Berkshire Hathaway 4th Quarter 2013 13F-HR

The Berkshire Hathaway (BRKa) 4th Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 3rd Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*

New Positions
Goldman Sachs (GS): Bought 12.6 million shares worth $ 2.1 billion**
Liberty Global (LBTYA): 2.9 million shares worth $ 246.5 million

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential. Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Added to Existing Positions
Wells Fargo (WFC): Bought 326,500 shares worth $ 15 million, total stake $ 21.4 billion
Exxon Mobil (XOM): 1.04 million shares worth $ 97.9 million, total stake $ 3.9 billion
Wal-Mart (WMT): 236,498 shares worth $ 17.9 million, total stake $ 3.75 billion
U.S. Bancorp (USB): 203,400 shares worth $ 32.2 million, total stake $ 3.2 billion
DaVita (DVA): 5 million shares worth $ 332.8 million, total stake $ 2.4 billion**
USG Corporation (USG): 17.8 million shares worth $ 610.4 million, total stake $ 1.2 billion**
General Electric (GE): 9.99 million shares worth $ 257.3 million, total stake $ 272.5 million**

Reduced Positions
Moody's (MCO): Sold 252,400 shares worth $ 20.1 million, total stake $ 1.96 billion
ConocoPhillips (COP): 2.45 million shares worth $ 160.5 million, total stake $ 726.1 million
Liberty Media Corporation (LMCA): 322,340 shares worth $ 43.6 million, total stake $ 716.8 million
Suncor (SU): 5 million shares worth $ 167.3 million, total stake $ 434.2 million
Starz (STRZA): 1.1 million shares worth $ 32.3 million, total stake $ 135.6 million

Sold Positions
Dish Network (DISH): Sold 547,312 shares worth $ 31.1 million
GlaxoSmithKline (GSK): 345,819 shares worth $ 19.3 million

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio, even if they still manage a small percentage of the overall portfolio.

These days, any changes involving smaller positions will generally be the work of the two portfolio managers (even if some individual positions are becoming more substantial).

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer and, to a less extent, technology (primarily IBM) stocks.

1. Wells Fargo (WFC) = $ 21.4 billion
2. Coca-Cola (KO) = $ 15.6 billion
3. American Express (AXP) = $ 13.5 billion
4. IBM (IBM) = $ 12.5 billion
5. Procter and Gamble (PG) = $ 4.2 billion

As is almost always the case, it's a very concentrated portfolio.

The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.***

We'll get firm numbers when the annual report is released, but the combined portfolio value (equities, bonds, cash, and other investments) will likely exceed $ 210 billion.

The above portfolio, of course, excludes all the operating businesses that Berkshire owns outright with ~ 290,000 employees.

Here are some examples of the non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, and Oriental Trading Company.
(Among others.)

Then there's also the deal Berkshire closed last year for 50% ownership of H.J. Heinz.

In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.

See page 106 of the annual report for a full list of the operating businesses.

Adam

* All values calculated below are based upon Friday's closing price.
** Goldman Sachs and General Electric common shares came from warrants converted via net share settlement. Convertible notes of USG were also converted into common shares of USG. These all came out of moves made by Buffett during the financial crisis. Berkshire received shares in Goldman Sachs and General Electric from exercised warrants with both deals being amended from cash settlement to net share settlement. The DaVita moves were first disclosed in early December.
*** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (POSCO, Sanofi, Tesco PLC, etc.) is updated in the annual letter. So the only way any of these stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR. The preferred shares in Bank of America are also not included in the 13F-HR.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Munger's Daily Journal Reveals Holdings

Charlie Munger has, on prior occasions, talked about the importance of patience combined with acting decisively when opportunity presents itself:

Success means being very patient, but aggressive when it's time. - Charlie Munger at the 2004 Wesco Shareholder Meeting

and

If you took the top 15 decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor. - Charlie Munger at the 2004 Wesco Shareholder Meeting

In addition to his role as vice chairman at Berkshire Hathaway (BRKa), Munger also serves as chairman of Daily Journal (DJCO) and naturally has plenty of influence over their investments.*

Well, earlier this week, the company provided details for the first time of their common stock positions.

More on that in a bit but first some background.

This 10-Q from a couple of years back outlined some of their moves (without naming specifics) into marketable securities in recent years:

In February 2009, the Company purchased shares of common stock of two Fortune 200 companies and certain bonds of a third, and during the second and the third quarters of fiscal 2011, the Company bought shares of common stock of two foreign manufacturing companies. During the first quarter of fiscal 2012, the Company bought shares of common stock of another Fortune 200 company. The investments in marketable securities, which cost approximately $45,166,000 and had a market value of about $76,213,000 at December 31, 2011...

Now, compare that to this 8-K that was filed earlier this week:

At December 31, 2013, the Company held marketable securities valued at $150,747,000, including unrealized gains of $102,770,000.

It goes on to say:

The marketable securities consist of common stocks of three Fortune 200 companies, two foreign companies and certain bonds of a sixth, and most of the unrealized gains were in the common stocks.

So it at least appears they still basically have the same positions that were established between February 2009 and early in fiscal 2012 (though, since the cost basis has risen slightly, at least some additional moves -- even if minor in percentage terms -- have been made since then), and we now have a relatively up-to-date view of how well these moves have worked out (so far).

For some context, keep in mind that Daily Journal had a bit less than $ 22 million in cash, U.S. Treasury Notes and Bills at the end of their 2008 fiscal year. They wisely held this rather conservative allocation until prices became extremely attractive in early 2009 then deployed it, along with retained earnings, aggressively into shares of businesses they apparently consider attractive.**

So I'd say they've allocated their capital rather well and that this exemplifies being very patient then acting decisively when the opportunity arises.

