Dear Fellow Investors:
Below you will find our review of the 2014 Berkshire Hathaway Annual Shareholder Meeting. As we consider these men pioneers of long-duration common stock investing, we wanted to share what we believe were the best nuggets of wisdom from the weekend.
1. Thou Shalt Not Envy.
Munger: “We are way better off by not adding to a culture of envy.”
At Smead Capital Management, our motto is “Only the Lonely Can Play.” Sticking to your own discipline when other investors are temporarily doing better than you, is effectively avoiding envy. We don’t envy the returns others make in their disciplines and hope our investors stick to the kind of long durations emphasized by Berkshire Hathaway.
2. Thou Shall Hire Great People and Over-trust Them.
Buffett: “They make mistakes, but we get more success overall.”
Mr. Buffett sounded like author Jim Collins who said, “get the right people on the bus.” We try to look for this in our investments and attempt to do this in our own company.
3. Thou Shall View Competition as the Enemy of Competence.
Munger: “Don’t try out for the NBA if you are 5’2″ tall. To find a circle of competence, compete against idiots. The slowness of what we do causes few to compete with our model.”
In essence, we think Buffett and Munger were saying that one should invest in S&P 500 index sectors, industries and companies where the consensus is fearful. Buffett has said that you “pay a high price for a cheery consensus” and gave a loud re-endorsement of CEO Brian Moynihan at Bank of America. The long duration confidence and “slowness” of what we do in our large bank holdings will be a source of future success, in our lonely opinion!
4. Thou Shall Value Qualitative over Quantitative.
Buffett: “Aesop Was Right (a bird in the hand is worth two in the bush). Fisher was qualitative in analyzing stocks, Graham was quantitative and Charlie convinced me that Fisher is correct.”
Our eight criteria have a clearly qualitative bent and do not emphasize the deep value pattern of Ben Graham. We will comment more about this subject next week, related to recent statistics which show that long-term Alpha is connected to low-capex and high free-cash flow generation companies.
5. Thou Shalt Remove Ignorance from Investing.
Munger: “Investing and business success is about ignorance removal.”
We have argued for years (just ask my kids) that all the math you need to be a great investor is learned by the end of 7th grade. Don’t let complexity and high math fool you in the investment vehicles you analyze. We contend that successful investing in common stocks comes in long durations and from doing something which is relatively simple, but humanly hard to execute. Charlie said that See’s Candy taught Warren and him about brands and led to the purchase of Coke in 1988. In effect, it “removed some of their ignorance” associated with brands.
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.
This Missive and others are available at smeadcap.com