At the 2000 Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) shareholder meeting, Warren Buffett and Charlie Munger were asked about the potential impact of a strong dollar on investments like Coca-Cola (KO) and Gillette.
After Buffett spoke for a few minutes, Munger gave one of his usual pithy answers:
“We have a willful agnosticism on all kinds of things, and that makes us concentrate on certain other things. This is a very good way to think if you’re as lazy as we are.”
Munger’s point was that you should focus your attention on what’s importantand knowable, when looking at an individual company. Worrying about what’s unimportant and unknowable – things like commodity prices and currencies – is a distraction that does not help you achieve the task at hand.
As always, how you define what’s important depends on how you think about the world. If you’re a trader, movements in commodity prices or foreign exchange rates may be of upmost importance because they can impact short-term earnings and stock prices (of course, that still doesn’t mean either of them are knowable). But if you’re a long-term investor, the impact of these transitory considerations is immaterial.
The reality is that many people in today’s financial markets are closer to traders than investors. Think of companies like Dollar General (DG) or Costco (COST), both which I’ve written about lately. On their recent conference calls, these companies have fielded a number of questions from analysts on the potential impact to their businesses of tariffs or a trade war.
While that may be important if you’re a Wall Street analyst trying to guess what next year’s earnings per share will be down to the penny, the reality is that these factors have very little impact on the long-term intrinsic value of these companies. These questions tell you nothing about the sustainability of the long-term competitive advantages that have helped Costco to succeed for decades. If you’re not a trader, you should be gleeful that others view the world through a different lens: To the extent the stock price moves based on short-term considerations like tariffs, that’s not a risk to the long-term investor; it’s an opportunity.
The same idea of “willful agnosticism” applies at another level. It’s the ability to watch others focus on companies or industries that you don’t understand and accept that somebody, somewhere is making money in ways that you can’t.
Many investors seem to struggle with this idea. As an example, I spend a fair amount of time on Twitter (TWTR) and see countless people pulled into battleground stocks like Tesla (TSLA). From my perspective, the bulls and the bears alike, generally speaking, have been pulled down a rabbit hole that has consumed a significant amount of their attention. As time goes on, it appears that their focus is less about making intelligent investments (on either side of the table) and more about proving the other side wrong. And while being right on an investment certainly feels good, devoting your undivided attention to a single idea that’s a small part of your portfolio is not the best use of time.
Here’s the important point: To be a successful investor, you don’t need to have an opinion on every company in the world or even on every last detail of the companies you’re invested in. Instead, you need to focus on a handful of businesses where you can intelligently assess the few factors that will determine the long-term success of the business. Everything else is noise. The short-term, the unimportant, or the unknowable.
For what it’s worth, this is how Buffett approaches his investment decisions (from an interview with Alice Schroeder, the author of “The Snowball”):
“I have seen him make his famous five minute decisions on the phone. Five minutes is the outside amount of time it takes him to decide. If the person can be succinct and convey the salient points he’ll say 'Yes' or 'No' in 60 seconds. The time is determined by how long it takes the person to convey the salient points, not how long it takes him to think about it. It’s virtually instant once he has grasped the two or three variables that are important to him. Typically, and this is not well understood, his way of thinking is that there are disqualifying features to an investment. So, he rifles through and as soon as you hit one of those it’s done. Doesn’t like the CEO, forget it. Too much tail risk, forget it. Low-margin business, forget it. Many people would try to see whether a balance of other factors made up for these things. He doesn’t analyze from A to Z; it’s a time-waster.”
With the benefit of hindsight, I can see where I’ve erred in the past by not following this example. I got sucked into businesses that were clearly decent (at best) because I thought the price-earnings multiple was low enough. Instead of being completely focused on the most important filter to long-term value creation -- business quality -- I let myself get swayed by other factors. Essentially, I started with the game I want to be playing (finding great businesses at fair prices that I could own for long periods of time) and distorted it into a completely different game (buying companies that I thought were decent that could potentially rerate higher). If you haven’t stumbled into that arena, take my experience as evidence: It’s a game I’ve played multiple times in the past 10 or so years (a time when investors have had the wind at their backs), and it has cost me a lot of money (both directly and in terms of opportunity costs).
I could’ve avoided those mistakes with a simple question: is the normalized per-share earnings power of this business highly likely to be much higher a decade from now than it is today? If the answer is “no,” the next step shouldn’t be to investigate whether the price-earnings ratio is low enough to justify taking a flyer. The appropriate course of action is to move on.
Disclosure: None.
Read more here:
Some Thoughts on Electronic Arts
Costco: Maintaining Its Dominance
Dollar General: Another Step Forward
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