As I mentioned above, thanks to this recent 13F-HR, we also now know what 4 of the marketable securities they invested in happen to be:

Wells Fargo (WFC): $ 72.3 million
Bank of America (BAC): $ 35.8 million
U.S. Bancorp (USB): 5.7 million
POSCO (PKX): 5.0 million

That leaves, after subtracting the value of these 4 stocks from the total of $ 150.7 million noted in the 8-K filing, roughly $ 31 million for the remaining marketable securities. So nearly 80% of the portfolio is in just four stocks and, to say the very least, is heavily weighted toward financials. 

Not exactly textbook portfolio management and, well, not exactly surprising.

Munger has talked in the past about his views on the need (or lack thereof) for diversification.***

"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?" - Charlie Munger in Kiplinger's

"I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken." - Charlie Munger in a 1998 speech

I'd say that the concentration of this portfolio more than reinforces his point.

Unlike the position in POSCO, which is an ADR, it might turn out that the fifth stock (as indicated in the 8-K filing), is listed on an exchange outside the United States. 
(Shares not listed on an exchange inside the United States need not be included in a 13F-HR.)

It seems fair to say that, other than possibly the common stock of Bank of America, none of these positions should really come as a surprise.

Berkshire owns the common shares of Wells Fargo, U.S. Bancorp, and POSCO along with preferred shares of Bank of America.

Adam

(Correction: Charlie Munger's thoughts above on the need for lots of patience followed by aggressive action when the opportunity presents itself are from Whitney Tilson's notes taken at the 2004 Wesco meeting. The initial version of this post had it as the 2004 Berkshire meeting.)

No position in DJCO. Long positions in WFC, USB, and BAC established at much lower than recent market prices. Also, small long position in PKX established near current prices.

* From this 10-Q: The Company's Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company's Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.
** Earnings for Daily Journal came in at ~ $ 8 million per year or slightly less in 2009-11 but was down substantially from those levels in 2012-13. Now, comprehensive full year 2013 financials and the most recent fiscal 1st quarter financials have not yet been made available. The company has said they won't submit a filing (for either reporting period) until internal controls are properly assessed. Here's how they explained it in December of 2013:
Due to a significant increase in the Company's stock price in 2013, the Company no longer qualifies as a smaller reporting company and is now an accelerated filer for the first time. Accordingly, this is the first fiscal year for which an audit of the Company's internal control over financial reporting is required...
So, instead, we only have preliminary full year results. It's worth noting that, during the fiscal year 2013, the company also took on $ 14 million of margin debt, bought New Dawn Technologies, Inc. for $ 14 million -- $ 11.8 million net of cash acquired -- and bought ISD Corporation for approximately $ 16 million.
*** Munger clearly doesn't think much of diversification but does say most individual investors should probably be buying index funds: "Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund." As far as picking stocks he says: "You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge." 
Some will underestimate the difficulty of getting satisfactory results picking individual stocks over the long haul and, mistakenly, will also underestimate the wisdom of owning (i.e. not trading) low cost index funds instead. Those who concentrate their holdings and are overconfident in (or overestimate) their own investment capabilities seem destined for poor or even disastrous results. Portfolio concentration may make lots of sense for the likes of Munger and similarly capable investors, but it's probably going to make a whole lot less sense for many others. So it's knowing limits and staying well within them.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Asset Growth and Stock Returns

From this 2008 paper:

Asset Growth and the Cross-Section of Stock Returns

"ONE OF THE PRIMARY FUNCTIONS OF CAPITAL MARKETS is the efficient pricing of real investment. As companies acquire and dispose of assets, economic efficiency demands that the market appropriately capitalizes such transactions. Yet, growing evidence identifies an important bias in the market's capitalization of corporate asset investment and disinvestment. The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spinoffs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns."

A recent Barron's article explained it this way:*

Barron's: Buy the Asset Sellers

"A 2008 study published in the Journal of Finance found that over the long term, U.S. stocks in the market's bottom decile ranked by recent asset growth outperformed those in the top decile by 13 percentage points a year."

The article also points out that...

"A 2012 paper that focused on international markets reported similar findings."

The paper's findings (on page 1610) reveal specifically the following gap in performance from 1968 through 2003:

Value weighted (VW) returns for firms with lowest asset growth: 18%

Value weighted (VW) returns for firms with highest asset growth: 5%

"...we find that raw value-weighted (VW) portfolio annualized returns for firms in the lowest growth decile are on average 18%, while VW returns for firms in the highest growth decile are on average much lower at 5%."

So there is the 13% gap but the paper also notes that "with standard risk adjustments the spread between low and high asset growth firms remains highly significant at 8% per year for VW portfolios and 20% per year for equal weighted (EW) portfolios."

I am highly skeptical of the "standard risk adjustments" but that's a subject for another day. Still, even using the most conservative numbers from this paper, the gap is not at all insignificant.

The paper concludes by calling this "a substantial asset growth effect on firm returns."**

I've mentioned the following quote before but, due to its relevance, I'll include it here for those who may not be familiar with it:

"Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive." - Warren Buffett in the 1992 Berkshire Hathaway (BRKa) Shareholder Letter

The bottom line is to avoid the misjudgment that exciting growth must necessarily lead to high returns. That growth might be a negative factor may or may not be counterintuitive, but understanding it is very useful and important. On occasion, high growth requires so much capital that returns are poor for owners. Other times, fast growth attracts competitors, fresh capital, and possibly a disruption that changes what, for a time at least, looked like attractive economics. The list goes on. There are many variations of this that tend to be very industry specific.
(Consider how often growth is mentioned on a major business media outlet with at least the implied assumption that growth must be a good thing. Another way to think about it is this: In that context how often -- though, admittedly, a subtlety even if a crucial one -- is the potential negative implications of growth written about or discussed? I think we're talking, at best, about exceptions to the rule.)

