Everybody is different. Each and every one of us. We all have unique personalities which we apply to our everyday actions and beliefs, which in turn denote our individual style. Authors have different styles, as do coaches, business people and even musicians. And naturally, because of this, every investors’ style is also different.
While all of the Investment Masters have great track records of long term success, they naturally all have their own styles. Whether it’s running highly concentrated portfolios, focusing on a select type of asset or having a different time horizon, each has had their own path to success. As Buffett likes to say, there’s more than one way to get to investment heaven.
“I’ve said in investing, in the past, there’s more than one way to get to heaven.“ Warren Buffett
“There are many, many different ways to make money in the investment business and the one I describe as ours, its not necessarily the only right one but it’s the one we like.” Howard Marks
Buffett, for example, often says his style is a combination of Ben Graham and Phil Fisher. He’s taken elements from both and combined them.
“I think I’d rather think of myself as being a sort of a hundred percent Ben Graham and a hundred percent Phil Fisher in the points where they don’t — and they really don’t — contradict each other. It’s just that they had a vastly different emphasis.” Warren Buffett
As a student of Graham, Buffett started out with a focus on buying companies whose underlying asset values exceeded their share prices. As his asset base grew, he leaned more towards Fisher’s style of seeking wonderful businesses. But Buffett never forgot the three key tenets of Graham’s approach.
“The three basic ideas that underlie successful investing — look at stocks as businesses; have the proper attitude toward the market [use it to serve you and not to instruct you], and to operate with a margin of safety.” Warren Buffett
And while all of the Investment Masters have their own unique style, those three ideas underpin the majority of their investment philosophies; Karman, Greenblatt, Akre, Pabrai and many more.
“With those three sort of philosophical benchmarks, the exact — the evaluation technique you use is not really that important. Because you’re not going to go way off the track, whether you use Walter’s approach — Walter Schloss’s — or mine, or whatever. Phil Carret has a slightly different approach. But it’s got those three cornerstones to it, I will guarantee. And believe me, he’s done very well.” Warren Buffett
And while we should learn from the Masters, we must also recognise we aren’t them. Each of us have different knowledge bases and different skill sets; we all have a unique circle of competence.
More importantly, each us are wired differently. It is because of our different psychological make-up that we must find a style that suits us. Buffett touched on this in 1994 when he was asked about Peter Lynch:
“There’s certainly a fair amount of overlap. There’s some difference. Peter [Lynch], obviously, likes to diversify a lot more than I do. He owns more stocks than the names of companies I can remember. I mean, but that’s Peter. And, you know, I’ve said in investing, in the past, that there’s more than one way to get to heaven. And there isn’t a true religion in this, but there’s some very useful religions. And Peter’s got one, and I think we’ve got one that’s useful, too. And there is a lot of overlap. But I would not do as well if I tried to do it the way Peter does it, and he probably wouldn’t do as well if he tried to do it exactly the way I’d do it.” Warren Buffett
From my own observations, I’d say Charlie and Warren’s tolerance for volatility is higher than most investors. Share price volatility doesn’t scare them. Munger has often said that if you can’t stomach a 50% fall in a stock price, the markets are no place for you.
“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” Charlie Munger
Many shareholders can’t stomach such returns.
“Large losses, though initially only on paper, often derail an otherwise rational investor. An illogical fear of loss insidiously exerts an undue influence on portfolio decision making. (Rationally, the lower prices go, ceteris paribus, the less the likelihood of further loss—a truism that falls on deaf ears when fear has the upper hand.)” Frank Martin
For the last decade or more I’ve run ‘alpha funds’ for some of the world’s largest hedge funds and long-only investors. Each of these funds have different requirements and risk tolerances; some of these clients want you to manage only long positions, others let you choose your long/short and net/gross exposure, while some want a market-neutral portfolio and others beta-hedge all positions. One commonality is they all want limited losses or drawdowns [usually sub 5%]. This happens to suit my style; a low tolerance for loss, even if it is just quotational [i.e. not permanent loss of capital].
