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Over the last year, I’ve had the privilege of interviewing many superb investors for my new book, The Great Minds of Investing, which will be published on May 29. It features profiles and portraits of 33 renowned investors, including Warren Buffett, Charlie Munger, Irving Kahn, Howard Marks, Bill Ackman, Marty Whitman, Donald Yacktman, Mohnish Pabrai, Jean-Marie Eveillard, Bill Miller, Thomas Russo, and Joel Greenblatt. My partner in this project was Michael O’Brien, one of America’s preeminent photographers, who has spent the last five years creating stunning portraits of the legendary investors in this book.
What struck me again and again as I worked on the book was the profound influence that Buffett has had on many of the most successful investors of our time. By now, his influence may even have eclipsed that of Ben Graham. Here, then, are some of the many insights about Buffett that the investors in this book shared with me during our interviews. The goal, of course, is not merely to celebrate Buffett, but to learn from his extraordinary success.
THOMAS RUSSO
In 1982, Thomas Russo was studying law and business at Stanford when Buffett came to address his business class. Russo was dazzled by the speed of Buffett’s mind, his “quirky delivery,” and his “deeply thought” ideas. From that day on, he has followed in Buffett’s footsteps, building a formidable investment record on the foundation of three crucial ideas from that revelatory lecture.
First, Buffett explained one of the great benefits of buy-and-old investing: You don’t pay taxes on your gains until you sell. The lesson, says Russo, was that you should “stretch your time horizon” to take advantage of this tax deferral. Second, assume that you will have only 20 great investment ideas in your lifetime—and, if that’s likely to be the case, bet big on your best ideas. Third, said Buffett, “You can’t make a good deal with a bad person.” In other words, take care to partner with managements that truly seek to serve their shareholders’ best interests.
Russo, who has owned Berkshire Hathaway for about 33 years, favors managements that invest heavily for future returns even when this expense hurts their earnings in the short term. He describes this trait as “the capacity to suffer.” No CEO embodies this quality more than Buffett. For example, he invested aggressively to expand Berkshire’s GEICO unit, even though it produced a reported loss of about $250 to bring each new policyholder onboard. His willingness to stomach these short-term losses enabled GEICO to attract millions of new policyholders, boosting Berkshire’s intrinsic value by about $20 billion.
As Russo told me, we tend to benefit in life when we “sacrifice something today” to “gain something tomorrow.” Buffett, the most patient and rational of investors, understands this principle perfectly.
MASON HAWKINS
Mason Hawkins, the Chairman and CEO of Southeastern Asset Management, told me that he and Buffett — an old friend of his — have undergone a similar evolution. Inspired by Ben Graham, they were both “quantitatively focused in the early part of our investing history.” That meant buying stocks only when they traded for much less than a conservative estimate of their value. “In the second half of our investment journey, the qualitative factors have become more important,” says Hawkins. “And that same evolution has occurred at Berkshire.”
This shift toward a more qualitative approach meant that Hawkins and Buffett increasingly focused on less tangible factors such as whether a CEO is “capable,” “shareholder-friendly,” and “honorable in the way he’s treated his employees, his family and society.” However, Hawkins concedes that these personal appraisals are “the hardest thing”—a problem that was vividly illustrated when Dell Computer underwent its controversial privatization. “We misassessed Michael Dell,” admits Hawkins, who was outraged that the business was “taken from us at a subterranean price.”
When I asked Hawkins what he had learned from Buffett’s example beyond the world of investing, he replied: “The thing I admire most about him is his passion in knowing where his strengths are and keeping his focus on those strengths. I think a good example is turning over his assets to Bill and Melinda Gates, so he can continue investing and managing Berkshire. I think his discipline and his clarity of thinking is most exceptional.”