In contrast, sometimes -- though it is far from assured -- the boring, stable, firms with only modest or low growth prospects establish themselves in a competitive framework that allows the strongest to maintain attractive return on capital for a very long time. Now, there are, without a doubt, many examples of growth being a very good thing for investors. The problems arise when growth is assumed to always be somewhere between a good and a great thing for investors; they arise when no consideration is given to the alternative implications of growth; they also arise when extreme an premium price is paid -- relative to approximate intrinsic value -- upfront for that potential growth.***

High growth rates and attractive long-term investment outcomes need not have much to do with each other.

The main point is that growth is often treated as always being a good thing. Well, sometimes growth is of the low (or worse) return variety. Think airlines for many decades. That industry grew impressively for quite some time. Sometimes, too much is paid for the privilege of ownership because of the exciting growth prospects.

The study above happens to focus on asset growth and returns.

Well, this "asset growth effect" seems not at all limited to asset growth; it seems to apply to growth more generally (though certainly not a rule of some kind...there are plenty of examples of good growth). Below, I've included some related posts that may be of interest to explore further along these lines.

I happen to think it's not a bad habit to consider carefully things that conflict, contradict, or that might be inconsistent with what one is predisposed to think (or with prevailing wisdom). It's all too easy to quickly dismiss what's counterintuitive and just move onto the next thing. Some will run into an odd paradox, for example, and treat it as nothing more than an interesting anomaly. Too often -- or, at least, often enough -- that is a mistake. The biggest insights -- though, of course, not all -- can reside near what at first seems nonsensical. Occasionally, the most useful discoveries are found inside or near what initially seems unfamiliar, contradictory, and even uncomfortable.

Another mistake is to "write off" 100% of an investment idea due to some very real existing flaw. Well, sometimes the part that is right can be very useful (i.e. lucrative) while the downside (or cost) of what's wrong is very small. In the real world, more often than not, solutions are usually going to at least somewhat messy and incomplete. Investment is always the weighing of various pros and cons. It's making smart trade-offs between alternatives. It's about opportunity costs.

When something doesn't sit well with what is preconceived, it's just generally not a good idea to ignore it. In fact, to me it's better to develop a tendency to do the exact opposite. Admittedly, this frequently leads nowhere but, at least, new things are learned. In fact, I'd argue it's best to study and try to learn from those kinds of things at least 2 or 3 times as hard as one might otherwise be inclined to do.

I've not yet found the perfect investment and, well, I won't.

Yet plenty of good but flawed ones exist.

Attractive return on capital that's sustainable long-term and purchased at the right price (i.e. plain discount to value) is a priority.

Growth, in a vacuum, isn't.

Sometimes growth leads to the creation of enduring value for shareholders, but too often it leads to the exact opposite outcome:

Reduced rewards for the investor at greater risk of permanent capital loss.

Adam

Long position in BRKb established at much lower than recent market prices

Related posts:
Buffett and Munger on See's Candy: Part II - June 2013
Buffett and Munger on See's Candy - June 2013
Aesop's Investment Axiom - February 2013
Grantham: Investing in a Low-Growth World - February 2013
Buffett: Stocks, Bonds, and Coupons - January 2013
Maximizing Per-Share Value - October 2012
Death of Equities Greatly Exaggerated - August 2012
Stock Returns & GDP Growth - July 2012
Why Growth Matters Less Than Investors Think - July 2012
Ben Graham: Better Than Average Expected Growth - March 2012
Buffett: Why Growth Is Not Necessarily A Good Thing - Oct 2011
Buffett: What See's Taught Us - May 2011
Buffett on Coca-Cola, See's & Railroads - May 2011
Buffett on Pricing Power - February 2011
Grantham: High Growth Doesn't Equal High Returns - Nov 2010
Growth & Investor Returns - June 2010
High Growth Doesn't Equal High Investor Returns - July 2009
The Growth Myth Revisited - July 2009
Pricing Power - July 2009
The Growth Myth - June 2009
Buffett on Economic Goodwill - April 2009

* The title of this article alone pretty much says it all:

Fast firm growth doesn't mean great stock returns

"It may surprise most investors that firms experiencing rapid growth subsequently have low stock returns, whereas contracting firms enjoy high future returns. For example, a 2008 study found that a value-weighted portfolio of U.S. stocks in the top asset-growth decile underperformed the portfolio of stocks in the bottom decile by 13 percent per year for the period 1968-2003. A recent paper shows that the same is true internationally as well."

** From the conclusion: "Over our sample period firms with the low asset growth rates earn subsequent annualized risk-adjusted returns of 9.1% on average while firms with highest asset growth rates earn - 10.4%. The large 19.5% spread is highly significant. Weighting the firms by capitalization reduces the spread to a still large and significant 8.4% per year." The 13% gap noted above is value weighted (VW) but not adjusted for risk. Take your pick. These all represent rather significant gaps in performance.
*** On the surface, estimating intrinsic business value on a per share basis isn't necessarily difficult. As Buffett has said: "Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life." So just figure out what cash can be taken out of a business over the long haul then discount that cash appropriately, right? Not so fast. The definition is simple. The calculation itself is not. It's, in part, the assumptions (interest rates, future cash flows, how well future cash will be put to work, etc.), some of it hard to quantify but important stuff, that make the actual calculation more difficult and, inevitably, at best a range of possible values (even if the mechanics aren't that tough to learn). Buffett has also said there are good reasons "we never give you our estimates of intrinsic value." (The one explicit reason Buffett mentions being that not even Charlie Munger and himself will come up with the same intrinsic value estimate using the same facts.) Instead, he prefers to provide "the facts that we ourselves use to calculate this value." In the 2011 letter, Buffett explained that while they "have no way to pinpoint intrinsic value," a useful -- even if "considerably understated" -- proxy happens to be book value. This older post on how Buffett likes to specifically discount cash in order to calculate value might be of interest to some.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Bogle on "The Relentless Rules of Humble Arithmetic"

