Replicating Buffett

I've often wondered why Warren Buffett's formula for building wealth is so hard to replicate.  I think a few things are at play that prevent the average investor from obtaining the sorts of returns Buffett has throughout his career:

Fear of uncertain outcomes
A misunderstanding of Buffett's entire approach
The wrong mindset and temperament

Fear of uncertain outcomes:  Even though Buffett's approach to investing is tried and true, it's not certain that someone, following Buffett's approach to a tee, will have the same results.  What if they enter the market right before a recession or crash and lose a large chunk of their net worth?  Buffett has the confidence from years of experience on his side and he obviously has the means to wait out a dip in the market.  In fact, these days, he looks forward to a dip.  His Berkshire Hathaway has so much cash on hand right now that he'd love to put some of it to work in the market but equities have recently been out of his buying range.  The hard part is waiting until the opportune time to place your bets.  And even then, with a rather concentrated portfolio of your best picks, your portfolio will likely be much more volatile than Dow Jones or an index fund.  Many people don't fare well with this sort of uncertainty.

This potential lack of a security net scares many potential investors off, as well, as they have families to take care of and other needs to be met.  Society also tends to frown upon the guy who leaves a secure, high paying job, to pursue wealth in another venture.  It appears irresponsible or greedy or lazy.  However, those who do make the jump and do it properly tend to be rewarded.  Read Charlie Munger's bio; he left a great career in law to pursue investing full time. 

Taking the first step is also difficult.  How do you know when to enter the market?  This, I believe, can't be learned from the sidelines, but must be obtained from experience.  But taking the first step in anything is difficult.  We often don't embrace change, but change is necessary.

A misunderstanding of Buffett's entire approach:  Many hear Buffett's name and think, "stock market genius".  In reality, Buffett has many more layers than his stock picking prowess.  He prefers to buy entire private businesses rather than parts of large companies via public trading.  He also suggests avoiding excessive debt, but if you understand his approach, he uses significant amounts of borrowed money (insurance "float") to invest in other businesses.  His debt is cheap or possibly free; "float" is the money his insurance companies collect as premiums that he can invest until a claim is placed and some money must be paid out to settle the claim.  Therefore, if his insurance underwriting team writes profitable policies, the premiums he collects less the administrative expenses becomes additional profit that he can invest.  He's basically being paid to borrow money!  It's brilliant!

While Buffett's stock market record is absolutely incredible, he never would have been able to take advantage of Mr. Market to the extent that he has, had he not bought privately held businesses that kick off significant cash and provide investable income via insurance float.  This is why I believe there is only one Warren Buffett.  Buying a business is daunting.  I know that from experience.  And it takes a number of years for many businesses to reach their full potential or even turn a profit.  This is such an important, yet under appreciated, aspect of Buffett's approach.  I would venture to say that those who study Buffett's philosophy and follow his advice, rarely buy businesses.  They are missing a key ingredient in duplicating Buffett's success.  Others have had success in the market like Buffett.  Read his, "The Superinvestors of Graham and Doddsville" article for evidence.  But the magnitude of his accomplishments was made possible by the cash kicked off from his private businesses.

The wrong mindset and temperament:  Buffett also ENJOYS the extreme long game, not because he has to, but it's simply his mindset.  He wants to be able to sleep at night stress free; a portfolio manager doesn't have that luxury.  Professional money managers can't touch Buffett because they need to keep up, year after year, with their colleagues and competitors.  A portfolio manager can't tell his boss to give him 5 years before reviewing his performance.  Buffett never had to answer to anyone but himself and his partners - and his partners had full faith in him. 

Individual investors are in the same boat.  They can't handle the ups and downs of the market and so they end up selling out at the wrong time.  They don't focus on the long game.  They don't have the confidence that things will work out.

Buffett is truly one of a kind and the goal doesn't need to be to attain greater wealth than him.  If one can accomplish a tenth of what he has accomplished, they will find themselves very well off.  To do that, you need to be comfortable with the uncertainty, understand the Oracle's entire approach, and keep a level head with a proper mindset.

Winning or Losing by Saving???

A few weeks ago, I came across this Instagram post from CNBC on a Grant Cardone quote. 

