What’s the major parallel? They are looking for simple,
painfully obvious investments. Buffett has said it over and over: a great investment should be apparent very
quickly.
When you feel like you are shooting fish in a barrel, your thesis is going to be simpler and more
understandable, and thus more likely to work out. The obvious ones are the
best ones.
Often times when I say such things, people respond by
saying “But if it’s too simple, you might be missing something!” Ah, but this
is flawed thinking, and skews the idea of making investments simple: you still have to do all your homework, but
the final thesis should be a few sentences.
The great investors
know their holdings like the roads leading to their house: eyes wide shut.
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Q: In your letters you speak frequently
of the importance of not over-complicating things. What are your secrets to
keeping your life simple?
Buffett: When making investments, pretend in life you have a punch-card with only 20 boxes, and every time you make an investment
you punch a slot. It will discipline you to only make investments you have
extreme confidence in. Big money is made by obvious things. If using a discount rate of 8% vs. 10% is going to make or break an
investment idea, it's probably not a good idea.
At a Berkshire Annual Meeting, someone comments on
discounted cash flow modeling:
Charlie
Munger (Berkshire Hathaway's vice chairman) said, "Warren talks about these discounted cash flows. I've never seen
him do one."
"It's true," replied Buffett.
"If (the value of a company) doesn't just scream out at you, it's too
close."
In a talk with Wharton Students in 2003, Buffett reflects
on the “obvious investment” approach:
"I like to go for cinches. I
like to shoot fish in a barrel. But I like to do it after the water has run
out."
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Mohnish Pabrai responded in a similar way when asked about
his successful investments.
Question: Would you say that in your
experience, your best investments have been derived from some obscure
"hidden" asset value you find in an investment or from some
traditional valuation measures?
Mohnish Pabrai: The best investments
are total no-brainers that can be explained in a short paragraph or two.
They are obvious investments. The more
words and spreadsheet cells it takes to layout the case for an investment, the
worse it’s likely to do. Frontline was obvious. Stewart Enterprises was obvious.
Level 3 was obvious. Pinnacle Airlines was very obvious. More recently, Ipsco
was very obvious and that was nearly a 300% return in less than 2 years.
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Knowing this, I was re-reading some passages from a book I
enjoy: Market Wizards, Interviews
with Top Traders, one of the interviews being investing legend Jim Rogers.
While he has a different range of investments than most
investors, he’ll just as likely invest in Malaysian Palm oil as General Motors,
he has a laser like focus on finding
investments that simply can’t lose; ones where the economics are too right to
be wrong.
Mr. Rogers’ quotes on investing in Market Wizards
are investing gems:
Q: It sounds like you have a great deal
of conviction when you put on a trade.
Jim: Yes, I do; otherwise I don’t bother doing it. One of the best rules anybody can learn about investing is to do
nothing, absolutely nothing unless there is something to do.
Q: Do you always wait
for a situation to line up in your favor?
Jim: I just wait until there is money
lying in the corner, and all I have to do is go over there and pick it up.
I do nothing in the meantime. Even people who lose money in the market say, “I
just lost my money now I have to do something to make it back.” No, you don’t.”
You should sit there until you find
something.
And lastly:
Q: If you
were counseling the average investor, what would you tell him?
Jim: Don’t do anything until you know
what you are doing. If you make 50% two years in a row then lose 50%
in the third year, you would be worse off than if you just put your money in a
money market fund. Wait for something to
come along that you know is right. Then take your profit, put it back in
the money market fund, and just wait again. You will come out way ahead of
everybody else.
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Sounds like very basic common sense which is so uncommon.
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