The quotes below are from the early 1990s Chairman Letter’s from Warren Buffett in regards to difficulty of investing, diversification, management performance and a common investment mistake most people make (even Buffett), jumping in and out of companies shares.
“Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.”
The statement above came at the end of a discussion of how meaningless the beta of a stock & past price movements are in relation to “Value” and reminds me of the methodology of K.I.S.S, or keep it simple stupid. Complexity leads to mistakes, or at the very least a more vulnerable system.
“Before looking at new investments, we consider adding to old ones. If a business is attractive enough to buy once, it may well pay to repeat the process…..Late in 1993 I sold 10 million shares of Cap Cities at $63; at year-end 1994, the price was $85.25. (The difference is $222.5 million for those of you who wish to avoid the pain of calculating the damage yourself.) When we purchased the stock at $17.25 in 1986, I told you that I had previously sold our Cap Cities holdings at $4.30 per share during 1978-80, and added that I was at a loss to explain my earlier behaviour. Now I’ve become a repeat offender. Maybe it’s time to get a guardian appointed.”
Yes, Warren had made plenty of mistakes (US Air preferred, Berkshire Hathaway are other great examples) most he claims are in regards to opportunity costs and the business he understood but remained from purchasing.
“Casey Stengel described managing a baseball team as “getting paid for home runs other fellows hit” and is how Warren sums up working with the all important management team that has been assembled over the years at Berkshire Hathaway.
The importance of not chasing Wall Street darlings, hot industries, commodity based businesses (unless they enjoy THE low-cost producer position) or new issues.
“Fear is the foe of the faddist, but the friend of the fundamentalist.”
“As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label: “Competition may prove hazardous to human wealth.”