"You can skip spending $5 at Starbucks every day and save $10,000 over the next 5 years, but if you think $10,000 is going to change your life, you're not just broke, you're being stupid." - Grant Cardone

FIRE(D)!!!

FIRE(D) - Financial Independence Retire Early (by Default???).  So, I had planned on being out of the corporate workforce within two years to concentrate on my investments, property, and businesses.  Well, that plan was just accelerated after I was let go from my position this past Friday, 11/30/2018, due to downsizing.  So now, Decision Day approaches.  Now, the fun begins . . .

Well, that was a quick 2.5 years . . .

After a 2.5 year hiatus - and I'm not really sure if that was intentional or not - I decided it was time to post an update.  Wow, a lot has happened with a few trips around the sun!  Looking through past posts, I have mixed feelings.  I can honestly say I'm proud of how much I've stayed the course, even without writing this blog to help keep me in line.  However, I also remember why I think I stopped writing for a while.  I think I wanted more out of my writing and I gave up trying to get there.  That lack of fulfillment came maybe as I ran low on interesting material that I was passionate about writing or maybe as I felt my time was better spent on productive activities such as reading or researching ideas, rather than writing about dreams.  Anyhow, I guess I got the bug again . . .

Using Availability to Our Advantage

Marco Rubio has recently been taking a lot of heat for his robot-like performance at the most recent Republican national debate.  In case you somehow missed it, he repeated a stump line verbatim four times, completely out of context, in answering the moderator's questions.  Governor Chris Christie lambasted him on national television, calling Rubio out for being the robotic politician that Washington manufactures.  My initial thought, besides the feeling of embarrassment for him, was:  How can he not know what he is doing?  Why can't he stop himself from regurgitating the same canned line? 

I think it comes down to the availability heuristic.  From Wikipedia:

The availability heuristic is a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method or decision.

Basically, your brain takes a shortcut and tells your mouth to spew the first thing that comes to mind; that is, the idea that is currently most available in your brain.  While this heuristic typically serves your brain beneficially in most every day cases - who would enjoy conversing with someone who had to put 10 minutes of thought into each carefully chosen sentence? - it has a tendency to choke under pressure. 

Put yourself in Rubio's shoes - or even Rick Perry, who infamously forgot the third government agency he would drop in order to cut federal spending at a debate during his 2012 presidential campaign.  Or, think of when your boss walks in unexpectedly and peppers you with questions on progress or schedule or budget - items that maybe you hadn't thought about yet today as your mind was focused on resolving a more technical issue currently at hand.  You freeze and spout out the first thing that somewhat coherently makes sense, even if it isn't 100% accurate.  You may even repeat yourself a couple of times, using your line as filler material in hopes that a more lucid thought will quickly materialize.

Daniel Kahneman and Amos Tversky discuss this phenomena at depth and provide examples of the biases created from availability in their classic 1974 paper, "Judgment Under Uncertainty:  Heuristics and Biases" (pdf. version of original article here).  One such analogy illustrates how the risks of an expedition may be significantly overvalued if those risks are vivid and come to mind easily.  How many people do you know who are afraid to swim in the ocean because of the possibility of a shark attack - which, based on historical evidence, is highly unlikely to occur?  For whatever reason - be it Hollywood movies or the gruesome picture we imagine in our heads - the image is vivid and easily recallable, forcing us to put much more weight on the likelihood that it will occur than it actually deserves.

And it's not just in what we say and how we react to social situations.  It is also in our private actions and decisions.  Take your finances, for example.  Say you began to invest in 2006 or so and, since then, you casually follow the overall stock market.  You take a diversified, conservative investing approach - maybe a few blue chips, but mostly Vanguard funds, as your financial advisor recommends.  2008 comes along and wipes out 40% or more of your holdings.  You panic, sell out, and lick your wounds.  The market continues to drop and even though you know the market has historically produced positive returns since its inception, you stay on the sidelines, missing out on the eventual massive recovery.  Why?  Because the only thought, the available thought, in your mind is the vivid memory of your losses.  You don't care what the experts say, you're not screwing around with stocks ever again. 

