The Great Communicator

Yes, Warren Buffett is a great investor. He is an even better teacher. While Buffett gains notoriety for his phenomenal track record, he is respected, admired, and has throngs of people making the annual pilgrimage to Omaha each spring to listen to him, because he willingly shares and communicates his vast sums of accumulated knowledge with anyone that puts in the time and effort to learn.

It has often been said that the best teachers in the world can take the most complex of ideas, and explain them in such a simple manner that even the most uninformed student can understand. And if this is the measure of a great teacher, then Buffett is surely one of them. Buffett primarily uses the power of analogy to convey his ideas and thoughts to his "students". A recent example of this, is when asked about the proposed remedies for the current financial crisis, Buffett related it to a patient in the ER who needed to be revived. He rightly pointed out that in time of crisis—the patient crashing—people need to act quickly and do something to revive the patient, rather than arguing about if the patient ate too much or smoked too much over his lifetime. In hearing this analogy, it was almost as if you could see a light bulb go on in people’s heads about our current economic state, as they said to themselves “Ah, I get it!” And if imitation is the best form of flattery, then Buffett is in good standing, as you began to hear this analogy preached far and wide, just shortly after Buffett made the comparison in a television interview with Charlie Rose.

When you think about it, successful investing is also about making analogies between seemingly different businesses and ideas. The person who can apply what they learned by studying the success--or perhaps more importantly the failure--of a particular business or industry, to the concepts of another business or industry will likely have a leg up on those who only understand the intricacies of one industry, no matter the depth of their knowledge. Taking this concept one step further, the practice of making analogies is essentially a method of assessing one’s opportunity costs at any one time, which--as I’ve written previously--is what investing is really all about. Perhaps one could argue that Buffett’s ability to make analogies has been (and is) better than many other investors’, which has helped contribute to his long-term investment success, as well as his enduring appeal as a teacher.

I’m often asked what will Berkshire eventually be like without Buffett. Given the investment model and brand Buffett has built in Berkshire, as well as his stated intention to separate the operating and investing roles of his job into people he has already identified to take the reins, I don’t think Berkshire’s financial results will miss a beat. What I do think Berkshire will miss, though, is the communication and teaching ability of Buffett. His successors will likely do well for the company, but I doubt they will be able to attract and inspire as many “students” as both Buffett and Munger have done over the years. In fact, while I still think Berkshire would have done well, I’m not sure it would have been as great as it has become (as a company) had it not been for Buffett’s ability to communicate and teach.

This brings me to an interesting point about the investment industry. I’d argue that it is the job of most financial professionals to teach their clients as much about investing and the financial marketplace as possible. It seems so natural to me that by effectively teaching your clients—by using terminology that they understand--will help to foster trust, and as such, this trust will compel clients to gladly pay a reasonable fee for your knowledge and advice. But what has actually happened in the financial services industry over the last several decades has been anything but the creation of a culture of teaching and trust. Rather, the culture that has been created is that of a sales culture. Unfortunately, to make a sale, most “professionals” obscure things, use esoteric terminology that not only can their clients not understand--or the professionals themselves likely--but also probably cause their clients to be fearful of asking a question at the risk of looking stupid. This type of fear can be a strong motivator in making a sale, so it has been practiced even more—often at the expense, rather than for the benefit of the client.

I’ve thought about this a lot, and frankly, the only term I can come up to describe it is sad. This “sales at any cost culture” is likely a cause of part of the financial problems we have today. And when you think of what all these other vultures were doing to--rather than for--their clients, it’s no wonder that Buffett and Berkshire (as well as those that practice what he preaches) have become so successful, as he was one of the few teaching, while everyone else was so busy selling.

I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts.

Justin

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.

Berkshire Continues to Accumulate Burlington Northern Shares

Late last night, Berkshire Hathaway (BRK-A) indicated that it purchased an additional 4.4 million shares of Burlington Northern Santa Fe (BNI) over the last three days. This additional purchase gives Berkshire almost a 22% stake in the railroad. This move isn’t really surprising, as Burlington’s shares have fallen to the low $60’s in recent days, which evidently made the price even more attractive to a long-term owner like Berkshire. Recently, chairman Warren Buffett has been chided by a myriad of pundits as some of his stock picks have dropped after he has made his initial purchase, but I think this is yet another example of him being able to opportunistically add to a position that he likes as the price has become even more attractive. Furthermore, this move is also instructive to the rest of us, as it is an additional example of using the market to serve you rather than instruct you as an investor.

If you haven’t already done so, please be sure to sign-up for my free email alerts on Warren Buffett, Berkshire Hathaway, and value investing by emailing me at buffettinsights@gmail.com

Justin

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.

Investing is Basic Economics

At a recent Wesco Financial (WSC) annual meeting, Wesco Chairman and Berkshire (BRK) Vice-Chairman, Charlie Munger was asked a question about what tools or courses one could take to become a better investor. Munger quickly quipped, that all one needs to understand investing and to become a better investor is a basic course in economics.

The key--and brilliant, I might add--insight here is that to become a good investor, one just needs to understand basic supply and demand interactions in markets. Essentially, all that one needs to do to make money by investing is to sell assets that are in high demand (low supply), and buy assets that are in low demand (high supply), and wait for markets to return to equilibrium. Like all great insights this one is also simple, yet why is that so few people can actually execute it?

In my view, the difficulty for most folks is that it is incredibly hard for them to wait for opportunities (supply/demand imbalances) to invest, and then to also wait for markets to recover and clear (supply/demand equilibrium). It can often take years for these events to occur, and time and time again it’s evident that the average investor just doesn’t seem to have the emotional temperament to be patient and wait. But is it their fault?

Perhaps, but I don’t think most Wall Street professionals help the average investor to understand these basic economic concepts either. Most Wall Street professionals make money for themselves by living off of the buying and selling of their clients. As a result, it’s in these professionals’ interest for their clients to do anything but be patient and wait. Rather, they’d like to have their clients make as many transactions as possible, as frequently as possible. In my opinion, the way that Wall Street achieves this “transaction volume” is by creating so much noise and esoteric terminology, that the otherwise patient investor becomes so confused about what is going on in the world, that they are eventually cajoled into making a move—often at exactly the wrong time.

The irony is that while short-term transactions are being promoted from far and wide, most individual investors actually have a long enough time horizon to be patient and wait for both opportunities to present themselves, and then to also wait for markets to recover. Given this time horizon advantage, how can individuals tune out Wall Street’s noise and apply a basic economic framework to long-term investing?

Let’s think about today’s markets. Fear is widespread. Predictions of doom and gloom are rampant. And as a result, the demand for US Treasury bonds (safety) is so high, that even as the Treasury has upped its own issuance of debt—thereby increasing supply--short-term bills are still, in some cases, returning negative rates of return—i.e. buy $1.00 and get $0.98 back. Taking it one step further, the prices of Treasury bonds today actually have no where to go, but down. Stated interest rates cannot—by definition—go lower than 0.00%, and when they eventually rise, the price of these bonds will fall, as supply would begin to outstrip demand.

Almost all other assets--stocks being one of the major ones--have seen their prices fall, as supply is currently much greater than demand. Basic economic theory would suggest that when supply and demand eventually adjusts again (similarly as described above), it will force supply and demand in other markets (such as stocks) to also adjust, perhaps eventually creating greater demand for these types of securities. And within these markets, this type of economic analysis could be performed on a more micro, or granular, level on the individual securities themselves to identify imbalances. This is no great insight. It is just a simple extension of a basic economic theory developed centuries ago, and applied to a modern market. So, if this appears to be so simple, what is the great equalizer?

It has everything to do with time and temperament. On the former, one has to consider if they have a long enough time horizon to wait for markets to stabilize or return to equilibrium, whenever that may be. On the latter, all one can really do is not watch the hourly market gyrations or listen to the myriad of daily prognosticators--maybe just turn them off--and trust that logic and rationality will eventually return to markets in the years and decades ahead.

If you haven’t already done so, please be sure to sign-up for my free email alerts, by emailing me at buffettinsights@gmail.com. I also welcome dialogue with and comments from my readers, so please be sure to send me any questions or comments you may have.

You might also be interested to know that this article was also recently featured in a MarketWatch article, which I've linked here.

Justin

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way. This content is intended solely for the entertainment of the reader, and the author.