Even though we started at the very same time
Alexander Hamilton began to climb
How to account for his rise to the top?
Man, the man is
My daughter’s favorite Broadway play is Hamilton, but with prices around $600 per ticket (that’s not a typo), the soundtrack makes one of the all-time great relative value investments (even better with Apple Family Music Plan). Currently, her favorite song is Non-Stop (you can listen to it here), from which the passage above comes. Hamilton’s rise to power was in large part due to his work effort, he was “non-stop” when it came to learning and writing.
If I had to propose a theme song for Buffett’s success, it might go something like this:
That’s why we’re waiting
Waiting on the price to change
We keep waiting
Waiting on the price to change
The entire premise behind Non-Stop, and at the center of Hamilton’s success, is his work ethic. We love stories about work, the stories fit our Horatio Alger storyline of being able to succeed ourselves. If we work hard enough (if we read, write and learn–Non-Stop), we too will have success.
I too believe that hard work equals success, but investment success is its own unique animal that requires a slightly different approach to hard work. The work is certainly hard, but it is not the same as many other professions.
In most areas of life, continued practice will eventually bring success. Think about playing an instrument. Hours of “concentrated practice” will allow a young pianist to play at a high level. Think about basketball. Hours of shooting made Steph Curry the great shooter he is today. (If you would like to read a great book on the subject of “concentrated practice,” read Peak instead of Outliers.)
Investments, on the other hand, require a certain level of waiting for the opportunities to come to you. The hard work on your end allows you to be prepared to swing the bat when the right “pitch” comes your way, but there is no amount of reading, writing or analyzing that will “create” a great investment opportunity. Take three of Buffett’s most famous investments. He did not create these opportunities.
GEICO: Shift from solely public employees to “John Q public” led to underwriting “foot faults” and dramatic under-pricing of their insurance policies.
American Express: Salad oil scandal.
Washington Post: Watergate Scandal (combative tone of President Nixon towards the Washington Post).
All of these investments required outside events to “bring the opportunity to Buffett.” He didn’t burn the midnight oil to create any of these investments. Quite the contrary, I think he was able to take advantage of them because he was not involved in other investments that were less worthy of his capital. The good in most cases is the enemy of the great.
What does this mean for the investment manager or individual investor today?
- You must be willing to learn about a company and not make an investment. The idea that a company will be within your circle of competence and valuation range the first time you look at it is absurd. Just like an actual investment, your time spent on companies could benefit you years down the road. Taking the time today to make the investment without reaping any actual investment returns is the ultimate in long-term thinking.
Buffett first invested in Geico in 1951(see article), but had sold out by 1954. 25 years later in 1976, Buffett made his major investment in Geico after their share price fell from $61 to $2. He would later acquire the rest of the company in 1996. (As a counterpoint, Buffett’s first purchase in 1951 happened only a few weeks after he first discovered Geico in the holdings of his idol, Ben Graham, and a mere 48 hours after Buffett made his initial visit to Geico on a weekend to discuss the company with the first person who answered the door at the headquarters, Lorimer Davidson).
- The “non-stop” work ethic would teach you that practically everything is within your circle of competence with enough hard work, however, a “waiting” mindset allows you to feel at peace with the fact that there are going to be many things that are outside your circle of competence.
Nvidia was the best performing S&P 500 stock in 2016. Nvidia makes graphics cards for computer gaming. No amount of time or effort would have made me comfortable with this company. That’s fine.
- Be prepared to not have any good ideas for quite some time. The hard work ethic would mandate a certain level of “work product” that should be produced on a semi-regular basis, however, if you are working mainly for preparation to have the opportunities come to you, there are bound to be stretches where there are no good ideas.
From Buffett’s 1986 letter:
Meanwhile, we had no new ideas in the marketable equities field, an area in which once, only a few years ago, we could readily employ large sums in outstanding businesses at very reasonable prices. So our main capital allocation moves in 1986 were to pay off debt and stockpile funds. Neither is a fate worse than death, but they do not inspire us to do handsprings either.
The story of Hamilton is a great story of how hard work can lead to success. Investing certainly requires hard work, but it also requires waiting….and more waiting….and…..
Matt Brice is the portfolio manager of The Sova Group, LLC, an investment firm that manages separate accounts for clients. Matt can be reached at firstname.lastname@example.org.