Tuesday, 14 August 2012
Your mental focus is: on YOUR INVESTMENT PROCESS
The Master Investor treats investing like a business: he doesn't focus on any single investment but on the overall outcome of the continual application of the same investment system over and over and over again. He establishes procedures and systems so that he can compound his returns on a long-term basis. And that's where his mental focus is: on his investment process.
Once you're clear what kind of investments you'll be buying, what your specific criteria are, and how you'll minimize risk, you need to establish the rules and procedures you'll follow to gain the Master Investor's long-term focus.
Bottom line: Focus on your investment process to compound your returns on a long-term basis
Once you're clear what kind of investments you'll be buying, what your specific criteria are, and how you'll minimize risk, you need to establish the rules and procedures you'll follow to gain the Master Investor's long-term focus.
Bottom line: Focus on your investment process to compound your returns on a long-term basis
Warren Buffett's favourite pastime
One evening, Buffett and his wife Susan had dinner with friends. Their hosts had just come back from Egypt.
After dinner, as their friends were setting up the slide projector to show him and Susan their pictures of the Pyramids, Buffett announced:
"I have a better idea. Why don't you show the slides to Susie and I'll go into your bedroom and read an annual report."
Warren Buffett doesn't just enjoy reading annual reports. It's his favourite pastime.
"He just had a hobby that made him money. That was relaxation to him."
A master investor lives and breathes investing 24 hours a day.
After dinner, as their friends were setting up the slide projector to show him and Susan their pictures of the Pyramids, Buffett announced:
"I have a better idea. Why don't you show the slides to Susie and I'll go into your bedroom and read an annual report."
Warren Buffett doesn't just enjoy reading annual reports. It's his favourite pastime.
"He just had a hobby that made him money. That was relaxation to him."
A master investor lives and breathes investing 24 hours a day.
"Whatever you have, spend less." If compound interest isn't working for you, it's working against you.
By keeping what he has, and adding to it by living below his means, the Master Investor lets his money compound indefinitely. And compound interest plus time is the foundation of every great fortune.
Wealth is really a state of mind. In the words of Charlie Munger: "I had a considerable passion to get rich. Not because I wanted Ferraris -- I wanted the independence. I desperately wanted it." If you share this attitude, once you have gained that hard-fought independence the last thing you're going to do is jeopardize it by blowing all your money.
The alternative to living below your means is the debt-laden pattern of the middle class: If compound interest isn't working for you, it's working against you, bleeding your money away just as a spurting artery drains your life-energy.
Additional notes:
Most people want to be rich so they can fly first class, live it up in the Ritz, feast on champagne and caviar, and go shopping at Tiffany's without giving a second though to their credit card bill.
The problem is that people who have this attitude to money don't wait until they're rich before they start indulging their fantasies, even if only on a small scale. As a result they never accumulate any capital, or even worse go into debt so they can live beyond their means ... and remain poor or middle class.
Wealth is really a state of mind. In the words of Charlie Munger: "I had a considerable passion to get rich. Not because I wanted Ferraris -- I wanted the independence. I desperately wanted it." If you share this attitude, once you have gained that hard-fought independence the last thing you're going to do is jeopardize it by blowing all your money.
The alternative to living below your means is the debt-laden pattern of the middle class: If compound interest isn't working for you, it's working against you, bleeding your money away just as a spurting artery drains your life-energy.
Additional notes:
Most people want to be rich so they can fly first class, live it up in the Ritz, feast on champagne and caviar, and go shopping at Tiffany's without giving a second though to their credit card bill.
The problem is that people who have this attitude to money don't wait until they're rich before they start indulging their fantasies, even if only on a small scale. As a result they never accumulate any capital, or even worse go into debt so they can live beyond their means ... and remain poor or middle class.
Buffett can also be hard on himself. Sometimes, too hard.
In 1996, Buffett once again became a shareholder of Disney when it merged with Cap Cities/ABC, of which Berkshire was a major shareholder. Buffett recalled how he had first become interested in Disney 30 years earlier. Then,
"....its market valuation was less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was sitting with more cash than debt. At Disneyland, the $17 million Pirates of the Caribbean ride would soon open. Imagine my excitement - a company selling at only five times rides!"
"Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-adjusted price of 31 cents per share. That decision may appear brilliant, given that the stock now sells for $66. But your Chairman was up to the task of nullifying it: In 1967 I sold out at 48 cents per share."
With 20/20 hindsight, it's easy to see that selling at 48 cents per share was a major blunder. But in criticising himself for doing so, Buffett overlooks the fact that in 1967 he was still largely following Graham's investment model. In that model the rule is to sell a stock once it reaches intrinsic value.
Nevertheless, he has clearly taken to heart Philip Fisher's observation that studying "mistakes can be more rewarding than reviewing past successes."
Buffett shows it is better to be overly critical than forgiving of your own mistakes. As Buffett's partner Charlie Munger puts it:
"It is really useful to be reminded of your errors. I think we're pretty good at that. We do kind of mentally rub our own noses in our own mistakes. And that is a very good mental habit."
"....its market valuation was less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was sitting with more cash than debt. At Disneyland, the $17 million Pirates of the Caribbean ride would soon open. Imagine my excitement - a company selling at only five times rides!"
"Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-adjusted price of 31 cents per share. That decision may appear brilliant, given that the stock now sells for $66. But your Chairman was up to the task of nullifying it: In 1967 I sold out at 48 cents per share."
With 20/20 hindsight, it's easy to see that selling at 48 cents per share was a major blunder. But in criticising himself for doing so, Buffett overlooks the fact that in 1967 he was still largely following Graham's investment model. In that model the rule is to sell a stock once it reaches intrinsic value.
Nevertheless, he has clearly taken to heart Philip Fisher's observation that studying "mistakes can be more rewarding than reviewing past successes."
Buffett shows it is better to be overly critical than forgiving of your own mistakes. As Buffett's partner Charlie Munger puts it:
"It is really useful to be reminded of your errors. I think we're pretty good at that. We do kind of mentally rub our own noses in our own mistakes. And that is a very good mental habit."
Buffett's $2 Billion Mistake
Uniquely, Buffett also considers what could have been when he analyzes his mistakes.
In 1988 he wanted to buy 30 million (split-adjusted) shares in Federal National Mortgage Association (Fannie Mae), which would have cost around $350 million.
"After we bought about 7 million shares, the price began to climb. In frustration, I stopped buying ... In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned."
In October 1993, he told Forbes that "he left $2 billion on the table by selling Fannie Mae too early. He bought too little and sold too early. "It was easy to analyze. It was within my circle of competence. And for one reason or another, I quit. I wish I could give you a good answer."
This was a mistake that, he wrote, "thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program which began later the same year.
In 1988 he wanted to buy 30 million (split-adjusted) shares in Federal National Mortgage Association (Fannie Mae), which would have cost around $350 million.
"After we bought about 7 million shares, the price began to climb. In frustration, I stopped buying ... In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned."
In October 1993, he told Forbes that "he left $2 billion on the table by selling Fannie Mae too early. He bought too little and sold too early. "It was easy to analyze. It was within my circle of competence. And for one reason or another, I quit. I wish I could give you a good answer."
This was a mistake that, he wrote, "thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program which began later the same year.
Learn from Your Mistakes
Always treats mistakes as learning experiences.
We're programmed to learn from our mistakes. But what we learn depends on our reaction.
A child goes to school, and what does he learn about mistakes there? In too many schools, he is punished for making mistakes. So he learns that making mistakes is WRONG; and that if you make mistakes you're a FAILURE.
Having graduated with this carefully ingrained attitude, what's his reaction when, as is inevitable in the real world, he makes a mistake? Denial and evasion. Blame his investment advisor for recommending the stock, or the market for going down. Or justify his action: "I followed the rules - it wasn't my fault!" just like the kid who screams "You made me do it." The last thing he's going to do with that kind of education is to be dispassionate about his mistake and learn from it. So, just as inevitably, he'll do it again.
When a master investor makes a mistake, his reaction is very different. First, of course, he accepts his mistake and takes immediate action to neutralize its effect. He can do this because he takes complete responsibility for his actions - and their consequences.
