It shows how hard it is to be rational on something very simple.
Now at a place like Berkshire Hathaway or even the Daily Journal, we’ve done better than average.
And now there’s a question, why has that happened? Why has that happened?
And the answer is pretty simple. We tried to do less. We never had the illusion we
could just hire a bunch of bright young people and they would know more than
anybody about canned soup and aerospace and utilities and so on and so on and so on.
We never had that dream. We never thought we could get really useful information on
all subjects like Jim Cramer pretends to have.
(laughter)
We always realized that if we worked very hard we can find a few things where we were right.
And that a few things were enough. And that that was a reasonable expectation.
That is a very different way to approach the process.
And if you had asked Warren Buffett the same thing that this investment counseling did,
“Give me your best idea this year.”,
and you had just followed Warren’s best idea, you would find it worked beautifully.
But he wasn’t trying to know the whole…he would give you one or two stocks.
He had more limited ambitions.
I had a grandfather who was very useful to me, my mother’s grandfather, and he was a pioneer.
He came out to Iowa with no money but youth and health and took it away from the Indians.
He fought in the Black Hawk…he was a Captain in the Black Hawk Wars, and
he stayed there and he bought cheap land and he was aggressive and intelligent and so forth and
eventually he was the richest man in the town and owned the bank,
and highly regarded, and a huge family, and a very happy life.
He had the attitude…having come out to Iowa when the land was not much
more than a dollar an acre, and having stayed there until that black topsoil
created a modern rich civilization, and some of the best land in the world.
His attitude was that in a favored life like his, when you were located in the right place,
you just got a few opportunities if you lived to be about 90.
And that the trick in coming out well was seizing a few opportunities
that were your fair share that came along when they did.
And he told
that story over and over again to the grandchildren that hung around him all summer, and
my mother who had no interest in money
remembered the story and told it to me. But I’m not my
mother’s natural imitator and I knew Grandpa Ingham was right.
And so I always knew from… when I was a little boy
that the opportunities that were important…that were gonna come to me…were few
and the trick was to prepare myself for seizing the few that came.
This is not the attitude that they have at a big investment counseling thing.
They think if they study a million things they can know a million things.
And of course the result is that almost nobody can outperform an index. Whereas
I sit here with my Daily Journal stock, my Berkshire Hathaway stock, my holdings in Li Lu’s
Asian fund, my Costco stock, and of course, I’m outperforming everybody.
(laughter)
And I’m ninety-five years old. And I practically never have a transaction.
And the answer is that I’m right and they’re wrong. And that’s why it’s worked for me and
not for them. And now the question is do you want to be more like me or more like them?
The idea of diversification
makes sense to a point if you don’t know what you’re doing and you want the standard result
and not be embarrassed, why course you can widely diverse.
Nobody’s entitled to a lot of money for
recognizing that because it’s a truism it’s like knowing that two and two equals four.
But the investment professionals think they’re helping you by arranging
diversification. An idiot could diversify a portfolio! Or a computer for that matter.
But the whole trick of the game is to have a few times when you know that
something is better than average and to invest only where you have
that extra knowledge. And then if you get just a few opportunities that’s enough.
What the hell do you care if you own three securities and J.P. Morgan Chase owns a hundred?
What’s wrong with owning a few securities?
Warren always says that if you lived in a growing town and
you owned stock in three of the best enterprises in the town, isn’t that diversified enough?
The answer is of course it is…
if they’re all wonderful places. And that Fortune’s formula which got so famous
which was a formula to tell people how much to bet on each transaction if you had an edge.
And of course the bigger your edge, the more close the transaction was to a certain winner,
the more you should bet… And of course there’s mathematics behind it…
But of course it’s true. It’s perfectly possible to buy only one thing
because the opportunity is so
great and it’s such a cinch. There are only two or three.
So the whole idea of diversification when you’re looking for excellence, is totally ridiculous.
It doesn’t work. It gives you an impossible task.
What fun is it to do an impossible task over and over again?
I find it agony. Who would want to do it? And I don’t see a way.
My father had a client, he was a lawyer in Omaha,
he had a client whose husband had a little soap company.
The guy died and my father’s sold the soap company.
This woman was one of the richest people in town in the middle of the depression,
and what she had was a little soap company and the biggest mansion in Omaha’s best neighborhood.
When they sold the soap company she had a mansion in the best neighborhood
and three hundred thousand dollars. But three hundred thousand dollars
in 1930s something was an incredible amount of money.
A little hamburger it was a nickel a big hamburger was a dime, and the all you can eat cafe in Omaha
would feed you all needed to stay alive for two bits a day.
I mean 300,000.
Well she didn’t hire an investment counselor, she didn’t do anything, she’s a wonderful old woman.
She just took that, she divided it into five chunks, and she bought five stocks.
I remember three of them because I probated her estate.
One of them was General Electric, one was Dow, one was Dupont, and I forget the other two.
Then she never changed those stocks. She never paid any adviser. She never did anything,
and she bought some municipal bonds, she never spent her income,
and she bought some municipal bonds from time to time with the (inaudible).
By the time she died in the 50s she had a million and a half dollars.
No cost. No expenses. I said, “How did you decide to do that?”
And “Well…” she said, “I thought electricity and chemistry were the coming things.”
She just chucked it all in and sat on her ass. I always liked that little old woman.
My kind of a girl. But it’s rare!
But if you stop to think about it, think of all the expense and palaver
that she didn’t have to listen to
and all the trouble she avoided, and zero costs. And of course
what people don’t realize, because they’re so mathematically illiterate,
is if you make 5 percent and pay 2 of it to your advisors,
you’re not losing 40 percent of your future
you’re losing 90 percent. Because over a long period of time that little difference
causes a 90 percent disadvantage to you. So it’s hugely important
for somebody who’s a long term holder not to be paying a big annual toll
out of the performance.
And of course there are a few big time advisors now who are using indexation very heavily.
And of course they’re prospering mightily. And of course every time
they get somebody it’s just agony for the rest of the investment counseling business.
This is a very serious problem.
And I think these people who were used to winning as old-time value investors
who are now just quitting the profession. That’s a very understandable thing to do.
I regarded it as more noble than staying in…you know…playing along with the denial.
It’s an interesting problem.
You can see I’m not trying to make your morning.
I’m just trying to describe things the way they are.
But this business…
Why does Li Lu succeed so mightily?
Well partly he’s sort of a Chinese Warren Buffet.
That really helps. And partly he’s fishing in China! Not in this
over-searched, over-populated, highly competitive American market, and there’s
still pockets of ignorance and lassitude in China that gave him so unusual opportunities.
The first rule in fishing has always been fish where the fish are.
And the second rule of fishing has always been ‘Don’t forget rule number one’.
And Li Lu just went where the fishing was good and the rest of us are like
cod fishermen who are trying to catch cod where the fish have been fished out.
It doesn’t matter how much you work, when there’s that much competition.
Every little idea I see in the world some are going after. I sat once on an investment committee
at the University of Michigan and in came one of their successful investors located in London.
And what had this investor done in London?
He decided to invest in sub-Saharan Africa.
And the only marginal securities were a few banks that traded in the Pink Sheets,
so he would buy very tiny quantities of these banks.
And every time some poor person got tired of having their money in the mattress and
put it in a bank he did a little better. And of course he made a lot of money.
Nobody else was investing in little tiny banks in Africa.
But the niche was soon filled. What the hell do you do for an encore after you
put your client’s money in a bunch of little tiny banks in sub-Saharan Africa?
The niche gets filled quickly. How many wonderful niches are there going to be
when some guy in London is buying all these tiny little bank stocks in Africa? It’s hard.