasphemywhenyouquestionanybody,WarrenBuffettincluded.
3.Befairandoperateinanethicalmanner•Youcanbegoodandberich;onedoesn’tprecludetheother.
•It’spossibletofindcompanieswhere
employees,shareholders,andcustomersallwin,andthosecanmakeforwinninginvestments.
•Lookforcompaniesthatcommunicateinanopen,honestway.You,asanowner,deservetobetreatedthisway.
FiveCapitalManagement
LisaRapuanofoundedLaneFiveCapitalManagementinJanuary2007,afteryearsspentatthelegendaryvalueshopLeggMasonCapitalManagement.BasedoutofTowson,Maryland,herfirm’s
sevencorevaluesevokeatrueBuffett-liketemperamentandoutlook.Wediscusssomeofthosevalues,andmuchmore,intheinterviewthatfollows,whichIconductedwithLisaonSeptember10,2010.Ithasbeenpublishedastranscribed.
TellmealittlebitaboutLaneFiveCapitalManagementandwhatyou
andyourteamareworkingtoachievethere.
LaneFiveisaninvestmentpartnership.We’restructuredasahedgefundbutwedon’treallyhedgemuch.Wehavethecapabilitytoshortandwedon’treallyshortmuch.WhatI’vetriedtodoiscreateafirmthathasthefreedomtodotruelong-termvalueinvesting.Whilethatsounds
silly,becauseisn’tthatwhatwe’realltryingtodo,I’vebeenthroughanumberofiterationsandit’shardtocreatetheinstitutionalfreedomtodoittherightway.Andthepressuretomanagetoanindexortonotholdcashortotradearoundeventsortomanagemonth-to-monthreturnsortonothavetrackingerrorisendless.It’sreallyhardtobuilda
businesswithoutplayingthatgame.I’mattempting,then,tocreateafirmthatcancarveoutalittlebitoffreedomawayfromsomeoftheseinstitutionalconstraintssothatwecanpracticeourcraft.That’swhythestructureofourfirmisthewaythatitis.
Thereareacoupleofotheritems,suchas,IpersonallydecidedatsomepointinmylifethatIdidn’t
wanttomanage$25billionwhenIgrewupandthattheprocessofassetgatheringandalsoofjustmeetingtheneedsofthatmuchmoneyandinvestingdirectlywiththatmuchmoneywasmorethanIcouldhandle.So,LaneFiveisasmallfirm.Wehavethecapacitytobemanytimesthesizethatweare,butevenifweweremanytimesthesizethatweare,wewouldstillbe
asmallfirm.Sothisideaofbeingasmallpartnershipissortofdesignedsothatwecanbesuccessfulwhilestillstayingsmallandinvestingtherightwaytoinvest.
Howdidyouendupasavalueinvestor?Didyouexploreotherinvestmentstylesbefore“seeingthelight”?
Ididn’treallythinkaboutthedefinitionofwhatIamuntilmycareerwaswellunderway.Theguywhofirsthiredme,hedidn’tevenhiremetobearesearchanalyst.ItwasthislittlefirmcalledFranklinStreetPartnersinChapelHill[NorthCarolina]andtheguywasBobEubanks.Iwasthethirdemployee.Hisfirmwasastart-upandhehiredmetowritethebrochure.Ialso
builtthecomputersystem—itwasastart-up,soIdidwhateverneededtobedone.Hehadaninterestingstyle.Therewasavaluecomponenttoitbutitwasmuchmorestorydriven,heusedalotofcharts,hecaredalotaboutgrowth.Hewaslookingforstocksthatgoup,basically.Thatwasmyfirstexposuretoinvesting.Overtime,Istarteddoingresearchforhim.
WhenIleftthereandstartedworkingforBillMiller[atLeggMason],thatwas1993.So,in1993,Billwasnotfamous,notwell-knownyet.IcameinthereandIlearnedfromBillamorevaluation-centricanddrivenpartofthesamewayoflookingatthings.Let’sdifferentiatevaluationfromvalue—valuationwasacentralpartofthestrategyat
FranklinStreetthatIlearnedfromBob.Itwasn’tsomuch,“Isitavaluestock?”Itwasmore,“Where’sittrading,whatisthevaluation,andwhereshoulditbe?”whichis,infact,valueinvestingbutitdoesn’tnecessarilygoaboutitthewaythat,“Let’slookatwhatGrahamandDodddid.Let’slookatwhatBuffettdoes.Let’sstructurethisphilosophicallyfromthe
bottomup.”Itapproacheditalittlebitdifferently.
Thenyoufast-forwardtotheBillyears,whichisreallywhereIbecameamorematureinvestor.Weweretotallygroundedinvaluation,butIdidn’tevenreadBenGrahamuntil1997.Sowhat’sinterestingaboutitisthatIdon’thavethatbackgroundofsomanyothervalueinvestors.
OneoftheguysIjusthiredjustcamefromColumbiaandBuffettandGrahamareeverything.Everything.Thebasisoftheuniverse.Icometosomeofthesameconclusionsandpracticesbutwithoutthemoralgrounding,IguessisthewayIwouldsayit.Forme,it’snot“ThisisthewaythatBuffettdoesit.ThisisthewaythatGrahamdidit.
ThisisthewaythatI’mgoingtodoit,damnit!”
Valuationwasreally,reallyimportantandwasthedrivingfactorofwhatwedidatLeggMasonbutouroutcomesandwhatweendedupdoingwereverydifferentthanwhatotherpeoplewhocalledthemselvesvalueinvestorsweredoing.JustlikeIdon’tspendalotoftimethinkingaboutwhat
animalwe’rein—bull,bear,duck,whatever—Idon’tspendalotoftimethinkingabout“I’mavalueinvestor.”ThevaluationisallthatmattersandIlearnedthatfromcominginfromadifferentdirection.Itdoesn’tmatterwhatitdoes,whoitis,whorunsit.Allthatmattersis,isitmispriced?Andtheonlywaytofigureoutifit’smispricedistousevaluation.
So,Icameatitalittlebackwards.
ThemostappropriateBuffettquotethatIlearnedafterwardsisthatallinvestingisvalueinvesting,because,bydefinition,nothingisgoingtogoupmorethanthemarketifit’snotmispricedattheinitialposition.
WarrenBuffett’sbeenquotedassaying
temperament—notintellect—isthemostimportantqualityaninvestorcanhave.Howdoyouthinkyourowntemperamenthasplayedintoyoursuccessasaninvestor?
Ithinkthere’sacouplethings.LetmestartbytalkingabouttheportfolioattributesI’vechosen.Youchoosetomanagemoneythewaythat
youthinkyoucanmakeadifference,thatfitsyourtemperamentandyourstyle.Iamverygoodatignoringnoise,theday-to-daystuffjustisn’timportant,andIwillgomonthswithouttrading.I’mnotsurehowpeoplewhotradeeverydayandarelookingatshort-termtrendsandoptimizingtradingstrategiesandthingslikethatsleepatnight.Forme,it’s
patience,it’slowactivity,it’sthoughtful,it’smovingmoredeliberately.Idon’tknowwhyIhavebeenparticularlygoodatdoingthat,butIdoknowthatit’sanadvantagethatIhaveoveralotofpeople.Ijustdon’tfeeltheneedto“dosomething”alotoftimes.
Now,Idon’tknowifthat’salearnedbehaviororaninherentbehavior.Ithink
it’sprobablyalittlebitofboth,becauseI’mnotthemellowestpersonintheworldwhojustsitsaroundand,youknow,listenstotheGratefulDead.I’mactuallyextraordinarilycompetitiveandI’malsoasprinter—notevenalong-distancerunner,whichwouldseemtomakemoresense.Butthatrequiresagreatdealofpatienceanddisciplineandwork,even
thoughyourraceisonlytwenty-threeorsometimestwenty-foursecondslong.SoIthinkthatit’ssimplythattome,thatisthebestwaytomanageyourownemotions,thatisthebestwaytoloweryournumberofmistakes,anditsimplymakessensetome.SoIcan’tsaythatthelow-activity,long-term-thinkingthingisapersonalitytraitbutIdefinitelyadopteditbecause
Ithinkit’stheonethatworks.Anotherthing,andIthink
thisisprobablymoretemperamentthanlearnedbehavior,IcarealotaboutfiguringoutsomethingandverylittleaboutwhatotherpeoplethinkandsoI’vealwaysbeenalittlebitunconventional.Sothatpieceofmypersonalityandthatpieceofmytemperamentissuitedtothelong-termvalue
investingway.OnceIfiguresomethingoutandIputsomethingtogetherandIhavealotofconfidenceIcanignorewhateveryoneelsehastosay—Idon’tignoreevidence—butIcanignorethenoiseandtheopinionsofpeopleandcontinuetobuildmyconfidence.That’snothardforme.That’ssomethingIfindtobeveryeasy.Thatcouldcomefrom
trainingasahistorymajor,lookingforlong-termtrendsandthreadsoftruth.
Buffetttalksaboutjudginghimselfstrictlybyaninnerscorecard,notanouter,meaninghedoesn’tcarewhatanyoneelsethinks.Isn’tithardattimestooperatethatway,though?
Whenyou’renotdoingwell,
intheshorterterm,whichcanhappentoanyone,sometimesit’sbecauseyou’remakingmistakes,sometimesit’sbecauseyou’renotapplyingyourprocesscorrectly,butsometimesyouareandyoustillaren’tdoingwell.Youhavetocombinethesetwothingsofbeingadaptive,open-minded,andbeingalearningmachinewithalsonotchangingyourstripesor
chasingthelatesttrend.It’sareallyfineline,areallydifficultlinetowalk.
There’salotofsuccessfulinvestorsofallstripesbutmyparticularstrengthandmyparticularadoptionoflong-termvalueisbecausetherearekindsofthingswhereIcanseeadifferentfuturethanotherpeoplesee.Icanhaveconfidenceinsomethingwherethemarketis
discountingcompleteuncertainty.There’sanevidence-basedpartofitandananalytical-basedpartofitbutthere’salsoatimehorizonpartofitwhereIwanttolookthroughandseehowthisisgoingtoshakeout.I’mgoingtolookathowlotsofotherthingshavehappenedinthepastandusemyabilitytolookfarandwidetodothatandIthink
thatpartcomesfromhavingthisdrivetounderstandthings,whetherthat’sfromreadinghistoryorunderstandingwhyscienceworks—Idon’tcare,whatevertoolIhavetousetofigureitout,Iwilluseit.Havingthissortofmultidisciplinaryviewpointabouttheworldhelpswiththat.
Whichinvestorshaveyouadmiredandlearnedfrom?Whatlessonshavetheytaughtyou?
IadmireandlearnfromanyonewhohasareallygoodrecordandItrytofigureouthowtheygotthere.I’llreadaninterviewwithanyoneandaskmyselfwhatdoIhaveincommonwiththispersonandwhatdoInot,andwhynotdo
itthatway?IusetheseasopportunitiestofigureouthowIcoulddosomethingbetterbutthereareobviouslysomepeopleIbondwithmorethanothers.It’sinteresting;they’renotnecessarilytheoneswhodoitjustlikeIdo.
Obviously,BillMillerismyhero.Hegavemethebuildingblockstobuildmycareer,andheandIwork
togethervery,verywell.AndwecreatedaprocesswhenIwasatLeggMasonfrom1993to2003thatIthinkwasexceptional.Ilearnedfromhimandhelearnedfromme,Ihope,alittlebit.Wehadaverywonderfultime.
BillistheonlyoneofthesepeopleIactuallyknow.AlltheseothersIdon’tknow.IreadwhattheydoandIlookandsay,“Partsofwhatthey
dohashelpedmedowhatIdobetter.”TheweirdestoneoftheseisBruceBerkowitz.Whenhetalks,it’slikeit’scomingoutofmymouthandyetweneverownthesamestocks,either.It’sjustwhenhetalksphilosophicallyIreallyfeelacamaraderiewithhim.
Ihavelearnedalotfromreadingtheonesthateverybodyreads,theSeth
KlarmansandtheBenGrahamsandtheWarrenBuffetts.AndItrytotakewhatthey’resayingandlearnfromthem,butwhat’sdifferentaboutmeisthatIdon’ttrytobetheseguys.Idon’ttakeeverythingtheysayasgospel.Becauseit’swhatsuitsthemandthat’swhythey’regood.Theyfoundwhatthey’regoodat.
Idon’tthinkyoucan
adoptsomeoneelse’sstyle.Idon’thaveaninvestingidol,someoneI’mtryingtobejustlike.Itrytolearnfromeachofthem,andIthinkhowamIdifferentfromthispersonandhowamIdifferentfromthisnextperson?
EvenifyoutalktoBillMiller,whoI’mstillveryclosewith,hewilltellyouallthethingsthatarewrongwithme,oneofwhichisthatI
havetoohighofanevidentiarythreshold,meaningIhavetodoalotmoreanalyticalgroundworkbeforeI’mcomfortablewithsomething.Ineedahigherdegreeofcertaintythanhedoes.ButifyoulookatmydegreeofcertaintythatIneed,it’sprobablymuch,muchlowerthanwhatBuffettneeds.OrwhatSethKlarmanneeds.
SoIreadthemallandIthinkthey’reallamazing.Someofmyfavoritepeopletoreadarealsotheoneswhoareoutoffavor.Itrytofindout,“Howdotheyreactintimesofadversity?”Alloftheseguyswhohaverecordsthatarereallygood,andbetterthanminerightnow,probably—theyallhavesomethingtoteachme.Itrytofigureoutwhichofthe
thingsthatthey’redoingareapplicabletomyskillset,mytemperament,myfirm,andmyteam.Andifitworks,Iwilltrytoadapttoincorporateit.
Ithinkthisisanimportantpoint,becauseaswetalkaboutinthebook,BuffettstartedoutaspureBenGraham,buthewouldbecomemorequalitative
andmorePhilFisher–likeovertheyears,thankslargelytoCharlieMunger’sinfluence.It’simportantforpeopletorealizethattheycanandshouldlearnfromtheestablishedmasters,buttheyshouldneverbeafraidtodothingstheirownway.
Right.Youcomefromadifferentsetofexperiences,youcomefromadifferent
generation,youhaveadifferenteducation,youhaveadifferentbrain,youhavedifferentparents.SowhatdrivesmecrazyispureBuffettworship.Sure,Buffett’sgreat,hehasagreatrecord,buthe’snotgoingtotellyoueverythingthat’sgoingoninhishead.Youcan’treplicateit,youcan’tcopycat.Thisbusinessiswaytoocompetitivetotrytobe
whatsomebodyelseisbeing.AsIsaidattheValueInvestingCongressoneyear,“IamnotWarrenBuffettandneitherareyou.”Sojustbecarefulnottotrytobesomeoneelse.Figureoutyourownplaceandjustbeyourself.
Inthelistofcorevaluesforyourfirm,LaneFiveCapitalManagement,you
list“Workwithbrilliantpeople.”WeknowBuffettalsovalueshisrelationships,whetherhe’sbuyinganentirecompanyandleavingthecurrentmanagementintact,orbuyingapieceofapubliccompanywithamanagementteamheadmires.Twoquestionsaboutthis,then—howdoyoudefine“brilliant”andhowdoyousuggestthe
averageinvestortrytoassessthemanagementofcompaniesheorshe’sinvestingin?
Therearethreekindsofdifferentpeopleyouworkwithinourbusiness.There’syourteam,thepeoplewhoworkforyouorworkwithyou.Thereareyourclients.Andthentherearethecompaniesyou’reinvestedin
andthepeoplethere.Wetrytoapplythatcorevaluetoallthree.
Idefine“brilliantpeople”inthefollowingway:Forthepeoplewhoworkformeorwithme,theotherpartnersinthefirm—theirbrilliancedoesn’thavetobethesameasmybrilliance.Thereisapureintellectualfirepowerissuethere.Themostimportantpieceiscuriosity
andhavingabroadrangeofinterests,andhavingafireinthebellytofigurestuffout,whetherit’scognitivepsychology,orthebestmechanismforwhereyouputyourhandwhenyoubringthefreethrowup,oreconomicsorpoliticalscienceorwhatever.Athrivingcuriosityisthesinglemostimportantpieceforme,becauseevenifthepersonhasafewpoints’
lowerIQ,ifthey’vegotthatthrivingcuriosity,they’llmakeupforit.Ilikevoraciousreaders.Ilikepeoplewhohavedonelotsofinterestingthings.
Backtotheunconventionalthing,Ireallydon’tlikepeoplewhohavehadacareerthatisjustwhattheytellyoutodo—IvyLeague,GoldmanSachsfortwoyears,businessschool,
trytogetajobatahedgefund.Thosepeopledon’tinterestme.Sothat’showIdefinebrilliance.AndthereasonthisisoneofourcorevaluesisthatIhaveastylethat’snotforeveryone,asaclient,either.Sowhathappensisthatthere’saself-selectionmechanismforthepeoplewhoaremylimitedpartners—mypartnersinmyfundversusmypartnersin
myfirm.TheytendtobepeoplewhoIenjoytalkingto,also.Ican’ttellyouhowamazingthatistohavehappen.
Andthenthere’sthemanagementpiece.Ibendtherulesalittlebitherebecausebrilliancehaslotsofdifferentwaysofmanifestingitself.Infact,I’vefoundthatjustbecausesomebody’sareallysmartguyorgirl,thatdoesn’t
meanthey’reagreatmanagerofacompany.SowhatI’massessingonthatsideisalmostalwaysjustwhethertheyareverygoodatcapitalallocation.That’snotjustwhetherornotyoubuybackstockorwhatkindofdebtyouuse.That’salsowhatR&Dyoufund,howyouchoosetogrow,doyouunderstandearningexcessreturnsinyourbusiness,and
doyouunderstandwhenit’sappropriatenottoinvest.SoIjudgethequalityofmanagementalmostexclusivelyonwhethertheygetthatcapitalallocationpieceofthepie.
Itrytojudgethatfirstwithoutmeetingthem,becauseasmoothpersoncanreallymessyouupalittlebit.IfI’minvestinginacompanythat’snotnecessarilya
turnaround,that’smorejustanongoingbusiness,whereIcanlookattherecordandmakeareasonableassessmentofit,Itrytojudgeitmathematically.Whathavetheydone?Havetheyboughtbackstockwhenitmadesense?Havetheyleveredupwhenitmadesense?Havetheiracquisitionsbeenvalue-added?Havetheyimprovedreturnsoncapital?Arethey
goodatthat?That’sasignificantmeasureastowhetherthat’sgoodmanagementornot.