Buffett has no emotional hang-up about admitting his mistakes. He makes it his policy to be frank and open about them. According to Buffett, "The CEO who misleads others in public may eventually mislead himself in private." To Buffett, admitting your mistakes is essential if you are to be honest with yourself.
There is no shame in being wrong, only in falling to correct our mistakes. Having cleared the decks by getting rid of the offending investment, a master investor is free to analyze what went wrong. And he always analyzes every mistake.
- First, he doesn't want to repeat it, so he has to know what went wrong and why.
- Second, he knows that by making fewer errors he will strengthen his system and improve his performance.
- Third, he knows that reality is the best teacher, and mistakes are its most rewarding lessons.
If you wanted to teach someone how to ride a bike, would you give him a book to read? Or would you give him a few pointers, sit him on a bike, give him a gentle shove and let him keep falling off until he figures it out for himself?
"Can you really explain to a fish what it's like to walk on land?" Buffett asks, "One day on land is worth a thousand years of talking about it."
We're programmed to learn from our mistakes. But what we learn depends on our reaction.
A child goes to school, and what does he learn about mistakes there? In too many schools, he is punished for making mistakes. So he learns that making mistakes is WRONG; and that if you make mistakes you're a FAILURE.
Having graduated with this carefully ingrained attitude, what's his reaction when, as is inevitable in the real world, he makes a mistake? Denial and evasion. Blame his investment advisor for recommending the stock, or the market for going down. Or justify his action: "I followed the rules - it wasn't my fault!" just like the kid who screams "You made me do it." The last thing he's going to do with that kind of education is to be dispassionate about his mistake and learn from it. So, just as inevitably, he'll do it again.
When a master investor makes a mistake, his reaction is very different. First, of course, he accepts his mistake and takes immediate action to neutralize its effect. He can do this because he takes complete responsibility for his actions - and their consequences.
Buffett has no emotional hang-up about admitting his mistakes. He makes it his policy to be frank and open about them. According to Buffett, "The CEO who misleads others in public may eventually mislead himself in private." To Buffett, admitting your mistakes is essential if you are to be honest with yourself.
There is no shame in being wrong, only in falling to correct our mistakes. Having cleared the decks by getting rid of the offending investment, a master investor is free to analyze what went wrong. And he always analyzes every mistake.
- First, he doesn't want to repeat it, so he has to know what went wrong and why.
- Second, he knows that by making fewer errors he will strengthen his system and improve his performance.
- Third, he knows that reality is the best teacher, and mistakes are its most rewarding lessons.
If you wanted to teach someone how to ride a bike, would you give him a book to read? Or would you give him a few pointers, sit him on a bike, give him a gentle shove and let him keep falling off until he figures it out for himself?
"Can you really explain to a fish what it's like to walk on land?" Buffett asks, "One day on land is worth a thousand years of talking about it."
"Understanding" versus "Knowledge"
You can put knowledge in a book and sell it. But not understanding.
To understand is to combine knowledge with experience. Not someone else's experience: your own. Experience only comes from doing, not from reading about what someone else did (though that can add to your knowledge).
The meanings of these two statements are clearly different.
Knowledge usually means a collection of facts - a "persons's range of information," or the "sum of what is known." But "understanding" implies Mastery - the ability to apply information and get the desired results.
To understand is to combine knowledge with experience. Not someone else's experience: your own. Experience only comes from doing, not from reading about what someone else did (though that can add to your knowledge).
The meanings of these two statements are clearly different.
Mr. A has a good knowledge of investing.
Mr. A understands investing.
Knowledge usually means a collection of facts - a "persons's range of information," or the "sum of what is known." But "understanding" implies Mastery - the ability to apply information and get the desired results.
Warren Buffett's favourite book.
It should be no surprise to learn that Warren Buffett's favourite book on his favourite pastime is reading annual reports.
Preservation of Capital is the first aim.
Since preservation of capital is Warren Buffett's first aim, his primary focus is, in fact, on avoiding mistakes and correcting any he makes and only secondarily on seeking profits.
This doesn't mean he spends most of his day focusing on what mistakes to avoid. By having carefully defined his circle of competence, he has already taken most possible mistakes out of the equation. As Buffett says:
"Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them .... Overall, we've done better by avoiding dragons than by slaying them."
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