Buffett on Investing vs. Business

Jason Zweig's "Intelligent Investor" column in last week's WSJ featured some interesting Buffett tidbits:

1)  Buffett, whose powers of mental calculation are legendary, confessed that he doesn't know how well Berkshire Hathaway's (BRK.A) portfolio of stocks has done in recent years: 

I've no idea what the rate of return would be.  But, knowing myself how hard it would be to do the calculations right, I'm suspicious of anybody's numbers.

The reason it's so hard to calculate is that you can't just take the ending value of the portfolio and compare it to the beginning, because he added outside money along the way (generated from operating earnings, interest and dividends) and also took out money (to buy operating business, fixed income instruments, raise cash, etc.).  Keep this in mind the next time someone pitches you a fund with a fantastic historical "IRR".

2)  Buffett talks about the advantages of being both a businessman and an investor, rather than one or the other:

Being a businessman makes me a better investor and being an investor makes me a better businessman . . . Most businessmen limit themselves to their own field, and most investors don't really think about businesses.  And many businessmen are semi-oblivious to to the yardsticks other people use outside that field.  I'm always comparing everything to everything else.

"Most investors don't really think about businesses" is a pretty strong statement.  At the end of the day most investments--stocks and corporate bonds--are simply claims on the assets and cash flows of businesses.  It's a damning indictment to say that most investors, including professionals, don't think about what's actually behind the pieces of paper they own. 

Conversely, as I've said before, to be able to approach investing from the perpective of someone who understands businesses can be of great advantage.  Most family offices are in this position, since they're started and seeded by successful businessmen who've sold their business. 

Disclosure:  Long Berkshire Hathaway

Comments

[Prudent Man...:]

I have found in my close to fifty years as an investment professional that virtually no retail clients understand the stock/equity business ownership risks. I also know of some money managers and hedge fund traders who are completely clueless about business and they have MBAs or law degrees from Harvard. This past year is proof that Investment bankers don't understand how to run a business, but most of us old timers knew this in the late sixties and early seventies and they have continued to make the same mistakes over and over again.

This is good stuff and should be included in the "Know Your Customer Questionnaire" when brokers open client accounts. Of course, nobody expects the media to understand any of this as few market commentators can balance their own checkbooks.

2008 Nov 08 08:12 PM

[whidbey:]

Interesting, but to his investors it is really of no concern. BRK is so diversified that it can survive, if not prosper, in most markets.

What I am concerned about is the strength of the whole US economy and the main economies of the world. The weakness we are seeing is a consequence of globalization I suspect (connections), coupled with idiotic behaviors by many adults (no judgement).

The talk of regulation leaves me a little crazy since I have worked in corporate regulatory affairs for a long time and they develop new kinks before the old can be fully understood and ruled on. Some day, maybe next week, the wheels are going to come off and no one is going to be able to do a thing about it.

2008 Nov 08 09:48 PM

[cyborg1939:]

There are three camps at least?

1. It is only the paper certificates of a company that one is buying and selling............Cra...

2. It is the company one is buying and selling.........Buffet...

3. It is the symbols alone that one is buying and selling from the minute charts.........technic...

???? any other groups?

2008 Nov 08 11:48 PM

[long_on_oil:]

I have learned three things from this correction.
#1 A company can look like it has a fantastic short term and long term future (Transocean) but it can still fall over 50% almost overnight and basically none of the fundamentals have changed.
#2 You make nothing owning a company unless the company pays dividends. If you are a investor and prefer to hold great companies for a long time (5 years or more) you will eventually get your legs knocked out from under you via these damn market corrections.
#3 If you are a typical investor, you will not take anything off the table during good times and by time you decide to go to cash, it is to late.

2008 Nov 09 03:16 PM

[D-D:]

Being a businessman means that you have to know the management team as well and trust that they will run the business well. It makes no sense to buy a "hot" stock with poor management

2008 Nov 09 09:53 PM

[kotika98:]

Buffett said most investors, the excepttion is those in the field of "private equity". He himself is operating the largest private equity fund.

2008 Nov 10 12:58 AM