JOEL GREENBLATT
When Joel Greenblatt was an undergraduate at Wharton, he was unconvinced by his professors’ insistence that markets are efficient. Then, in his junior year, he read a magazine story about Ben Graham that changed his life. Greenblatt told me that Graham gave him an intellectual framework that was “so simple and clear that it got me very excited.” The key message: investors should value businesses in a disciplined way and invest only when they trade at a hefty discount. Greenblatt told me that Buffett then added one vital “twist” that “made him one of the richest people in the world: Buying cheap is great—and if I can buy good businesses cheap, even better.”
Greenblatt says it took him “a little while to get” Buffett’s twist, “but luckily I got it early enough to supercharge Ben Graham’s overarching framework.” Armed with these insights, Greenblatt founded Gotham Capital in 1985. In its first 10 years, Gotham returned 50 percent annually after expenses but before fees.
Years later, in The Little Book That Beats The Market, Greenblatt laid out in simple terms what works when it comes to investing. He recommended investing in companies with a high earnings yield and a high return on capital. As he explains it, these two metrics provide a practical way of picking stocks that are both “cheap and good”—a powerful fusion of Graham and Buffett.
BILL MILLER
During my interview with Bill Miller in his offices in Baltimore, our conversation turned to the subject of what it takes to be a successful investor. Miller recalled what Buffett had written in 2007 about the qualities he sought in selecting a chief investment officer. Buffett observed: “Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.”
“Buffett had it exactly right,” Miller told me. “That’s what it takes to be a good investor. And the hardest thing is probably emotional stability, and the second hardest is independent thinking.”
Intriguingly, Miller surmises that value investors are “wired differently” so that the part of their brain that registers financial loss doesn’t react in the same way as it would for the average investor. In his own case, he says, “I’m very emotionless. I’m contrary in the sense that paper losses, quotational losses, just leave me to think there’s more opportunity.” He sees a similar lack of emotion in fellow value investors such as Buffett, Hawkins, and Chris Davis.
This idea came up and again in my interviews with great investors. For example, Howard Marks recalled investing about $500 million a week as the market crashed during the financial crisis. Marks told me that he didn’t find it at all stressful to go against the crowd, noting: “To be the person who steps onto the exchange floor in 1929 and says, ‘I buy,’ you have to be unemotional.” Like Miller, he sees “being unemotional” as a central ingredient in Buffett’s success.
MOHNISH PABRAI
Few investors have studied Buffett as obsessively as Mohnish Pabrai. After discovering Buffett in 1994, he quickly concluded that this “simple approach” to investing was “so powerful” that “it’s really the only way you should be doing things.” Pabrai told me: “I thought about Warren as putting down what I call the laws of investing.” As Pabrai sees it, these laws include the idea that you should “think about a stock not as a stock but as a business”; “you should buy it when it’s cheap”; and you should let the mood swings of the market “serve you.”
What puzzled Pabrai was that almost no fund managers followed Buffett’s approach. “Most professionals still don’t get it,” he marvels. “What a country, what a beautiful place, where you have the entire set of physicists who don’t believe in gravity!” By contrast, he was determined to follow Buffett’s model faithfully as he embarked on a 30-year game with the goal of transforming $1 million into $1 billion. To achieve such high returns, Pabrai says, you have to search relentlessly for “wide mispricing,” typically in “places that people hate.”
In 2008, Pabrai teamed up with Guy Spier to bid $650,100 for a charity lunch with Buffett. Pabrai was struck not just by Buffett’s remarkable intellect, but his generosity in sharing his wisdom, so that his lunch guests would “feel they got a tremendous bargain.” For Pabrai, the greatest lesson from the lunch grew out of their discussion of Rick Guerin, a once-famous investor who was badly mauled when the market crashed in 1973-74. The moral of the story, says Pabrai, was that “you should be very afraid of leverage.”
As Buffett’s own career proves, enduring investment success depends as much on temperament as on I.Q. “Charlie and I always knew we would become very wealthy, but we weren’t in a hurry,” Buffett told Pabrai and Spier. After all, he added, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy—if you’re patient.”
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