super investors: Super investors are wired slightly differently from most of us: William Green
What is common among great investors?
One of the most striking themes that I found again and again with the greatest investors is that they tend to be very unemotional and very rational. They are looking at the data, the evidence of the numbers in a very dispassionate way, analysing things with a great attention to probability. They are always thinking what is my downside risk here? Is the upside greater than the downside?
Someone who is a total embodiment of this is Warren Buffett’s legendary partner Charlie Munger. He is now 97-years-old and he is often regarded as being even cleverer than Warren Buffett. and I went to interview Charlie Munger in Los Angeles and he had bought Wells Fargo Bank at the absolute bottom tick in March 2009 during the financial crisis, when the last thing anybody wanted to own was a company in financial services.
I said to him was it difficult for you to buy when everyone else was panicking and there was so much anxiety? Do you struggle against those emotions?He said no, not at all. I do not feel it. I said so you were not even really trying to repress those emotions and he said no and Warren is wired exactly the same way. So one of the great advantages temperamentally a lot of the best investors have is that they are wired slightly differently than most of us.
For me, one of the lessons of the reporting all these years of research that I did was to say well am I wired in a way to win this game, am I wired intellectually emotionally to win this game? One of the great characteristics of the great investors is to say that they had only played games that they could win. So Buffett will say, how do you beat the legendary chess player Bobby Fischer? He said, play him at anything but chess!
You have touched upon concentration versus diversification. Nick Sleep and his letters are very famous among the investing community. This is often discussed in investing circles in India – should we have a very concentrated approach to investing big money or do we just spread our risks over? What is your view?
That depends on both your talent and your temperament. Somebody like Nick Sleep ran this extraordinarily successful hedge fund with his partner Qais Zakaria which beat the market by something like 800 percentage points over 13 years. They closed the fund, returned something like $3 billion in assets to the shareholders and they just have invested their own money very successfully in recent years.
Nick simply owned three stocks — Berkshire Hathaway, Amazon and Costco. He recently added a fourth stock and his view was these are companies where the destination is very clearly excellent. We know that over the long term they are doing the right things to reach a desirable destination. He says I am happy to own these companies and he has owned Costco for 18 years and Amazon for 16 years. But I have to recognise that I am not Nick Sleep, I am not Warren Buffett, I am not Charlie Munger and the temperamentally I simply cannot cope with that degree of concentration.
I interviewed John Templeton in The Bahamas many years ago. In many ways, he is regarded as the greatest global stock picker of the 20th century. He says that for the average investor, the intelligent thing to do is to own maybe four or five funds that are exposed to different areas of the market. He said over the course of his lifetime, he had made half a million investment decisions and he put a one-third of them with the opposite of wisdom. So he said if somebody as good as him who is working extraordinarily intensely and who was a Rhodes scholar and came top of his class at Yale, was making mistakes a third of the time, then you want to protect against your own fallibility. So the simple piece of advice from him that I should own three, four, five funds and not overestimate myself, has been very helpful. It has protected me from a fair amount of stupid mistakes over the last 20 years.
You have also interviewed Jack Bogle, another legendary investor. He talks about keeping it simple. There is a very big surge in ETFs in India as well as new investors pile on. From your interaction with Jack Bogle, could you tell us why index funds are so important?
Yes, Jack Bogle was a fascinating character who died a year or so ago. Warren Buffett has said that if a statue is to be built for anybody in the investment industry, it should be for Bogle because he has done so much to help shareholders. He was really the pioneer of the index funds and Vanguard now manages something like $6.2 trillion. It is an extraordinary thing that he launched. But when I interviewed Jack Bogle many years ago he said to me that if you understand the simple mathematics of investing, you understand the importance of expenses, the fact that they eat away your returns.
He said the mathematics was so clear. If you have a middleman, a croupier as he put it, who is skimming part of your profits, it really eats into your returns. He said that for most people the default position is just to take a very simple approach where you have an index fund that tracks the markets at a very low cost. This whole approach of simplicity really went through a lot of the greatest investors to a surprising degree.
Joel Greenblatt is another great investor that I have focused on. He founded a firm called Gotham Capital and he had extraordinary returns. He averaged 40% a year for 20 years which means essentially you turn $1 million into $836 million which is quite a nifty trick that I wish I was capable of replicating. I asked him what was the secret of investing and he said it all boils down to one thing which is you value an asset and then you buy it for much less than its worth. That is an idea that runs through Howard Marks, Charlie Munger, Warren Buffett and I think that is a very robust and powerful idea that comes really from Ben Graham originally, who is Warren Buffett’s teacher.
Once you understand that simplicity will be the inviolable principle underlying investing, it provides a true north for you. You are less likely to get knocked off course by things that are irrelevant particularly in times that are faddish or overheated. When other people are panicking, you can come back to these inviolable rules and say I know what I want to do is value your business and buy it for less than its worth.
What does your research say about pulling off the idea of cloning? In what kind of conditions does cloning work and what are the things you have learned out of your chat with Mohnish Pabrai?
I spent an enormous amount of time with Mohnish and actually the book begins in India because I spent five days with Mohnish travelling initially from Mumbai to Dadra & Nagar Haveli, to visit a rural school chain in Silvassa. What is really fascinating about Mohnish is that he is not just a relentless cloner in the market, he is a relentless cloner in every area of life. So his charitable foundation Dakshana is really a clone of the Super-30 programme which the mathematics teacher Anand Kumar set up in Bihar.
Mohnish says in every area of life, there are people who are wiser and cleverer and more experienced than me. Let me figure out what the rules are that they have uncovered, what works and then replicate it with tremendous attention to detail. He replicated the laws of investing of the greatest players of the investment game — Warren Buffett and Charlie Munger. One of the things that is very tricky is that you have to do it in a way that suits your temperaments and your talents and so Charlie Munger has said that a well diversified portfolio could actually just have four stocks and so if you are Mohnish and you have an extraordinary appetite for risk and an incredible temperament, you can have a four-stock portfolio. Mohnish in recent years had an enormous amount of his portfolio in companies like Rain Industries. I cannot do that. I cannot cope with it temperamentally.
Guy Spier says I just do not have the same level of confidence and nerve that Mohnish has. So Guy shares many of the same positions that Mohnish has but they are not as aggressive and that is really an important idea for all of us. You want to learn from the people who are better, smarter, more experienced, wiser but you want to do it in a way that suits your talents and your skills and your appetite for risk.
Source link