In my last post, I introduced a thought experiment: what would be the ideal situation for the investment of your family wealth if you had started a generation ago, and what lessons can we learn from that experience? My answer was to invest 35 years ago with Warren Buffett in his company, Berkshire Hathaway, for several reasons. The first I covered in my previous post – that Buffett is completely aligned with you since all of his net worth is invested right alongside yours.
The next point that I think is important is that Buffett always explains to you what he is doing, and does so in a very clear and simple manner. If you don’t understand what your money manager is doing, or if he can’t or won’t explain it in a clear and concise way, that should be troubling. People who turn their money over to “geniuses” who make them money in inexplicable ways all too often are victimized in the markets.
Finance is not a science. Lots of people with math and physics degrees have been trying to make it a science and they almost ended western civilization in 2008. Do not trust numbers, trust your people instincts and, above all, your own common sense. Buffett’s annual reports are the best concise guide to common-sense investing ever written and they are freely available to anyone. He talks about what he did right and what he did wrong, and he analyzes his mistakes with breathtaking honesty. That is why so many people await his annual report with anticipation every year and spend the weekend after it is released going through it sentence by sentence.
When investing with Buffett in Berkshire Hathaway, the great majority of holdings are known and not only disclosed but discussed and analyzed for investors. You can see them in every report and they don’t change much from year to year. So make sure you understand what your money manager is doing. As Buffett says, the explanation should contain no Greek letters.
Another characteristic of Berkshire has been that it is defensive. Buffett defines risk as the possibility of permanent capital losses, and avoids situations that can lead to these. He carries out the simplest but most difficult instruction you can have in investing: be fearful when others are greedy and greedy when others are fearful. That means he avoids booms and bubbles and takes advantage of recessions and crashes. That is a great formula for success.
In a line that has become a cliché, Buffett says that the first rule of investing is not to lose money. And the second rule is: never forget rule number one.
So we take another principle from Berkshire: always protect the downside. In looking at money manager returns, pay close attention to how your potential money manager performed in 2008-2009, 2002-2003 and 1990-1992. Saving money on the downside is more important long term than making a ton of it on the upside.