While my tolerance for loss hasn’t changed over the years, my style has evolved. I’ve become far more focused on taking a longer term view, looking out three to five years to try and establish what a company might be earning. I’ve shifted from advocating stocks on undemanding multiples to preferring high quality companies with competitive advantages that are getting stronger. I now structure the portfolios I run around companies that meet these criteria. I’ll build smaller positions in other opportunities like mis-pricings, takeovers etc, around the core positions.
Once a big advocate for short selling and maintaining a short book, I’ve found it far less fruitful over the years than spending time finding quality mis-priced companies to buy. (I sometimes wonder if that’s a sign we are late in the market cycle). While I focus on individual stocks I spend a lot of time constructing a portfolio which is likely to perform under alternative scenarios. Come what may, I’ve got a pretty good idea how the portfolio will perform under different scenarios.
While Buffett’s core positions since the 1970’s have been ‘franchise businesses,’ he’s also invested in silver, oil, takeovers, distressed bonds and preferred stock. Before Berkshire, the Buffett Partnership operated like a multi-strategy hedge fund. Buffett has since evolved.
We know Buffett’s always had an aversion to technology stocks. At the Berkshire 2012 meeting Buffett said he wouldn’t buy Apple. In years gone by Buffett swore himself of airlines and jokingly enrolled himself in AA [‘Airlines Anonymous’]. More recently, he’s taken large positions in both.
“I would not be at all surprised to see them [Apple and Google] be worth a lot more money ten years from now, but I wouldn’t want to buy either one of them. I do not get to the level of conviction that would cause me to buy them. But I sure as hell wouldn’t short them, either.” Warren Buffett 2012
And that’s a key lesson: Markets change and you need to adapt. A set and forget approach does not work when investing.
“An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style. He can earn them only by carefully evaluating facts and continuously exercising discipline.” Warren Buffett
“Investors who adhere to one particular style are likely to end up in trouble, sooner or later.” Marathon Asset Management
“It is dangerous to rely on a single strategy in a doctrinaire fashion. Strategies and disciplines ought always to be tempered by intelligence and intuition.” Peter Cundill
“An investment approach may work for a while, but eventually the actions it calls for will change the environment, meaning a new approach is needed.” Howard Marks
“If you fit your nature with your investment style and it makes economic sense, you’ll probably do pretty well.” Shad Rowe
“You have to invest the way that’s comfortable for you.” Walter Schloss
“You need a method that suits your personality.” Colm O’Shea
“You have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size fits all investment strategy that I can give you.” Charlie Munger
“If you are going to be a great investor, you have to fit the style to who you are. At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.” Michael Burry
“Part of the game of investing is to come into your own. You must find some way that perfectly fits your personality.” Li Lu
“If you are pursuing a style that doesn’t fit your temperament, you won’t be happy. Show me an unhappy investor and I’ll show you an unsuccessful investor.” Ralph Wanger
And if you’re managing money for others, make sure those investors are aligned with your style. If not, you risk having to liquidate the portfolio at exactly the wrong time.
“We care less about volatility than others and try to find limited partners who are like-minded.” David Abrams
“People say, “Do you want individual owners? You want institutional owners?” What we want are informed owners who are in sync with our objectives, our measurements, our time horizons, all of that sort of thing.” Warren Buffett
“People ask for advice and I say, ‘The first and most important thing is make sure that you choose your clients carefully.’ Most people either look at me like I had three heads, like ‘You’ve got to be kidding me’, like ‘That’s quaint.’” Seth Klarman
You can see that all investor’s styles differ. Warren Buffett is not Peter Lynch. Neither is he Ben Graham or Phil Fisher. And nor are they he. But Buffett has elements of his style which are common to all three. And you’ll find that while no two of the Masters investment styles are the same, there are common threads that run through all of them; if you’ve read any of the Investment Masters tutorials you will have noticed as much. You’ll do well to learn from the Masters and adopt some of their approaches, but in the end you must find both a style and investor clients that you’re comfortable with, that ultimately suit your personality.
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