Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) spend a tremendous amount of time reading and thinking about their investments, and it's not just these two great investors who prioritize thought over action. Many great value investors, including Mohnish Pabrai (Trades, Portfolio) and Seth Klarman (Trades, Portfolio), have written and spoken about the importance of the thought process.
Nick Sleep, the co-founder of Nomad Investment Partnership, discussed the importance of stepping back to think in his 2012 letter to investors. Nomad returned over 18% per annum net of fees between 2001 and 2013, so clearly the firm is doing something right. This performance resulted from a concentrated, disciplined and long-term investment strategy -- very similar to the style of investing pursued by The Oracle of Omaha and his right-hand man.
In his 2012 letter to partners, Sleep highlighted some recent comments from the British naturalist David Attenborough, who proclaimed that Charles Darwin was the most outstanding naturalist who ever lived. He attributed the reason for such a transformative impact on the world in which we live to having "only spent four years traveling and the rest of the time thinking." The author observed:
"[Note] The model of behavior he observed in Charles Darwin: study intensely, go away, and really think. It is Darwin, he argues, who has contributed more. In other words, Attenborough is saying that the human mind trumps endless data collection. We could be more specific: the frontal cortex of the brain, which is charged with rational thought and information processing, can make more sense of the world, given enough time to think it through, than the senses themselves can make sense of the world."
In today's information-soaked world, the author explained that it is easy to lose sight of the power of thought. Many financial professionals prioritized data collection, he noted, rather than observation, which can be just as powerful as a research tool. Trying to understand why different businesses succeed and others fail cannot entirely be explained by the numbers.
Take Coca-Cola (KO, Financial), for example. This company does not have the best balance sheet on the market, nor does it have the best profit margins or return on invested capital. So, from a purely financial standpoint, the business does not appear to be a good investment from a third-party perspective.
However, Coca-Cola has spent decades creating an image, building its brand power and curating competitive advantages, which are not reflected in its operating numbers. These advantages only become apparent when one takes a step back and thinks about what makes a good business.
In his 2012 letter, Sleep noted that some of the most successful businesses of the past 100 years, including the Ford Motor Company (F, Financial), Wal-Mart (WMT, Financial), Southwest Airlines (LUV, Financial) and Amazon (AMZN, Financial), had many things in common. They prioritized customer service, low costs and cheap prices. They focused on doing things a little better every day, and all of these little actions added up into one big success story:
"When we study truly great businesses we find that very often it has been simple human attributes that have lead to their success: you feel differently drinking a Coke than a no brand cola or, you may feel differently towards a business that consistently undercuts the competition in price or, a delivery service that literally goes the extra mile and picks up returned items – and the reason you have these feelings, and the stimuli that produce them, have hardly changed in millennia. When we try to understand the factors that made great businesses great, in our opinion, there is lots of time to think."
Thinking may not produce instant rewards or profits, but in the long run, taking a thoughtful approach may yield higher returns.
Disclosure: The author owns no shares mentioned.
Read more here:
- The Hallmarks of a Great Company: Low Costs and Reinvestment
- Nomad Investment Partnership: Inactivity as a Source of Value Added
- Buy What You Know: A Strategy for Any Market
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