When we first met, I was quite puzzled by his approach of “Invest in companies that never lose money.” Being young, ambitious and slightly cocky, I felt that an investor should focus on companies that always make money rather than companies that never lose money. His explanation was quite simple: making money is never the hard part; its learning how not to lose it that makes a fundamental difference. A company can have a great product, but if it’s not managed properly the company can falter, trip or stumble in profitability.
Recently I was reading comments by one of my admired professional value managers who referenced a quote by Wilbur Ross…
Next were banks: At this time CIBC and TD had exposure to the Enron fallout and were being named in lawsuits for damages from their activities with the energy giant. But even with these bad behaviours, a bank almost always covers their margin of safety well above the prime lending rate. Even when they offer a more competitive rate, they’re most likely doing so with leverage on assets or providing a spread on the money they’ll use from other products. Chuck’s example was giving someone a GIC rate of 3.75% and offering a mortgage at 6.25%. He said that quite frequently a bank can return 10-16% from the money you lend them in the long-term. The bank simply borrows your money at 3.75% and hands it to a mortgage lender who they charge 6.25% or higher. (This is also the gentleman who told me to invest aggressively into banks whenever their P/E is 60-70% of their relative index)
He proceeded another day during a BCT to tell me in great detail everything he did from the moment he woke up until I met him for lunch that day. He told me the exact model of bed he woke up in, what type of underwear he put on, what razor, shaving cream, denture cleaner, mouth rinse & hair gel he used. He then shared what he had for breakfast. By this time I was confused, I wondering if he had taken all of his medication that morning as prescribed. But when he asked me what things in life had barely changed over the last 10, 25 or 50 years I was stumped. The world was always changing as new products, technologies or things in our lives improved. I already knew that banks & insurance companies had been around as long as most people can remember, but I was convinced there were very few businesses that had. When I looked over his portfolio with a perplexed look, he asked me if people had changed how they eat out, where they go for groceries, what the majority of our clothes were made of, the composition of tires, etc. He let me sit there for a moment, sitting back in a chair smiling and then finally asked, “Do you get it yet young man?”
What he was doing was explaining what I would later learn to be one of Buffett’s fundamental investing strategies that very few people capture in their own discipline: predictability. The company, product or service through which you invest in will not change today, tomorrow or at any time in the near future. The company may sell more, produce more, change a few non-core products or services along the way, but the fundamentals of what the company does won’t.
What Chuck was offering me for the first time in my life was a different way to look at investing in contrast to the strict numbers that I had learnt in business school. Here was a man who had never picked up a quantitative book on financial analysis, designed elaborate S.A.’s or ever performed a professional case study on a problem facing a multinational corporation. Yet he understood the qualitative qualities that any business needed to understand in order to be successful. If he knew that the cash flow of a specific company was maintained & predictable, if the product/service was protected by quality management & consumer desire, then he never had a problem investing into it. He would wait for a downturn in the market (often in the midst of a recession) and bulk up positions in key holdings of his portfolio to take advantage of negative market sentiment.
When investors today look to the market in times of increasing uncertainty, I often look back to the lessons I’ve learnt from Chuck & others. It helps me to re-focus back onto my investing strategy, the fundamentals I’ve designed & incorporated into my practice and where to look for value when everyone else is focused on something else. The vision of a contrarian is now infused into my business instincts and often I’m zigging well before the rest of the market has even thought to zag.
I’m young and and I’ve made mistakes. But once I began to learn the classic mistakes that most investors make and how large of an impact those mistakes have on your ability to generate returns over a long period of time, I made a promise to myself to develop a discipline that would enable me to avoid or at least minimize mistakes.
Those, as many know, are my Value Rules. From those I’ve designed portfolios, investing strategies & a common sense approach to investing that helps me lower my exposure to risk. It’s important that readers understand that they will never completely eliminate risk from my investing activities, but by increasing my MoS and reducing exposure to risk I stand a much better chance of generating consistent compounding returns over the long-term.