The availability heuristic messes with our rational thought.  Economists like to believe that humans are rational thinkers, but rational thinking is not innate.  Everyone knew the 2008 market was going to correct - and correct it did!  Those on the sidelines missed out on enormous gains.  The rational move would have been to dig deep and invest more.  A killing would've been had.  But our mind isn't innately wired to think like that - but we can train it to. 

Charlie Munger in his revised "Psychology of Human Misjudgment", gives this gem of advice:

The great algorithm to remember in dealing with this tendency is simple: An idea or a feat is not worth more merely because it is easily available to you.

If we force ourselves to undervalue the first idea that pops into our minds, we can enable ourselves to make more rational decisions.  The overwhelming affect of the 2008 crash left vivid memories in investors' brains and overshadowed the last 100 years of positive performance.  Similar reactions took place in those who lived through the 1930's Great Depression.  Story after story can be found of gun shy businessmen, bankers, and investors.  Families put their money under their mattresses or in safes where it could never again be lost in the financial markets.  We need to get beyond that train of thought and force rationality into our minds.

An even more interesting strategy is to force yourself to think rationally when you have time to do so.  Read the thoughts of good decision makers.  Read Warren Buffett's letters to his shareholders to get a sense of how he reaches rational business decisions.  They are intriguing and can be applied to personal finance as well as large scale investment decisions.  Read Benjamin Graham to understand how to rationally value a business or Kahneman to understand the biases your mind subconsciously utilizes.  Rubio and Perry could learn a thing or two from these guys, like don't count on canned answers, for one.  Had they been comfortable within their respective platforms and spent their mental energy on thoroughly fleshing out their political positions, they wouldn't need to bank on recalling over-used speeches that have limited upside but large downside risk.

Your brain can be wired to make rational decisions - not by being an intuitively rational thinking machine - but by trickery; use your brain's instinctive mental shortcuts to your advantage.  The more rationality you constantly feed your brain (via books, education, etc.), the more subconscious, rational decisions will be automatically made. 

Streamline Your Mind

From successful businessmen to politicians and entrepreneurs to investors, a penchant for reading seems to be a common trait existent in many of the world's top leaders.  From President Obama to former NFL quarterback Fran Tarkenton, many start their days scouring the local and national newspapers and favorite blogs. 

"The Week" published a wonderful article in 2013 describing Warren Buffett's and Charlie Munger's reading habits.  Here's an excerpt:

Warren Buffett says, "I just sit in my office and read all day." 

What does that mean? He estimates that he spends 80 percent of his working day reading and thinking. 

"You could hardly find a partnership in which two people settle on reading more hours of the day than in ours," Charlie Munger commented. 

When asked how to get smarter, Buffett once held up stacks of paper and said he "read 500 pages like this every day. That's how knowledge builds up, like compound interest."

The article goes on to describe how possible Buffett successor, Todd Combs, has heeded his bosses advice and reads up to a thousand pages on some days! 

Confirmation Bia$

The recent attacks in Paris, I hope we can all agree, were tragic.  As the friends and relatives of the victims continue to mourn, we turn on the news every morning to updates on the search for the suspected attackers.  And, in the aftermath, social media fills up with opinions on the Syrian refugees immigrating to America in search of a better life and, more importantly, peace.  Fear abounds as to whether potential terrorists will use the opportunity to enter the country and plot further attacks on our own soil. 

Log in to Twitter or Instagram to find yourself inundated with fiery opinions and impassioned debates of commenters either siding for or against the 31 governors who have decided to not welcome Syrian refugees into their states.  58 comment responses later and nothing has been resolved.  The end result:  a lot of mud-slinging, anger-fueled rage, hot tempers, and little resolution.  What we DON'T have is a significant amount of level-headed, clear minded, well reasoned discussion.  How does this happen every time a new hot button issue arises?  How do we not improve our ability to better resolve a discussion and not take the bait some attention seeking poster hangs out there in a Facebook rant?  Why, after so many of these episodes, do we still constantly let our emotions impede our reasoning?

Well, one reason might be that social media provides a platform for this type of conversation - a back-and-forth exchange where one can take time to flesh out his argument, use a thesaurus to find a bigger, more complicated word, and dial up a Wikipedia article or two to find under-scrutinized pieces of information to back his side prior to hitting "reply".  But the root of the problem goes deeper than that.  We are pushed to partake in these disputes because of Confirmation Bias.

