warren buffett

Letters to Our Children #5: Your Human Capital

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One investment supersedes all others: invest in yourself. Renowned investor Warren Buffett promoted this idea in a 2017 interview. It cannot be taken away, it adjusts for inflation, it helps you have a more interesting life and earn more money.

Interestingly, Buffett’s prime example of this is not an Ivy League education, but a simple public speaking course, one that many thousands of others have also pursued. Early in life he realized a crippling anxiety about public speaking would impair his career. Beginning long ago with the help of Dale Carnegie, he is now at ease in front of tens of thousands of shareholders, high powered interviewers, presidents, other business leaders, or any other situation required of him.

When we invest in our selves, we are seeking to improve our value to others. The more valuable we make ourselves, the more an employer or customer will pay us. The collection of attributes that create this value are called human capital.

Many aspects of human capital are free. Years ago I became acquainted with a senior officer of a large publicly traded company whose most obvious super power is kindness. After he moved on to a leading role elsewhere, people familiar with him always remembered that trademark feature, and how he had helped them in the past, how he made them feel.

Kindness is free. So are dependability, punctuality, being true to your word, enthusiasm, diligence, and all the other traits we seek when we deal with others. Others desire those same traits in us.

Some aspects of human capital require time and money, sometimes lots of both. Think of the education and training required of surgeons, for example. Educational paths and career planning are beyond the scope of this essay, but the value and wisdom of all of your choices ultimately comes down to whether you figure out how to add value to the rest of society.

We have heard the idea of “follow your passion” debated back and forth. Understand the difference between doing what you are passionate about, and being passionate about what you do. One of them has a wider range of opportunity than the other.

The source of our wealth is our earning power, which arises from our human capital. In future letters we will talk about how to manage the fruits of your human capital, but it all starts here.

Clients, if you would like to talk about this or anything else, or suggest ideas for future letters, please email us or call.

The Anti-Buffett

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We had back-to-back conversations recently with clients who are big fans of Warren Buffett. Oddly, they seem to dislike the application of his principles to their portfolios. It is a good illustration of why Buffett’s success has endured, in our opinion. His ideas are easy to understand, hard to do.

Consider these quotations, investor first, then Buffett in bold.

“This stock has done nothing but go down since I bought it. I want to sell.”
I love it when stocks I like go down, then I can buy more at a better price.

“That company is in the news all the time with problems. I don’t think we should buy it.”
The troubles everyone knows about are already in the stock price.

“Everyone I know is afraid of this market, so I’m thinking of getting out.”
Be greedy when others are fearful.

“This stock is doing great, it’s gone up a lot since we bought it.”
Watch the company, not the stock.

These conversations are noteworthy because they are rare. The tagline on our digital archives, ‘for the best clients in the whole world,’ reflects our high esteem for you.

Clients, if you would like to talk to us about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Every Share Sold is Bought

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We talk a lot about cycles, but there’s one truth to them that we could come right out and say more often: there are no ups without downs, no downs without ups. Night and day. Yin and yang. Buy and sell.

People sometimes lose sight of this reality, especially when talking about the waves of selling that engulf the markets from time to time, cratering prices. They might say, “Long term investing is all well and good, until the financial crisis comes and wipes out half your account—that happened to me.”

In the last crisis (2007–2009), the markets recovered and went on to post gains for many years. When I inquire whether their accounts have bounced back since then, some reply, “Of course not! Everybody had to sell out to save what was left!”

Life is too short for most arguments, isn’t it? We move on to other topics. But the fact remains: even on the worst days in the depths of the crisis, when the market was suffering large percentage losses, we believe every share sold was also bought. There are two sides to every transaction, a buyer and a seller. Not everybody “had” to sell out.

In the fall before the market bottom in March 2009, noted investor Warren Buffett wrote in The New York Times that the economy was likely to be larger—and company profits higher—ten and twenty years in the future.1 Therefore, he was buying.

We felt the same way.

But it may feel as if everybody is selling. In the crisis, one of you told us it was no longer possible to talk about the economy or markets at coffee in the mornings, because every single person there called you a fool for staying in or told you all your money would be lost. Another said the same thing about the Friday night dinner crowd—you felt lonely. But you persisted.

It is popular lore among financial advisors to presume that people are really not capable of investing effectively, pointing to behavioral economic studies. You know we have worked hard to find you, the exceptions: people who either have the native good sense to invest effectively or who can learn how to do it.

We believe that every share sold is also bought. We have a choice, which side of those transactions to be on. Clients, if you would like to talk about this or anything else, please email us or call.

Notes and References

1. Warren Buffett “Buy American,” The New York Times: https://www.nytimes.com/2008/10/17/opinion/17buffett.html. Accessed: September 24, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing, including stocks, involves risk including loss of principal. No strategy assures success or protects against loss.