Thenthere’stheoneswhereyouhavetoask,“Aretheygoingtogetit?”That’samuchmoredifficultassessmenttomake.Thenyou’rerelyingonhumanjudgment,whichistheleastreliableofthetoolsthatwehave.Ialsohavealotof
stupidrulesaboutcertaintypesofmanagersIjustdon’twantanythingtodowith.They’rethingslike,“Whatistheirbehaviorlike?Aretheyreallypromotional?Dotheyseemtobetoogearedupongrowth?Aretheytooslickaroundtheedges?Aretheytoosalesyonthewholething?”Youknow,basicquestionsaboutintegrity.Iprefersortofboringpeople
whoarelow-key,down-to-earth,andinterestedindoingtherightthingratherthanconvincingmethatthey’rethegreatestthingsinceslicedbread.
Foranaverageinvestor,theycandothemathematicalthingthatIdo,whichislookattheirhistoryofcapitalallocation.That’ssomethingthatanyonecando,becauseyoujustneedthe10-Kstodo
that.Buttheobjectivejudgmentofamanagementteamismuchtougher.Youcan’treallytellfromseeingaguyonCNBCifyoucantrusthimornot.
Youcanlearnalotfromtheconferencecalls,though.Youcanlearnalotfromhowtheyanswerthequestions,whethertheyanswerthemstraightforwardly,andhowtheyframetheiranswers,
whetherthey’reaggressiveorconciliatory.Butyouarealittlebitoutofluck,asanindividual,nothavingaccessnecessarilytothem.Andfrankly,evenasasmallfirm,Idon’talwayshaveaccesstoCEOsandCFOs.IusuallyhavetowinmywayintotheirheartsbyprovingthatI’vedonealltheworkandthatoftentakesalongperiodoftime.EventuallyIgetin.
Sometimesittakesalotofphonecalls,though,askingquestionsthattheIRpersoncan’tanswertodemonstratemyinterestandmyintegrityandtheworkthatwe’vedonebeforefinallygettingtheCEOortheCFOtopayattention.
Everyonceinawhile,youcomeacrossamanagementteamthatjustgetsit.Forexample,whenEd
BreentookoverTycoin2002thecompanyatthattimewasadisaster.Hewouldjustgetonthecall,andthisisaverycomplicatedcompany,andhewouldtalkaboutitintermsthatweresimplebutnotsimplistic.Henarroweditdowntothekeyelements.You’dgetoffhisconferencecallsandthink,“Youknow,it’sjustnotthathard.Whydoothercompanieshaveto
makeitsohard?”You’dwonder,“Howcomethisguygetsit?”andthenyou’dlistentoanothercall,wheremaybetheylistentoWallStreettoomuch,maybetheydon’tunderstandtheirconstituents,theythinktheyhavetochangetheirstory.You’djustcomeoffandthink,“Hedoesn’tgetit.Hedoesn’tgethowtodrivethisparticularbusinessandhowto
communicateittoWallStreetinasimplemanner.Orhe’sjusttryingtotelluswhatwewanttohear.”
Ithinkanybodycanlistentoconferencecallsanddetermine,“DoesthispersonsoundliketheyreallyunderstandtheirbusinessandifIworkedforhimwouldIdowhathesays?WouldIbeexcitedandonboard?”There’sjustayesorno.Does
themanagementgetitordoesthemanagementnotgetit?Believeitornot,therearemorecompanieswherethemanagementdoesn’tgetitthantherearewheretheydo.
Anotherofyourfirm’scorevaluesis“Learnandreadwidely.”ThisisalsosomethingthatBuffett’slegendaryfor,asishispartnerCharlieMunger.
Whydoyouthinkthisisimportant?
Itmattersbecausetheworldiscomplexandtheworldisadaptive.Idon’tknowwhythisis,Idon’thaveatheologicalorepistemologicalfoundationforthis,butithascometomyattentiontimeandtimeagainthattherearepatternsintheworldthatrepeatacross
seeminglyunrelatedsystems.Sotherearethingsaboutthemarketsthatappeartometobeverysimilartothewaythatbiologicalsystemswork.Orthereareanalogies,therearerecurringpatternsthataresimilar,andwesureknowalotmoreaboutbiologicalsystemsthanwedoaboutthemarkets,andsoifIcanstudybiologicalsystemsandtheycangivemeanylittleinsight
intohowthisworks,that’shelpful.Andit’sreallyindirect,soIdon’twanttomakeitsoundlike,“Well,IstudynervesystemsandIfigureoutthatthisworksthatway.”It’sreallyveryindirectandveryamorphous.
There’salsotheelementofhistoricalpatterns,notjustsystems,butevents,suchasthewaythatwarshappen,thewaythatculturesevolve,the
waythatdemographicshaveaffectedcountries,thewaythatnaturaleventshaveaffectedcountries—again,amorphous,indirect,buttheyprovidegreaterconnectionsinyourbrain,yourbrainbecomesmorerobust,andthepatternrecognitionmachinebecomesbetter.Youmakeconnectionsthatotherpeoplemightnotmake.That’sataverybroadlevel.
Atamorepracticallevel,acuriouspersonismorelikelytouncoverthepieceofinformationthatwillbetheevidenceyouneedtohavehigherconfidencethanthenextguythatisnotcuriousenoughtoberesourceful.Youknow,someonewho’sbasicallylike,“Igetthis.Iunderstandhowthisworks.Idon’tneedtothinkaboutitallthatmuch.”Whereas
someonelikeme,orthepeoplewhoworkforme,arealwaysasking,“HowelsecanIthinkofthat?WhatamImissing?Whatelseishappening?WhatelsecouldIdo?HowelsecouldIturnthisonitshead?WhatelsecouldIresearchtofigureoutifthisisrightornot?”
Now,youhavetobecarefulwiththat,becauseyoucouldworkononething12
hoursadayfortherestofyourlifeandstillnothave100percentinformation.Butit’sthedrivetobecurious,andthepersonwhonaturallywantstolearnandreadwidelyismorelikelytobeabetteranalyst.Then,secondly,theactofreadingwidelyandbroadlyprovidesyouwithamorerobustsetofpatternsandconnectionsandnetworksthat,atthemargin,I
thinkhelpyouunderstandhowtheworldworks.
Whatdoyoureadeveryday?
Well,everydayislessimportantthanovertime,buteverydayyoudohavetodoyourdefensivereading.Youhavetokeepupwithwhat’sgoingon,andreadthebusinessnews,whichis
annoying,butyouhaveto.Thatismoredefensivethanoffensive.
There’sacoupleofbigcategoriesofthings,solet’slookatmykindofreadingschedule.Numberone,IalwayskeeproomforreadingnovelsandIknowthatmightsoundlikeagirlythingtosay.I’lllettheboysallreadhistoryandbiographies—IknowthatbecauseIjust
interviewedfivehundredpeople,andeveryboy,whenyouaskthemwhattheyliketoread,theyallsay,“biographies.”Ikeeproomfornovels,though,becauseIthinknovelsareinsightsintohumanpsychologyandIenjoythemandtheyhelpyougetoffyour10-Ksand10-Qs.I’mverywaryofpeoplewhosayIdon’thavetimetoreadnovelsbecauseIhaveso
many10-Kstoread.Outsideofthat,thereare
threecategories.Firstisscience.IbelongtotheSantaFeInstitute,whichissomethingthatBill[Miller]introducedmeto.It’sforthestudyofcomplexadaptivesystemsandIreally,reallyloveit.Idon’tunderstand80percentofit,butIloveit.Andit’s,again,sortofindirectandamorphous—you
letitwashoveryouandoccasionallysomethingcomesoutwhereyougo,“Ohmygosh,Iunderstandnowhowthisworks.”SoIenjoyreadingaboutscience.It’llvary—I’llgothroughanevolutionperiod,I’llgothroughapsychologyperiod,Iwentthroughabigbrainperiodlastyear.Climatestuffisreallyfascinatingtome,too.
Anothercategoryisstrategicorcompetitive—thesearemorebusinessbooks,buttheymightnotbe100percentaboutbusiness.Theymightbeaboutdifferentcompetitivewaysoflookingattheworld.Itmightberereading[Michael]Porter’sCompetitiveStrategy.Itmightbereadinganybooksabouthowindustriesdevelopandhowtothinkabout
competitivepositioning.That’salsoreadingMichaelEisner’sbook,orreadingDisneyWar,orreadingGoodtoGreat,orRogerLowenstein’sbooks—thosesortsofbooks,whereyoudon’talwayshavetoreadthewholething,buttheycangiveyouinsightintohowabusinessworksandthey’rereallyhelpful.Then,I’lldoalotofbehavioralfinancestuff
—thatmightnotbebooksasmuchaspapers,goingbackandreviewingsomeofthestuffthatAndrewLoisdoingorthosekindsofthings.
Whataresomeofyourfavoritebooksoninvestingorbusiness?
LetmetellyouthebooksthatIreread.TheonesthatIreadoverandoveragainarePeter
Bernstein’sCapitalIdeas,thefirstsixorsevenchaptersofRobertRubin’suncertaintybook(youcanstoponceyougettothepartaboutLatinAmerica—I’mtalkingaboutwherehelaysoutprobabilisticthinkinginthebeginning),theJesseLivermorebook,EducationofaSpeculator,Moneyball.I’vereadamillionotherbooks,butIdon’tgoback
andrereadSecurityAnalysis.IactuallywouldgobackandreadTheIntelligentInvestormorethanIwouldSecurityAnalysis.ThosearetheonesIreread.TheonesIremindmyself,maybenoteveryyear,butmaybeeveryotheryearorso,justtoremindyourselfwhyyoudowhatyoudo.
What’sbeenyourbiggest
mistakeasaninvestor?Whatdidyoulearnfromit?
IhavemadesomanymistakesIhaveahardtimepickingone.ButIcantellyouthattheyare,essentially,allthesamemistake.First,therearetwothingsyouneedtodifferentiateinourbusiness:There’sbeingwrong,andthere’smakingmistakes.Theyarenotthe
samething.Ireallyfocusonprocessversusoutcome.
Beingwrongiswhenyouappliedtheprocesscorrectly,andtheoutcomewasbad.Youlookbackandyousay,“OK,well,basedontheinformationIhadatthetime,wouldIhavemadethesamedecision?”Ifyoudeterminethatyouappliedyourprocesscorrectlyandthatyoudidthebestyoucouldandyoujust
madethewrongdecisionwiththerightprocess,fine.Acceptitandmoveon.
Theonesthatarebadoutcomesbecauseofbadprocess—orsometimesyoucanevenhavegoodoutcomeswithbadprocess,butwe’llfocusonthebadoutcomesandbadprocess—thosearetheonesyouhavetoreallyworryabout.
Here’sarecentexample
ofthat.I’vemadeothers,butI’llgiveyouarecentone.Ilostalotofmoneyin2008inalotofthings,buttheonethatdrivesmebananaswasinvestingintheRenaultstub—youknow,thecar.Ouranalysiswasactuallygood.It’snotliketherewasanythingaboutRenaultthatwedidn’tknoworunderstand,thatwedidn’tget.Thiswasatradewhere
youbuyRenaultandthenyoushortVolvoandNissanagainstitbecausetheyowned44percentofNissanand20percentofVolvoTruck,soyoucouldbasicallycreateRenault’scorebusinessforfree.Sothen2008happened,theeconomytankedandobviouslycarcompanieswoulddoparticularlybadlyatthatparticularmomentsoweendeduplosingalotof
moneybecausenotonlydiditgodown,butRenaultwentdownmorethanNissanandVolvo.Soastubthatwastradingforzerowentintomassivenegativetrading.Sofine,it’sanunderstandablemistake—howcouldyouhaveknowntheeconomywasgoingtofallapart?I’mnotbeatingmyselfupoverthatpart.
ThetwothingsIdidin
thatmistakethatabsolutelydrivemetodistractionare,No.1,Inormallysavemyselffrommassiveerrorslikebankruptcyandthingslikethatbyavoidingbusinesseslikecarbusinesses.Iwilldoturnarounds,Iwilldomessythings,butIdon’tusuallydothat.AsIlookbackonit,Ithinkprobablybecausethingsthatappearedcheaptomeatthatpointwerefewandfar
between,atthebeginningof’08,Ioverdiditonthisone.Iputwaytoomuchofmyportfolioinitbecauseitwassocheapanditwassoeasilyexplainable.Soitwasputtingtoomuchinit,inabusinessthatwasn’tagoodbusiness,sowhenyouarewrongyoudon’tgetsavedbythegoodnessofthebusiness.
Andhere’stheadditionallesson—probablytheone
that’sgoingtobetheeasiestnevertorepeatagain—Igotsomuchpositivefeedbackonthisone.Everyonesaiditwasbrilliant.IpresenteditattheValueInvestingCongressandthewholeworldwaslike,“OhmyGod,that’sthebestidea.”I’dtalkaboutitinclientmeetingsandthey’dbelike,“Ohit’ssogreat.It’ssowonderful.You’regoingtomakealotofmoneyonthis.”
Itwastooeasybyhalf.Lettingyourconfidence
beaffectedbyotherpeople’sreactiontoitshouldhavebeenagiantredflagbecausenormallywhenIinvestinsomething,especiallyatthebeginning,notafteritstartsworking,everyonethinksI’mwrong.Nooneevertellsmehowgreatitis.
There’salotoflittlelessonsinthere,butthebig
oneIthinkisthatexternalreinforcementoftheideadoesn’tmakeitbetter.AndthereforeIprobablydidn’trecognizetheimperfectionsofit.Igotoverconfident.Andwejustdidterribly.Itwasawful.Evenifithadn’tbeengoinginto2008—solet’stakethatpieceoutofit,whichisawhole’nothercanofworms—[therewas]theoverconfidenceinabad
businessandtoolargeaposition.Partofourprocessisavoidingthethingswhereifyou’rewrong,thebusinessdoesn’thelpyou,andactuallyhurtsyou.Thenatureofthebusinessitselfhurtsyou.Itwasjuststupid.
Youmentionedlookingaroundandnotfindinganyreadybargainsatthetimeyoudidthis.Doyoufeellike
youloweredyourstandards?
Yes,totally.Thelessonis“Whenthere’snothingelsetoinvestin,don’tinvestinanything.”
Whatlessons,ifany,didyoulearnfromthemarketmeltdowninthefallof2008?Haveyouchangedanythingaboutyour
investingstyleorapproachsincethen?
Yesandno.Wehadaterrible2008.Wegotcaughtlikeeveryoneelse.Westartedgoinglongwaytooearly.IstartedgettingmoreaggressiverightbeforeLehmanwentdown.There’sagoodlessonthereaboutpatience.Valuationsaren’tnecessarilyfleeting.You
don’talwayshavetobebuyingaggressivelyintodips.Youcanbealittlebitmorepatient.That’sprobablyalessonthatallvalueinvestorshavetolearnoverandoveragain.That’ssortofaself-reinforcingthing.
Butfroma“changing”perspective,I’malwaysalittleearly.WhensomethingreachesapricethatIthinkisagoodpriceIwillstart
buyingitandthemarketmightdecidetoofferitatanevenbetterpriceforarelativelylongperiodoftimebeforeitstartstobottomout.SoIjusthavetoacceptthatthat’spartofourprocess,andIcan’thelpit.That’sjustpartofinvesting.TherearetimesI’velookedatandsaid,“Well,Ishouldn’thavebeensoearly.Ishouldn’thavegotteninsofast.”Butatthe
sametime,that’salsopartofwhereoursuccesseshavecomefrom,soIcan’tjusteliminatethatwithouteliminatingsomeofourmajorsuccessesovertime.WhereIcandobetterisonwhatI’malreadyholdingwhenthingsstarttofallapart.Oneofthedangersthatlong-termvalueinvestorslikemehaveisthatwewilllookthroughdivots,and
differentiatingbetweendivotsandgiantblackholesisprobablysomethingthatIcouldbebetterat.
Weknewhowbadthebusinesseswouldget.Wedidn’treacttoitatall.Therearesomebusinesses,again,thatareterrificandyoudon’twanttoreactbutthereareotherbusinessesthatarenotasgoodandyouprobablyoughttoreact.We’vebeen
muchmoreconsciousofdescribingourbusinesseswhenwe’rebuyingthemupfrontastowhetherthesearethingsyou’regoingtoholdthroughthickandthinoraretheythingswhere,shouldyoustarttoseeevidenceofdeterioration,youneedtobealittlemoreaggressiveaboutselling.Oralsowhentheygetclosertofairvalue,bemoreaggressiveaboutselling.
Butwewentbackandwelookedateverythingwedidwrongandalotmoreofitwasexecutionthanprocess.Sowedidn’tchangeourprocessmuch.Weaddedsomesafetymeasures.Wetriedtoaddsomebetteranalysisofdownside,butwhenyouhavetradingdownside,ormark-to-marketdownside,it’sdifferentthanwhenyouhavebusiness
downside.Sowhenwelookedatit,wesaid,“Someofthethingsthatcausedustolosemoneyin2008willhappentousagain,andohwell.”Andthereweresomeotherthingsthatwethinkwe’llbeabletobemorecognizantof,likedeteriorationinthebusinessesthatarereallynotthekindsofbusinessesthatyouwanttoholdthroughanysortof
downturn.Iknow2008wasbadand
Idon’twanttosoundcavalieraboutit,butI’mactuallyprettyhappythatwedidn’tchangetoomuch.I’veseenalotofpeoplethatchangedeverythingtheydidandwerereactiveandthat’sreallybad.Soyes,welearnedsomethingsandyes,wechangedsomeapplicationsofourprocessandwetriedto
emphasizethethingsthatmighthavehelpedusdobetter,butphilosophicallythecoreisstillthesame.Wedidn’tsuddenlydecidewe’regoingtobefullyhedged.Wedidn’tsuddenlydecidewe’regoingtobemacrotraders.Wedidn’tsuddenlydecidetogoshort.Wesaid,“Wemadeaveryconsciousdecisiontodoitthiswayandthat’sbecausethat’swhatwethink
worksforthelongtermandIstillbelievethat.”