A follow up to this post:

"...it's been said (by my detractors) that all I have going for me is 'the uncanny ability to recognize the obvious.' The curious irony, however, is that most people either seem to have difficulty recognizing what lies in plain sight, right before their eyes, or, perhaps even more pervasively, refuse to recognize the reality because it flies in the face of their deep-seated beliefs, their biases, and their own self-interest. Paraphrasing Upton Sinclair: 'it's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it.' But only by facing the obvious realities of investing will the intelligent investor succeed." - From John Bogle's remarks at NYU in 2007

Later in those same remarks Bogle added the following:

"The first of the two relentless rules of humble arithmetic I'll mention is a simple one: Gross return in the financial markets, minus the costs of financial intermediation, equals the net return that we investors share."

Bogle goes on to explain "the foolishness and counterproductivity of our vast and complex financial market system."

He does this by using his own version of a parable by Warren Buffett.*

Here is Bogle's version of the parable:

"Once upon a time...a wealthy family named the Gotrocks, grown over the generations to include thousand of brothers, sisters, aunts, uncles, and cousins, owned 100 percent of every stock in the United States. Each year, they reaped the rewards of investing: all the earnings growth that those thousands of corporations generated and all the dividends that they distributed. Each family member grew wealthier at the same pace, and all was harmonious. Their investment had compounded over the decades, creating enormous wealth, because the Gotrocks family was playing a winner's game.

But after a while, a few fast-talking Helpers arrive on the scene, and they persuade some 'smart' Gotrocks cousins that they can earn a larger share than the other relatives. These Helpers convince the cousins to sell some of their shares in the companies to other family members, and to buy some shares of others from them in return. The Helpers handle the transactions, and as brokers, they receive commissions for their services. The ownership is thus rearranged among the family members.

To their surprise, however, the family wealth begins to grow at a slower pace. Why? Because some of the return is now consumed by the Helpers, and the family's share of the generous pie that U.S. industry bakes each year—all those dividends paid, all those earnings reinvested in the business—100 percent at the outset, starts to decline, simply because some of the return is now consumed by the Helpers.

To make matters worse, while the family had always paid taxes on their dividends, some of the members are now also paying taxes on the capital gains they realize from their stock-swapping back and forth, further diminishing the family's total wealth.

The smart cousins quickly realize that their plan has actually diminished the rate of growth in the family's wealth. They recognize that their foray into stock-picking has been a failure and conclude that they need professional assistance, the better to pick the right stocks for themselves. So they hire stock-picking experts—more Helpers!—to gain an advantage. These money managers charge a fee for their services. So when the family appraises its wealth a year later, it finds that its share of the pie has diminished even further.

To make matters still worse, the new managers feel compelled to earn their keep by trading the family's stocks at frantic levels of activity, not only increasing the brokerage commissions paid to the first set of Helpers, but running up the tax bill as well. Now the family's earlier 100 percent share of the dividend and earnings pie is further diminished.

'Well, we failed to pick good stocks for ourselves, and when that didn't work, we also failed to pick managers who could do so,' the smart cousins say. 'What shall we do?' Undeterred by their two previous failures, they decide to hire still more Helpers. They retain the best investment consultants and financial planners they can find to advise them on how to select the right managers, who will then surely pick the right stocks. The consultants, of course, tell them they can do exactly that. 'Just pay us a fee for our services,' the new Helpers assure the cousins, 'and all will be well.'

Alarmed at last, the family sits down together and takes stock of the events that have transpired since some of them began to try to outsmart the others. 'How is it,' they ask, 'that our original 100 percent share of the pie—made up each year of all those dividends and earnings—has dwindled to just 60 percent?' Their wisest member, a sage old uncle, softly responds: 'All that money you've paid to those Helpers and all those unnecessary extra taxes you’re paying come directly out of our family's total earnings and dividends. Go back to square one and do so immediately. Get rid of all your brokers. Get rid of all your money managers. Get rid of all your consultants. Then our family will again reap 100 percent of however large a pie that corporate America bakes for us, year after year."

Market participants have a better alternative even if too many choose to ignore it. The emphasis should be on generating returns via increases to the intrinsic value of business instead of more cleverly trading price action than the next guy.

More from Bogle:

"That brings us to my second relentless rule of humble arithmetic. Successful investing is not about the stock market, but about owning all of America's businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation's—and, for that matter, our world's—corporations. For in the very long run, it is how businesses actually perform that determines the return on our invested capital."

This can be accomplished by owning an index fund bought well. It can also be accomplished, at least for those inclined and able to do so effectively, by owning a shares of good businesses, also understood and bought well.

In any case, it's buying only what one truly understands (an easy mistake to make is overestimating how well understood an investment truly is), knowing one's own limits, minimizing frictional costs, then allowing -- instead of clever trading -- the per share increase to intrinsic value to be the primary driver of future long run returns.

"By periodically investing in an index fund...the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.

On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you." - Warren Buffett in the 1993 Berkshire Hathaway (BRKa) Shareholder Letter

In both cases the emphasis is on not making the mistake that was made by the Gotrocks family.

This plainly makes a huge amount of sense but I suspect, since not many seem to have taken the advice of Buffett or Bogle before, they aren't likely to be inclined to do so now.