Of Wrestling and Life

I am extremely biased, but I strongly believe wrestling is one of the toughest, most challenging, character building, and valuable activities that a person can participate in.  Few other sports pit one competitor against another in an environment that requires as much mental preparation as full-body strength, endurance, and coordination.  MMA may be one of the few exceptions.

I was fortunate enough to have had a semi-successful high school wrestling career - placing 8th my junior year and 3rd my senior year at the Indiana State Wrestling Tournament - before walking on to a Big Ten wrestling team.  On the nurture side, outside of family influence, the sport probably did more to shape my life, my values, and my belief system than maybe any other external factor to this point.  Wrestling involves many intricacies that can be applied to numerous - maybe most - obstacles encountered throughout a lifetime.  With that, I have compiled a list of lessons wrestling can teach that apply to life in general:

We Are Wimpy!

We, as a society, are wimpy.  We become more and more sensitive to every news article or Twitter post that rubs us even slightly the wrong way. We turn to social media as an outlet and believe it exists only as a means for us to vent our perspective.  If we don't like something, well, instead of doing something productive to change it, we voice our frustration in a Facebook rant.  Seven likes later - there, you feel better.  You DID do something about it.  You just changed the world, didn't you?

I'm not blaming social media for the current state of our culture; it had to be expected as the world grew more connected.  We all have a right to be heard - I'm not denying that - it's just that now we can easily access an audience for our tirades instead of chewing the ear of our significant other or neighbor or co-workers over the water cooler.  In fact, I don't even mind the obsession our society has with "being heard" and "making a point".  I think it even offers an advantage to the "doers" over the "talkers". 

Why do the "talkers" do what they do (or, don't do what they could do?)?  It starts young.  Parents these days (man, I'm sounding old!) do everything in their power to ensure that their kids are comfortable, regardless of how much they are being set up to fail.  Megan McArdle opens her book, "The Upside of Down" with a discussion on how schools are set up to let children fail later in their lives.  Parents side with their kids over teachers, grade averages are increasing - not due to smarter students, but out of convenience, multiple valedictorians are named in the same school - sometimes in the 30's and 40's - because "no one wants to make a distinction between the kids".  In general, everyone gets a trophy for participating.

Why Knowing it All Makes you Dumber . . .

A difference exists between confidence and arrogance - between being well-informed and believing you have all the answers.  Why are we so reluctant to say, "I don't know"?  Or, "I'll have to check on that"?  Instead, when pushed into a corner or pressed for more information, we succumb to a recency bias and blurt out anything we can recall on the topic at hand.  Regardless of whether the information we are spouting is correct or not - we only say it because it is the most easily accessible information our brain can provide at the moment - we feel the need to sound informed.  Or, more likely, we have a fear of being regarded as uninformed or, worse yet, unprepared. 

Volunteering the most recent information that comes to mind may get us out of a temporary pickle, but it will catch up eventually.  The problem is, once something comes out of our mouth, we own it; we tend to believe and defend it even more than before the statement was made.  The vicious cycle continues with confirmation bias, where we now begin to search only for information that supports our position, building additional mental support for a stance that we were once not really sure we even agreed with.

"Waiting for the Universe to Respond to What You've Been Manifesting"

Over the weekend, I stumbled upon this picture on Instagram:

 

 

It was so ridiculous and pointless - just like most brain-drain social media posts, I suppose - but it was also one of those images that became stuck in my head.  How often do you feel like this?  I mean, REALLY feel like this?  I've felt this way more lately than I can ever remember - and it's tough.  Anxiety has got to be one of the most difficult emotions to suppress.  If you're like me - and I'm assuming if you're reading this then we likely share number of similar characteristics - it is not in your nature to sit back and watch the world go by.  You need to be doing something; you need to be planting some seed or nurturing one that you've previously sown.  Sitting and watching is next to impossible. 