Ifyouhadonepieceofadvicetopassalongtobeginninginvestors,whatwoulditbe?
Don’twatchCNBC.That’ssortofflip,buttherealmessageis“Youhavetofindyourownstrategy.”Youcan’tcopyorreacttoother
people.It’saveryself-analyticalprocess.Focusonwhatyoudowellandwhatyourskillsetisanddon’tworryaboutwhateverybodyelseisdoing.
LaurenTempletonCapital
Management
Aswelearnedinthethirdchapterofthisbook,LaurenTempleton’sbeeninvestingsinceshewasjustalittlegirl.
Giventhatsheisthegreat-nieceofSirJohnTempleton,valueinvestingquiteliterallyrunsinherblood.Herfirm,LaurenTempletonCapitalManagement,isbasedoutofChattanooga,Tennessee.IconductedthisinterviewwithLaurenonSeptember22,2010,anditispublishedastranscribed.
Tellmealittlebitabout
LaurenTempletonCapitalManagement.Howisthefirmstructuredandwhatareyoutryingtoachieve?
We’reanassetmanagementfirm.Wewerefoundedin2001.Thefirmis100percentownedbyme,soit’safemale-ownedfirm.Webeganwithonehedgefundproductbutwe’vesincealsomovedintothelong-only
separatelymanagedaccountbusiness.Weareavalueinvestingboutiquefocusedexclusivelyonglobalbargainhunting.And,naturally,we’retryingtobuildwealthforourinvestorsandcompoundtheirmoneyatthehighestratepossibleinthemarketgivenanacceptablelevelofrisk.
Howdidyouendupasa
valueinvestor?Didyouexploreotherinvestmentstylesbefore“seeingthelight”?
Well,asyoumightimagine,becauseIgrewupintheTempletonfamilywearereallyafamilyofvalueinvestors.IstartedbuyingstockswhenIwassevenoreightyearsold.Mydadwouldallowmetobuyone
shareamonthofanystockIwanted.Hewouldbuyitforme.Andthenhewouldtakethestockcertificate,becauseatthetimetheymailedyouanactualcertificate,andhewouldmatandframethestockcertificateandhangitonthewallsofmyroom.SowhenIwasachild,myroomwasliterallywallpaperedwithstockcertificates.
Atfirst,likeanychild
would,Iboughtveryfamiliarcompanies—likeDisney,Wal-Mart,theGap.Ireallydidn’tpayanyattentiontovaluation.Butitwasveryimportanttohavethesestockcertificateshangingonthewallsofmyroombecauseallofasudden,Ireallydid,asachild,thinkofmyselfasanownerofoneofthesecompanies.Icanremembertellingfriendsonthe
playgroundthat,yes,IdidownpartofDisney.Andtheycouldn’tbelieveit.
ButitwasthatapproachtolookingatinvestingthroughtheeyesofabusinessownerIthinkthatnaturallyguidesinvestorsintovalueinvesting.Tome,valueinvestingisalifestyle.Ineveryotherareaofmylife,Iseektofindthebestbargaininrelationtosomething’s
value—whetherI’mbuyingacarorahouse,andwhywouldn’tIdothesameinthestockmarket?Ijustgrewupthatway.Myfamilywasverythrifty.Mydadwasverythrifty.Heownedalocalhardwarestoreandheandmymomsaved50percentofeverythingtheyevermade.UncleJohn[Templeton]sayshedidthesamething.Ofcourse,theyweresavingfor
theopportunitytogooutandbuysharesofbusinessesthatwerelistedonthestockexchange.Ifyou’rebuyingapartofabusiness,youwanttogetthebestbangforyourbuckandgowhereyoufindthebestvalue.
SoIwouldsayI’vealwaysbeenavalueinvestor.Now,ofcourse,I’vereadaboutandstudiedotherinvestmentstylesbutnoneof
themseemedtoresonatewithme.Ithinkthatvalueinvestingisinvestinginthestockmarket.Manyoftheotherstylesandstrategiesappeartometobemorespeculative.Idon’tapproachthestockmarketasacasino.Idon’tgambleinthestockmarket.Iinvestinbusinesses.
WarrenBuffett’sbeenquotedassaying
temperament—notintellect—isthemostimportantqualityaninvestorcanhave.Howdoyouthinkyourowntemperamenthasplayedintoyoursuccessasaninvestor?
Icompletelyagreewithhim,firstofall—itistemperamentandnotintellect.Ithinksomepeoplearebornwithanaturalabilitytobebetterinvestors
thanotherpeople.However,Ithinkallinvestorscanimprove[theirtemperaments].Ithinkwhatmakesagoodinvestoristheabilitytocontrolyouremotionsandsomepeoplearejustbetteratthatthanotherpeople,andthereareahostofreasonswhy.Therearesomanycoolresearchprojectsoutrightnowinthefieldofneurosciencelooking
attheroleofhormonesliketestosteroneandestrogenandneurotransmitterslikeoxytocinthatreallyaffectourdecision-makingprocessandmightcontributetoaninvestor’sabilitytocontrolhisorheremotions.SomepeoplearejustnaturallybetteratthatbutIalsothinkthateverybodycanlearntobebetteratcontrollingtheiremotionsandatleastbe
cognizantofhumanbehavior.Ithinkthatinvestorswho
cancontroltheiremotionsaregoingtohavebetterreturns.WarrenBuffett’sgreatatdoingthat.Andinmanyways,hedoesinvestlikeawoman.Hedoeshisresearch,he’scool,calm,andcollected.Alotofmengetonatestosteronehighandtakeriskierandriskierbets.IthinkWarrenBuffettisastudentof
humannatureandhecancontrolhisemotionsmuchbetterthantheaverageperson.
Bystudyingandreadingabouthumanbehavior,youcanimplementsometoolstohelpyourinvestingstrategy.Forinstance,UncleJohnalwayskeptawishlistofsecuritiesinhisdeskdrawer,andoftentimes,hewouldhavegood-til-cancelledlimit
ordersoutonthesesecuritiesatwellbelowmarketprices.Let’ssay30percentbelowthemarket.Sowhenthemarketwouldfallinvalueortherewouldbeamajorcorrectioninthestockpriceandheknewthathumannaturewouldmakeitscarytostepinandbuy,becausethetradeswerealreadyoutthere,it’skindofforcingyourselftodowhatyoushoulddoand
buyagoodcompanywhenthestockgoesonsale.
IthinkmytemperamenthashelpedmebecauseI’maverygoodstudentofhumannature.I’mverycognizantofmybiasesandIspendalotoftimethinkingabouthowtocompensateforthem,whetherthat’shavinglimitordersinoncertainsecuritieswellbelowthemarketordifferentrulesorprocedures
wehavehereatthefirmtoassistmewhenIknowI’mgoingtobeinastressfulsituation.IalsothinkthatItakemoreriskthanmostwomendo.SoIthinkthathashelpedmeinmyinvestmentcareer.
Yourinvestmentfirm,andthebookyouandyourhusbandwrote,arebasedontheinvestmentstyleof
yourgreat-uncleSirJohnTempleton,whowasarenownedvalueinvestorhimself.InwhatwaysishisstyleofinvestingdistinctfromBuffett’s?
BothUncleJohnandWarrenBuffettstudiedunderBenjaminGraham.Sothey’rebothgoingtohavethatasacommondenominatorintheirinvestmentstrategies.Butthe
majordifferencebetweenSirJohnandWarrenBuffettisthefactthatSirJohnpioneeredglobalinvesting.Sohe’sknownasaglobalinvestor,andalthoughWarrenBuffetthasrecentlymadesomepurchasesoutsideoftheUnitedStates,he’slargelyknownasaU.S.investor.IthinkthatUncleJohnhadacompetitiveadvantageoverWarren
Buffettinthathehadalargeruniverseofstockstostudytofindbargainopportunities.
Letmegiveyouanexampleofwhyalargeruniverseofstocksisimportant.UncleJohnwasinvestinginJapanintheearly1960satP/Eratiosof4x.SohewasveryearlyintoJapan.U.S.investorsstartedbuyingintoJapaninthe1980s.Ofcoursebythatpointstocks
wereovervaluedinJapan,therewasahugebubbleinJapan,headedtowardabigstockmarketcrash.UncleJohnwasalreadyoutofJapanbythattime.He’dmoved60percentofhisassetsintotheUnitedStates,around1981,1982.Atthesametime,BusinessWeekwasproclaimingthe“DeathofEquities”intheUnitedStates.
Sobecausehehada
largerinventoryofstocksandtheabilitytoinvestinanycountry,hecouldmovefromJapanwhenJapanwasgettingoverheatedtotheUnitedStateswhenstockvaluationswereverydepressed.AndhewascapableofavoidingJapan’sbubble.Ithinkitjustmakesmoresensetoincreaseyourinventoryoruniverseofstocksbylookingoverseas.
IthinkthatWarren
Buffett’sgeniusisinhisinvestmentvehicle.ThewayhestructuredBerkshireHathawayissosmart.UncleJohnmanagedamutualfund,andmanagingamutualfundisverydifficultbecausethetendencyofaninvestoristowithdrawcapitalattheworsttime.Sothemutualfundmanagerhastoprepareforcapitaloutflowswhenstocksarecheapandinflowswhen
stocksareexpensive.
WeknowBuffettconsidersmanagementveryimportantandvalueshisrelationshipswithpeople,whetherhe’sbuyinganentirecompanyandleavingthecurrentmanagementintact,orbuyingapieceofapubliccompanywithamanagementteamheadmires.Twoquestions,
then:Doyousharethistraitwithhim?And,ifso,howdoyousuggesttheaverageinvestortrytoassessthemanagementofcompaniesheorshe’sinvestingin?
WedosharethattraitwithWarrenBuffett.However,weassessacompany’smanagementabilitybasedonthenumbers.So,studyingtheirfinancialstatements,
we’relookingforcompaniesthataregrowingfasterthantheirindustry,havehigheroperatingmarginsthantheirindustry,andhigherreturnsoncapital.Ofcourse,whenwestudythecompany,we’restudyingtheircompensationstructure,we’relookingataccountingtechniquestoseeifthey’rebeingtooaggressivewiththeiraccounting.Alargepartof
thatissimplythatwe’reasmallerfirmandwecan’taffordtogovisiteverysingleoneofthemanagementteams,butwedospeaktothemallbeforeweinvest.Wegetthebestinformation,though,fromtheircompetitors.Butyes,Ithinkmanagementisextremelyimportant,butwejudgethatthroughastudyoftheirfinancialstatements.
Youknow,evenWarrenBuffettsaid,“Youshouldinvestinabusinessevenafoolcanrunbecausesomedayafoolwill.”Also,eventhoughWarrenBuffettplacesahugedegreeofimportanceonmanagement,healsolooksatcompetitiveadvantage,economicmoat,forinstance.Ithinktheaverageinvestorshouldlookforcompaniesthataregrowingfasterthan
theirindustry,havehigheroperatingmarginsthantheirindustry,andhigherreturnsoncapitalthantheirindustry.Andiftheyfindacompanythathasthosethreequalities,they’velocatedagoodmanagementteam.
Buffettislegendaryfortheamountofreadinghedoesandinformationheconsumes.Whatdoyou
readonaregularbasis?Whatareyourfavoritebooksoninvesting?
Onadailybasis,IreadtheWallStreetJournal.WealwayshavetheEconomistlyingaround,alloverourhouse,differenteditionsofit,becauseittakesalongtimetoreaditsoImaystillbeworkingonaneditionfrombackinJulymonthslater.On
theweekends,wegetBarron’s.
WhenIwasayoungperson,oneofthefirstbooksIreadoninvestingwas[James]O’Shaughnessy’sWhatWorksonWallStreetandIreallylikethatbook.AndIreadPeterLynch’sbooksandIenjoyedthose.Forsomeonewho’smoreseriousaboutinvesting,IthinkTheIntelligentInvestor
andSecurityAnalysisbyBenjaminGrahamaremust-reads.CommonStocksandUncommonProfitsbyPhilipFisherisareallygoodbook.Likeeveryone,we’realsoreadingatonofdataonline.WehaveanonlinereportthatcomesoutonaquarterlybasiscalledtheMaximumPessimismReportthatweprofileourcontrarianinvestmentstrategiesinand
that’sbeenreallywellreceived.ButIlovetoreadothervaluemanagers’newsletters.IliketoreadthequarterlyreportsfrommutualfundsthatIown.Really,anytimethatIcangetmyhandsonanothermanager’slettersorinformationthatIrespectandagreewiththeirstrategy,that’sveryhelpfultome.
Buffett’sknownforstayingwellwithinhiscircleofcompetence,leavingareasliketechnologycompanieslargelyalone.Doyousharethisinvestingtraitwithhim?
Yes,verymuchso,especiallyasavalueinvestor.Asavalueinvestor,ifIcan’tvalueit,Ican’tinvestinit.Sothatkeptusoutofalotof
financialstocksthatwereshowingupinourscreensduringthefinancialcrisis.Wecouldn’tgetourarmsaroundthebalancesheetssowecouldn’tinvestinthem.Howdoyouvaluesomethingifyoureallydon’thaveatransparentviewofthebalancesheet?Ofcoursethatkeepsusoutofbiotechandindustrieslikethatwherethere’sjustnogoodwayfor
ustovaluethecompany.Soifwecan’tvalueit,wecan’tinvestinit.
You’refamiliarwithsomeoftheresearchaboutthedifferencesbetweenmenandwomeninvestors.Toyou,what’sthemostinterestingaspectofthisresearch?
AbouttwoyearsagoIhadthe
greatprivilegeofparticipatinginadiscussionoutinCalifornia,withaboutfifteenhedgefundmanagers.Thepurposeofthediscussionwastodiscussfreedomandfreeenterprise,butthediscussionwasledbyneuroeconomistPaulZakfromClaremontUniversity.He’sproducedsomeamazingresearch,whichhassomefinancialimplications.Itjust
mademesoexcitedaboutthefieldofbehavioralfinanceandneuroscienceandthedifferencesbetweenmenandwomenandthat’sreallywhatI’vebeenstudyingforthepasttwoyears.Sothebooksonmybedsidetablerightnowareallrelatedtothatfield.Itisreallyfascinatingstuff.IguessIamdrawntoitbecausetherearefewwomeninmyprofessionanditis
interestingtoconsiderhowgenderinfluencesmybehavior.Also,behavioralfinanceandvalueinvestingareverycompatiblesubjects.
Whatadvicewouldyoupassalongtobeginninginvestors?
Startearly,startnow.
So,startinvestingateight
yearsold?
Yes,actually!Compoundingismagic.You’lllaughatthis,butit’strue.Mydadtoldmebedtimestoriesaboutthemagicofcompounding.Itismagical,butthemagicingredientistime,sostartearly.Butalso,startearlybecauseyou’regoingtomakemistakesandthat’sOK,too.Butgoaheadandmakethose
mistakes.Andthenmybiggest
pieceofadviceisinvest,don’tspeculate.Approachapurchaseofastockasbuyingaportionofabusiness.Andifyoulookatitthroughtheeyesofabusinessowneryou’regoingtomakewiserinvestments.Iwish,forthatreason,thateverytimepeopleboughtstocktheywerestillissuedastockcertificate.
Becausesomethingaboutthat,asachild,holdingthatstockcertificateinmyhandandhavingsomethingtoputonmywallthatrepresentedthesharethatIowned,itreallygavemeasenseofownershipinthatbusiness.Andnowwitheverythingelectronicandnoonehasstockcertificatesanymore,itfeelslikesomethinginvestorsaremoreapttogoinand
tradebecausetheyhavelessownershipofit.Ireallylikestockcertificates.
WhenIgraduatedfromcollege,Iborrowedaverysmallamountofmoneyfrommyfathertobuyastockthatoneofmyfriendshadrecommendedtome.AndIborrowedthemoney,Iboughtthestock,anditreallycrashedinvalue.Ilostatonofmoney.Icalledmydadup
andsaid,“Oh,I’msosorry,I’velostthemoney.”Andhesaid,“Great!That’sexactlywhatIwashopingwouldhappen!Nowyouknowtherearenohottipsinthestockmarket;thisisnotagameofgambling.Youhavetodoyourhomeworkandmakewiseinvestments.ThisisthebestlessonIcouldhaveevertaughtyou.Iwashopingthatstockwouldgodownin
value.”ItreallytaughtmealotbecauseIwasreallyupsetaboutit.It’snotacasino.Ifyoutreatitlikeacasinothenthosearegoingtobeyourresults.
CapitalManagement
Mother-and-daughtervalueteamCandaceKingWeirandAmeliaWeirsearchforvalueopportunitiesthroughtheirfirmParadigmCapitalManagement,whichserveshigh-net-worthand
institutionalinvestors.Foundedasasmall-capoutfit,ithassinceexpandedtoofferseveraldifferentinvestmentvehiclesforundervaluedcompaniesofallsizes.IconductedthisinterviewwithCandaceandAmeliaonOctober7,2010,andithasbeenpublishedastranscribed.
Tellmealittlebitabout
ParadigmCapitalManagement.What’sthehistoryofthefirm?
CANDACEKINGWEIR:Itwasformedin1972,soclearlythatwasalongtimeagoandIthinkIformeditwhenIwastooyoungtoknowanybetter.IformeditalwayswiththeideathatIenjoysmall-capvalueinvesting.Thathasjustalwaysappealedtomewhere
youcouldunderstandacompanyandactuallyhaveanevaluationmethodologythatgaveyouacomfortlevel.Didn’tmeanyoualwayswereright,butyouhadcomfortthattheprocesswassolidandobviouslyoverthirty-sevenyearsyoulearnalot,butIstillbelievetheprocessisverysolidanditisverytangible.Ileftasmallerfirmthathaddonealotofvery
esotericinvesting,likeinbiotechandthingsthatwouldbethenextgreatfixforsomething,butwouldalwaysbesellingat30timesrevenuesandazilliontimesearningsornoearnings.Iwasnevergoodatthat.IguessIammoreofafundamentalist.
Amelia,didyouwanttoaddanythingtothat?
