Inspiration from Great Investors
Investing, whether it is in an early-stage company or with an alternative investment manager, is a process in which one only gets better by virtue of learning. Gaining insights and experiences however doesn’t need to be limited to just those you incur personally. There is a tremendous amount of wisdom to be gleaned and applied from some of the most brilliant investors of our time. While it is completely unrealistic to assume I will ever be able to replicate the performance or brilliance of these investors, it is possible to employ some of their core tenets to expand our thinking and ultimately enhance the performance of our investments. By reading about and watching today’s great investors it is possible to derive key nuggets that can be adapted to our own situations, opportunities and styles.
Warren Buffett – Applying Common Sense and Conviction
It’s hard to start any list of this nature without highlighting someone who is arguably the greatest investor of our generation, if not ever. There are many insightful and valuable quotes and lessons that can be derived from Warren Buffett’s wisdom and history.
For me, Buffett’s brilliance is the apparent simplicity and common-sense that anchors many of his investment decisions. His relentless focus on the underlying quality of the business and its management team relative to conventional stock price metrics has proven profitable over the long term across many industries. This common-sense approach reduces reliance on the short-termism so prevalent on “the Street” and instead concentrates on long-term quality as manifested in areas such as business profits generated in cash, return on capital, pricing power and franchise value. He wants to understand a company’s competitive advantage and more importantly it’s durability.
A core Buffett principle is “it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Ideally he tries to buy quality that has been marked down because “price is what you pay: value is what you get.” The linkage of price and value avoids confusing a good company as a good investment. This is a threshold question I ask myself before making any equity investment.
Buffett has made some of his greatest investments by relying on these principles when others were obsessed with market noise. He likes to buy when the market is pessimistic because that view leads to lower prices on quality merchandise. One of the traits I admire most about Buffett is his discipline – he buys what he understands and is “fearful when others are greedy and greedy when others are fearful.”
Finally, another one of Buffett’s quintessential lessons is also incredibly obvious – one must be ready to pounce when opportunities present themselves. Buffett recalled in a recent CNBC interview that when opportunities arise there is no time to be “reading a book on the theory of diversification.” He added, “When you find something where you know the business, it’s within your circle of competence, you understand it, the price is right, the people are right,” he said, “then you take your thumb out of your mouth and you barrel in.” This preparation may be held dormant for extended periods, but when that moment strikes it could be an enormous differentiator and the source of a great investment. For example, Buffett’s homework paid enormous dividends during the 2008 financial meltdown. When the opportunity presented itself, Buffett was able to respond rapidly and purchase large, attractively-priced investments in iconic companies like Goldman Sachs and Bank of America.
Buffett’s mantra of being ready and then patient is a simple rule which many investors frequently dismiss.
Howard Marks – The Value of Being a Contrarian
As the founder and CIO of OakTree Investments, Howard Marks has established himself as one of the pre-eminent contrarian and deep value investors. Through his writings known as missives, Marks has shared his core investing principles that deeply resonate and influence my personal investment philosophy and decision-making process.
What I especially like is that his principles are generally intuitive and easy to understand. Price is a critical factor because “good assets become bad assets if priced too high.” A key factor for Marks is understanding investor psychology, which he believes resembles a pendulum whereby short-term prices are the result of a popularity contest, and not necessarily value. He strives to be a contrarian by buying the unpopular investments discarded by others. He tries to “see what others don’t see” and is wary of the phrase “this time is different.” For me one of Mark’s most poignant comments is “what a wise man does in the beginning a fool does in the end.” Often investment opportunities are shared or evaluated in groups and hence there is a herd mentality that subsequently emanates positively or negatively. Marks epitomizes independent thinking and action, which in many cases translates into early actions that generate superior risk-adjusted returns.
Adding to his emphasis on contrarianism and deep value, Marks incorporates market psychology and risk management because, as he asserts, “the markets can remain irrational longer than you can remain solvent.” Similar to Buffett, Marks compares investing to baseball, stressing that “you don’t have to swing and there are no strikeouts.” Instead, you wait for your pitch which requires discipline, patience and homework. According to Marks, “You can’t predict but you can prepare by knowing the knowable.”
Being a contrarian requires the confidence to trust your gut and your homework, regardless of what others decide.
Kenneth Griffin – Relentlessly Focusing on Risk Management
Since first investing with Ken Griffin’s Citadel hedge fund in the mid 1990s, I have always been struck by their almost maniacal devotion to identifying, quantifying and managing risk. This focus was ever-present back when there was a small team managing a couple of hundred million dollars. It has continued today, where a global team of over 1,600 professionals manage over $27 billion dollars across virtually every global financial market.
A foundational focus for Citadel is trying to capture small price discrepancies between related securities. This pursuit typically requires substantial leverage which in turn necessitates controlling or eliminating outside variables. The process of managing risk at both the macro and the most minute level is dependent on deep technological and quantitative analysis. I believe that committing the time and resources to this aspect of portfolio management has differentiated Ken from his peers.
While few are able to match Citadel’s capabilities in this regard, the key lesson I take from Ken Griffin is the core of risk management – asking the question of what could go wrong? This fundamental mindset can and should apply to virtually any type of investment. Investing or building a business is about taking risks, and while one may not be able to control every risk, one shouldn’t be blindsided by it.
I vividly remember a meeting with Ken in the late 1990s. He explained how they had addressed the highly unlikely risk of Citadel’s Chicago office building temporarily losing electric power. Just thinking along those lines was impressive, however, they took risk management to an entirely new level: I learned that they went so far as to add a dedicated generator and have a full fuel truck always available in the rare event of a power outage.
Managing risk doesn’t guarantee an investment will make money, but it can make an enormous difference when things turn out less than ideally. Protecting against the massive downside of a single investment position can have enormous benefits for the overall portfolio returns.
Paul Singer – The Merits of Manually Intensive Investing
Paul Singer is the founder and Chief Investment Officer of one the oldest and most successful hedge funds, Elliott Management Corp. Now managing over $34 billion dollars on a global basis, Singer has amassed a 4-decade track record that has only recorded two negative years.
When I met Paul in the early 1990s I was struck with how he described his investment style as “manually intensive.” He and his team pride themselves on doing the excruciating work and taking the tough actions that most investors are incapable of analyzing or unwilling to undertake. It was this “manual intensity” that enabled them to capitalize on situations and opportunities that most overlooked or passed on.
Early on, much of his focus was on distressed securities whereby they would go through the painstakingly process of scrutinizing obscure legal documents to uncover hidden sources of value. Elliott’s research often leads to assembling controlling interests in a class of securities and then navigating through the legal landscape to unlock the realization of hidden values. This activist approach can often take years, as best evidenced by the 15 years he has been battling Argentina over its debt default. The combination of Singer’s hard work, tenacity and capital resources led Bloomberg Magazine to dub him “The World’s Most Feared Investor.”
For me, the underlying lesson of Singer’s success is that generating consistently attractive investment returns often requires doing difficult, detailed work and then advocating for change for the benefit of one’s investors. My inspirations from Paul Singer are not derived by what some view as tough tactics, but rather by the sheer amount of thought and work that goes into an investment, and his relentless devotion to making sure his investors are not taken advantage of.