One of the reasons?

It's just too simple.

"...our model is too simple. Most people believe you can't be an expert if it's too simple." - Charlie Munger at the 2007 Wesco Meeting

"Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever." - Warren Buffett

"The business schools reward difficult complex behaviour more than simple behavior, but simple behavior is more effective." - Warren Buffett

Warren Buffett: What He Does Is "Simple But Not Easy"

And, as Bogle points out above, too obvious. Well, sometimes what's simple and obvious also happens to be wise.

"The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors." - From The Motley Fool

Some will continue to think they can pick the winning funds beforehand. Some actually will. Others will pay excessive fees thinking that the skill involved will more than offset it.

"Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 percent to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value." - Jack Meyer, former President and CEO of the Harvard Management Company from 1990 to 2005, commenting on investment managers

An investment plan based upon picking the exception seems not a realistic plan at all.

The same is true for stocks. Many shouldn't be trying to pick individual stocks -- especially if their particular approach involves excessive amounts of trading -- but will continue to do it anyway despite the evidence that they're likely to underperform.

Investor overconfidence is a big part of the problem.

Bogle rightly emphasizes humble arithmetic. Yet, in what may seem but is not at all contradictory, Buffett and Munger say, when it comes to investing well, the numbers themselves matter less than some think.**

"If you need to use a computer or calculator to make the calculation, you shouldn't buy it." - Warren Buffett at the 2009 Berkshire Hathaway Shareholder Meeting

They're hardly implying that the numbers aren't relevant, it's just that there's no place for false precision in the investment process.

Too much of what matters isn't quantifiable.

Adam

Long position in BRKb established at much lower than recent market prices

* The parable can be found in the 2005 letter on pages 18-19. Buffett's version of this parable is also covered in the prior post. For those familiar with it, there'll be not much new here in Bogle's version. Still, I do happen to think it's the kind of thing worth revisiting from time to time. Others will likely see it, much like Bogle's detractors, as just more recognition of what is obvious. Well, considering the large proportion of participants who underperform the market as a whole, it sure seems that, too often, the obvious gets ignored by some otherwise very smart people.
** Charlie Munger in this speech at UC Santa Barbara: "You've got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there's no precise numbering you can put to these factors. You know they're important, but you don't have the numbers. Well practically (1) everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they're taught in academia, and (2) doesn't mix in the hard-to-measure stuff that may be more important. That is a mistake I've tried all my life to avoid, and I have no regrets for having done that."
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Is Buffett Just Lucky? - Part II

A follow up to this recent post.

Is Buffett Just Lucky?

This recent paper attempts to better understand what's behind Buffett's success through empirical analysis.

Here is an excerpt from the conclusion section:

"In essence, we find that the secret to Buffett's success is his preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large absolute and relative drawdowns this entails. Indeed, we find that stocks with the characteristics favored by Buffett have done well in general, that Buffett applies about 1.6-to-1 leverage financed partly using insurance float with a low financing rate, and that leveraging safe stocks can largely explain Buffett's performance.

Buffett has become the focal point of the intense debate about market efficiency among academics, practitioners, and in the media (see, e.g., Malkiel (2012)). The most recent Nobel prize has reignited this debate and, as a prototypical example, Forbes writes 'In the real world of investments, however, there are obvious arguments against the EMH. There are investors who have beaten the market – Warren Buffett.' The efficient-market counter argument is that Buffett may just have been lucky. Our findings suggest that Buffett's success is not luck or chance, but reward for a successful implementation of exposure to factors that have historically produced high returns.

At the same time, Buffett's success shows that the high returns of these academic factors are not just 'paper returns', but these returns could be realized in the real world after transaction costs and funding costs, at least by Warren Buffett. Hence, to the extent that value and quality factors challenge the efficient market hypothesis, the actual returns of Warren Buffett strengthen this evidence."

Let's consider further the leverage Buffett uses that is mentioned above. The kind of stable leverage -- mostly in the form of insurance float -- employed by Buffett is tough for most to replicate.

Some think all leverage is bad leverage. Yet, when leverage is in the right proportion, is cheap, and stable in nature, it can work very well.

Stable means that sources of funding won't dry up when the going gets tough. Funding can't be highly dependent on short-term creditors who'll cut credit lines when there are signs of trouble.

That just makes a difficult situation untenable. A big source of the financial stress -- along with too much leverage -- for some financial institutions during the crisis five years ago or so.

This Morningstar article by Sam Lee explains it very well:

The poster boy for leverage done right is none other than Warren Buffett. Yes, the man who said, "A long, long time ago a friend said to me about leverage, 'If you're smart you don't need it, and if you're dumb you got no business using it.' " He makes extensive use of a special kind of leverage, the prepaid premiums, or "float,"...

Lee also adds:

Float can never be called away at the whim of a nervous counterparty. Even better, the timing of the payouts is unrelated to market conditions, so Berkshire doesn't have to stump up a mountain of cash just as the markets are going to hell in a handbasket.

So, unfortunately, this is the one important aspect of what Buffett does that most investors can't realistically make happen. This point is well made later in the same Morningstar article. Most leverage available to investors is often not only too costly to make sense but, more importantly, is also not stable enough during the tough times even if used in moderation. In other words, the requirement to post collateral at the worst possible time must be avoided.

Margin, for example, simply doesn't cut it as a stable source of funding. Very short-term financing -- in pretty much all its forms -- that's employed to fund the purchase of longer term assets just doesn't cut it. That sort of funding is likely to become scarce just when it is needed most (maybe during the next financial crisis). It only seems to work really well until it suddenly doesn't. The result being forced sales of assets at (or nearly at) just the wrong time.