AMELIAWEIR:Igrewup,obviously,withamotherwhohadthisinherbloodforalongtime,inthateverytimeyouwenttodoerrandsorback-to-schoolshoppingoranythinglikethat,youwereinevitablydoingastorewalkatthesametimeandcheckingoutinventoriesortrafficorhowlongthelinesweretocheckout.So,inthatsense,obviouslyitwassomething
thatIwasalwayskindofindoctrinatedwith.ButIactuallywenttocollegeandwasanEnglishmajorundergradanddidn’treallytotallyeverimaginethatIwouldquitebeinthisseatatthispoint.
ButIactuallystartedoffworkingasaneditoratPaineWebberrightaftercollegeinequityresearchandatsomepointitgotalittletiresometo
keepcorrectinganalysts’typos.Atsomepoint,youwouldratherbeontheactualanalyticsidethanjustkindofreadingsomeoneelse’sthoughts.IwenttoworkatBearStearnsinequityresearchcoveringthetextileandapparelindustries,socompanieslikeTommyHilfigerandPolo.Ireallylikeditanddecidedtogobacktobusinessschooland
reallyknewatthatpointthatIwantedtobeonthebuyside.Ithinkyousortofhavethatiterativeprocessofrealizingthatatsomepointyoudon’twanttobereadingotherpeople’sopinionsandatsomepoint,evenifyoucanwritetheresearchreports,youwouldstillratherbeontheactualdecision-makingside,andsothatledmetowhereIamtoday.
Howdidyouendupasvalueinvestors?Dideitherofyoutryotherstrategiesorothermethodsbeforekindofsettlingintoyour“valueskin,”sotospeak?
CANDACEKINGWEIR:IguessIspeakformyselfsinceIhaveobviouslydonealotmoreyearsthanAmelia.No,Ihavealwayshadavaluetilt.ThatisoneofthereasonsIformed
myfirm.Ireallydidn’tunderstandmoreesotericinvesting.IalwayskindofbelievedthatEBITDAmultiplesoffreecashflowmeantsomething,andaslongasyouthoughtyouhadamanagementteamthatmadesenseandhadaproductgrowthstorythatyoucouldunderstand,normallythosewerethekindoffundamentalsthatallowed
youtobeprettysuccessfulovertime.
AMELIAWEIR:OnethingIamjustthinkingabout,anditiseasiertoseeinhindsight,butwhenIwascoveringthetextileandapparelindustries,itwasinthelate’90sthrough2001,soneedlesstosay,noonecared.EveryonewasreallyfiredupaboutInternetthisandInternetthatand
everythingwassellingatcrazyvaluations.Thefactthatyouhadthesereallyinterestingcompanieswithrealbusinessesandrealbalancesheetsandsolidcashflowsdidn’tmatter.Ijustrememberthesalesguyswouldbecomingaroundthefloortoseewhichanalystshadanythinginterestingtosay.Theywouldwalkrightbyusbecausetheycouldn’t
careless.Theywantedthemoreinterestingtechnames.
Ithinkeventhenitgavemeasortofperverseorcontrarianappreciationforrealcompanies,obviouslyseeinghowthatallplayedout,butatsomepointIalsothinkitishardanytime.Itislikegoingshopping,evenfromaconsumerstandpoint.Youneverwanttofeellikeyouareoverpayingfor
something.Youliketogetsomethingonsale,andIthinkthatthereiskindofasimilarmindsettothatideaofrecognizingvalueandfeelinglikeyougotitattherightpriceandthatyouactuallythinkitisworthmore.
WarrenBuffetthasbeenquotedassayingthattemperament,notintellect,isthemostimportant
qualityaninvestorcanhave.Sohowdoyouthinkyourowntemperamentshaveplayedintoyoursuccessasinvestors?
CANDACEKINGWEIR:Hmmm,thatisaprettycomplexquestion.IguessIwouldsayIthinktobegoodatthis,youhavetohaveaprettyeventemperament.Ithinkyouhavetobeabletotakea
longerviewattimes.Iwilljustgobacktosomethingmorefreshinmymind,thedebacleattheendof’08andearly’09.Idon’tthinkanyofusquiteknewwherethingsweregoingtoshakeoutatthatpoint,butyoucouldn’ttakeyourselfoutofthegame.Youhadtokeepshowingup,sotospeak,andplayingthegame.
ButIthinkthatiswhere
ourmantra,andIthinkAmeliacanspeaktothis,comesinhandy.Isaytoouranalysts,“Headdown,steadywinstherace.”Whoknowswhatthisisallgoingtoshakeoutto,whatthefinaloutcomeisgoingtobe?Butifyousticktowhatyouknowyoudowell,whichisspeakingwiththecompaniesandbeingabletogettomanagementandsay,“Yourstockisoff70
percent.Isthereanychangeinyourbusiness?”Oftentheysayno.Thenyousay,“Boy,thisisreallywhacko.”Butyouwouldn’tgooutandspendeverylastdimeyouhadbecauseyouknewyouhadtobeprudent.Ithinkittakesacertainamountofasteadyhandtobesuccessfulasaninvestor.
Wenevertryandmarket-time.Iamnotgoodatit.It
wouldn’tentermymindtobeamarkettimer.Sure,Ithinkaboutthemacroissues,butIdon’ttrytotimemyinvestments.Itisreallyoneinvestmentatatime.Thatmakessensetome.Iguessyouhavetohaveacertainsetcourageofyourownconvictions,becauseoftenyoucanbewrongforweeksormonths.It’snotthatyoureallywerewrong,butyou
appeartobewrong.WallStreetisdownon,goingbacktoAmelia’sstory,WallStreetdoesn’twanttotalkaboutclothingmanufacturers.Thatisreallydull.Ayearlater,theymaysay,“Boy,thatisbrilliant.Wewantallwecanget.”Soyoudohavetohavethecourageofyourconvictions,Ithinktobegood.Youreallyhavetobegrounded.
Ithinkwehadaprettyfabulousyearin’09,justbecausewestucktoourknittingwhenotherpeoplewerejustfrozenintheground.We’djustcomeinandwe’dtalktoourcompaniesandifwethoughtthatthingswerereallyoutrageouslyoutofwhack,thenwewouldbuyalittlemore,butfundamentallyweareverydisciplined.Ithink
disciplineisreallycritical,too.Youdohavetoshowupeveryday,nomatterthedaysyouhateit.Yousay,“Ican’tbearit.”Youcan’tbeartoloseanymoremoney.Itakeitverypersonallyalways,butifyoudon’tshowup,youdon’tgettoplaythegameandeventuallyyouarejustoutofthegame.AMELIAWEIR:2009wasreallyamazingifyoulookatthe
month-by-monthperformance,inthesensethatweultimatelyhadavery,verygoodyearperformance-wise.IguessIamjustreiteratingtheideathatyouhavetohavealong-termviewandyouhavetohavethattemperamentthatismoreevenkeeledandthatyoulistentoyourselfandyoustickwiththeoriginalideathatyouhad,versusbeing
swayedbythemarketorthenewsoreveryoneappearingtorunfortheexits.
Itwasinthefirstquarterof2009whereIwouldsay,andIwouldsaythismoreaboutmymotherthanmyself,Ithinkthecumulativeexperiencehelps.Butitistemperamentaswell,ofbuyingmoreofnamesthatyouknewandhadacomfortlevelwithversussomany
peopleatthatpointwhowerereallyparalyzedandstayedonthesidelines.Sothatbythetimethemarketturned,theywerethenkindofscramblingtocatchupinthesecondhalfoftheyear,whichatsomepointyoucanonlymakeupsomuchofthatwiththekindofswingthatthemarketshad.Ican’tthinkofabetterexampleofthetemperamentquestionina
longtimethanthatperiod,whereyoureallyhadtogetinthereandhaveyourowninternalclockthattoldyouitwasOK,insteadofwaitingforeveryoneelsetodoit,becausethatisreallywhereyoumakethebestmoney.
Managementandthe“peopleaspect”ofinvestingareveryimportanttoBuffett.WhenBerkshire
buysawholecompany,heleavesmanagementintact,orifheisbuyingsharesofapubliccompany,hewantstohavemanagementhetrustsandbelievesin.Isthatimportanttoyouall,too?
CANDACEKINGWEIR:Absolutely,yeah.
Why?Andthen
additionally,aretherewaysforindividualinvestorstotrytoassessmanagement?Howwouldyousuggesttheygoaboutthat?
CANDACEKINGWEIR:Yes,Ithinkitiscriticalbecauseattheendoftheday,ifIamanyexample,weown,maybeatanytime,maybe70namesinourportfolio.Soyoucan’tpossiblybeanexperton
everyproductandeverycompany.Thatwouldbeafool’sgame,soyoudohavetodoalittlebitofdelegation.Youhavetothinkthatyouhaveamanagementteamthatcanunderstandwheretheyshouldbeinthemarketplaceandwhatproductsaregoingtodrivetheirbusiness.IamnotgoingtotrytogetdowntothatnextgranularleveloftellmewhyXYZisthenext
whatever,soIthinkthisisapracticalapproachtoit.Youcan’tknowitall.
Ithink,maybeagain,itisbecauseofexperience,butclearlyyoujustquicklypickuponbrightpeople,articulatepeople,peoplethatcantellyouareallycohesivestoryandavision.EventothisdaywhenItalktoanewcompanyandIhavenovestedinterestasIstartthedialogue,
sometimesafterIfinishaconversation,Iwilljustkindofputthefiledownandsenditbacktotheanalystsandsay,“Idon’tthinkso.Maybeyouareright,butIdon’tthinkitisgoingtoworkifIdon’tthinkthecompanycanarticulatewhattheydo.”
SoIthinkyouhavereallygottounderstandnotonlycantheyarticulatetheirbusinessfromtheinvestment
communityside,butmostimportantly,dotheyknowtheirbusiness?HowdoIknow?Ilookatthetrackrecord.IguessIfeellikeIamatriallawyer.Iaskthesequestionsdayinanddayout.Ihavealreadyspokentosixcompaniestoday.It’swhat,3:30?It’satypicaldayforme,andIamjustconstantlygaugingandlisteningfortheanswers,soyoudothislong
enoughandyoudohaveasenseofwhattherightanswershouldbe.
Wearesittingwithadetailedsetofquestionsfromtheanalystsandsaying,“Well,youneedtogobackandtalkabouthavetheyrenewedtheirlineofcredit,havetheydonethis,whataretheythinkingaboutthat?”Soyouareconstantlygrillingthemandyourealizeitisa
goodmanagementteamiftheyhavethoseanswers.Whensomebodyasksmeaboutmybusiness,IliketothinkIcanarticulatemostoftheanswersbacktothem.Andifallofasuddenyoufindsomebodywhoiskindofhemmingandhawingorbeingslightlyevasive,itisjustmysetofrules,butwejustkindofdropthename,becauseyoureallydon’thave
time.Thisisahardenough
gamewhenyouthinkyouaregettinggoodinformationfromthemanagement,notinsideinformation,justaclearunderstandingoftheirbusiness.Ifpeoplesomehowarenotwillingtosharethatwithyou,wejustkindofmoveon.Thereareenoughsmartmanagementsoutthere,enoughgoodbusinesses.I
wouldnotinvestinacompanythatsays,“Yeah,youcanreaditwhenwereleaseour10-Q.”Iwouldsay,“OK,thankyou.”Andthatwouldbeit.
Butasto[individual]investorshavingthataccess,Ithinkthatishard.Itisnotlikeyouhaveinsideinformation,butitisjusthavingtheaccessbecauseyourunenoughmoney.IamnotWarren
Buffett,butpeopleknowweareseriousinvestors,letmeputitthatway,andtheyknowwehavedoneitforalotofyears,sopeoplerespectthat,forlackofabetterterm.
AMELIAWEIR:OnethingIwouldsaythoughisthatgoingback,thereweretimeswherewemaybeonthephonewithacompany,andIcanthinkofafewinmore
recentmonths,buttherewasonewherewhateverguidancetheyhadputout,theysortofhadatrajectoryfortheyearthattheyneededtoreallystickprettycloselytoittomaketheirnumbersfortheyear.Atsomepointtowardtheendofthecall,andagain,wehavealistofquestions,andmostofthemareprettystraightforward,butweaskedsomethinglike,“So,you
thinkyouareontracktohitthat”—Iammakingupthenumbersrightnow—“butyouthinkyouareontracktohitthat$20millionrevenuenumberforthesecondquarter?”AndtheCFO,hepausedforaboutonesecondlongerthannormalandwaslike,“Well,”andbasicallyhisanswerwaslike,“Yeah.”Hedidn’tsayanything,hedidn’tgiveyoutonsofinformation,
butonacertainlevelweboth,afterwehungup,wewerelike,“Thatdidnotsoundgood.”Andthepointbeing,theyblewthequarternottoolongafterthat.Thentherealtrickisactingonitintime,notjustpattingyourselfonthebackforhavinggaugedtheanswerright.
Toyourpointaboutindividualinvestors,ifitisacompanythatIeitherdon’t
knowwellordon’tfeellikeIreallyhavemyarmsaround—andthisissomethingthatIthinkdoesmatterfortherandompersononthestreetwhowantstoinvest—youcanlistentothereplayoftheconferencecalloryoucanreadthetranscript.Ialwaysfinditmuchmoreusefultolistentotheconferencecall.Becauseatranscriptisatranscript,ifyouarejust
lookingforsomenumbersorclarification,butyoukindofwanttohearwhatthetoneisinmanagement’svoice.YouwanttohearthemduringtheQ&Aperiod.Sometimessomeoftheanalystsaremoreaggressiveornot,butyouwanttohearwhatthatdialogueislikeandaretheydefensiveoraretheyalittlevagueoraretheyreallyhelpful?Ithinkthatnoneof
thatisanexactscience,butIthinkagain,itlendsadditionalinformationifyouarewillingtogothroughthatefforttolistentoit.
Ithinkthatisveryuseful.Andyou’reright,it’sjusttough,itjustis.Ifyouarearetailinvestorandyoudon’thaveaccesstopeople,youareleftalittlebittoyourowndevices,justthe
conferencecallsorjustpublicinformation,butthat’sachallenge.
CANDACEKINGWEIR:Itisjustverytimeconsuming.Bythetimeyoutalktosixcompanies,youhavespentsixorsevenhoursofthedayonthephone,soitisnotsomethingthatyoudolightly.Youhavetohaveenough,Iguess,ofaweightedinterest
tospendthattime.
Buffettislegendaryfortheamountofreadingthathedoesandtheinformationheconsumes,sowhatdoyoureadonaregularbasis,andthenwhataresomeofyourfavoritebooksoninvesting?
CANDACEKINGWEIR:Ireadprettyvoraciously.IthinkAmeliacanattesttothat.
ThereisprobablynotaweekendinmylifeIamnotupearlyreadingforprobablyacoupleofhoursbeforethedaygetsgoing.Butnormallyitisjustprobablyatonofsell-sidenotes,notesfrommyanalysts,andmydailyreadingisstrictlyalltheinvestmentthings,whetheritistheWallStreetJournal,Investor’sBusinessDaily,Bloomberg,therearezillions.
ButIthinkthetrickisyougetsomuchinformationoverloadtodaythatyouhavegottobeabletosaythisisn’tworthmytimeprettyquickly.Youcandrownintheinformation,soItryandlimitit,keepitrelativelysimple.
SometimeswhenIsortoutmyreadingattheendofthedaybeforeIdoitthenextmorning,Iwilljustsortitinpiles.Onewillbelikecritical
information,earnings,companyreleasesandwheresomeoneasksaboutacompanythatIownrightnowthatIneedtothinkabout.Thentheotherpilewillbeforwhenmybrainisalittlemorerelaxed.Icanlookatthisontheweekend,likenewinvestmentideasormoremacrothoughts.AndtherearereallytwodifferentkindsoftheinformationIneedto
absorb,soIalmosthavetodoitinadifferentmindset,ifthatmakessense.
Andthatismytypicalreading.Criticalinformationrightaway,whichIprobablyspendacouplehoursadayonandthenalittlemorebigpicture,whichIprobablyspendafewhoursaweekendon.Andhonestly,Idon’tthinkIhavepickedupabookoninvestingintenyears.
Thatisthetruth.Ifind,personally,Iamalwaysinconstantoverload.Itisalmosttoomuchinformation.Weprobablygetresearchfromthirtyfirmseveryday.Wejustfilteritouteveryday.Itisalotofstufftothinkabout.
ThenIthinkourstyleisourstyle,whichisreallyaboutknowingmanagement,runningourownearningsmodels,makingourownkind
ofhypothesisofwhywearedoingthisinvestment.Soitisnotlike,letmegoreadthisbookandfigureouthowtodoitbetter,andIamnotsayingwecouldn’tdoitbetter.ItisnotlikeIthinkwearesoterrific,buttherearejustsomanyhoursinaday.NowandthenIwillbuyabookandIwillsay,“Hmmm,whenIamonvacation,Iamgoingtotakethiswithme.”
ButIhavegottosayhonestly,I’drarelyeverpickitup.
AMELIAWEIR:Yeah,Iunfortunatelywouldhavetosecondthat.Onceinawhilesomeonewillgivemeabook,andthey’relike,Ithoughtthiswasagreatbook,butitsortofgoesbacktothefactthatyouareworkingsohardwhileyouareworkingthatby
thetimeIamgoingaway,thenIreallywanttoreadtheNewYorkerorsomething.Idon’twanttoreadamaybegoodormaybebadbookoninvesting.
ButoneofthethingsthatIthinkisveryusefulis—again,thereissortoftheusuallitany,youarereadingtheWallStreetJournal,youarereadingtheNewYorkTimes,youarereadingthe
FinancialTimes—thenIthinkonethingthatIdovaluealotissortofaslightlymoreinternationalperspective.SowhetheryouarereadingtheEconomistortheFinancialTimes,inadditiontotheJournalandBloomberg,becauseIthinkagain,youjustseeaslightlymore,insomeways,objectivetakeonthings.Inaway,itisthesamepiecesofthepuzzle,but
theyaremaybepresentedinaslightlydifferentalignment,whichmakesyousometimesthinkaboutthingsdifferently.
CANDACEKINGWEIR:Ithinkthatisabsolutelytrue.