 

When Dark Clouds Fill the Sky

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Warren Buffett’s latest shareholder letter contained a remarkable paragraph:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

Long-time clients saw how this worked in the recovery from the 2009 crisis low point, and the post-9/11 lows in 2002. You are a remarkable group: when others panicked and sold out, many of you stayed the course. There is no guarantee, of course, that history will repeat, or that past performance indicates future outcomes.

Like great chess players, we need to be thinking many moves ahead. In our opinion, the economy in the US and around the globe is pretty good. We do not buy the whole stock market, we pick our spots. And we are excited about those spots.

But we do need to be steeled to both occasional market corrections of up to 10%, and the deeper declines that occur from time to time. They cannot be reliably predicted. What is in our control, however, is how we react. Do we sell out at low points, or get in position for a possible recovery? We are taking steps that may mitigate a general market decline—no guarantees, of course.

We are a little more prone to keep a little cash in reserve, to diversify into lower-priced markets, to continue to prune holdings that may be extended and add names we believe to be bargains. Most of our holdings are not sitting at all-time highs, although overall market averages are–the S&P 500 for example reached a new high as recently as March 1st1. You can read about our current themes here.

In the very best case, markets and our account values fluctuate. This is the tradeoff we accept in order to seek the returns we need to pursue our goals.

We have a great partnership with you, our amazing group of clients. You understand living with volatility can lead to long term rewards. We think we know what to do, whether the skies are blue or the dark clouds have gathered. If you have questions or comments, please write or call.

1Market data from Standard & Poor’s


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The Beauty of Simplicity

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The high priests of investing preach in a strange language, filled with jargon and confusing acronyms. But some of the people who have actually made the most money investing speak in plain language. Nearly anyone can understand Warren Buffett and Charlie Munger, for instance.

In a recent Wall Street Journal interview, Munger said “There isn’t one novel thought in all of how Berkshire is run. It’s all about… exploiting unrecognized simplicities.” This elegant idea may be at the heart of the difference between effective investors and those who try to play one in real life, the high priests.

Simple ideas have been central to things that have been good for us. Before we cite examples with which you may be familiar, it is only fair to note that there is a yawning gap between “simple” and “easy.” What we do—what you put up with—is not easy.

Historically, the stock market has tended to gradually rise over time. Simple. But what would they talk about all day on CNBC if they didn’t act like the next sneeze or burp from the Federal Reserve (or whatever) would either doom us or make us rich?

Buy low, sell high. Simple. Many if not most investors end up doing the opposite, following trends, jumping on bandwagons, joining stampedes. We know how doing the opposite works out, buying at high prices and selling at low prices. Not pretty.

Own the orchard for the fruit crop. Simple. Yet only rarely does one hear this wisdom from the high priests. They talk about volatility as if it were risk, when the truth is, if the fruit crop is big enough for you to live on, you do not have to worry what your neighbor would pay for the orchard, or if his offer is higher or lower than the day before.

We’ve always believed that what we do is simple. Sure, there are a lot of fine points and nuances. We invest a lot of time and resources to find and learn the pertinent information. But in the end, we ought to be able to explain it to you. This is our goal. If we have missed, or you would like help interpreting something else you do not yet understand, call or write.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

Things Warren Buffett Never Said

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Warren Buffett may be the most famous investor in the world. The annual meeting of his company is known as ‘Woodstock for Capitalists,’ and is attended by 40,000 people. Countless articles, essays, and books have been written (including by us) about the things he has said.

As far as we know, nobody has ever written anything about things Buffett NEVER said. But here are our top three things Buffett never said:

1. “The stock went down, so I sold it.” Buffett knows the market goes up and down. He studies companies, not stock ticker symbols. When the fundamentals are in place, he buys. Then he holds. Then he holds some more. If the price declines, he typically buys more. This is what ‘buy low, sell high’ is all about.

2. “I’m waiting to invest until we get more economic data to clear up the uncertainty.” In his seven decades of investing, Buffett has noticed that uncertainty is always with us. He reads and studies ceaselessly, and when he finds something to buy, he buys it. Frequently, this turns out to be when the price is depressed because of temporary factors. Others are paralyzed by uncertainty when Buffett is taking action.

3. “A lot depends on what the Federal Reserve does next month.” Buffett has run his company for more than five decades, while seven different people held the chairmanship of the Federal Reserve Board, through innumerable cycles of Federal Reserve tightening and loosening. He can tell you what he paid for his stake in Coca Cola and when it was purchased. He probably cannot say what the Federal Reserve did at the meeting before, or the meeting after, the transaction. Why? Because it doesn’t matter in the long run.

Warren Buffett does not wear a halo. He is a human being and that means he makes mistakes. But he has made more money investing than any other human being on the planet. We think it pays to listen to the things that he has said. But there may be even more value in understanding the things he never said.

If you would like to discuss these concepts or your specific circumstances at greater length, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Stock investing involves risk including loss of principal.