Supported by Greenhaven Road Capital, finding value off the beaten path.
The Buffetology YouTube channel has some nice content. These are my notes from a Peter Lynch talk in 1994.
Two ideas first:
- It’s great that YouTube has the ability to play at a faster than normal speed. Thanks YouTube.
- We’ve entered a time when some, (all?) video content is available online. That amazes me. The only thing I’ve never found is an Emmitt Smith commercial where he’s doing bench presses the day after the Super Bowl and says something like, “no time for rest.” As a 49er fan Smith drove me crazy, but I loved that commercial.
1/ Understand deeply. This first quote about investing was worth the time it took to watch.
“If you don’t understand it doesn’t work. This is the single biggest principle. People are very careful with their money. When they buy a refrigerator they get Consumer Reports. When they get a microwave oven they do that. They ask people what’s the best range, what kind of car to buy. They do research on apartments. When they go on a trip to Wyoming they get a mobile travel guide. When they go to Europe they get the Michelin travel guide. People hear a tip on a bus about some stock and they put half their life savings in it before sunset and they wonder why they lose money in the stock market.”
Ramit Sethi has said the same thing about buying a house. It’s the biggest purchase of your life, take some time to become an expert.
Jason Calacanis said “There’s level of deep, deep obsessive knowledge you need to have of all your competitors. Of all the nuances of their products. Of the history.”
We don’t do this. We prefer to “hear a tip on the bus.” That’s because deep understanding is hard. Fortunately, there are ways to get better at it.
- Be there. Talk to your customers, feel their pain, manage your property. Be like Samuel Zemurray.
- Make jokes. Comedy requires a deep understanding, just look at Jason Zweig, Lonely Island, and James Corden.
- Learn. Mohnish Pabrai said, “(Warren and Charlie) get a little more information because they’re willing to dig deep and read a lot, which most people aren’t willing to do.”
You don’t have to have a deep understanding unless it’s in an area very important to you. Which brings us to point number two.
2/ Do the work or get out. “If you purchase a stock you should do certain things. If you’re not ready to do those things you should keep your money in the bank. Some people aren’t willing to do the homework. Some people don’t have the stomach for it. They should stay out.”
In his How to Start a Startup class at Stanford, Sam Altman said the same thing about entrepreneurship.
Entrepreneurship and investing are huge challenges but also a lot of fun. What other careers, asks Charley Ellis, allows you to participate until you are one-hundred? “The rewards are really quite substantial.”
Do the work. Otherwise, get a target date retirement (choose one with the lowest expense ratio) and take Jason Zweig‘s advice. When someone asks you about the stock market, tell them, “I don’t know and I don’t care.”
About that stock market….
3/ Macroeconomic liars. “No one can predict the stock market, it’s a complete waste of time.” “If you spend 14 minutes a year on economics you’ve wasted 12 minutes.” “Economic predictions are a total waste.” “I spend zero time thinking about what is going on in Washington. I just deal with facts.”
Well, that’s clear.
But, what should I pay attention to?
4/ Microeconomic truths. Lynch might best be known for the “buy what you know approach.” In 2015 he clarified to the WSJ what exactly he meant by that.
He didn’t need to, it’s pretty clear in this video from 1994.
- If you’re a nurse and you see a new drug that works well, check it out.
- If you run a smelting plant and you see a new kind of aluminum, check it out.
- If you run a restaurant (this one is from the WSJ piece) and you see Panera opening on your street, check it out.
Put 10% in a stock you like, suggests Josh Brown.
“You need an edge to make money,” Lynch says, and having a job in an industry is an edge, “a big edge.”
Edges are only the first step down the path of deep understanding. You also have to be objective. “You can’t treat it like your grandchildren,” says Lynch, “If the fundamentals slip you have to say goodbye to it. Remember, the stock does not know you own it.”
“Investment is most intelligent,” wrote Benjamin Graham, “when it is most businesslike.”
Ah, NBD. Gotcha. How hard is objectivity? It’s not like I’m prone to the endowment effect, recency bias, survivor bias, optimism/bull market bias, or the anchoring effect. Here’s how Michael Lewis described Daryl Morey’s experience with that last one.
Morey is taking a behavioral economics class at Harvard Business School during the 2011 NBA lockout. The professor asked the students to write down the last two digits of their phone number, then:
“asked the class to write down their best estimate of the number of African countries in the United Nations. Then she collected all the papers and showed them that the people whose cell phone numbers were higher offered systematically higher estimates of African countries in the United Nations. Then she took another example and said, “I’m going to do it again. I’m about to anchor you. Here. See if you aren’t screwed up.” Everyone had been warned; everyone’s minds remained screwed up. Simply knowing about a bias wasn’t sufficient to overcome it: The thought of that made Daryl Morey uneasy.”
Besides objectivity, there’s something else Lynch suggests. Forget forecasters. The auto section has better information than the financial one.
5/ Be patient. “Another key element is you have plenty of time. People are in an unbelievable rush to buy a stock.” “You could have waited ten years after WalMart went public and still made thirty times your money.”
In his diary about the great depression, Benjamin Roth writes that an investor needed three things to scoop up cheap stocks.
- “Patience to wait for the right moment.”
- “Courage to buy or sell when that time arrives.”
- “Liquid capital.”
Another way to put this is to wait for the right pitch. Warren Buffett said he learned this from the book by the great hitter Ted Williams. Right now – early 2017 – Berkshire Hathaway has seventy million dollars in cash.
Excellent CEOs – The Outsiders – writes William Thorndike have “crocodile-like patience.”
6/ Margin of safety. According to Seth Klarman:
“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world.”
Joel Greenblatt wrote, “Margin of safety should always top your investment list.”
What does Peter Lynch add to this idea? “If you can add 8 and 8 and get reasonably close to 16,” says Lynch, “that’s the only math you need to know.”
If it’s not clear there is a MoS, there isn’t one.
7/ Luck. “In chess an outstanding player will beat a good player one thousand times in a row. In poker or bridge there’s more uncertainty. You can play a hand exactly right and lose. The stock market is much closer to poker.”
Ending on the two-jar model seems about right.
Thanks for reading.