AMELIAWEIR:Asanexample,theNewYorkTimes,sometimeinearlySeptember,hadanarticleabout3-Dprintingandhowitisbeingusednow
forthingslikeprosthetics,thathistoricallyhavebeenprohibitivelyexpensiveandhardtomanufactureandtimeconsuming.Andsomeofthenewerprintingprocessesaremuchfaster,muchcheaper,andmakethesethingsmuchmoreaccessible.
AndbecauseIamobviouslyalwaysbehindonmyreading,Iwasjustthrowingawaysomeold
Economistsrecently,andIwasflippingthroughone.ItwasaFebruaryissuefromthisyear,andtheyhadathreetimesaslongarticleontheexactsametopic,andthatwasinFebruary,versustheNewYorkTimeswritingthisarticleinSeptember.Thatisthestuffthatisinteresting,wheresomeinformationisoutthereandsomepeopledecidetofocusonitat
differenttimes.Ithinkbyhavingthatspectrumofreading,thatishowsomethingsparksyourbrain.Obviously,Ididn’treadthatarticleinFebruary,butIthinkthatstuffisinterestingbecauseyouneverknowwhatkindofalchemymakessomethingfromaninvestingperspectivesparkinyourownmind,like,“Whataboutthis?”Or,“Ifthisis
happeninghereandthatishappeningthere,thenwhatistheimplicationforpalladiumminingstocks?”SoIthinkinthatway,itisreallyimportanttojusthavethatbreadth.
CANDACEKINGWEIR:AndalsoIwouldsayjustthatyouneedtogetaway,becauseweareprettyintensewhenyouareworking.Theyareprettyintensedays—whetherthey
areten-ortwelve-hourdays—theyarelongdaysandtheyareveryintense.Sometimesyoujustabsolutely,whetheritisbeinginTimbuktuorbeinginLondonorbeinginParis,youdefinitelyjustneedtototallychangeyourenvironment.Andthenthatdoesgiveyouatotallyfreshlookatthings.
Ithinkthatiscritical,too.Iknowatonofreallybright
peoplewhoworkextraordinarilyhard.Itdoesn’tmeanitisalwayssuccessful.Thatistheironyoflife,sosometimesyoujusthavetostepbackandsay,“Whoa,whatamIdoingherethatisn’tworking?”BecauseIdon’tthinkanyonehastheHolyGrailhere.Itisjustkindof“Doyouthinkyoudoitbetterthansomepeople?”Yes,and“Haveyoudoneit
foralongtime?”Yes.“Areyoureasonablycompetent?”Yes,butnobodyhastheHolyGrail.Ithinkwhenyoucanstepback,whetheritbeinDelhiorLondon,andsay,“Whoa,lookwhattheyaredoinghere,”youcanseealltheinfrastructure.Itisjustmind-boggling.Everywhereyoulookedthereweredamsandroadsandyourealizedthatmeantsomethingina
big-picturewaythatyouweren’tseeinginAlbany,NewYork,orNewYorkCity.
Thatisgreatadvice.OK,nowweknowthatBuffettisknownforstayingwithinhiscircleofconfidence,leavingareasliketechnologylargelyalone.Doyouallsharethisinvestingtraitwithhim?
CANDACEKINGWEIR:AbsolutelyIdo.AsIgetolder,IthinkIshouldjustinvestinwhatIknow.Everytimewedoaone-off,it’sliketryingtounderstandsomebusinesslikeweownthecompany.Iwon’tboreyouwithanamerightnow,butwesay,“Boy,thosearethenamesyouenduplosingmoneyonbecauseyoudon’treallyhavetherightpeer
groupkindofperspective.”It’snotlikeyouknowthreeotherpeopleinthebusinesswhounderstandhowthebusinessmodelshouldwork,letalonebeabletocheckoutthemanagementteam,becauseotherpeopleknowthem.
Invariably,Iwouldsaytwooutofthreetimestheyturnouttobedisappointinginvestments.Itmaybetakes
usayeartofigurethatout.Whereasifyouareinvestinginyourthirdcontractmanufacturingcompanyandthereareonlyseveninthewholeindustrythatarepublicandyouknowfourorfiveoftheseven,thenyouhaveaprettygoodperspective.Iamnotsayingyouarealwaysright,butyouknowwhatyoushouldavoid,letmeputitthatway.Ithinkthatisvery
helpfulinlife,it’sthelossesyouneedtoavoid.
AMELIAWEIR:ButIwouldsay,well,he[Buffett]avoidstechnology.Thatisanareathatweareoverweightin,soIthinkagain,everyonehastheirownverysubjectivesortof...
CANDACEKINGWEIR:Senseofstrength.
AMELIAWEIR:Yeah,exactly,andwhatkindofgrabssomeoneintellectuallyorfrommykindofcuriosityperspectiveandsointhatsense,Ithinkeveryonecanhavetheirowncorecompetence.ButItotallyagreethatanytimeyoukindofhavedabbledinanamewhereyoureally,again,don’thavethatpeergrouporcompetitivelandscapeorjust
yourownrealunderstandingofit,youarebasicallyweightingthingstothedownsideoverthelongerterm,justbecausetherearemorewildcardfactorsthanyoucanaccountforversusaretailerwhenyouowntenotherretailers.
CANDACEKINGWEIR:Ithinkthatisright.SoweagreewithMr.Buffett.
Whatadvicewouldyoupassalongtobeginninginvestors?
CANDACEKINGWEIR:Asabeginninginvestor,Iwouldsaystartwhereyouhavesomekindofcomfortzone,sometouchstonethatmakesyouthinkthismakessensetoyou.Maybeitisbuyingsharesinthelocalbank,ifyouhavealwaysdoneyour
bankingthere,orbuyingtensharesofNikebecauseyoulikeNike’srunningshoesandyouthinkitisagoodcompany.Gosomewherewhereyouhavesomerealtangiblethoughtaboutthecompanyandnot,“So-and-sosaidtobuythisstockbecauseitisgoingtogoupnextmonth.”
Irememberasakid,myfirststockinvestmentwas
buyingsharesinMohawkAirlines,whichwasthelocalregionalairlineherebackintheday.Itwasjustverytangibletomebecauseweflewitallthetime.IwouldhaveahardtimetellingyouifImadeanymoneyonitornot.IthinkIdidmakealittlemoney,butIthinkthatwastheidea.WhatwasI,sixteenyearsoldandprobablyspent$200,butitwasverytangible
tome,andIthinkthatisimportanttogowithsomethingthatatleastifitgoeswrong,youhavearationaleforwhyyoudiditasopposedtosomebodytoldmetodoit.
Amelia,didyouwanttoaddanything?
AMELIAWEIR:Ithinkit’sfunnythatyouwerejust
talkingaboutMohawk.Iamthinkingaboutsomeofmyearlyinvesting,andagain,itwassortofrightoutofcollege.IwasclearlymoreofaLudditeandsonotsotunedintothesortofInternetdot.comboom,butIbought,itisamazing,itissortoflikethetwostocksyoushouldhaveneverbought,oneofwhichwasXerox.IboughtXerox,andthisisobviously
aspeoplearestartingtouseemailmoreandstartingtoemailfilestoeachother.Thentheotherone,whichyouknow,itwaswaybeforetheiPod,butitwasamusicretailer,whichagain,overtimeCDsaleshavefallenoffacliffandnomusicretailerhaseverfoundawaytoreallystillkeepsellinghardcopiesofanythinginanupwardtrajectory.
Withthatbeingsaid,Iwouldsayfrommyfirstinvestingexperience,theywerethingsthatIthoughtIsortofunderstood,theymadesensetome.Ithinkprobablyveryfewnewinvestorsaregoingtobesuccessful,soatleastyoucanlookatitandunderstandwhyversusyouboughtsomethingthathaddot-comontheendandyouboughtitfor$50ashareand
thenitwenttozero.Istillwouldjuststandbytheideathatitissomethingthat(a)youuseoryouarefamiliarwith,or(b)goingbacktoyoutalkingaboutNike,itissortofsomewherethatyougo,soyoumightbuyFinishLineoverFootLockerasafootwearretailerbecauseyouseebothinthemallandyoualwaysseemorepeopleintheFinishLinestore.Anditmay
notactuallyberight,butatleastyouhavethekindofatouchstonethatyoucankeepreferringbackto,versusitallbeinginavacuum.
Yeah,youarestartingtothinkaboutitandapplycauseandeffect,inasense.Therearemorepeopleinthestore,somaybeyoucouldbewrong,butatleastyouarethinkingaboutit.
AMELIAWEIR:Theniftheymissonthequarterandtheysay,“Weweremorepromotionalthanweplannedon,”thenthatpersonthinksthenexttimearound,“Whatisonsale?”andnotjusthowmanypeopleareinthestore.Ithinkitissortofthatiterativeprocess.
FundandtheMotleyFoolGreatAmerica
Fund
BillMannistheportfoliomanagerfortheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmerica
Fund.Hespecializesinidentifyingcompanieswithunderappreciatedcompetitiveadvantagesandassets.PriortoworkingforMotleyFoolAssetManagement,heservedascoadvisorforTheMotleyFool’sHiddenGemsandPayDirtsmall-capinvestmentnewsletterservicesandwasthefoundingadvisorforTheMotleyFool’sGlobalGainsinternationalstocknewsletter
service.LongtimeFoolChrisHillconductedthisinterviewwithBillonSeptember22,2010.Ithasbeenpublishedastranscribed.
Buffetthasbeenquotedassaying,“Temperament,notintellect,isthemostimportantqualityaninvestorcanhave.”Howdoyouthinkyourowntemperamenthasplayed
intoyoursuccessasaninvestor?
Firstofall,IhavebeendoingthisforawhilebutIdon’tknowthatI’dgosofarastocallmyselfasuccessfulinvestoryet.Ithinkanybodywhodoesisfullofit;probablyalittleprematureifyouaren’tBuffett’sageandathislevelofsustainedsuccessyet.
Thatsaid,Ithinkhavingatemperamentthatallowsyoutoworryaboutthethingsthatarecentraltoabusinessasopposedtowhatthestockmarketisdoingisaprettycrucialthingforme.Youseepeoplesayingallthetime,“ThemarkethasdroppedXpercent,”or“Somecompanyhasgoneup15percent,”likesomebodyknowssomething.Inmostsituations,nobody
knowsanything.Itispeoplebeingbattedtoandfrobythewavesofthemarket.
Businessesdon’tjustgainvalueorlosevalueasquicklyasthemarketsaysthattheydo.Ithinkthatisaprettyimportantthingbecauseitallowspeoplewhodohavethatmentalitytofindopportunity.
Doyouthinkofyourselfas
avalueinvestor?
Ido.Ithinkofmyselfasascaredy-catinvestor.Ithinkwhenyoutalkaboutvalueinvesting,therearereallytwowaystolookatit.There’sthesortofwhatyou’dcallstatisticalvalueorthepeoplewhosay,“Well,IamnotbuyinganythingunlessitislessthanaP/Eof7,”or,“Iamnotbuyinganything
abovebookvalue.”Idon’tthinkthatway.Ithinkintermsofjusttryingtobuysomethingforlessthanitisworthandtryingtosellitforwhatitisworth,orevenbetter,formorethanitisworth.
Tome,thatisthedefinitionofvalue.Asagoodexample,andIwaslamentingthistheotherdaybecausethecompanywastakenprivate,
in2005,IrecommendedacompanyforMotleyFoolHiddenGems(TheMotleyFool’ssmall-capstocknewsletterservice)calledFairmontHotels.Ithadnoearnings.Itwasinthemiddleofarestructure.Itwasaprettybadtimeforthehotelbusinessandthestockhaddonehorribly.Soifyoubelievedthestockmarket,thiscompanywasonitsway
out,butthereweretwothingstomethatasavalueinvestorIfocusedon.
Onewasthefactthatthiswasacompanytradingatabout$2billionwhereyoucouldn’tpossiblyreplaceallofitshotelsforanywhereclosetothatlittle.Thepropertiesthemselveswerejustworthsomuchmorethan$2billion,soyouhadsomeopportunityrightthere.You
hadwhatIwouldcallafloor.Theotherthingwasthatit
hadcashandsoitwasnotacompanythatwasgoingoutofbusiness,itwasjuststruggling.Ithinkbeingavalueinvestorgivesyoutheconfidencetobuysomethinglikethat,notreallytoworryaboutwhatishappeningoverthenextcoupleofquarters.Iguessthatgetsbacktosortofthetemperamentalissue,but
italsosortofdefineswhoyouare.Youarenotlookingformomentum.Youarenotlookingforcompaniesthatarenecessarilyshowingspectacularearningsgrowth.Infact,theirearningscouldquitefranklybekindoflousy,butatthesamepointintimethattheyaregreatinvestments.
Howdidyougettothat
pointinyourinvestingphilosophy?Werethereotherinvestmentstylesthatyouexperimentedwithbeforeyou“sawthelight”?
Ididalittlebitofeverything.Ihavealwaysbeenfascinatedbymathandsothegraphingandthechartingandputtingthingsthroughsortofmechanicalscreenstolookforinvestments—that,tome,
wasalwayskindofelegant,becauseitjustseemedsologicalandreasonable,buttherewasalwayssomethinginthebackofmymind.
Whenyoulookedatacompany,yousaid,“Well,itearnedadollarthisyearandIamgoingtomuddleitoutat10percentgrowthgoingonforXperiodoftime.”WheneverIwasdoingsomething,therewas
somethinginthebackofmymindthatalwayssaid,butwhatifitdoesn’t?Ithinkthatthatisoneofthecoreattributesofvalueinvestors.
Ifyouthinkaboutthestockmarket,thestockmarketisanexerciseinoptimism.Itisalmostanirrationaloptimismbecauseyouaresayingwheneveryoubuysomething,thatyouaresmarterthantherestofthe
market.Youknowmore.Youhavebetterinsightthan100millionpeoplewhoarewillingtobuyorsellstocks.Ithinkthatisaprettyboldstatementforalotofpeople.Itisaboldstatementforeverybody.
Sotocomeintowhatisanoptimisticpursuitandbepessimisticaboutwhateveryouarelookingat,Ithinkitisaprettyinterestingmindset,
butIdon’tknowthatIhaveseentoomanypeopleinthestockmarketgetintroublebybeingtoopessimistic.Generallyspeaking,youseetheothersideofthecoin.Peoplesay,“Well,thiscompanyisgrowingat40percent,itisgoingtokeepgrowingat40percent,orifIwanttobeconservativeaboutit,itisgoingtojustgrowat36percent.”Wellyouknow,
whatifitdoesn’t?Whathappensthen?Whatisyourprotection?
Ithinkthatthatisreallytheessenceofavalueinvestor—someonewhoentersintosituationswherehesees,evenifhehappenstobewrongbecauseit’snotlikevalueinvestorshavesomegreaterinsightonthefuture,buttheyseesomesortofdefensivestance,beitjustin
theutterlylowlevelofthestockprice,orthereissomethingaboutthecompanythattheythinkpeoplearemissing.Butyoustillgothroughtheprocessofbeingapessimisticoptimist,Iguesswouldbetheleastawfulwaytoputit.
Buffettreadsawholelotandconsumesatonofinformation.Whataresome
thingsthatyoureadonaregularbasis,andalongthosesamelines,doyouhaveacoupleofbooksoninvestingthathavebeenparticularlyhelpfultoyou?
IdosomethingthatBuffettalsodoes,whichisthatItrytoreadcompanyannualreportseverysingleday.Itcanbeboring.Itcanbeincrediblytediousgoing
throughannualreportsofcompaniesthatmakefastenersfordoorsfortrailerhomesandthingsofthatnature.SomuchofinvestingIthinkforalotofpeopleisreceivedwisdomasopposedtogoingtothesourcedocuments.That,tome,isimportant.ThereisanadvantageofgoingthereoverlisteningtoaWallStreetanalystorsomethingsimilar.
Thatmakesupahugeamountofmyday.
Ialsolikereadingtradejournals.WewillgetQuick-ServeRestaurantMonthlyandOilRefineryWeeklyandtheViaticalJournal,forinstance.
Whatwasthatlastone?
Viaticals.
Whatisa“viatical”?
A“viatical”iswhenyou’vegotalifeinsurancepolicyandyouarenotyetdead,butyouthinkyouwouldliketotradeinthevalueofthatinsurancepolicy.Therearecompaniescalledviaticalsthatbasicallywilldothat.Theywillpassyououtofyourinsurance.
ButIdon’thavetodiefor
themtodothat,doI?
Thegoodnewsisyoudon’thavetodie.Thebadnewsisyoudon’tgetasmuchmoney.Someonedoesn’tgetasmuchmoneyastheywouldhaveifyouwereactuallydead.
Hmmm.Gotit.
Asyoucanimagine,thatis
awfullychipperreading,becauseithasgottwoofthegreatestsubjectsintheworld—ithasgotdeathandithasgotinsurance.Thatisacheerfulread.
Whataboutinvestingbooks?
BothofJoelGreenblatt’sbookshavebeenincrediblyvaluable.Oneisthevery
modestlytitledYouCanBeaStockMarketGenius,andtheother,almostequallymodestlytitledTheLittleBookThatBeatstheMarket.Botharejustspectacularintermsofthinkingandintermsofreallyinstructingenterprisinginvestorstosomeoftheoddballplaceswhereyoucangoandfindvalue.
Thenobviouslytheonethatyouwillhearfrom
everyone,andtheonethatyouwouldhearfromBuffetthimselfwouldbeSecurityAnalysisbyBenjaminGraham,whichIwouldcallthemostactivelyavoidedinvestingbookinhistory,justbecauseitissuchhardreading.Itishardreadinganditspellsalmostapuritanicalapproachtothemarketthatforfolkswhoareoptimists,doesn’tseemlikeawhole
heckofalotoffun.Itisliketakingthejoyoutofthings,butitistrulyawonderfulinstructionmanualforpeoplewhowanttobevalueinvestors.
AsidefromBuffett,arethereotherinvestorsthatyouhaveadmiredforyearsandlearnedfromandifso,whataresomeofthekeythingsthatyouhave
learnedfromthem?
ImentionedJoelGreenblattearlier.IthinkwhatisgreataboutJoelisthatheissomeonewho,unlikeBuffett,whoisoftenbuyingwholecompaniesatthispoint,isgenerallyspeaking,involvedinthemarket.Hehasreallygivenaninstructionmanualforhowtothinkaboutcertainoddballsecuritiesthataren’t
whereeveryoneislooking.Likepreferredsecuritiesanddebtandconvertiblesandreally,reallyfunthingslikethat,andby“fun”Imeannotfun.Soyeah,hehasbeenaveryimportantinfluence.