Buffett's leverage, in contrast, is set up such that doesn't need to worry about a counterparty who requires the posting of collateral at the worst possible time (i.e. a margin call).*

He also knows that the eventual payouts are usually far removed from current market conditions.
(e.g. Consider the put options Buffett has previously written on indexes. These options generally expired far into the future (a decade plus). Little collateral was required. They also could only be exercised upon expiration. These may seem to be minor differences, but it means that what is happening to the market near-term matters little as far as cash needs go. The potential payouts aren't connected to the current market environment. A big advantage.)

As I mentioned in the prior post, the deals Buffett made during the financial crisis understandably get lots of attention. This leads, I think, to the incorrect conclusion that outperformance is primarily the result of his unique position.**

There's no doubt that the modest leverage Buffett uses -- mostly in the form of insurance float which provides cheap and, crucially, stable funding -- plays an important role. Yet, as I've already said, I think it's a mistake to conclude this alone or mostly is the driver of his results. From earlier in the paper:

"...Buffett's leverage can partly explain how he outperforms the market, but only partly."

Also, that leverage is only put to work in moderation is hardly unimportant factor.***

So the leverage Buffett uses is cheap, stable, and moderate. He keeps lots of cash on hand. Each of these things, in combination, matter.

Naturally, the way that Buffett invests takes not a small amount of discipline. The leverage advantage aside, many aspects of the approach can be learned. Well, at least they can if the ideas are treated with deserved respect and with enough hard work.

This doesn't suggest his incredible results over the decades can be matched by many, but it just might help someone who takes it seriously to avoid taking on more risk for less reward (and maybe avoid paying a whole lot of frictional costs for the privilege).

I'm sure that some will think it necessary to continue waiting for sufficient empirical evidence. Debate and disagreement that moves the world closer to what's reasonably true is a healthy thing. On the other hand, resistance to ideas with greater merit because it's at odds with a preferred but flawed theory, for whatever reason, is not.

When something that seems to work in the real world conflicts with an established theory, it's a useful habit to give it serious consideration.

For those who still choose to completely ignore Buffett's way of thinking, all I can do is wish best of luck with their own investments.

Doing better than the market as a while long-term is never going to be easy. Most market participants will not. That doesn't logically lead to the conclusion that the markets are efficient.

In fact, these two seemingly conflicting things can coexist just fine.

Adam

* At least not a large amount of collateral in proportion to total resources.
** Well, a little quick math will reveal that, while those deals are surely good for shareholders, they just aren't big enough relative to the all other assets to really drive increases to intrinsic value. From earlier in the paper: "We find that both public and private companies contribute to Buffett's performance, but the portfolio of public stocks performs the best, suggesting that Buffett's skill is mostly in stock selection."
*** During the financial crisis some large financial institutions employed extreme leverage -- easily 25-to-1 and even much worse with an appropriate consideration for what, in many cases, was off-balance-sheet -- while often relying too much on short-term funding sources.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Wells Fargo's 2013 Results

Here's a quick summary of Wells Fargo's (WFC) latest earnings:

Full year 2013
- Net income: $ 21.9 billion, up 16 percent from 2012
- Diluted earnings per share: $ 3.89, up 16 percent
- Revenue: $ 83.8 billion, down 3 percent
- Return on Equity (ROE): 13.87%, up 92 basis points
- Annualized net charge-offs as a % of average total loans were less than half than the previous year
- Average loans increased to $ 805.0 billion from 775.2 billion
- Average core deposits increased to 942.1 billion from 893.9 billion

Net interest margin continued to decline from 3.76% at year end 2012 compared to 3.39% at the end of 2013. In a vacuum that naturally is not be a good thing but, in the context of the current interest rate environment and relative to competitors, they continue to do just fine. Net interest margin remains a real relative advantage for Wells compared to other large banks which directly contributes to the bank's more than solid ROE.

One way to look at their performance overall since the financial crisis is that, despite that narrowing net interest margin and the year over year decline in revenue, they just earned $ 3.89 per share compared to $ 2.47 in their peak earnings year leading up to the financial crisis.

In contrast, some other large financial institutions are still earning only a fraction per share of what they earned prior to the crisis or, well, had a far worse fate.

I think it is fair to say that the decline in net interest margin is hardly surprising considering the current interest rate environment.

Any improvement to this environment could favorably impact net interest margin and, ultimately, Wells Fargo's overall earnings power. The good news for shareholders is the bank is doing just fine even if that does not occur anytime soon.

Of course, inevitably, the economic environment will erode some time down the road. When (not if) that time comes, what will matter is whether the bank is capable of handling it. That comes down to things like pre-tax pre-provision profit (PTPP)*, making quality loans, along with sufficient liquidity and capital.

The diluted average share count did decline in 4Q 2013 compared to 3Q 2013 due to buybacks (from 5,381.7 billion to 5,358.6 billion). We'll see if this continues. They did say in their news release that additional shares were bought back through a forward repurchase transaction that's expected to settle in 1Q 2014.

Net interest income after provision for credit losses increased to $ 40.5 billion from $ 36.0 billion, the biggest driver of the increase to earning in 2013. Net interest income was actually slightly down year over year but the reduction in provision for credit losses was substantial. This, more than anything else, was a key driver of the 2013 earnings increase.

Noninterest expense declined to $ 50.4 billion from $ 48.8 billion. This also partly accounts for the increase to earnings.

On the other hand, noninterest income declined from $ 42.9 billion to $ 41.0 billion. This was the biggest hit to earnings and was driven by a decline in mortgage banking. It should be noted that 2012 was an elevated year for mortgage banking activity compared to 2011 and 2010. In fact, the noninterest income not related to mortgage banking were, in total, actually higher year over year.

