A shared trait that great investors have is their will to teach and share their knowledge. Just like in the Bible, sometimes they teach in parables, as these examples tend to stick longer in our heads.
Today, I’ll review 3 teachings from Seth Klarman (Trades, Portfolio), Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) that contain a lot of investing wisdom.
Seth Klarman (Trades, Portfolio) on The Essence of Speculation
“There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The teller said, “You don’t understand. These are not eating sardines, they are trading sardines.” Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading.”
When we treat stocks as pieces of paper or just tickers blinking on a screen, we become thrilled when we see their price go up, and scared when it goes down. If we slow down the game, we will realize that what really matters is the quality and origin of the sardines (underlying businesses), not how their price behaves in the short term.
Warren Buffett (Trades, Portfolio) on Having a Concentrated Portfolio
“When carried out capably, a (concentrated portfolio) strategy will often result in its practicioner owning a few securities that will come to represent a very large portion of his portfolio. This investor would get a similar result if he followed a policy of purchasing an interest of say, 20% of the future earnings of a number of outstanding college basketball stars. A handful of these would go on to achieve NBA stardom, and the investor’s take from them would soon dominate his royalty stream. To suggest that this investor should sell off portions of his most succesful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.”
Buffett has also mentioned that diversification is helpful only when investors don’t know what they’re doing. To thoroughly understand a business and how it makes money (which is different to what product or service they provide) takes time and dilligence.
Even though there is a lot of brainpower involved in Wall Street, most of it is employed in overlooking underlying economics, predicting earnings for the following quarters and following the herd. It is better to deeply understand a handful of companies than overstating our own capacity and concluding we know them all (and investing in them all as well).
Charlie Munger (Trades, Portfolio) on Constructive Criticism
“Ira Marshall (Charlie’s long-time friend, who suggested a better look on See’s Candies) said you guys are crazy – there are some things you should pay up for, like quality businesses and people. You are understimating quality. We listened to the criticism and changed our mind. This is a good lesson for anyone: the ability to take criticism constructively and learn from it. If you take the indirect lessons we learned from See’s, you could say Berkshire was built on constructive criticism.”
Pride and rejecting the idea that we could be wrong, can create a lot of pain and harm us financially. Seth Klarman (Trades, Portfolio) discussed that investing is an arrogant act since we are basically stating that “I am correct, while the market is wrong.” Recognizing we could be mistaken, and if we are, having the courage to learn from our mistakes, will make us better investors (and persons) overall in the long-run.
