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Sunday, June 8, 2014

Inside Buffett's Brain

Here is an article that Warren Buffett fans will enjoy:

"Inside Buffett's Brain" by Pat Regnier in Money magazine,

It describes an attempt to create a formula that not just matches Warren Buffett's performance but exceeds it.

Trying to duplicate Buffett's success or at least discover his secrets has, of course, become something of a national pasttime.  Many people who become charmed by his folksy, common sense investment stories are convinced that they can do what he has done.

This reminds me of a presentation I went to many years ago at the National Press Club in Washington DC where the presenter was a money manager who had exceptional success in investing in so-called "fallen angels" - stocks that for some reason or other had fallen on difficult times and consequently had seen their stock price drop significantly.  I watched as the crowd nodded in response to the money manager's description of superior performance.  I watched as the crowd scribbled notes in response to his listing of things he looked for.

Finally, he got to the point where he named his fund's largest holding.  It was General Public Utilities which had gotten pounded as a result of the Three Mile Island nuclear accident.  At this point, there was a gasp and the scribbling stopped.  The crowd morphed in an instant from anticipating discovering the golden goose to understanding they weren't nearly on the same plane as a serious value investor.

According to the article, Buffett earned 19.7%/year, compared to 9.8% on the S&P 500, over the past 49 years!  Using the rule of 72, we can divide 72 by 19.7 and find that Buffett's portfolio was doubling every 3.65 years, on average!  And he did this with what most people would consider to be boring stocks--Geico, Coca Cola, American Express.

I think it is possible that, like the crowd that learned about General Public Utilities, many Buffett wanabees, formula or no formula, will be frustrated for two reasons.  First the world is different today. It is changing much, much faster because of technological advances, globalization, and general information flow making the identification of solid, basic companies that will be leading brands over a 30- to 40-year period considerably more difficult.  In today's world, products are produced with practically zero marginal cost and many times fixed costs are not that substantive.  Industries are disrupted by talented kids with computer power in the proverbial garage.  Secondly, few people in Warren Buffett's heyday had anywhere near his patience and staying power; and they are surely fewer and farther between today.

I think he knows this, and this is why he pushes index fund investing even to the point of recommending it to his heirs.

1 comment:

  1. Nice read! Very informative. Did you know that? Nestle wants a bigger bite of luxury chocolate, may consider acquisitions. Full story here: