CKBlog: Strategies

Wednesday, May 09, 2018

Berkshire Hathaway Shareholder Meeting 2018: Buffett Prefers Discipline over IQ

“If I was given a choice between hiring someone out of Grad School that was brilliant or someone that memorized Chapter 8 of Ben Graham’s Intelligent Investor, I’d choose the one who memorized Chapter 8. What we do doesn’t take a high IQ. It takes discipline and it takes time.” - Warren Buffett

Over 40,000 of us flock to Omaha each year to sit in a sports arena and learn from two of the greatest investors of our time. Perhaps of all time.

The line to enter the event ... at 6:45 a.m.

Warren Buffett began buying Berkshire Hathaway stock in 1962 for $7.50 a share. At the time, it was a fledgling textile company based in New Bedford, Massachusetts. However, through discipline, time, and the tenets of his mentor Ben Graham, Warren Buffett built Berkshire Hathaway into a $500 billion enterprise. Its Class A shares now trade for close to $300,000.00 per share!

What is Warren’s secret? There are no secrets. Which is a major reason we disciples make the pilgrimage each year. Warren and his Vice Chairman, Charlie Munger, are incredibly gifted investors. But they also have an unmatched ability to distill the complex into something us mere mortals can understand—and use.

I have far too many take-aways to cover in one blog post. Therefore, I would like to focus on the quote that kicked off this post because it distills the beauty of the weekend so well. There’s a lot in those three sentences. Let’s break them down.

Graduate School

Both Warren and Charlie often comment that folks don’t need to go to graduate school to become successful. However, I don’t believe either would be where they are today without it. Charlie is a lawyer by trade, graduating from Harvard Law School magna cum laude. Both he and Warren maintain Charlie’s legal background and his research skills have been invaluable to their success.

Warren attended three graduate schools, including Wharton, University of Nebraska, and Columbia. However, it was his time at Columbia that changed his life. It was there that he studied under the Godfather of Value Investing, Benjamin Graham. Graham’s The Intelligent Investor is a value investor’s bible. I try to read it every couple of years. Each time I get a little more from it.

My copy of “The Intelligent Investor”

Chapter 8

Chapter 8, titled, “The Investor and Market Fluctuations” is a masterful examination of the relationship between the investor and the stock market. You should heed Warren’s advice and read this chapter for yourself but if not, I offer the following excerpt:

“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

Can’t you just see Mr. Buffett saying those words? I bet he has thousands of times.

IQ

It’s a common theme in Buffett’s musings. Last year, Buffett said, “If you have a 150 IQ, sell 30 points to someone else. You need to be smart, not a genius.”  He’s convinced it doesn’t take brilliance to be a good investor. He thinks it’s quite simple really. Moreover, he’s very convincing about it. After listening to Charlie and him talk about their experiences and their process, you are left convinced you have what it takes.

Discipline

You may have what it takes, but do you have the discipline required to achieve superior results? This is the hard part. It’s one thing to know how to do it; it’s another to stay committed and execute. This translates to all aspects of life. Sure, professional athletes have God-given talent, but they also work on their craft while the rest of us are sleeping.

It took Michael Phelps just 4,440.56 minutes (roughly 74 hours) in the pool to win his 23 Olympic gold medals. However, how many years worth of swimming did it take to lead him to the podium? Warren says he spends six hours a day reading. How often do you read?

It doesn’t only take dedication to work on his craft, but Warren is stubborn about sticking to Graham’s principles. This means not paying lofty prices for a stock even if he likes the underlying business. Need evidence? Berkshire’s cash hoard has climbed north of $100 billion. It pains him, but he stays disciplined. If no stocks meet his criteria, he waits.

Munger said it best during this year’s meeting: “Part of the Berkshire secret is when there is nothing to do, Warren is very good at doing nothing.” Classic Munger.

Time

At 87 and 94, Warren and Charlie sure have had a lot of time. And let’s hope they get a lot more of it. Sometimes, it takes time for investments to pay off. Perhaps the best example of this is Warren’s favorite transaction. In 1972, Berkshire bought See’s Candy for $25 million. In the 46 years since, the California chocolate maker has returned over TWO BILLION DOLLARS in profits to shareholders! Clearly, See’s Candy has great management and delicious chocolate, but to deliver billions, the key ingredient wasn’t cocoa. It was time.

Each year, the thousands of us flock to Omaha in search of a magical nugget that we can apply to our investment process and to our lives. And each year, we are reminded that the secret is there is no secret. You don’t leave Omaha with some stock tip or foolproof investment formula. The true value for the value investor is right in front of us. Stick to successful principles, stay disciplined and give it time.

And that will keep me coming back ... every time.

Note: I own Berkshire Hathaway stock. As do many CastleKeep clients.

If you would like to learn more about the weekend, please email me at .(JavaScript must be enabled to view this email address). Like Warren and Charlie, I am happy to share.