IthinkDavidNierenbergisprobablysomeonewhonoteveryonewillmention.HerunsaveryconcentratedvaluefundbasedjustoutsideofPortland,Oregon,in
Washingtonstate.Ihadtheopportunitytositdownwiththemnotthatlongago,andthethingthattheysaythatIthinkisaveryimportantthingforinvestorsistheydoeverythingtheycantogettoknowacompany.Theyknowthesuppliers.TheyknowwhentheCEO’smother’sbirthdayis.Noamountofinformationtothemistoosmallortooesotericandthey
runaveryconcentratedportfolioandtheyhavedoneextraordinarilywellovertime,reallybasedontheirwillingnesstogoandtrytogetaninformationaledgeinanentirelylegalway.
Itisnotliketheyaretradingoninsiderinformationorstealingpitchsignals.Theyjustdecidedthatiftheyaregoingtoinvesttheirmoneyintocompanies,theyare
goingtoknowthecompaniescold.Thedaytheyinvestisreallywhentheworkbegins.Theythinkthatisareally,reallyimportantthingforinvestors,becausesomanypeople,theybuysomethingandsay,“Well,timetolookforthenextthing,”andtheykindofforgetthattheyjustputthousandsofdollarsintothelastthing,andthatlastthingdoesn’tstopevolving
simplybecausetheyhavestoppedanalyzing.Thatwasareally,reallyvaluablethingforme,particularlyaswelaunchedtheIndependenceFund,tojustseesomeonewhoreallywalksthatwalk.
Buffettisknownforstayingwithinhiscircleofcompetence.Isthataninvestingtraitthatyousharewithhim?
Itis,thoughIwouldsaythatwetryto.IdohaveateamthatworkswithmeandsowehaveputeachpersonwithintheirowncirclesofcompetenceandthenIdependsomewhatuponthemtoberight,ifyouwill.Ourportfolioisnotasconcentratedastheaverage,eventhecollectionofcompaniesatBerkshireHathaway,anditdoesgo
acrossindustriesandgoacrossgeographicboundariesinawaythathisdoesnot,butIwouldsaythatthecircleofcompetencecanbedrawnanumberofdifferentways.IknowforafactthatIhaveabsolutelynoabilitytodetermineeitherwhattechnologyisgoingtobethenextbigthingorwhatdrugshavethebestchanceofsucceeding.
Sothesingle-drugbiotechcompaniesandthentechcompaniesingeneralareonesthatIjustknowtostayawayfrom,andnotbecausetherearen’topportunitiesthere,butIhavenoinformationaladvantage.IhavenoknowledgeadvantageandbasicallyIwouldberollingthedicewithreceivedknowledge,andwhoknowswhatagendamightbebehind
thatinformationorthepropagatoroftheinformation.SoIknowwellenoughtostayawayfromlotsofthings.IthinkmywifewouldprobablysaythatIhavenoabilitytoforecastanytrendsinanywalkoflife,sothatisprobablybestthatIstayawayfromtryingtodoso.
Whatadvicedoyouhave
forbeginninginvestors?
TheysaythatsomanyguitarplayersreallyburnoutbecausetheytrytoemulateJimiHendrixandsomanydrummersburnoutbecausetheytrytoemulateNeilPeart,andIthinkthatthereissomethingtobesaidaboutnottryingtobesomeoneelse.Tobeingtruetoyourselfandnottryingtoemulateeven
someonewhoisasspectacularasWarrenBuffett.Hecandividecomplexfractionsinhishead.Heisreallyatalentwithoutcompare.Heiskindofanislanduntohimself.
IthinkalotofpeoplejustreallytrytobethenextBuffettinsteadoftryingtobethefirstwhoevertheyare.Investingishardenoughwithoutsaying,“Well,my
instinctsaysX,butWarrenBuffettsaysY,soIamgoingtodoY.”Ithinkthatisaveryimportantthingforpeoplewhoarejuststartingout.
Mysecondpieceofadvicewouldbetotakeyourtime.Thereisnorush.Somanytimeswithbeginninginvestorstheygetawfullyexcitedaboutitandbeforetheyhavestudieditforsixmonths,theyown20different
thingswith95percentoftheirmoney,andthatisscary.Itisscarybecausetheymightnotthinkitisscary.Sotakeyourtime,beyourself.Thatsoundslikeanafter-schoolspecial,butitapplies.
(CourtesyofMotleyFoolInsideValue)
Fourbookseveryaspiringvalueinvestorshouldread:
TheEssaysofWarrenBuffett:LessonsforCorporate
America,byWarrenE.BuffettandLawrenceA.Cunningham
TheIntelligentInvestor:ABookofPracticalCounsel,byBenjaminGraham
CommonStocksandUncommonProfits,byPhilipA.Fisher
TheLittleBookThatBuildsWealth,byPatDorsey
BeginningInvestors
AgainsttheGods:TheRemarkableStoryofRisk,byPeterL.Bernstein
ARandomWalkDownWallStreet,byBurtonG.Malkiel
BeatingtheStreet,byPeterLynch
Buffettology,byMaryBuffettandDavidClark
GoodtoGreat:WhySome
CompaniesMaketheLeap...andOthersDon’t,byJimCollins
HowtoBeaValueInvestor,byLisaHolton
HowtoReadaFinancialReport,byJohnA.Tracy
InvestmentMadness:HowPsychologyAffectsYourInvesting...andWhattoDoAboutIt,byJohnR.Nofsinger
OneUponWallStreet:How
toUseWhatYouAlreadyKnowtoMakeMoneyintheMarket,byPeterLynchandJohnRothchild
SelectWinningStocksUsingFinancialStatements,byRichardLoth
TheEssentialBuffett:TimelessPrinciplesfortheNewEconomy,byRobertG.Hagstrom,Jr.
TheFutureforInvestors:
WhytheTriedandtheTrueTriumphOvertheBoldandtheNew,byJeremyJ.Siegel
TheLittleBookofValueInvesting,byChristopherH.Browne
TheLittleBookThatBeatstheMarket,byJoelGreenblatt
TheMotleyFoolInvestmentGuide:HowtheFoolBeatsWallStreet’sWise
MenandHowYouCanToo,byDavidGardnerandTomGardner
TheNeatestLittleGuidetoStockMarketInvesting,byJasonKelly
IntermediateInvestors
BeyondGreedandFear:UnderstandingBehavioralFinanceand
thePsychologyofInvesting,byHershShefrin
Buffett:TheMakingofanAmericanCapitalist,byRogerLowenstein
Bull’sEyeInvesting:TargetingRealReturnsinaSmokeandMirrorsMarket,byJohnMauldin
ContrarianInvestmentStrategies:TheNextGeneration,byDavid
DremanHowtoPickStocksLike
WarrenBuffett:ProfitingfromtheValueHuntingStrategiesoftheWorld’sMostFamousValueInvestor,byTimothyVick
Investing:TheLastLiberalArt,byRobertG.Hagstrom
InvestmentFables:ExposingtheMythsof“Can’t
Miss”InvestmentStrategies,byAswathDamodaran
It’sEarningsThatCount:FindingStockswithEarningsPowerforLong-TermProfits,byHewittHeiserman,Jr.
JohnNeffonInvesting,byJohnNeffandS.L.Mintz
JustOneThing:TwelveoftheWorld’sBestInvestorsRevealtheOneStrategy
YouCan’tOverlook,byJohnMauldin
LessonsfromtheLegendsofWallStreet,byNikkiRoss
MoneyMastersofOurTime,byJohnTrain
MoreThanYouKnow:FindingFinancialWisdominUnconventionalPlaces,byMichaelJ.Mauboussin
Mosaic:Perspectiveson
Investing,byMohnishPabrai
PoorCharlie’sAlmanack:TheWitandWisdomofCharlesT.Munger,byCharlesT.Munger
TheDhandhoInvestor:TheLow-RiskValueMethodtoHighReturns,byMohnishPabrai
TheEssentialBuffett:TimelessPrinciplesfortheNewEconomy,by
RobertG.HagstromThe5KeystoValue
Investing,byJ.DennisJean-Jacques
TheFiveRulesforSuccessfulStockInvesting:Morningstar’sGuidetoBuildingWealthandWinningintheMarket,byPatDorsey
TheFocusInvestor,byRichardM.Rockwood
TheWarrenBuffettPortfolio:
MasteringthePoweroftheFocusInvestmentStrategy,byRobertG.Hagstrom
ValueInvesting:ABalancedApproach,byMartinJ.Whitman
ValueInvesting:FromGrahamtoBuffettandBeyond,byBruceC.N.Greenwald,JuddKahn,PaulD.Sonkin,andMichaelvanBiema
ValueInvestingToday,byCharlesH.Brandes
WhenGeniusFailed:TheRiseandFallofLong-TermCapitalManagement,byRogerLowenstein
YouCanBeaStockMarketGenius:UncovertheSecretHidingPlacesofStockMarketProfits,byJoelGreenblatt
AdvancedInvestors
CreativeCashFlowReporting:UncoveringSustainableFinancialPerformance,byCharlesW.MulfordandEugeneE.Comiskey
ExpectationsInvesting:ReadingStockPricesforBetterReturns,byAlfredRappaportandMichaelJ.Mauboussin
FinancialFinePrint:UncoveringaCompany’sTrueValue,byMichelleLeder
FinancialShenanigans:HowtoDetectAccountingGimmicksandFraudinFinancialReports,byHowardM.Schilit
FinancialWarnings,byCharlesW.MulfordandEugeneE.Comiskey
FooledbyRandomness:The
HiddenRoleofChanceinLifeandintheMarkets,byNassimNicholasTaleb
InvestmentPhilosophies:SuccessfulInvestmentPhilosophiesandtheGreatestInvestorsWhoMadeThemWork,byAswathDamodaran
InvestmentValuation:ToolsandTechniquesforDeterminingtheValueof
AnyAsset,byAswathDamodaran
OptionsasaStrategicInvestment,byLawrenceG.McMillan
QualityofEarnings:TheInvestor’sGuidetoHowMuchMoneyaCompanyIsReallyMaking,byThorntonL.O’Glove
SecurityAnalysis:TheClassic1940SecondEdition,byBenjamin
GrahamandDavidDoddTheAggressiveConservative
Investor,byMartinJ.WhitmanandMartinShubik
TheInterpretationofFinancialStatements,byBenjaminGrahamandSpencerB.Meredith
The(Mis)behaviorofMarkets:AFractalViewofRisk,Ruin,andReward,byBenoit
MandelbrotandRichardHudson
TheQuestforValue,byG.BennettStewart,III
TheTheoryofInvestmentValue,byJohnBurrWilliams
Valuation:MeasuringandManagingtheValueofCompanies,byTimKoller,MarcGoedhart,andDavidWessels
Acknowledgments
Funnyhowthingsturnout,isn’tit?Theideaforthisbookandtheinitialpitchforithappenedwaybackinthesummerof2007.Atthetime,
weFoolsweresimplymarvelingoverthestudiesthathadcomeoutoftheworldofbehavioraleconomics,showingthatwomenandmentendedtoinvestinverydifferentways.Andwenoticedsomethinginteresting—namely,thatitappearedwomeninvestedwithavery“Buffett-like”temperament.We’dlongadmiredMr.Buffettandhis
calm,patient,unflappabletemperament.Wesawthisexemplarytemperamentasadefiningcharacteristicandanexplanationforhisabilitytobuildgreatwealthandbeatthemarketoverdecades,puttingcharlatanaftercharlatanonWallStreettoshame.WeknewtheimportancethatBuffetthimselfplacedoninvestorshavingtheproper
temperament,andwebelievedthatbyfocusingoureffortsforthisbookonuncoveringandhighlightingthekeystohavingtheoptimaltemperament,wecouldhelpimprovethelong-termreturnsofallinvestors,menandwomenalike.
Whatwecouldn’thaveforeseeninourabsoluteworstnightmareswaswhatwastocomeforthefinancialworlda
littleoverayearlater.Asitturnedout,weallneededalessonintemperament,perhapsmorethaneverbefore.
Ofcourse,giventhechoicebetweenwatchingnumerousexamplesoftemperament-gone-wrongunfoldbeforeoureyesandnothavingtoseeourportfoliosandnesteggsabsolutelydemolished,I’m
prettysurewe’dhavechosentoskiptheexamples.Buthereweare,withaneyetothefuture,and,hopefully,youfeelreadytofaceitwithasteady,calmtemperament.Infact,you,dearreader,arethefirstthank-youofmanyImustmakehere.Thankyouforcomingonthisjourneywithme,andforreadingthisfar(youdidn’tjustskipahead,didyou?!).IhopeI’ve
madeitworthyourwhile,andthatyou’velearnedandlaughedalongtheway.
ThankyoutoWarrenBuffett,formodelingtheidealtemperamentoverdecadesanddecades.Thanks,too,forsoopenlysharingyourwisdomwithinvestorseverywhereovertheyears,andfor(hopefully!)havingasenseofhumoraboutthisbook’stitle.
ThankyoutoDavidGardner,TomGardner,andErikRydholmforfoundingTheMotleyFoolohsomanyyearsago.It’sgoodtobeaFool.Thankyouformakingitpossibleandforgivingmesomanyincredibleopportunitiesovertheyears.AndTom,aspecialthank-youtoyouforwritingtheforeword,fortrumpetingthisprojectthewholeway
through,andforyourfriendship.
ThankyoutoSuzanneGluck,ouragentatWilliamMorrisEndeavor,fornegotiatingourbookdealandforsupportingTheMotleyFooleverystepoftheway.
ThankyoutomyeditoratHarperBusiness,HollisHeimbouch,forherconstantencouragement,sharpedits,thoughtfulsuggestions,and
enormousdosesofpatienceandflexibility.Thankyou,Hollis,aswell,foryourkindnessandsenseofhumor.Icouldn’thaveaskedforabettereditorandwillremainforevergrateful.
ThankyoualsototheotherexcellentfolksatHarperCollinsforbeingasenthusiasticaboutthisbookasweare,includingKathySchneider,DougJones,
AngieLee,TinaAndreadis,SamanthaChoy,MarkFerguson,MatthewInman,andColleenLawrie.It’swonderfultoworkwithateamofpeopleasexcitedaboutsomethingasyouare!
ThankyoutoRobynGearey,whofoundthetimetomakesurethisbookactuallycametogetherwhilealsoworkingtripletimetooverseethelaunchofseveral
newFoolnewsletterservices.Robyn,thankyoufortalkingmethroughmomentsofexistentialangst,self-confidenceswoons,andgeneralfreak-outs.Yourcalmdemeanorandencouragingmannerwereagodsend.Thankyouforalwaysbeingthere.
ThankyoutomoneymanagersLisaRapuano,LaurenTempleton,Candace
KingWeir,AmeliaWeir,andBillMannfortakingthetimeoutoftheirpackedschedulestodointerviewsforthisbook.Thankyouforsharingyourexperienceswithallofus.
ThankyoutoFoolsMacGreer,ChrisHill,andSteveBroidoforalltheirhelpnailingdowninterviewsandquotesfromfolkslikeRogerLowenstein,AndrewKilpatrick,PremJain,and
NellMinow.Wordtothewise:ifyouneedtotalktoanybody(seriously,justaboutanybody),thesearethethreeguyswhocanpullitoff.
ThankyoutoFoolsJohnReevesandAlexPapeforfact-checkingthisbookwithinaninchofitslifeandfortheirexcellentoverallcommentsonthemanuscript.Thankyoubothforsavingmefrommymistakes!Thank
youalsotoFoolsHopeNelson,PaulElliott,ToddEtter,BuckHartzell,andAndyCrossforreadingthemanuscriptandsharingyourideasonhowtomakeitasgoodasitcouldpossiblybe.Allofyoursuggestionswereenormouslyhelpful.ThankyouallfortakingthetimetoworkonthiswhenIknowyouhadaboutamillionotherthingsgoingonatthesame
time.ThankyoutotheFool’s
ownmarketingguru,theaforementionedPaulElliott,andtotheFool’spublicrelationsguru,AlisonSouthwick,fornevershootingdownacrazyideaandfortheirwillingnesstogoallouttomakethisbookahit.ThankyoutoFoolDanStapletonforworkinghisdesignmagiconthecover.
ThankstoFoolsGinniBrattiandRandyCoonforsupportingthisproject.ThankyoutoFoolwritersAlyceLomaxandDayanaYochimforbeingsuchinspirations.ThankstoJoeMagyerandtheentireMotleyFoolInsideValueteamforsograciouslysharingtheirreadinglist.AndthankyoutoFoolJonathanMuddforpullingonesentenceburiedwithinabook
proposaltotheforefront,therebygivingusourmostexcellentbooktitle.
Last,butcertainlynotinanywayleast,thankstoAustinforyourloveandsupportasIsathunchedovermylaptop,peckingawayonthisforseeminglydaysandnightsonend.ThanksformakingmelaughandsmilewhenIneededit(alot).Thanksforbeingsweetand
understandingandpatient.Thanksformakingmeendlesscupsofteaandpotsofcoffee.ThanksfordistractingmewithepisodesofTheOfficejustwhenIthoughtI’dreachedmybreakingpointandneededsomelevityfromthattitanofthepaperbusinesshimself,MichaelScott.Mostly,thanksforputtingupwithme.Iappreciateit,andammore
WallStreetPanicof2008,”TheMotleyFool,http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx.
2.AndrewRossSorkin,TooBigtoFail(NewYork:Penguin,2010),10.
3.WarrenE.Buffett,BerkshireHathaway2007ShareholderLetter,February2008,
http://www.berkshirehathaway.com/letters/2007ltr.pdf,3.
4.TheAmericanHeritageDictionary,4thed.,s.v.“temperament.”
5.WarrenBoronson,J.K.Lasser’sPickStocksLikeWarrenBuffett(NewYork:Wiley,2001),246.
6.BusinessWeek,July5,1999,quotedinRobertG.Hagstrom,The
WarrenBuffettWay,2nded.(Hoboken,NJ:Wiley,2005),178.