Investing in Others' Dreams

I recently have had the opportunity to invest in a small startup restaurant in my home town, the owner being a high school friend/acquaintance from years ago.  He is only looking for a little startup capital - rent and labor in our town is so cheap; the downtown building he wants to lease/purchase will cost something like $700/month and it is in the heart of our town of 20,000 people.  Our downtown used to be more vibrant.  Or, at least, that's how I remember it growing up.  We have an old courthouse in the center of town that gives the town character and a welcoming feel, our Fourth of July parade is packed every year, we have nice clean lakes that are great for boating and fishing, and the downtown area has potential if the right people were involved.  The compassionate, nostalgic part of me wants to give him his money and hope he succeeds.  The logical, business side of me says, "Restaurants fail.  Bad investment" - even if it is a relatively small sum.

Entity and Incremental Learning

From Business Insider

I've been on a bit of a psychological kick lately digging into books like "Bounce" and "Thinking Fast and Slow" - which is quickly becoming one of my favorites and, by far, one of the most informative I've ever come across.  "Bounce" mentions some of the work of Carol Dweck, who was the author of "Mindset", which contains some mind blowing information on how our minds work and how we can condition them to focus on success.

While her book was a great read, I had forgotten - or, more likely, didn't yet understand - how enlightening her concepts really were.  That was until a couple of months ago.  Not only did her writing continue to pop up in a number of books I had been reading, but my son was born.  After seeing how fast little babies pick up new habits and how quickly they learn, I began to think about the best way to raise him from a psychological standpoint to empower him to live the best life he possibly can.  I remembered Dweck and gave myself a refresher of her teachings, which took on an entirely different meaning than the first time I plowed through "Mindset". 

One of the tenets of "Mindset" was the distinction between entity and incremental learning.  Entity learning was the belief that brainpower and intelligence were innate and could not be improved.  It gave the individual a sense of entitlement.  On the opposite end of the spectrum was incremental learning:  the belief that "the novice can become the master" (quoted from "The Art of Learning").  Empowering! 

Deliberate Practice in Pursuit of Goals

For years now, I've been enthused and passionate about investigating the role of talent in shaping the person we become in our lives.  Books like "Talent is Overrated" by Geoff Colvin, "Outliers" by Malcolm Gladwell, and "Mindset" by Carol Dweck had huge impacts on shaping my perspective about innate abilities and showing evidence that we all truly have much more control over our lives than we initially assume.  I have recently read "Bounce" by Matthew Syed, who was an Olympic table tennis player for Great Britain.  He had won numerous European table tennis championships as well as Commonwealth Championships - but readily admits to choking in the 2000 Sydney Olympics.  At that point, he began to investigate the intricacies of success, why some experts choke, and the role of genetics in shaping our talent.  The book was phenomenal (I hope to do a write up on it soon).  Syed knows a thing or two about success in athletics at the highest levels, which gives the book some validity over the others, who were written by psychologists and journalists.  "Bounc" is like "Talent is Overrated", "Outliers", and "Mindset" on steroids (in fact, Syed even talks about steroid use in sports!).

Anyway, it was another eye opener into what we are truly capable of accomplishing with, as Colvin defines it, "deliberate practice".  Deliberate practice can be thought of as hours of focused practice - not going to the driving range to hit golf balls, but going to the driving range, focusing on the grip for hundreds of swings, then focusing on the backswing for hundreds of swings, etc.  Ideally, you'd be able to film yourself or receive immediate feedback so you can make minor adjustments.  Watch this talk from Colvin.  While this task is much different than perfecting a golf swing, the message remains unchanged:

Suggestion, Anchoring, and the Adjustment Heuristic

I've recently been reading (listening on audio!) through Daniel Kahneman's "Thinking Fast and Slow" and one idea struck me that I haven't been able to get out of my head:  Anchoring and the Adjustment Heuristic.  Here is the Wikipedia definition:

Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.

Kahneman and Amos Tverskey Kahneman goes over numerous examples of this bias; one involved asking study participants if Gandhi was 144 years old when he died.  While this question is obviously absurd, as 144 years is longer than anyone can live, it sets an "anchor" from which the participants "adjust" from.  Participants adjust down from 144 to reach their answer. 

In another example, real estate agents were given sufficient information to assess the value of a house.  Within this information was the list price.  Some agents were provided information with a very high list price while others were given a very low list price.  The ones given the high list price produced a significantly higher value of the home than did those who were given the low list price. 

