From the Wall Street Journal (subscription required).
I had an interesting exchange with an Australian reader on the question of why someone rich and thus presumably financially savvy would need to hire a money manager.
I believe John Maynard Keynes, the great economist and a great investor as well, addressed an aspect of this issue in 1937. Investing, he write, is
the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it.
Many rich people, especially here in New York City where media, marketing, fashion and entertainment are important industries, made their fortunes from being able to identify and exploit popular taste, what the highest number of people are willing to pay the most money for. Even success in the the hedge fund industry--as opposed to the performance of a given hedge fund--depends in some part on this ability: You can make a lot of money raising capital for a fund in a hot sector or strategy and charging 2 and 20 for it. In fact, you may get richer raising a large fund which goes on to have a mediocre record than by raising a small fund in an unpopular sector that goes on to have a good record.
There is nothing wrong with having this ability, but when you turn this cast of mind to investing it can get you in trouble. Because by definition you can't succeed as an investor without purposely and purposefully being unpopular. An asset won't be a good investment unless it's undervalued when you buy it, and it won't be undervalued unless it's for some reason unloved. This is why people who are personally or professionally concerned with popularity often get into trouble investing over time. I'd give anything to see the personal investment results of the 100 richest people in Hollywood, or the world's top contemporary art collectors, or the heads of the major advertising agencies, during the tech boom and bust.
If you're one of these people, hiring an investment manager is likely a good idea. Take as your model David Geffen, who is both a Hollywood mogul and a top contemporary art collector. He's made more money as an arbiter of popular taste in music and movies than just about anyone, but he was shrewd enough to entrust the management of his capital to hedge fund manager Edward Lampert, who's kind of a hermit and has never been accused of being popular. The result, according to Geffen:
"I've made more money from Eddie than from all the businesses I've created and sold."
Your consigliere, alas, does not yet breathe the rare air of the Private Bank Client. I've never heard an investment pitch from a private bank but I do know some people who do the pitching, and it goes something like this:
A great advantage of being a [famous private bank] private client is access to our internal hedge funds, which are only available to our favored clients.
As it turns out, this access isn't really worth having.
Today is the day commonly recognized as both the birthday and the "deathday" of William Shakespeare, which of course makes it the perfect day to talk about Warren Buffett (again, I know. I'll stop eventually, but he's the best and I believe in studying the best).
What's the connection? Shakespeare is English literature's supreme uniter of great thought and great language. That is, he was both a profound thinker, on subjects like love/jealousy/death/revenge/ambition/patriotism, and a great communicator of that thought (you may not think so from having had to struggle through his plays, but in his day everyone spoke that way, and everyone from the drunk guys in the standing room of the theater (theatre?) to the Queen understood what he was saying).
The really interesting part is that those two things seem to be connected: the very greatest thinkers in a particular discipline seem to have the gift of language, the ability to explain themselves that the merely great or good do not. Think of Richard Feynmann in physics, or Abraham Lincoln in politics. In his famous essay "Politics and the English Language" George Orwell makes a similar point:
[The English language] becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts. The point is that the process is reversible. Modern English, especially written English, is full of bad habits which spread by imitation and which can be avoided if one is willing to take the necessary trouble. If one gets rid of these habits one can think more clearly, and to think clearly is a necessary first step toward political regeneration . . .
I believe the same thing applies in investing. Mark Sellers of Sellers Capital, a great investor himself and until recently a great writer about investing for the FT, put it best in a talk he gave to the Harvard Investment Club in 2007:
[To be a great investor] I believe you need to be a good writer. Look at Buffett; he's one of the best writers ever in the business world. It's not a coincidence that he is also one of the best investors of all time. If you can't write clearly, it is my opinion that you don't think very clearly. And if you don't think clearly, you're in trouble. There are a lot of people who have genius IQs who can't think clearly, though they can figure out bond or option pricing in their heads.
There, I did it! I connected Shakespeare to Buffett, via Orwell and Mark Sellers, no less.
Why is this important to you? This blog is about finding great investors to invest with. And in today's world, investment managers communicate to potential investors largely via the written word. Quarterly letters, annual letters, marketing materials, op-eds, blog posts, magazine articles, and even books--all designed to demonstrate that the writer is an investor worth investing with.
Our job, then, largely consists of identifying great investors from their writing. How to learn to do this? Well, study the best.
In May 1977 Fortune published an article by Warren Buffett called "How Inflation Swindles the Equity Investor." Buffett was not then famous, but in my opinion anyone who read the article when it came out and knew what to look for would have seen it all so clearly: This writer was a great investor. Some further research would have revealed that Buffett already had an outstanding track record, that unlike today's hedge fund managers he essentially worked for free, AND that anyone could have become his partner by buying shares in his investment vehicle Berkshire Hathaway. It was all right there, for less than the dollar it cost to buy the magazine.
Your consigliere was not yet alive when the article was published so he has an excuse. His parents, on the other hand, have none (Actually they have half an excuse, because whatever they were doing when they should have been reading Fortune, I was born nine months later). But I use this article to test myself: If I had read it at the time, would I have been able to identify Buffett as a genius? It's not a totally hypothetical question: I believe somewhere out there lives the "next Warren Buffett." Chances are he/she has written something about investing, something that's pretty widely available for those who are looking. If I can answer "yes" to the Buffett test question, I believe I have a better chance of finding the next Buffett through his/her writing.
So, what is it about that article? I recommend you read it yourself first and try to answer the question yourself. In a future post I'll write about what the article revealed to me, so stay tuned.
Check out this Charlie Rose interview of Mickey Drexler, the CEO of J. Crew who made his reputation as CEO of The Gap (just click on the "play" sign on the lower left of the little screen. You don't have to buy the article).
Drexler is my kind of manager. I know nothing about fashion--if you've seen me you'll agree--but I would consider investing in any enterprise he's involved in.
What strikes me about this article about Lance Armstrong running the Boston Marathon is that Armstrong, the most dominant cyclist ever, is a pretty mortal marathon runner. A marathoner friend of mine tells me that many amateurs, even those with demanding day jobs, run times equal to or better than his. It's also nice to know that, like any mortal athlete, Armstrong beats himself up for not training harder.
It seemed obvious to me that because the Tour de France and the Boston Marathon are both very demanding aerobic sports, if you're good at one you'd be good at the other. Not true.
I think there is a lesson to investors on the importance of focus. It may seem obvious that if you're good at one kind of investing you'd be good at another. Not true. I think there are two reasons for this. The first is that different kinds of investing are just that: different. They require different skills, different personalities. The second is that much of the reason people are good at something is that they focus on that one thing. Lance Armstrong's legs are supremely trained for pedaling a bicycle, less so for jogging. Julian Robertson of Tiger was an outstanding hedge fund manager when he was trying to "find the 100 best companies to buy and the 100 worst companies to short," less good when he got involved in big global macro bets. Harvey Weinstein was and is a great producer and marketer of independent films, but his magazine venture tanked. And so on.
The moral of the story is, when an successful investor ventures into a new area, he should be judged guilty until proven innocent.
Today's FT profiles one of my role models, Geoff Beattie, consigliere to the Thomson family of Canada. The Thomson family is itself a model for families seeking to grow wealth across generations. It started with Roy Thomson, the son of a Toronto barber who amassed a media empire (I remember a quote in which he described his method a simply "buying newspapers to make money to buy more newspapers to make more money . . .") worth about $300 million at the time of his death in 1976. Even more impressive is what happened in the second generation, led by Roy's son Kenneth: By 2005 the family fortune had grown another 100-fold, to $30 billion. Now in its third generation, led by David Thomson and Beattie, the company recently acquired media giant Reuters.
Here's what stands out to me about how the family did it:
Let me expand on this last point. Capital allocation decisions, over time, determine the rate of growth of your wealth more than anything else. Capital allocation doesn't just mean buying and selling businesses or parts of businesses (i.e. stocks), it also covers dividend policy and capital expenditure decisions. You have a business that makes money--what do you do now? Do you give it to yourself to spend? Do you reinvest it in the existing business? Do you buy a new business? Do you sell the existing business, which effectively brings its future profits into the present? These decisions over time make the difference. Compare the behavior of a capital allocation exemplar like the Thomson family to that of two other newspaper families:
The Washington Post, on the other hand, was smarter, more in the Thomson mold. Its founding Graham family, Katherine then her son Donald, it never overpaid for hot cable and other media properties, and diversified away from newspapers into the Kaplan Education company.
Then again, the Grahams benefited from the consigliere of all consiglieri: Warren Buffett himself.
Roger Lowenstein, who wrote an excellent biography of Warren Buffett (It looks like an updated paperback edition is about to be released), is the king of the long form "could you please explain" article--check out this one about the airline industry.
His newest piece is about the credit ratings agencies. It will appear in this weekend's New York Times Magazine, but it's available early online.
The Annual Meeting of Berkshire Hathaway is on May 3. Although I've been a shareholder for many years I've never attended in person. However I've usually managed to get a good sense of what happened from the many media sources that cover the meeting, as well as the various transcripts that are graciously typed and sent around by Whitney Tilson and others.
As I mentioned in a recent post, I'm always struck by the fact that people always seem to ask the same questions at the Q&A session, questions that have been asked and answered several times before. I'd like to see some fresh ones, especially those that help to answer the $64,000 question: Given its present size, at what rate can the intrinsic value of Berkshire be expected to grow over time? So:
Below is a list of the questions I would like Warren Buffett and Berkshire Vice-Chairman Charlie Munger to answer. Some I think I know the answer to, but I'm angling to have them answer it in their inimitable way. Some I doubt they would answer but I think are worth a try. Please feel free to use the comments to critique them, answer them, and, of course, add to them. Also please feel very free to email a link to this post to fellow investors, especially those who plan to attend the meeting. The more attendees who see and contribute to this list, the better the likelihood the list proves useful. If only one of these questions gets asked, I'll be very happy:
Questions about Berkshire's operating subsidiaries:
Questions about Berkshire's Investing and other capital allocation activities: