It is important to periodically revisit the lessons of investing from the great investors – past as well as present. Warren Buffet recently wrote a letter to shareholders celebrating the 50th anniversary of Berkshire Hathaway, which has some real gems when it comes to investing principles. Tren Griffin, a technology, policy and strategy partner at Microsoft, writes a very interesting blog ( ) where he covers a dozen things he has learned from a broad variety of greater investors (including Warren Buffet, Charlie Munger, Howard Marks, Seth Klarman and Ray Dalio), business leaders, entrepreneurs and venture capitalists which usually contain some very valuable insights. To summarise the dozen things he has learnt from Warren Buffet’s letter:
-Treat an investment security as a proportional ownership of a business. A security is not just a piece of paper. Not all businesses can be reasonably valued. That’s OK. Put them in the “too hard pile” and move on.
-Make bi-polar Mr. Market your servant rather than your master by trading with him only when it serves your interests!The best advice is simple: “be greedy when others are fearful and be fearful when others are greedy.”
-Buy at a bargain price which provides a margin of safety- i.e.
-Know your circle of competence and stay within it- risk comes from not knowing what you are doing. There are that contribution to this problem including overconfidence bias, over optimism bias, hindsight bias and the illusion of control.
-Most investing mistakes are psychological. Investing is simple, but not easy. Buffett has a great system, but his emotional and psychological temperament is especially suitable for investing. Like Charlie Munger, he is highly rational as human beings go. Everyone, including Buffett, makes mistakes. You can do very well in investing by just avoiding stupid mistakes.
-Buy at a bargain, avoid forecasting and wait! You can determine that buying an investment now is a bargain that creates a margin of safety based on a valuation process, but you cannot predict when the price will rise. So you wait.
-Investing results will always be lumpy.
-Risk is not the same as volatility. It is “volatility” after all which enables an investor to benefit from Mr. Market’s bi-polar behaviour (i.e., volatility is actually the source of a value investor’s opportunity). For the best essay on the proper definition of risk read Warren Buffett’s 1993 Berkshire Shareholder’s letter.
-Most investors should buy a diversified portfolio of low fee index funds/ETFs. As Yale’s David Swensen says: “Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It’s overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.”
-Follow the “cost matters hypothesis” as described by John Bogle: “In many areas of the market, there will be a loser for every winner so, on average, investors will get the return of that market less fees.” Mr. Market is both a benchmark and your competition. You need to beat him after fees and costs. Few can beat him and so most should be him.
-The only unforgivable sin in business is to run out of cash. The need for some cash as dry powder applies to everyone, the only question is how much cash to have on hand.
-Black Swans can appear any time. People will try to get you to buy things by hiding this risk.
-Brilliant insights into the investment process from one of the all-time investment greats and should be the basis of one’s toolkit for investing. My personal four key principles form a subset of the above:
-Diversify. You do not know what tomorrow may bring so diversify to mitigate risk.
-Be a Contrarian. By investing when other are fearful and being fearful when others are being greedy allows one to build a margin of safety and take advantage of the bi-polar Mr. Market.
-Be Patient. Allow time to work to your advantage. As Jason Zweig notes:
-Do not Leverage: As noted by Jeremy Grantham - It can remove the one advantage the individual investor has over the professionals – patience!
-As Gavyn Davies observes in his FT blog: after a negative January, February was another very strong month for global equities, with the US market posting its best monthly return since October 2011. Global equities are now up by 5.1 per cent this year, exceeding the pace of the ‘12-14 advance. However, there was a significant rotation in terms of performance, with Europe (+ 14.7%) outperforming the US (+2.2%) – see chart below. This has been in the aftermath of the U.S. stock market tripling since 2009, driven by a moderate but continuous recovery in GDP and corporate earnings and (most importantly) the QE policy by the Fed. However, earnings are now being negatively impacted (with downward revisions exceeding upwards revisions by 33%) by a strong dollar and the collapse in oil prices, and with the Fed likely to raise interest rates this year, the U.S. will probably underperform Europe and Japan which have supportive central bank policies in the form of QE.
As the second chart below illustrates, the recovery of global markets from the March 9, 2009 low (for the U.S) continues with India, U.S., Japan and Germany (in that order) posting the most spectacular gains. The Shanghai index, with its 52% rally last year, seems to have finally broken out of its trading range over the last 3 years. The buy on sharp market corrections and reduce on significant rallies approach still holds.