It’s that time of the year when the world’s most awaited corporate communication comes out. My guess is if we take all publicly listed companies around the world (except one), and add up the number of times their management letters get read, that number would be dwarfed by that for Berkshire Hathaway and Warren Buffett’s annual letter to shareholders. At $300,000+ per Berkshire Class A share, it’s safe to assume only a fraction of those readers are potential buyers.
All around the world, people from fund houses, financial media, popular investment blogs, and investment advisories pore through the simply formatted, 20-page letter to eke out key quotes, which then become the subject of thousands of investment articles, blog posts and tweets.
There is a problem with this investor fixation on the words of the “Oracle of Omaha”. It is hurting your returns. Let me explain this sure-to-be unpopular line of thought.
What makes Warren Buffett one of (if not) the most revered investor to millions of small retail investors around the world?
Of course, the returns
$100 invested in Berkshire at the beginning of 1965 would be worth $1.97 Million in Dec 2017, compared to $12,705 in the S&P500. That’s 155x the benchmark.
Critics argue that the “BRK multiple” over benchmark has shrunk significantly over time. Such that if you invested the same amounts in BRK and the S&P500 in 1990, your 2017 multiple would “only” be 2.5x, investing in 2000 it would be 2.1x and in 2010 would be 1.1x
To me, such criticism sounds like sportswriters who say Roger Federer is not as good because he’s winning grand slams with smaller margins.
If I outperformed the benchmark index 36 out of 53 years in operation with a CAGR of more than 2x the benchmark, that table would be page 1 of my letter to shareholders as well.
It’s more than the returns
Buffet is available
Have you come across a book on investing that does not have at least some space devoted to him and Berkshire? Type “Warren Buffett” on Amazon and over 1,000 book results come up. Since he first made his incisive letters to shareholders public, a self-perpetuating loop was created where authors desperately looking to decode the holy grail of investing find easily accessible content and so write about him at length which leads more investors to go seeking even more.
Buffet is likeable
In spite of careful curation by PR agencies, most billionaires appear forbidding and no-nonsense to the rest of us. Warren Buffett is disarmingly down-to-earth in all his interactions.
“Our experience is that envy is what really drives people. You can give someone a $2 million bonus and they’re happy until they see the next guy got $2.1 million and then they’re miserable. Charlie has pointed out that of the seven deadly sins, envy is the most useless, because you just make yourself miserable and can’t sleep. There’s real upside to gluttony – I’ve had some great times with gluttony. And we won’t get into lust.”
Or this line in the 2017 letter
“The format of that opening paragraph has been standard for 30 years. But 2017 was far from standard: A large portion of our gain did not come from anything we accomplished at Berkshire.”
Who wouldn’t find him likeable?
Most of all, Buffett makes it look easy
When you read or listen to investors like Ray Dalio, George Soros, and Carl Icahn, you “feel” the complexity of their investment frameworks and associated intellectual heft that makes their returns look unattainable to the rest of us.
Buffett, however, consistently distils massively complex ideas about successful investing into deceptively simple statements. Those statements then become legends, to forever be repeated by a legion of investors big and small.
This simplicity is deceptive. It make us think of Buffett’s investing as being easy.
When in fact, investing exactly like Buffett (other than just copying his trades) is nearly impossible. And that’s where it hurts investors by replacing real-world learning with pleasant unarguable quotes.
Prof. Feynman, probably one of the most intelligent people to have lived, said:
“If you can’t explain something in simple terms, you don’t understand it”.
He was known for his ability to explain to virtually anybody dense topics like quantum physics. He is credited with devising “The Feynman Technique” as a mechanism to master topics.
When Buffett says, “Price is what you pay. Value is what you get.” he’s at step 4 of a 4-step process where he has applied his phenomenal intellect to decades of “study” by investing and constantly learning.
Just like having Prof. Feynman explain why “spin one-half particles obey Fermi-Dirac” might help you and me “get” the concept superficially but won’t equip us to implement what we learnt to achieve the next breakthrough, Buffett’s simplistic statements exhibit his mastery of investing but do not make the readers competent investors.
Beyond Buffett and Learning by Doing
Bill Nygren likened reading the 15th book on Buffett to “investor comfort food” that feels good when you consume it but doesn’t add value in the long term.
So, first, be honest with yourself whether you’re consuming something, be it a book, blog post or tweet, for immediate joy (junk food) or long-term benefit (healthy food).
One way to determine whether it is the former, ask yourself what it would mean to implement it. How would you apply the framework and judge its effectiveness? How will you determine its suitability for your unique temperament? Most of all, how does this advice fit into/challenge your existing beliefs about investing? How does it make you a better investor?
If a certain strategy or advice seems too high-level or vague to test, let it go and focus on something you understand and can implement with real money. A simplistic strategy that you inherently understand is way better than a complex one you don’t.
Observe the results, including your all-too-human responses, then decide whether you’re happy to stick to the process for the long term, or if you want to refine it or outsource the whole thing.
Note of caution here: In some cases, the material might seem unimplementable on account of shortcomings in our own toolsets and will make sense as our understanding evolves. Go back and study them.
Someday, I hope to have the richness of mental models that allow me to truly get how Buffett’s quotes translate into returns. Until then, I won’t stop enjoying the odd Buffett tidbit. After all, life without the occasional beer and pizza wouldn’t be much fun. Oh, and Federer is a legend.
Learn anything in four steps with the Feynman Technique [link]