I’m a big fan of focusing on the investing process and letting the outcome take care of itself. As I have written before, in this regard investing is like the draft in pro sports. You can’t really tell how well you’ll do for a number of years, so you better focus intensely on the process.
That was the lesson from Michael Lewis’s bestselling book Moneyball which chronicled how Billy Bean, despite lacking funds to compete head-on with the dominant baseball franchises, built a championship team by drafting unknown and lesser known talent using a superior recruiting process.
Today, Bruce Berkowitz is a financial celebrity with $15 billion under management. Over the past decade, he trounced the S&P 500, delivering annual returns of approximately 13% versus a loss for the index. Ten years ago he was virtually unknown with only $11.5 million under management. Today his results attract billions of new investment dollars, yet it was his process that got him there. He laid it out in an October 2, 2000 article in BusinessWeek.
I think our philosophy makes a lot of sense. We’re doing nothing more than what the wealthiest individuals in the world have done. We act like owners. We focus on very few companies. We try and know what you can know. We try and only buy a few companies which we believe have been built to last in all environments. We recognize that you only need a few good ideas in a lifetime to be fabulously wealthy…. We’re always trying to wonder what can go wrong. We’re very focused on the downside.
Here’s my brief take on Berkowitz’s approach.
Invest like the wealthiest individuals have always done. Recently several articles were published about Tiger 21. According to an article published on fool.com, Tiger 21 is, “A peer network of 140 ultra-high-net-worth individuals who collectively control $10 billion in investable assets (i.e., the average member’s assets exceed $70 million). The group’s top holding is Berkshire Hathaway. Other top holdings include Brookfield Asset Management, Leucadia National, Loews and Markel, all of which follow the same principles – for example, as found in this list – that Berkowitz and Buffett use in allocating capital.
Act like owners. This is one of the ten tenets of my investing blueprint. Most people treat stocks like pieces of paper that can be bought and sold on a whim as they try to guess and exploit short-term price movements. This doesn’t work because in the short term chance and psychology drive prices and these cannot be predicted on a consistent basis. Do your homework and buy a fractional piece of a great business you understand. Then, be patient and let it compound.
Focus your investments. It’s hard to come up with a great idea – one you truly understand and where everything lines up. When you do, reason dictates that you make a meaningful commitment. Also, why waste time with your 30th best idea, if your best idea, or your second best, is available at a reasonable price?
Concentrate your research on what is knowable. Be true to yourself. Use checklists and be on guard against your behavioral weaknesses. Over confidence bias is very easy to fall prey to. Get the facts by doing the work yourself, i.e. reading the 10-K’s and the 10-Q’s. Some things are important and knowable, some things are important and unknowable – concentrate on the former, don’t waste time on the latter.
Buy companies that are “built to last in all environments”. Find companies with durable competitive advantages that can ideally hold up in both deflationary and inflationary environments. Buffett has said that a business’s moat is the most important consideration when making an investment.
Understand that you only need a few good ideas to get rich. Be patient. Munger says that intelligent investing is like patiently fishing at a stream where a fish may only come by once a year.
Worry about the downside. A lot of people have gone back to zero. Never do that. Learn what you’re doing and focus on avoiding permanent loss of capital. Don’t overpay and always insist on an identifiable margin of safety.