I bought my first stock
when i was 10 years old. I bought one share of Johnson & Johnson
with birthday money and it split three-for-one the next day. I own stocks all the
way through my childhood. My mom found me a stock broker of -inaudible-
gentleman who didn't mind a 10 and 12 year old calling him up for quotes at that point you had
a call for quotes there was nothing available any other way. I did a fifth grade
oral presentation to my class on how to buy stocks. I remembered that that was somewhat different than
what the other kids were presenting on. I was business oriented as a kid I told the story that when I
was maybe 3 or 4 years old, we were still living in New York city actually at the time.
I redecorated my room and set it up like it was a retail store and put price tags on all my stuff
in Baltimore I had — which we moved to when I was maybe 6 — I had a whole variety of businesses
I had paper route and then a second one which I did with friends and at one point with my brother
I had a snow cone stand in the driveway. One summer we rented a machine and we made we mixed
the snow cone flavors and actually made the ice out of my mother's fridge and she was not
happy because the entire freezer was storing ice cubes. I mowed lawns, I shoveled snow occasionally.
we had carnivals, I had a high school teacher who was a stamp and coin dealer. On weekends I
went with him to stamp and coin shows and had my own coin collection at that point. So, I was
involved in a variety of small scale business ventures. The investment philosophy
is a bottom-up value-driven philosophy. Looking for out-of-favor situations
securities that are loathed, despised, ignored, deliberately ignored, that fly below the radar
for some reason. Often the securities are complicated securities involving
not just a stock with dividends or bond with interest but a bankrupt bond or a royalty stream
or a royalty stream that ends suddenly or some other feature that made them more difficult than
than most people would care about analyzing or things that fell through the cracks or
again when the mainstream investors want to look at things in an index we want to look at things
not in the index, we've kicked out of the index. So, there's always an edge in our investing
looking for: kind of a favorable supply and demand situation where you're getting a real bargain
because other people — and you have limited competition — because other people aren't playing.
I think a good investor begins from a cautious standpoint, that a good investor is not somebody
who throws caution to the wins and gets on for the ride. A good investor somebody that kind of
identifies all the possible risks and finds ways to hedge or avoid as many of them as possible.
We've missed plenty of opportunities over the years but we've also never had any big disasters
and that has led us to a very good overall results. Can you talk to us about your philosophy of timing,
if there is or there's no philosophy of timing because you're looking at value and that you
understand value and essentially the big decision for you is the buy decision
more than the sell decision? Buying is easier, selling is hard, hard to know when to get out
there's no timing element you can never tell how big a bargain you might get offered tomorrow.
somebody comes along wants to sell you a dollar for $0.50 cents you can never know if they'll want
to sell to you at $0.40 cents tomorrow. So, you need to buy it and leave a little room to buy more
and maybe someday spend your last dollar and buy the bargain and maybe it goes down
before it goes up. So, you always are checking and rechecking your work. The critical thing
the thing that would cause you to lose your confidence when you're doing that
would be if you realize the dollar wasn't a dollar. You thought it was worth a dollar but
Greece failed or the euro fell or collapsed and all of a sudden your dollar is only $0.30 cents and
now what you thought was a bargain is overvalued. So, that's the dilemma, it's not so much figuring
out what it's worth today. It's making sure it'll still be worth that same thing or approximately
that same amount tomorrow. Are you different than Warren, in terms of how warren has evolved and how
you have evolved, obviously, I think Charlie Munger had some influence on warren in
understanding to to not just to look for the classic example of the cigarette butts,
but to look at things that were reasonable price with the belief that they could be that this still
was a margin of safety? First of all a lot of my Charlie Mungers are out here in the audience. So,
a lot of people here that I bounce ideas off of and we should we share thoughts. I mean how
have you evolved that is different from warren. Warren evolved through three stages he went
from buying cigar butts and getting the last few bucks for free, to buying great businesses at
really cheap prices, to buying and holding great businesses at so-so prices and maybe even this
new area of buying weird securities from crappy businesses at better than market prices like Bank
of America preferred or whatever. I'm still in phase one we're still buying we're still buying cigar butts
there's a good business there and buying them and it's a lot of fun and that's what you're proud of?
NO, I feel like I have stunted growth Charlie.
But he also doesn't, I mean he's not really focused on the gyration of the stock every day. Me, neither
I don't have a Bloomberg on my desk I don't care. You don't have a Bloomberg on
your desk? No, because might makes -inaudible- But what's on your desk then?
A phone, a giant piles of paper that are at risk of falling on me at any moment.
I have a computer and a phone. So, tell us about your desk . Have filled bottled water
I mean but you sit at a trading desk? When you're not meeting either clients or
are people that going to give you some information that might be relevant to what you decisions you
have to make. You're sitting at a trading desk. Thinking big thoughts. What are you really
it's not so much because you are reacting to the volatility of every market that you're invested in.
Because if you were value investor, my assumption would that that you're not looking to trade at
every moment. We're not traders, there's a wonderful story Chris brown and Tweety brown tells a story of
how they were interviewing somebody to come. You know, to come join their firm and
after the interview he's walking the fella to the elevator and the fella says, you know, it's
amazing here Tweety brown at most firms you can tell from the atmosphere in the place whether the
market's up or the market's down. Tweety brown you can't even tell if the market's open. (Laughter)
i think it's like that in our firm. We're making medium to long-term investments you know
three to five years or longer. So, we're not really that into.. The only reason we care about
the gyrations is, we can buy something even cheaper. Do you like bad times then?
We benefit from volatility, and distressed and everything else. We provide liquidity
when people want to sell things in a hurry. Presumably, it's a transaction between
consenting adults when somebody owns a bond that was triple A and now is
triple C, they want to sell, they want liquidity we sort of are our rhythm is opposite most
of the markets rhythm. We buy things when the market's down, we sell things when the market's up, Do I root
for bad times? Of course not, I love our country.
Is it frustrating when the market goes straight up and up and up as it did from 82 to 87?
It was frustrating and I worry because just at those times it's when the little guy gets sucked
in, and the little guy finds it irresistible when the market's going higher and higher the little
guy gets pulled in by stories from their neighbors, stories at the cocktail party and they hear about
how much money people are making the market. Charlie, you probably know this but the return
from all mutual funds in the 1990s was 600 basis points higher than the average return from the
investors in those funds during the same period. That's because they get it in the wrong time
and out of the wrong time. So, that's painful to me. So, what is your lesson? That's why I wrote the
book to try to educate the average person, but only like a few hundred of them read the book
I hope I'm going to get a copy of this book. What was it about margin of safety because in a
sense it's a term that you believe in. According to what I read it's a book that's on
Warren Buffett's desk. You both are great, I don't want the word disciples but your
great followers of the teachings of ben graham. I think it's probably on warren's bookshelf under a
pile of papers, I don't think Warren needs to read it anymore. What was it though?
I don't really know, I tried to write it to be accessible to the lay person
or the professional entering the field. So, I tried to use layman's language
and just make it accessible. It's certainly the term is borrowed from security analysis
and it's meant to be in some ways intellectual successor to intelligent investor
which was the more accessible of Graham's books. So, I think it's just another book in that tradition.
maybe if people can't get something they
want it even well, there may be a lot to that, I think they call it supply and demand.
Suppose you wrote recently the preface to the new edition of security analysis is
that right security analysis? Yes, what is it you want to say and why has it remained a
your lodestar and secondly sort of this remarkable, everybody knows I've probably done
more conversation with Warren Buffett than anybody alive and they're we talk about all the time
and how you know his own ben graham experience and coming to columbia and
what it meant to him. How do you understand why this has been such a profound
series of principles that have made you in investments who you are today?
First of all I wish I'd met ben graham I never was fortunate enough to do that.
I think Warren captured the idea himself in his 1964 article
the super investors of Graham and Doddsville and in it he talks about,
value investing is like an inoculation, you either get it right away or you never get it.
I think it's just true, I actually think there's a gene for this stuff whether it's
a value investing gene or contrarian gene. I think that everybody appreciates a bargain, but when
the market's going down most people overreact and get scared. My stock is going down what am I going
to do? So, if you're buying a sweater and it goes on sale from $400 to $150 you get excited when you get
to the store. But if you have a stock or you bought the sweater at $400 maybe you're not so happy.
So, I think it's for me it's natural but for a lot of people it's fighting human nature.
It is true what Warren Buffett said when you find out about it, it's like being let in
on this little secret. So, if you can remember that stocks aren't pieces of paper that gyrate all
the time, that stocks are fractional interest in businesses. It all makes sense you have it's almost
like you have to slow the game down like they talk about baseball speeding up on you you need to slow
it down. I can buy this thing for a huge fraction of what it's worth what am I worried about? If it
goes down? Okay so what's the gift here knowing what it's worth? I think that the analysis
is actually the easy part. When I speak to business school students, I tell them investing is
the intersection of economics and psychology. The economics, the valuation of a business is not that
hard. the psychology, How much do you buy? Do you buy it at this price? do you wait for a lower price?
What do you do when when it looks like the world might end? Those things are harder
and knowing whether you stand there buy more or something legitimately has gone wrong any to sell
those are harder things and that you learn over with experience, you learn by having the right make
psychological makeup in the first place. What's the right psychological makeup that you have?
Patience would be one. Cash would be another. Value investors have to be patient and disciplined
but what I what O really think is you need not to be greedy, if you if you're greedy
and you leverage you blow up, almost every financial blow up is because of leverage.
Then, you need to balance arrogance and humility and I'll explain what I mean
when you buy anything it's an arrogant act. You're saying the markets are gyrating and
somebody wants to sell this to me and I know more than everybody else so I'm going to stand here and
buy it. I'm going to pay an eighth more than the next guy wants to pay and buy it. That's arrogant
and you need the humility to say but I might be wrong and you have to do that on everything.
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