As an investment professional, I always find it beneficial if not compulsory to read anything about Warren Buffet, how he got the initial capital to form his first partnership, his tips and tricks surviving stock market volatility, how to get his team on-board, etc. Tap Dancing to Work is a book of selected articles about Buffett collected by Carol J. Loomis a former Fortune's senior editor-at-large. Those articles were published from 1966-2013 and some articles were written personally by Buffett.
Here's Loomis discusses the history of Buffett. She speaks with Pimm Fox on Bloomberg Television's "Taking Stock" on Dec 6, 2012. (Source: Bloomberg).
Some of the Buffett’s wisdom are really useful for our investment strategy. I share you three of them which I hold dear — all are from Loomis’ book.
1. Focus on what we’re good at and be tirelessly persistent
“Says Buffett: ‘If we get on the main line, New York to Chicago, we don’t get off at Altoona and take side trips.’ We also have a reference for logic around here. But what we do is not beyond anybody else’s competence. I feel the same way about managing that I do about investing; It’s just not necessary to do extraordinary things to get extraordinary results.” (Loomis, 2014, p. 64).
I pondered upon those lines as I glanced into our latest performance. We’ve made a cumulative return of around 127% gross of advisor fee since our inception in 2016 while S&P500 cumulative return was around 71%. Both numbers include reinvestment of dividends. Our strategy is long-only portfolio, no derivatives, nothing fancy, and nothing beyond our capabilities.
I’m neither being condescending nor saying that our strategy is the best of the whole shebang. Through our course of stock market investing (each of our investment team has an average of 15 years experience in stock market, mostly starting since they were at the university), we realise that we’re good at the simplest strategy— buy and hold stocks. Other strategies are too extraordinary for us.
Each person might have a different depiction of things which are extraordinary to them. It’s normal to try something extraordinary but after few trials and errors we should be able to find out what is more suitable for us and just be focus. Sometimes, the most favourable thing for us is the one most basic thing, the one we’re very good at.
2. A fault has been uncovered? Look further! There might be another
“Freddie had also made a big, unorthodox investment that Buffett didn’t like, and he wondered what else bad it was doing that he didn’t know about. ‘There’s never just one cockroach in the kitchen,’ Buffett said.” (Loomis, 2014, p. 93).
Freddie Mac is a mortgage loan company. Buffett, through his holding company, Berkshire Hathaway, retained roughly 60 million shares of Freddie stock through the 1990s. In 2000, Berkshire sold nearly all of its Freddie Mac stock and secured a big capital gain of around US$3 billion.
The reason of the sale, as stated by Buffett later in 2007, was because Buffett had lost respect for Freddie’s management. Buffett found that Leland Brendsel, CEO of Freddie, unwisely striving for double-digit earnings gains. Buffett said that gains like that don’t come naturally for financial companies, and managements reaching for them can “start making up the numbers.”
In the context of our work as investment manager, we always look for early sign that can lead a company to a financial woes. Any tiny signs can be helpful and may lead to a discovery of a bigger fault.
Let’s talk about the real example here. We started our investment journey back in Indonesia. Before the financial crisis of 2008, there was this one stock which everyone was bullish about. I never take any interest to put any of my money into this stock mainly because I had lack of respect for its controlling group. This stock is part of a conglomerate group which was partly known with numerous shams ie. legal case, tax evasion, accounting principles violation, etc. For me, this should be enough as an early sign. But back then nearly every Indonesian stock investor was so thrilled because from 2005 to early 2008 this stock grew more than 3x. However, after the financial crisis, this stock has been plummeting. As of today, its stock price is less than 1% of its peak price.
So, forget all of the return potential, be sensitive with any type of sign, no matter how small it is. There’s never just one cockroach in the kitchen. If you happen to find a tiny cockroach, look thoroughly, and you may find another one and then another one again.
3. Eat what we cook
“What reveals their potential? Strong investment performance, of course. But that is not conclusive, especially among young managers who generally lack of ten-year record. More important are certain character traits. Buffett himself starts with ‘high-grade ethics. The investment manager must put the client first in everything he does.’ At the very least, the manager should have his net worth invested alongside of his clients to avoid potential conflicts of interest.” (Loomis, 2014, p. 100).
Our firm just registered with the SEC around 4 years ago. Yes, we don’t have a long track record yet. But we started this firm by putting our own net worth to be managed together with clients’ fund under the same investment strategy. Rest assured, we act with our best interest to grow our clients’ investment as we are also incentivised by the growth of our own investment.
We hold our investment principle as per this dictum: investment manager must eat their own cooking. We, investment managers, should act like a chef. We know exactly the ingredients of the meal. If I as a chef wouldn't want to eat my own cooking, then it wouldn't be fair for me to serve it to the patrons. As a chef, it would be rewarding to know that the meal is appetising for the patrons. As an investment manager, it's rewarding to know that our strategy works for the well-being of our clients and also for ourselves.