25 September 2014
Book Update, WEB, & Adam Smith
The 2nd edition of The Focus Investor will be published on or about December 10th. I had delayed publishing the book hoping that the investing book market would recover but a recent health issue convinced me to move forward. The cover has been designed and I’m working on the final drafts of the book now with my editor so that we can then forward on the material to my book designer.
Here is the Amazon link to the pre-order:
Lessons From WEB and Gladwell
Once again Warren has allowed Fortune magazine to print an excerpt from his next annual letter to shareholders. (Link: http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/). This blog post is inspired by that letter and the most recent book by Malcolm Gladwell, David and Goliath: Underdogs, Misfits, and The Art of Battling Giants.
Let’s first look at the excerpt from Mr. Buffett’s annual letter. In the excerpt he describes two investments in fields outside common stocks. The common theme of both investments was that he was able to take advantage of low prices because the real estate environment was depressed after bubbles had burst. This is a simple lesson, but one that I’m always surprised that isn’t acted upon by most investors, i.e., when the situation is dark and stormy in the markets is when investors will have above average chances of finding investment opportunities to take advantage of. Understanding the history of financial bubbles so that you can take advantage of similar situations that will occur in the future is a major focus of my book, The Focus Investor.
Another piece of investment advice he mentioned in the article connected with the Gladwell book I’m currently reading. The quote was:
“Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed it is dangerous because it may blur your vision of the facts that are truly important.”
In one chapter of Mr. Gladwell’s book, he examines the basketball coaching career of Vivek Ranadive’s. Ranadive decided to coach his daughters seventh-and-eighth grade basketball team despite never having played basketball . In fact during the few times he had watched a basketball game he couldn’t understand why both teams let players get to the half court line unimpeded each time. His team was average, at best, so he developed a plan that would provide his team with a needed advantage, they would “…play a real full-court press – every game, all the time”. This strategy caused so much havoc that the team was able to compile a winning record that lead them into the final game in their league national championship series. Along the way Ranadive noticed that opposing coaches began to get angry because he wasn’t playing the game in the correct manner and one person tried to initiate a fight with him in a parking lot.
This is the same lesson Warren talks about in his letters, just because diversification is preached as main-stream gospel, doesn’t mean it’s the right strategy for investors to follow. Just because someone appears on television doesn’t make them an expert in investing and that you should act upon their suggestions. In fact I think most of the topics of conversation on CNBC are pure drivel and are actually dangerous for an investor to focus on because so much of it is short-term orientated.
Another example from Gladwell’s site highlights why I built this site in the first place. Focus, or concentrated investing, is looked at with suspicion in the mainstream investment community and in academia as well. Gladwell highlights how Manet, Degas, Cezanne, Monet, Pissarro, and Renior – all names that are immediately recognizable today even if you’re not an art collector, at the beginning stages of their careers where shunned by the established art intuitions of the day. The institutions treated their work with contempt and even when they happened to pick one of their pieces to display they would display them in the least visible areas.
The painters (known as the Impressionists) had a completely different interpretation of what art should be that didn’t match with what the establishment thought was fine art. They decided to hold their own show where they didn’t have to abide by the conventional painting rules with an additional benefit being that their art wouldn’t get lost in the hundreds of painting in the main show, “We are beginning to make ourselves a niche, ” a hopeful Pissarro wrote to a friend. “We have succeeded as intruders in setting up our little banner in the midst of the crowd.” As history has shown their approach certainly was successful.
One of the key lessons to learn from both Buffett and Gladwell (and expressed so well in the following quote by Gladwell) is that sometimes the “…apparent disadvantage of being an outsider in a marginal world turns out not to be a disadvantage at all.” I certainly have seen that over and over in my professional career.
George Goodman, who wrote under the pseudonym Adam Smith, passed away this year. In this short remembrance on Mr. Smith Jason Zweig wrote that Mr. Buffett considered him to be “…the second-best writer ever to explain how the investment business works, after the brilliant Fred Schwed, whose Where Are the Customers’ Yachts? remains the finest – and funniest – book on Wall Street ever written.”
Buffett went on to say that he thought his first book, The Money Game, was “incredibly insightful.”
Here is a quote from the 1968 version of The Money Game (p. 81) that I think fits in with the overall discussion in this blog post:
“If you are automatically applying a mechanical formula, then you are operating in this area of intuition, and if you are going to operate with intuition – or judgment – then it follows that the first thing you have to know is yourself. You are – face it – a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it…. A series of market decisions does add up, believe it or not, to a kind of personality portrait. It is, in one small way, a method of finding out who you are, but it can be very expensive. That is one of the cryptograms which are my own, and this is the first Irregular Rule: If you don’t know who you are, this is an expensive place to find out.”