Everybody loves Warren Buffett.
We probably have a small contingent of young investors today who all wants to be Buffett when they grow up. I hear of investors advocating Buffettism and also Mungerism, looking for the great company with a great moat and hoping to sit on it for decades making great compounding returns. And then plonking a huge chunk of the portfolio into a few names. Diversification is out, concentration is in, that sort of thing.
It is good to aim high, but we have to learn to crawl before we learn how to walk. Personally, I think it is much more realistic to start off with a low hurdle. The genesis of value investing started with Ben Graham and cigar butt stocks. From this genesis, there is actually a continuum towards the Munger/Buffett great business at fair value method. And the continuum is not necessarily linear, but presents various pathways.
Buffett, in his legendary article on the super-investors of Graham & Doddsville, referred to an investor who made 21% per annum (16% per annum net of fees) for a total of 46 years. 21% per annum compounding for 46 years is stupendous performance. If you do not believe me, just plug in quick numbers into a spreadsheet or an online calculator and see what $1000 is worth after 46 years of compounding at 21% per annum.
This performance was achieved with huge diversification of portfolio in many stocks, and the basic premise was just to buy cheap and sell at fair value, and protecting the portfolio with wide diversification. That was it. Remember simplicity, consistency and valuation?
The Super Investor in question was, of course, Walter Schloss (RIP).
So without further ado, I present:
Sixty Five Years on Wall Street- remarks by Walter Schloss
16 Factors to Make Money in the Stock Market
Forbes Article- Experience
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1 comment:
Agreed - a most underrated investor. The investment approach is systematic and repeatable (think checklists); but it is not exactly scalable, which means anyone running a fund would have to keep it pretty small. Either that or you occasionally have to put your activist hat on.
The problem with asset plays is that using Geiger Counters - as Munger puts it - is the path to millions, not billions (to be completely presumptuous here!). I think as one's portfolio grows and markets become more efficient, there are increasingly fewer opportunities of this variety and is less meaningful to overall returns. At that point an investor evolves to thinking about earnings power and franchise values.
Still, having a basket of asset plays is a reasonable strategy, particularly as a "hedge" in frothy markets because you should have a reasonable idea of the downside.
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