With these 2013 earnings in mind, consider the following comments about Wells Fargo by Warren Buffett in the 2012 Berkshire Hathaway (BRKa) Shareholder Letter. In the letter, Buffett explains that Wells Fargo's earnings is burdened by "'non-real' amortization charge":**

2012 Berkshire Hathaway Annual Report

"...serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others never lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real expenses. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when calculating earnings – even though from an investor's viewpoint they could not be more different.

He later adds the following:

"A 'non-real' amortization charge at Wells Fargo, however, is not highlighted by the company and never, to my knowledge, has been noted in analyst reports. The earnings that Wells Fargo reports are heavily burdened by an 'amortization of core deposits' charge, the implication being that these deposits are disappearing at a fairly rapid clip. Yet core deposits regularly increase. The charge last year [2012] was about $1.5 billion. In no sense, except GAAP accounting, is this whopping charge an expense."

So there may be actually be more earnings power --  economically speaking, even if the accounting indicates otherwise -- at Wells Fargo than meets the eye.

In any case, what Wells Fargo does in any particular quarter -- or, for that matter, any particular year -- just is not that interesting. It may be for traders, it shouldn't be for long-term owners. Similarly, when and by how much interest rates will be up or down isn't something I'm going to try and figure out. Sometimes the environment will be favorable; sometimes it will not be.

What really counts -- since the environment inevitably oscillates between being more and less favorable -- is whether a banking franchise is likely to produce attractive relative and absolute results at less risk over the long haul. The focus is on whether the moat will remain wide (better yet, can it be widened?), smart management of risk, and the long run trend of normalized earning power.***

Banking is by its very nature a very leveraged institution (even if less so these days). The real question with any investment but especially leveraged institutions is whether it has been built to be resilient during times of severe -- especially if systemically destabilizing -- economic stress.

As some learned the hard way during the financial crisis, funding sources for leveraged institutions must remain stable; liquidity plentiful. A bank can look or even be profitable but that won't matter much if suddenly the balance sheet comes under real pressure.

The only thing worse than being forced to raise capital when prices are least favorable for owners, is seeing funds leave, en masse, and being unable to raise capital in a timely manner from other sources.

Quality management will do smart things during the good times that anticipates the not-so-good times.

Adam

Long position in BRKb and WFC established at much lower than recent prices. 

* Pre-tax pre-provision profit (PTPP) -- net interest income, noninterest income minus noninterest expense -- is the first line of defense for any bank against credit losses. Otherwise, those losses begin impacting the balance sheet (i.e. allowance for loan losses and/or shareholders' equity balance). PTPP is a useful measure of a bank's ability to generate sufficient capital to cover credit losses during the worst part of a full credit cycle. Morningstar provides an explanation here (page 3). Strong PTPP relative to assets (and equity) isn't just about the potential for greater returns. It's not just about the upside. To me, what is far more important is that strong core earnings provides greater capacity to absorb credit and other losses that will inevitably arise at some point during a credit cycle even for the highest quality bank. Knowing that pre-tax, pre-provision capacity to earn is strong reduces at least one form of risk (among many others). 
** see pages 12-13 of the letter.
*** Some might be tempted to trade around the environment based upon how more or less favorable it seems. Best of luck. I mean, no doubt there are exceptions who actually do this successfully, but an approach based upon the exception seems more than just a bit unwise to me.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Henry Singleton: Why Flexibility Beats Long-Range Planning

James Grant recently reviewed a new book about the first economic forecasters in America.

Book Review: 'Fortune Tellers'

It's mostly about the folly of attempting to predict future financial and economic outcomes. From the review:

"The financial and economic future has been, is now and forever will be a mystery. Yet the power and dominion of the forecasting profession only seem to grow..."

Grant points to how Henry Singleton viewed forecasting:

"Henry Singleton (1916-99), longtime chief executive officer of the technology conglomerate Teledyne Inc., is not one of Mr. Friedman's subjects, but the corporate visionary understood the limits of forecasting. Once a Business Week reporter asked him if he had a long-range plan. No, Singleton replied, 'we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.' His plan was to bring an open mind to work every morning."

This is, of course, just one man's view, but considering his long-term track record I think his view deserves above average consideration. Investing with the long-term primarily in mind does not mean trying to figure out what's going to happen many years down the road. That's effectively impossible to do and mostly a waste of energy.
(Even if, as Grant points out, this reality hasn't exactly discouraged those in prediction business and their followers.)

Investing long-term means being positioned for just about whatever the world throws at you and accepting that the world will always be unpredictable.

Think of the position of strength that Berkshire Hathaway (BRKa) was in during the financial crisis. It wasn't necessarily due to brilliant foresight regarding the crisis; it was mostly due to the company's inherent flexibility that allowed for decisive action when others could not act in such a way.

This Bloomberg article quickly summarizes Singleton's approach to investing. It also mentions the incredible 23 percent annual returns he produced over two decades.

According to John Train's book The Money Masters, Warren Buffett once said the following about Singleton:

"Henry Singleton of Teledyne has the best operating and capital deployment record in American business."

Here's another good excerpt from Train's book:

"According to Buffett, if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as that of Singleton, who incidentally was trained as a scientist, not an MBA. The failure of business schools to study men like Singleton is a crime, he says. Instead, they insist on holding up as models executives cut from a McKinsey & Company cookie cutter."

Singleton's results are nothing short of impressive, but it's not just the returns that are admirable. It's the way that he accomplished those returns that, to me, makes him so worthwhile to study further.

Some might think investing well requires some unique ability to see the future. In fact, it's recognizing that you mostly can't. It's understanding that some who make predictions for a living are better at selling the brilliance of their unique crystal ball than providing useful prognostications.