Review: "Getting There" - Gillian Zoe Segal

"Getting There" may be my favorite book of 2015.  Gillian Zoe Segal does a fantastic job compiling anecdotal stories of successful people from all walks of life.  The book is structured such that each story is approximately 2-4 pages long, with some biographical information on the subject.  Each section concludes with lessons, or "pearls", as Segal puts it, that the subject has picked up throughout their journey.  Segal's background as a photographer is obvious with a beautiful portrait of each subject at the beginning of the respective chapter.  The book in itself is a piece of art. 

Her compilation spans the globe and covers subjects from all ends of the spectrum, from Wendy Kopp, founder of Teach for America, to Laird Hamilton, big wave surfer; from Nitin Nohria, Harvard Business School Dean, to Michael Bloomberg, former New York Mayor and founder of Bloomberg L.P.; and from investor Warren Buffett to Sam Adams brewer/founder, Jim Koch.  Anderson Cooper shares his journey in journalism and discusses the sacrifices he made along the way to becoming a CNN news anchor and host of his own show.  John Paul Dejoria discusses surviving off of 99 cent chips and chicken wings and a trucker's special breakfast, while living in his car and hustling his hair products.

Shyp in Chicago!

Last night, I was fortunate enough to attend a "fireside chat" at the General Assembly in Chicago with Kevin Gibbons, CEO and Co-founder of Shyp, and Antonio Gracias, CEO of Valor Equity Partners and board member on Tesla.  Mr. Gracias moderated the discussion and had some very interesting questions Mr. Gibbons. 

In case you are unfamiliar, Shyp is a company designed to make shipping easier and "frictionless".  You simply download the app, take a picture of the item you intend to ship with a pick up address, and a Shyp courier swings by (usually within 20 minutes) to pick up your package, wrap it, package it, and send it. 

The Opportunity Cost of Fantasy Football

I have recently been the recipient of verbal office jabs for my choice to abstain from Fantasy Football this year.  My retort?  The opportunity cost of drafting, managing, and discussing Fantasy Football does not warrant participation.  I played last year.  I enjoyed it.  I enjoyed it a little too much, spending Sunday's refreshing my phone at the local B-Dubs, telling my wife I need some obscure receiver to catch at least 4 passes for me to lock in a playoff spot - as if to include her in my predicament.  The end of the season was a welcome relief, maybe as much for me as it was for her.  No matter how many times I have vowed to not let FF take over my life, I still found myself sucked into the office banter throughout the week and a zombie - a shell of my non-football self - on Sundays.  I am STILL being sucked into the office conversations, and I'm not even playing this year!  That's power of Fantasy Football!

What is the tradeoff for that time and stress?  What am I missing out on?  Am I getting more out of participating than I would from some other activity?  What are the opportunity costs?

Utility - In Another Sense

Utility, in an economic sense, is defined in Investopedia as:

"Utility is an abstract concept rather than a concrete, observable quantity. The units to which we assign an "amount" of utility, therefore, are arbitrary, representing a relative value. Total utility is the aggregate sum of satisfaction or benefit that an individual gains from consuming a given amount of goods or services in an economy."

I became familiar with the term "utility" in this regard from Jordan Ellenberg's "How Not To Be Wrong" and it intrigued me.  Business Insider and Smithsonian give nice summaries of its use in the book here and here respectively.  The gist of it is that everything comes with a cost and you need to ask yourself what cost are you willing to pay for a level of comfort.  It is an "inconvenience factor" and Ellenberg measures it in utils.

You Win! Now What???

"If you don't continually revise your goals, the only place you've got to go is down." - Laird Hamilton, World Renowned Surfer

I've written extensively about the process of goal setting and listed some literature that expounds on those ideas (e.g. "Think and Grow Rich", "The Art of Learning", and "Mindset" - take a look at the "Good Reading" page for additional suggestions).  However, what happens when a goal is within site or attained?  What do we do next?  How often do you see professionals who seem to mentally "check out". 

The first one that comes to mind (as football season is drawing near!) is (former) NFL quarterback Jake Locker.