7.SheelahKolhatkar,“WhatifWomenRanWallStreet?,”NewYork,March21,2010,http://nymag.com/news/businessfinance/64950/.
8.Sorkin,TooBigtoFail,29.
9.MichaelLewis,“WallStreetontheTundra,”VanityFair,April2009.
10.RuthSunderland,“Afterthecrash,Iceland’swomenleadtherescue,”Observer,February22,2009,http://www.guardian.co.uk/world/2009/feb/22/iceland-women.
11.DavidJolly,“IcelandEmergedfromRecessionin3rdQuarter,”NewYorkTimes,December7,2010,
http://www.nytimes.com/2010/12/08/business/global/08icecon.html.
2:TheScienceBehindtheGirl
1.HannaRosin,“TheEndofMen,”Atlantic,July/August2010,http://www.theatlantic.com/magazine/archive/2010/07/the-end-of-men/8135/.
2.Ibid.3.DanieldeVise,“Report:Morewomenthanmen
inU.S.earneddoctorateslastyearforfirsttime,”WashingtonPost,September14,2010,http://www.washingtonpost.com/wp-dyn/content/article/2010/09/14/AR2010091400004.html.
4.Rosin,“TheEndofMen.”
5.BradM.BarberandTerranceOdean,“BoysWillBeBoys:Gender,Overconfidence,and
CommonStockInvestment,”QuarterlyJournalofEconomics116,no.1(February2001),261–92.
6.JohnAmeriks,Ph.D.,JillMarshall,andLiqianRen,Ph.D.,“Equityabandonmentin2008–2009:Loweramongbalancedfundinvestors,”Vanguard,https://institutional.vanguard.com/iam/pdf/RPD25.pdf,
December2009.7.JoanMacLeodHeminway,“FemaleInvestorsandSecuritiesFraud:IstheReasonableInvestoraWoman?,”UniversityofTennesseeatKnoxvilleCollegeofLaw,LegalStudiesResearchPaperSeries,researchpaper77,October2009.
8.StefanRuenziand
AlexandraNiessen,“SexMatters:GenderDifferencesintheMutualFundIndustry,”http://ssrn.com/abstract=1343490,February15,2009.
9.Ibid.10.“50LeadingWomenin
HedgeFunds:AreportinassociationwithPriceWaterhouseCoopers,”HedgeFundJournal,February2010,
http://www.thehedgefundjournal.com/magazine/201002/research/thfj-50-women-in-hedge-funds.pdf.
11.“WomeninFundManagement:ARoadMapforAchievingCriticalMass—andWhyItMatters,”NationalCouncilforResearchonWomen,August2009,http://www.ncrw.org/sites/ncrw.org/files/WIFM%20Report.pdf.
12.“WhenItComestoInvesting,Gendera
StrongInfluenceonBehavior,”MerrillLynchInvestmentManagers,April18,2005.
13.ClaremontGraduateUniversityMediaServices,http://www.cgu.edu/pages/4627.asp.
14.JasonPalmer,“Traders’raginghormonescausestockmarketswings,”NewScientist,April14,
2008,http://www.newscientist.com/article/dn13664-traders-raging-hormones-cause-stock-market-swings.html.
15.JohnM.Coates,MarkGurnell,andZoltanSarnyai,“Frommoleculetomarket:Steroidhormonesandfinancialrisk-taking,”PhilosophicalTransactionsofthe
RoyalSociety:BiologicalSciences,January27,2010.
16.Ibid.17.Ibid.18.Ibid.
3:AQuickIntrototheOracle
1.WarrenBuffett,interviewwithLizClaman,“The
BillionaireNextDoor,”CNBC,December2006.
2.AliceSchroeder,TheSnowball:WarrenBuffettandtheBusinessofLife(NewYork:Bantam,2009),88.
3.JohnTrain,TheMoneyMasters(NewYork:HarperCollins,1994),16.
4.LaurenTempleton,interviewwithauthor,
September22,2010,publishedastranscribed.
5.Schroeder,TheSnowball,148–49.
6.AlexCrippen,“CNBCTranscript:WarrenBuffett’s$200BBerkshireBlunderandtheValuableLessonHeLearned,”October18,2010,http://www.cnbc.com/id/39724884.
4:TradeLess,MakeMore
1.WarrenE.Buffett,BerkshireHathaway1988ShareholderLetter,February28,1989,http://www.berkshirehathaway.com/letters/1988.html.
2.DavidA.ViseandSteveColl,“SalomonDealGeneratesMoreBuffett-Watching,”WashingtonPost,September30,1987.
3.JenniferMyers,“28Business,Investment,Academic&LaborLeadersJoinAspenInstituteinBoldCalltoOvercomeShort-Termism,”AspenInstitutepressrelease,September9,2009,http://www.aspeninstitute.org/news/2009/09/09/28-business-investment-academic-labor-leaders-join-aspen-institute-
bold-call-overcom.4.WarrenE.Buffett,“AnOwner’sManual,”1996,http://www.berkshirehathaway.com/ownman.pdf,1.
5.MarkHulbert,“BeaTigerNotaHen,”Forbes,May25,1992,quotedinHagstrom,TheWarrenBuffettWay,180.
6.WarrenBuffett,1992BerkshireHathaway
annualmeeting,quotedinJanetLowe,WarrenBuffettSpeaks:WitandWisdomfromtheWorld’sGreatestInvestor(Hoboken,NJ:Wiley,2007),163–64.
7.———,BerkshireHathaway1996ShareholderLetter,quotedinWarrenE.BuffettandLawrenceCunningham,The
EssaysofWarrenBuffett,2nded.(NewYork:CunninghamGroup,2008),108.
8.PremJain,emailinterviewwithMacGreerofTheMotleyFool,September27,2010.
9.MattLogan,“BuyingtheBuffettWay,”TheMotleyFool,March26,2003,
http://www.fool.com/news/2003/03/26/buying-the-buffett-way.aspx.
10.MurrayChass,“BuffettIsInvestedinRodriguez,”NewYorkTimes,August10,2007,http://www.nytimes.com/2007/08/10/sports/baseball/10chass.html.
11.LisaRapuano,interviewwithauthor,September10,2010,publishedastranscribed.
12.TomandDavidGardner,MillionDollar
Portfolio(NewYork:HarperCollins,2009),xiii.
13.MorganHousel,“LearnfromBuffett’sPatience,”TheMotleyFool,November20,2008,http://www.fool.com/investing/value/2008/11/20/learn-from-buffetts-patience.aspx.
14.WarrenE.Buffett,BerkshireHathaway
1986ShareholderLetter,quotedinBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,95.
5:ReininOverconfidence
1.WarrenE.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967,http://www.pragcap.com/wp-
content/uploads/2010/02/BP20.pdf.2.WarrenBuffettandCarolLoomis,“Mr.BuffettontheStockMarket,”Fortune,November22,1999,http://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm.
3.Schroeder,TheSnowball,277.
4.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967.
5.LaurenTempleton,interviewwithauthor,September22,2010,publishedastranscribed.
6.WarrenE.Buffett,BerkshireHathaway1982ShareholderLetter,http://www.berkshirehathaway.com/letters/1982.html.
6:ShunRisk
1.WarrenE.Buffett,BerkshireHathaway
1992ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,103.
2.Lowe,WarrenBuffettSpeaks,p.116.
3.WarrenE.Buffett,BerkshireHathaway1985ShareholderLetter,inBuffettandCunningham,TheEssaysofWarren
Buffett,2nded.,77.4.———,BerkshireHathaway2008ShareholderLetter,February27,2009,http://www.berkshirehathaway.com/letters/2008ltr.pdf,16.
7:FocusonthePositivesofPessimism
1.WarrenE.Buffett,“BuyAmerican.IAm,”op-ed,
NewYorkTimes,October16,2008,http://www.nytimes.com/2008/10/17/opinion/17buffett.html.
2.Ibid.3.Ibid.4.———,BerkshireHathaway2008ShareholderLetter,5.
5.———,BerkshireHathaway2009ShareholderLetter,February26,2010,http://www.berkshirehathaway.com/letters/2009ltr.pdf,
15.6.BenjaminGraham,TheIntelligentInvestor,reviseded.(NewYork:HarperCollins,2006),204–5.
7.WarrenE.Buffett,“YouPayaVeryHighPriceintheStockMarketforaCheeryConsensus,”Forbes,August6,1979,republishedatForbes.comon
November8,2008,http://www.forbes.com/2008/11/08/buffett-forbes-article-markets-cx_pm-1107stocks.html.
8.BillMann,interviewwithChrisHillofTheMotleyFool,September22,2010,publishedastranscribed.
8:ResearchExtensively
1.Schroeder,The
Snowball,173.2.Ibid.3.Ibid.,149.4.RogerLowenstein,Buffett:TheMakingofanAmericanCapitalist(NewYork:RandomHouse,2008),32,287.
5.Schroeder,TheSnowball,445.
6.Lowenstein,Buffett,150.7.QuotedbyPeterLynch,Forewordtothefirst
editionofTheWarrenBuffettWay,inHagstrom,TheWarrenBuffettWay,2nded.,x.
8.AndrewKilpatrick,emailinterviewwithMacGreerofTheMotleyFool,September22,2010.
9.LisaRapuano,interviewwithauthor,September10,2010,publishedastranscribed.
10.JasonZweig,“HowtoIgnoretheYes-ManinYourHead,”WallStreetJournal,November19,2009,http://online.wsj.com/article/SB10001424052748703811604574533680037778184.html.
11.Buffett,BerkshireHathaway2008ShareholderLetter,16.
12.Ibid.
9:IgnorePeerPressure
1.WarrenE.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967,http://www.pragcap.com/wp-content/uploads/2010/02/BP20.pdf.
2.WarrenE.BuffettandBillGates,interviewbyBeckyQuick,“WarrenBuffettandBillGates:KeepingAmericaGreat,”CNBC,November22,2009.
3.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967.
4.WarrenE.Buffett,“LookatAllThoseBeautiful,ScantilyCladGirlsOutThere!,”Forbes,November1,1974,republishedatForbes.comonApril20,2008,http://www.forbes.com/2008/04/30/warren-
buffett-profile-invest-oped-cx_hs_0430buffett.html.
5.MacGreer,“TheMostUnderratedPartofWarrenBuffett’sSuccess,”TheMotleyFool,July19,2010,http://www.fool.com/investing/general/2010/07/19/the-most-underrated-part-of-warren-buffetts-succes.aspx.
6.RogerLowenstein,email
interviewwithMacGreerofTheMotleyFool,September16,2010.
7.CandaceKingWeir,interviewwithauthor,October7,2010,publishedastranscribed.
8.JasonZweig,“SoThat’sWhyInvestorsCan’tThinkforThemselves,”WallStreetJournalOnline,June19,2010,
http://online.wsj.com/article/SB10001424052748703438604575314932570154178.html.9.Buffett,BerkshireHathaway2008ShareholderLetter,16.
10.Schroeder,TheSnowball,133–34.
11.AndySerwer,“TheOracleofEverything,”Fortune,November11,2002,http://money.cnn.com/magazines/fortune/fortune_archive/2002/11/11/331843/index.htm.
12.LisaRapuano,interviewwithauthor,September
10,2010,publishedastranscribed.
13.Schroeder,TheSnowball,698.
14.Buffett,“BuyAmerican.”
15.Lowenstein,Buffett,133.
16.Ibid.,111.17.Schroeder,The
Snowball,31–32.
10:LearnfromMistakes
1.JasonZweig,“WhatWarrenBuffettWantsYoutoKnow,”Money,May3,2004,http://money.cnn.com/2004/05/03/pf/buffett_qanda/.
2.WarrenE.Buffett,BerkshireHathaway1996ShareholderLetter,inBuffettandCunningham,TheEssaysofWarren
Buffett,2nded.,134.3.———,BerkshireHathaway1994ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,132.
4.———,BerkshireHathaway1996ShareholderLetter,inBuffettandCunningham,The
EssaysofWarrenBuffett,2nded.,134.
5.Lowenstein,Buffett,354.6.WarrenE.Buffett,BerkshireHathaway2007ShareholderLetter,February2008,http://www.berkshirehathaway.com/letters/2007ltr.pdf,8.
7.———,BerkshireHathaway2009ShareholderLetter,February26,2010,
http://www.berkshirehathaway.com/letters/2009ltr.pdf,12.
8.Schroeder,TheSnowball,593.
9.Ibid.,252.10.LisaRapuano,interview
withauthor,September10,2010,publishedastranscribed.
11.WarrenE.Buffett,BerkshireHathaway2008ShareholderLetter,February27,2009,
http://www.berkshirehathaway.com/letters/2008ltr.pdf,16.
12.Ibid.13.WarrenE.Buffett,
BerkshireHathaway1989ShareholderLetter,March2,1990,http://www.berkshirehathaway.com/letters/1989.html.
11:EmbraceFeminineInfluences
1.Schroeder,The
Snowball,281.2.SamWhiting,“TheBridgeClub:WhatDoSharonOsberg,WarrenBuffettandBillGatesShare?Aloveofbridge,”SFGate.com,January22,2006,http://articles.sfgate.com/2006-01-22/living/17278374_1_bill-gates-mr-buffett-bridge.
3.“LikeaMarriage,Only
MoreEnduring,”MagazinefromTheWallStreetJournal,December2,2010,http://magazine.wsj.com/people-ideas/partnership/like-a-marriage-only-more-enduring/.
4.KatharineGraham,PersonalHistory(NewYork:Vintage,1998),525.
5.WashingtonPost
Company,“WarrenBuffetttoRetirefromtheBoardofTheWashingtonPostCompany,”January20,2011,http://finance.yahoo.com/news/Warren-Buffett-to-Retire-from-bw-3922745384.html.
6.LizClaman,“Buffett:Wouldn’tbuymorenewspapersatanyprice,”May2,2009,
http://liz.blogs.foxbusiness.com/2009/05/02/buffett-wouldnt-buy-more-newspapers-at-any-price/.
7.WashingtonPostCompany,“WarrenBuffetttoRetire.”
8.WarrenE.Buffett,BerkshireHathaway1983ShareholderLetter,March14,1984,http://www.berkshirehathaway.com/letters/1983.html.
9.———,Berkshire
Hathaway1984ShareholderLetter,February25,1985,http://www.berkshirehathaway.com/letters/1984.html.
10.———,BerkshireHathaway2007ShareholderLetter,13.
11.Ibid.
12:MaintainConsistent,PersistentResults
1.Train,TheMoney
Masters,1.2.WarrenE.Buffett,“TheSuperinvestorsofGraham-and-Doddsville,”inGraham,TheIntelligentInvestor,rev.ed.,appendix1,537.
3.Ibid.,546.4.WarrenE.Buffett,BerkshireHathaway1988ShareholderLetter,inBuffettand
Cunningham,TheEssaysofWarrenBuffett,2nded.,88–89.
5.———,BerkshireHathaway2009ShareholderLetter,February26,2010,http://www.berkshirehathaway.com/letters/2009ltr.pdf,4.
13:ValuePeopleandRelationships
1.Schroeder,TheSnowball,273.
2.WarrenE.Buffett,BerkshireHathaway1989ShareholderLetter,March2,1990,http://www.berkshirehathaway.com/letters/1989.html.
3.NellMinow,interviewwithChrisHillofTheMotleyFool,September22,2010.
4.WarrenE.Buffett,“AnOwner’sManual,”1996,
http://www.berkshirehathaway.com/ownman.pdf,5.
5.PremJain,emailinterviewwithMacGreerofTheMotleyFool,September27,2010.
6.LisaRapuano,interviewwithauthor,September10,2010,publishedastranscribed.
7.AmeliaWeir,interviewwithauthor,October7,
2010,publishedastranscribed.
8.MichaelD.Eisner,withAaronCohen,WorkingTogether:WhyGreatPartnershipsSucceed(NewYork:HarperBusiness,2010),35–36.
9.Lowenstein,Buffett,75.10.EisnerandCohen,
WorkingTogether,36.11.Schroeder,The
Snowball,532.
12.CarolLoomis,“WarrenBuffettgivesitaway,”Fortune,July10,2006,http://money.cnn.com/magazines/fortune/fortune_archive/2006/07/10/8380864/index.htm.
13.CarolLoomis,“The$600billionchallenge,”Fortune,June16,2010,http://features.blogs.fortune.cnn.com/2010/06/16/gates-buffett-600-billion-dollar-philanthropy-challenge/.
14.Hagstrom,TheWarrenBuffettWay,167.
15.Lowenstein,Buffett,45.16.WarrenE.Buffett,
BerkshireHathaway1986ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,50.
14:QuestiontheMasters
1.WarrenE.Buffett,BerkshireHathaway
1992ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,103.
2.Schroeder,TheSnowball,221
3.PhilipA.Fisher,CommonStocksandUncommonProfits(NewYork:Wiley,1996),16–19.
4.WarrenE.Buffett,
BerkshireHathaway1989ShareholderLetter,March2,1990,http://www.berkshirehathaway.com/letters/1989.html.
5.———,BerkshireHathaway1993Shareholderletter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,90–91.
6.Schroeder,TheSnowball,133–34.
15:ActFairlyandEthically
1.AlyceLomax,“PoptheChampagne!RegFDTurns10,”TheMotleyFool,August11,2010,http://www.fool.com/investing/general/2010/08/11/pop-the-champagne-regfd-turns-10.aspx.
2.WarrenE.Buffett,BerkshireHathaway2000ShareholderLetter,inBuffettand
Cunningham,TheEssaysofWarrenBuffett,2nded.,38.
3.WarrenE.Buffett,“AnOwner’sManual,”1996,http://www.berkshirehathaway.com/ownman.pdf,4.
4.Ibid.5.Schroeder,TheSnowball,229.
6.SusanGharib,“WarrenandCharlie:Ethics101,”xChange:The
NBRBlog,May3,2010,http://www.pbs.org/nbr/blog/2010/05/warren_and_charlie_ethics_101.html
16:FoolishInvestingPrinciples101
1.AndrewKilpatrick,emailinterviewwithMacGreerofTheMotleyFool,September22,2010.
2.LisaRapuano,interview
withauthor,September10,2010,publishedastranscribed.
3.CandaceKingWeir,interviewwithauthor,October7,2010,publishedastranscribed.
4.BillMann,interviewwithChrisHillofTheMotleyFool,September22,2010,publishedastranscribed.