From this interview with Charlie Munger:

"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.

Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.

I recommend to all of you exactly the same attitude.

It's kind of a snare and a delusion to outguess macroeconomic cycles...very few people do it successfully and some of them do it by accident. When the game is that tough why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?"

So consistently correct and useful predictions may not be impossible, but they sure seem to be an exception to the rule.

Well, an investment strategy based upon the exception seems like no strategy at all.

The good news for the long-term investor is that an unusual talent for making predictions is not a required skill. Investing certainly isn't an easy thing to do well. If it was more market participants would outperform the market as a whole. A sound investment process is made of many things (the right skills, experience, knowledge, and temperament etc.) and, at times, requires difficult judgment calls. The nice thing about investing is that the investor can always choose to take a pass if it's too close a call.

Buffett once explained it this way:

"I call investing the greatest business in the world...because you never have to swing."

Patiently wait for a "pitch" you like and have enough justifiable confidence to act decisively. The reason to buy should be obvious and provide a large margin of safety.

That's the idea. Sound easy enough but, well, it's not. One tricky aspect of all this can be that much of what matters in investing is hard to quantify. Investing requires, instead, lots of sound qualitative judgments combined with a good understanding of the numbers.

Here's how Charlie Munger explained it at the 2002 Wesco annual meeting:

"Organized common (or uncommon) sense -- very basic knowledge -- is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little."

More recently, earlier this year at the Berkshire annual meeting, here's an exchange between Warren Buffett and Charlie Munger that was captured on Wall Street Journal's live blog:

Munger: "We don't know how to buy stocks by metrics ... We know that Burlington Northern will have a competitive advantage in years ... we don't know what the heck Apple will have. ... You really have to understand the company and its competitive positions. ... That's not disclosed by the math.

Buffett: "I don't know how I would manage money if I had to do it just on the numbers."

Munger, interupting, "You'd do it badly."

Munger also said the following back in 2003:

"...practically (1) everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they're taught in academia, and (2) doesn't mix in the hard-to-measure stuff that may be more important. That is a mistake I've tried all my life to avoid, and I have no regrets for having done that."

Beyond that critical mistake, recognizing that the future is always uncertain -- even when it seems otherwise -- isn't a bad place to start for investors. In other words, just because the world happens to seem more certain from time to time doesn't mean that it actually is.

"The world's always uncertain. The world was uncertain on December 6th, 1941, we just didn't know it. The world was uncertain on October 18th, 1987, you know, we just didn't know it. The world was uncertain on September 10th, 2001, we just didn't know it. The world—there's always uncertainty. Now the question is, what do you do with your money? And if you—the one thing is if you leave it in your pocket, it'll become worth less—not worthless—worth less over time. That's certain—that's almost certain. You can put it in bonds and then you can get a certain 2 percent for 10 years and that's almost certain to be less than the decline in the purchasing power." - Warren Buffett on CNBC

Much goes into producing attractive long-term investment outcomes. There'll never be an easy recipe for investing effectively because, well, so much of it necessarily comes down to the experience, abilities, and limits of each individual investor.

Successfully allocating capital is never going to be an easy job, but it's not quite so difficult to create a what NOT to do list of the things that tend to hurt investment performance.

So here goes my what NOT to do list:

- Buy what is not well understood.

- Always seek confirming information.

- Never carefully examine misjudgments.

- Be overconfident in (and overestimate) your own investment talents and insights.

- Focus on the easy to quantify in lieu of the more important but sometimes tough to measure stuff.

- Ignore the many psychological factors (i.e. things like emotional and cognitive biases, fallacies, and illusions) that lead to misjudgments (even when the investment process is otherwise sound).

- Invest without an appropriate margin of safety considering the specific risks and opportunities.*

- Do not sell assets -- even very good ones -- when they get plainly expensive.**

- Do not carefully weigh opportunity costs.

- Focus on near-term price action.***

Among other things.

Though hardly exhaustive, the above list seems as sound a way as any to begin absolutely minimizing potential long run investment results.

Wise investors will, more or less, basically do something close to the opposite.

That, in itself, won't necessarily lead to great investment results, but at least is likely a step in the right direction.

Adam

Long positions in BRKb and AAPL established at much lower than recent market prices

Related prior posts:
Buffett: Forecasters & Fortune Tellers
Not Picking Stocks By The Numbers
Buffett on Teledyne's Henry Singleton

* Margin of safety is necessary because the future is always uncertain and mistakes inevitably get made. Yet the overconfident investor might feel sure that the investment they've made will eventually justify what initially seems a rich valuation. Sometimes they do, of course, but I always find it amusing when I read or someone says that a particular investment will eventually grow into its valuation. Investing isn't about growing into a particular valuation; it's about -- or should be about -- whether the forward returns are attractive considering the specific risks and compared to other well understood investment alternatives. Partial ownership of even the best business can become a dumb investment if the share price paid isn't right.
** This would seem obvious but some market participants are willing to own an expensive stock for technical reasons (e.g. momentum). Others will get caught up in a compelling -- possibly even legitimately so -- story despite the fact that so much has to go right to even justify the current price (never mind produce an attractive return going forward). On the other hand, this doesn't mean shares of a very high quality business should be sold just because it has become fully valued. That's a recipe for unnecessary mistakes and frictional costs. Buying and selling isn't just a opportunity to improve results, it's a chance to make a mistake. Making fewer well thought out decisive moves generally beats lots of unwarranted activity. Invest with "forever" or, at least, decades in mind whenever possible. The best businesses increase intrinsic value at an attractive rate and over a very long time horizon. 
*** Near-term is not measured in days weeks, or even months. Here's how Peter Lynch looks at it: "Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide."
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.