5.WilliamJ.Bernstein,
TheFourPillarsofInvesting:LessonsforBuildingaWinningPortfolio(NewYork:McGraw-Hill,2002/2010),268.
6.WarrenE.Buffett,BerkshireHathaway2009ShareholderLetter,February26,2010,http://www.berkshirehathaway.com/letters/2009ltr.pdf,14.
7.Thesectiononsellingis
pulled,inlargepart,fromStep10,“Don’tSellTooSoon,”in“TheMotleyFool’s13StepstoInvestingFoolishly,”writtenbyJoeMagyerandRichGreifner,andfoundhere:http://www.fool.com/how-to-invest/thirteen-steps/index.aspx.
Index
Thepaginationofthiselectroniceditiondoesnotmatchtheeditionfromwhichitwascreated.Tolocateaspecificpassage,pleaseusethesearchfeatureofyoure-bookreader.
ABC,132accounting,79“Air-aholism,”101,103AmericanExpress,49,61,107,
144–45apparelandtextilebusinesses,42–
43,209–10assets,allocationof,161–63AudurCapital,13balancesheets,79banks,seefinancialindustryBarber,BradM.,18–21,23,28Barron’s,204
BearStearns,2,209behavioraleconomics,18,28–29,
120,191–92,206Berkowitz,Bruce,183BerkshireHathaway:compoundedannualgaininbookvalueof,43,117–18
asoutperformingS&P500inmarketdownturns,121
sharepriceof,95–96stocksplitof,95–96transformedintoholdingcompany,43,110
WB’spurchaseof,42–43,100Bernstein,Peter,192Bernstein,WilliamJ.,163
biases,201Bill&MelindaGatesFoundation,
132biologicalsystems,asanalogiesfor
markets,80,189biotechcompanies,232BlueChipStamps,143Blumkin,Rose,113–14,115,125bonds,145,162Borsheim’sFineJewelry,60,114,
132“BoysWillBeBoys:Gender,
Overconfidence,andCommonStockInvestment”(BarberandOdean),18–21,23
brain,pleasurecentersin,89–90
Breen,Ed,188bubbles,50,119dot.com,56,71,86,88,89,90–91
housing,2,8–9,88,89Japanese,202
BuffaloNews,59Buffett,Susan,109–10Buffett,Warren:backgroundof,37–38,40charitabledonationsof,132“Graham-and-Doddsville”speechof,119–20,133
investmentcareerof,40–43paperrouteof,37–38,48,59,112
readinghabitsof,77–78temperamentof,6–7,14,15,88and2008–9financialcrisis,4–5,10,52–53,69–70,92–93
U.S.companiesasprimaryinvestmentsof,67–68
seealsospecificinvestmentstrategies
BuffetAssociates,Ltd.,41–42,87,117
BuffettBeyondValue(Jain),50,126
Buffett:TheMakingofanAmericanCapitalist(Lowenstein),88
BurlingtonNorthernSantaFe,59–
60,95–96,166businessmodels,79BusinessWeek,202BusinessWire,114“BuyAmerican.IAm.”(Buffett),
69,70,92buy-and-holdinvesting,seelong-
terminvestingBYD,68Callan,Erin,11–12capitalallocation,93–94,129,
186–87CapitalCities,112,132CapitalIdeas(Bernstein),192cash,maintainingamplereserveof,
67“challenge”hypothesis,30,31change:incompanies,166–67inmarketconditions,108
children,asinvestors,39–40,206–7
“cigarbutt”investing,72–73,131,136–37
circleofcompetence,13,55–62,68,81,83,106–7,108,147–48,152,159,160,164,173,174,175,197,205,211,221–24,232
WBon,86–87CitiesService,38
Coca-Cola,43,48–49,56–57,60,107
collaboration,12ColumbiaBusinessSchool,40,
119–20comfortlevel,139,208–9,213,
222–23inrisktaking,162–63,168seealsocircleofcompetence
CommonStocksandUncommonProfits(Fisher),137,204
companies,changesin,166–67competitiveadvantage,see
sustainablecompetitiveadvantage
CompetitiveStrategy(Porter),191
compoundinterest,154–56,206conferencecalls,andevaluating
management,130,187–89,216–17
confirmationbias,82–83,148,174conformity,appealof,89–90ConocoPhillips,82,107consistency,ofinvestment
performance,24,35,44,117–22,175
consumerbrands,60consumerconfidence,3contrarianinvestmentstrategies,
89,97,148,174,205,228CorporateLibrary,124–25cortisol,29–30,31–33
Costco,60,128–29courageofone’sconvictions,see
self-confidencecreditmarkets,3,9–10curiosity,importanceof,79–81,
185–86DairyQueen,43,60debt:creditcard,66,156–58excess,2,7,10,66–67,68,148,157,159,173
managementof,129decisionmaking:emotionsand,200–201outcomesvs.,102,192–93
discipline,maintaining,89,160,211–12
Disney,132,199diversification,138–39,164–65dividends,WB’sdislikeof,93–94Dodd,David,40,86,135,179dominance,maleassertionof,27dot.combubble,56,71,86,88,89,
90–91,210,223DowJonesIndustrialAverage,3,
90economicmoats,56–57,60,75,
106,204Economist,204,219,220efficientmarkettheory,118–21,
133Eisner,Michael,191emotionalcapital,13emotions,controlof,200–201EndofWallStreet,The
(Lowenstein),88Enron,92estrogen,200ethics,141–46,150,176seealsohonestyandopenness
Eubanks,Bob,178–79FairmontHotels,226–27fairness,seeethics;honestyand
openness“FemaleInvestorsandSecurities
Fraud”(Heminway),22“feminine”qualities,12financialcrisisof2008–9,2–6,17,
21–22,33–34,59,195–97,205,211,212–13
Icelandin,12–14WBand,4–5,10,52–53,69–70,92–93
women-managedhedgefundsin,25
financialindustry,9,61asmale-dominated,11–12toxicassetsof,9–10womenin,17–18
Fisher,Philip,85,137–38,184,204
float,43,61,94,100Forbes,88Fortune,71,110FourPillarsofInvesting,The
(Bernstein),163FranklinStreetPartners,178–79FruitoftheLoom,60futurescontracts,29–30Gap,199Gates,Bill,55,132Gates,Melinda,132GEICO,43,48,59,61,77,90,
107,139genderdifferences,seeinvesting,
genderdifferencesin
GeneralElectric,5,53,92GoldmanSachs,5,53,61,92Google,81Graham,Benjamin,40–42,47,63–
64,70,76,85,86,90,110,119,135–36,158–59,164,179,183,184,202,204,230
“cigarbutt”investmentstrategyof,72–73,131,136–37
Graham,Katharine,111–12,115Graham-NewmanCorporation,41Greenblatt,Joel,230,231Guinness,67gurus,questioning,135–40,175–
76,183–85
hedgefunds,177,198genderdifferencesinmanagersof,24–25,35,44–45,175
Heminway,JoanMacLeod,22Herbert,Joe,29Hermes,120Hill,Chris,225history,recognizingpatternsin,80,
189–90Hochschild-Kohn,103–4,106–7,
131honestyandopenness,13ofmanagement,128,130,138,146,150,175,176,187,215
WBon,142seealsoethics
housingbubble,2,8–9,89,107humanbehavior,investingand,
201Iceland,infinancialcrisisof2008–
9,12–14independentthinking,WBon,91indexfunds,164–65information:onlineavailabilityof,120overloadof,218
InnerScorecard,96–97,174,182institutionalinvestors,153insurancecompanies,floatused
by,43,61,94,100Intel,57–58
IntelligentInvestor,The(B.Graham),40,63–64,192,204
InternationalJournalofBankMarketing,26
Internet,76,90,210investing:“cigarbutt”approachto,72–73,131,136–37
contrarian,89,97,148,174,205,228
diversificationin,138–39,164–65
aslong-termcommitment,158–59
marketdownturnsasopportunitiesfor,88
inoverseascompanies,67–68,148,173
asowningpartofanactualbusiness,47–48,54,63,147,151–52,176,199,206–7
qualitativevs.quantitativefactorsin,73,85,108,136–38,184
socialimpactof,13startingoutin,169,206–7,222–24,233
valueapproachto,38,39,40,58–59,91,135,136
investing,genderdifferencesin,15,17–35,123,168,169–70,173–75,205–6
ofhedgefundmanagers,24–25,35,44–45,175
andlearningfrommistakes,27–28,35,44,174
long-termvs.short-termthinkingin,12
ofmutualfundmanagers,23–25optimismand,22–23,34,44,148,174
overconfidenceand,19–21,22–23,34,44,147–48,170,173
patienceand,21–22,147,173peerpressureand,26–27,30,35,44,109,148–49,174
andresearchthoroughness,26–27,34,44,148,174
risktakingand,20–21,24,30,32,33,34,35,44,109,148,170,173,201
testosteroneand,12,29–34,35,44,170,175,201
tradingfrequencyand,19–21,24,31,34,44,147,170,173
IRAaccounts,21–22Iscar,68Jacques,Susan,114Jain,Prem,50,126–27Japan,bubblein,202Johnson&Johnson,126–27,166Kilpatrick,Andrew,78,159
Klarman,Seth,183,184KraftFoods,60–61LaneFiveCapitalManagement,
177–78,185LaurenTempletonCapital
Management,198–99LeggMasonCapitalManagement,
177,179,180,183LehmanBrothers,11bankruptcyof,2–3,5,195
leverage,2,9Levitt,Arthur,141–42LittleBookThatBeatstheMarket,
The(Greenblatt),230Livermore,Jesse,192
Lo,Andrew,192long-terminvesting,9,10–11,165,
181,211asfemaletrait,12,147,173asowningpartofanactualbusiness,47–48,54,63,147,151–52,153,176,199,206–7
speculationvs.,47,152–53,200,206
WBon,71seealsovalueinvesting
Loomis,Carol,110–11,115Lowenstein,Roger,88–89,191Lynch,Peter,152,164,204macroeconomicenvironment,see
marketconditions,changeinMagellanFund,152,164managers,management:changesin,167conferencecallsasguideto,130,187–89,216–17
evaluating,126–30,134,150,159,186–89,203–4,213–17
honestyandopennessin,128,130,138,146,150,175,176,187,215
importanceof,125–26,137returnonequityasmeasureof,127
Mann,Bill,71–72,160–61,225–33
onvalueinvesting,226–29marginbuys,66marginofsafety,63–64,68,72,
93,135,148,176marketconditions,changein,108,
174market-timing,212MaximumPessimismReport,205mentors,questioning,135–40,
175–76,183–85MerrillLynchInvestment
Managers,27–28Microsoft,81,132Miller,Bill,179,183,184,191Minow,Nell,124–25mistakes:
impatienceand,102,103–5,106–7
learningfrom,27–28,35,44,51,82,99–108,174,192–94
ofomissionvs.commission,99–100
peerreinforcementand,105,194asreasonforsellingstock,167–68
asresultofchangingmarketconditions,108,174
asresultoffaultyanalysis,101,108,174
moats,seeeconomicmoatsMohawkAirlines,223Moody’sManuals,76
Moody’sreports,76MotleyFool,141–42IndependenceFundof,71–72,225,232
investmentprinciplesof,15,150–70
MotleyFoolHiddenGems,225,226
Mr.Market,70–71,73,136,148,158–59,167,174
Munger,Charlie,43,49,110,131,133,139,189
inHochschild-Kohnpurchase,103–4
qualitativeinvestingstrategyof,73,85,108,137,138,184
Wescopurchaseand,143–44Murphy,Tom,132mutualfunds,87,153,203genderdifferencesinmanagersof,23–25
Nasdaq,90NationalCouncilforResearchon
Women,26NebraskaFurnitureMart,60,113–
14,125NetJets,102–3neuroeconomics,12,29,205–6NewYorkTimes,51–52,219WB’sop-edcolumnin,69,70,92
Nierenberg,David,231–32Niessen,Alexandra,23–24“NiftyFifty,”87,89Nike,60Nissan,193novels,190–91October1987stockmarketcrash,
92Odean,Terrance,18–21,23,28OfPermanentValue(Kilpatrick),
78,159OmahaSun,59openness,seehonestyand
opennessoptimism:
benefitsof,69–70excess,22–23,34,44,71,73,148,174
Osberg,Sharon,110,111O’Shaughnessy,James,204overconfidence,19–21,22–23,34,
44,61,147–48,170,173,194overseasinvestments,67–68,148,
173,202–3oxytocin,200PaineWebber,209ParadigmCapitalManagement,
208–9patience,12,38,50–54,62,102,
103,105,106–7,160–61,
180–81,195,211,233genderdifferencesin,21–22,147,173
WBon,51–52peerpressure,26–27,30,35,44,
85–97,109,148–49,174,181,197
performancepersistence,24,35,44PersonalHistory(K.Graham),112pessimism:asinvestmentstrategy,22–23,34,44,69–73,148,174,228–29
WBon,70,73PetroChina,67Petursdóttir,Kristin,13
Porter,Michael,191price,valuevs.,118–19,120–21,
180Procter&Gamble,60,166profiteering,7QuarterlyJournalofEconomics,
19railroads,59–60Rapuano,Lisa,177–97onevaluatingmanagement,129–30,186–89
onfinancialcrisisof2008–9,195–97
onmakingmistakes,104–5
onpatience,52,180–81,195onreadingandcuriosity,79–81,185–86,189–90
readinghabitsof,190–92onrelationships,185–86onself-confidence,91–92,160,197
reading,importanceof,77–81,148,185–86,189–92,204–5,217–20,229–31
RegulationFairDisclosure(2000),142
relationshipbuilding,12,123–34,150,185–88,203
vs.returnoncapital,124,134,150,175
WBon,124Renault,193reputation,96research,thoroughnessof,53,61,
65,68,75–83,119–20,137–38,184,203–4,207,227–28,231–32
genderdifferencesand,26–27,34,44,148,174
researchanddevelopment(R&D),129,186
retirementsavings,168returnoncapital,203relationshipsvs.,124,134,150
returnonequity,127risktaking,63–68
comfortlevelin,162–63,168cortisoland,32–33excess,7,10,11,33,82genderdifferencesin,20–21,24,30–31,34,35,44,109,148,170,173,201
marginofsafetyand,63–64,68,72,93,135,148,176
returnand,21testosteroneand,30–31,33,44,175,201
Ruane,Bill,133Rubin,Robert,192Ruenzi,Stefan,23–24SalomonBrothers,145–46
SantaFeInstitute,191saving,importanceof,156–58Schloss,Walter,133scuttlebutt,137–38SecuritiesandExchange
Commission,76,141–42,143SecurityAnalysis(B.Grahamand
Dodd),40,192,204,230–31See’sCandies,43,60,107selectivedisclosure,141–42self-confidence,88,89,91–92,96–
97,160,197,212sellingstock,153–54,165–68,196shareholders:equaltreatmentof,141–42aspartners,143
short-terminvesting,7,10,47,63,200,206
asmaletrait,12marketvolatilityand,50
Sinegal,Jim,128–29small-capvalueinvesting,208socialimpact,investingand,13speculation,seeshort-term
investingsphereofunderstanding,seecircle
ofcompetenceStandard&Poor:500indexof,3,14,43,96,121,164
reportsof,76steroids,seecortisol;testosterone
stockmarket:downturnsin,33,87–88,121October1987crashof,92volatilityof,3,32–33,50,64,136
vs.otherinvestmentvehicles,155
seealsobubbles;financialcrisisof2008–9
stockoptions,127stocksplits,WB’sdislikeof,93,
94–95subprimemortgagebubble,see
housingbubbleSumner,WilliamGraham,2“SuperinvestorsofGraham-and-
Doddsville,The”(Buffett),119–20,133
sustainablecompetitiveadvantage,56,57,60,75,106,137,159,204
changein,167Tamraz,CathyBaron,114technologycompanies:difficultyofpredictingprofitabilityof,55–56,57,81,232–33
seealsodot.combubbletemperament,1–15,180–81,200–
201,211–13,225–26definitionof,6
genderdifferencesin,seeinvesting,genderdifferencesin
ofWB,6–7,14,15,88Templeton,John,39,58,198,201–
2Templeton,Lauren,38–39,58–59,
198–207onevaluatingmanagement,203–4
onglobalinvesting,202–3readinghabitsof,204–5ontemperament,200–201
testosterone,12,29–34,35,44,103,109,170,175,200,201
Tiffany’s,79
Tómasdóttir,Halla,13tradejournals,229trades,frequencyof,19–21,24,31,
34,44,47–54,147,153,170,173
travel,importanceof,220–21Treasurybondmarket,145Tyco,188USAirways,51,101–4,106–7U.S.Bancorp,61valuation,58–59,65–66,167,179–
80value:intrinsic,135–36
pricevs.,118–19,120–21,180valueinvesting,38,39,40,58–59,
91,135,136,177,178–79,198–99,205,208,210–11,226–29
seealsolong-terminvestingValueInvestingCongress,105,
185,194Vanguard,21–22Volvo,193WallStreet,seefinancialindustryWallStreetJournal,77,78,204Wal-Mart,60,79,100,199WashingtonPost,37,48,59,112WashingtonPostCompany,43,
53–54,59,65,93,111–13Weir,Amelia,129,208–24oncirclesofcompetence,222onevaluatingmanagement,130,216–17
readinghabitsof,219Weir,CandaceKing,208–24oncirclesofcompetence,221–22
ondisciplineandself-confidence,89,160,211–12
onevaluatingmanagement,214–15,217
onimportanceoftravel,220–21readinghabitsof,217–19
Weldon,William,127
WellsFargo,61Wesco,143–44WhatWorksonWallStreet
(O’Shaughnessy),204“winnereffect”hypothesis,30–31women:educationof,17financialindependenceof,13,168–69
infinancialindustry,17–18growingeconomicroleof,17asinvestors,seeinvesting,genderdifferencesin
retirementand,168Xerox,223
writer,thenasthemanagingeditorforonlinecontent.ShelivesinNewOrleans,Louisiana.TOMGARDNER,alongwithhisbrotherDavid,cofoundedTheMotleyFool,amultimediafinancialeducationcompany,in1993.Theyhavecoauthoredfivebooksandoverseetheaward-winningwebsiteFool.com(withapproximatelyfive
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