It shows how hard it is to be
rational on something very simple. Now at a place like Berkshire Hathaway or even
the Daily Journal, we’ve done better than average. And now there’s a question, why has
that happened? Why has that happened? And the answer is pretty simple. We tried
to do less. We never had the illusion we could just hire a bunch of bright young
people and they would know more than anybody about canned soup and aerospace and
utilities and so on and so on and so on. We never had that dream. We never thought
we could get really useful information on all subjects like Jim Cramer pretends to have. (laughter) We always realized that if we worked very hard
we can find a few things where we were right. And that a few things were enough. And
that that was a reasonable expectation. That is a very different
way to approach the process. And if you had asked Warren Buffett the same
thing that this investment counseling did, “Give me your best idea this year.”, and you had just followed Warren’s best
idea, you would find it worked beautifully.
But he wasn’t trying to know the whole…he
would give you one or two stocks. He had more limited ambitions. I had a grandfather who was very useful to me,
my mother’s grandfather, and he was a pioneer. He came out to Iowa with no money but youth
and health and took it away from the Indians. He fought in the Black Hawk…he was a
Captain in the Black Hawk Wars, and he stayed there and he bought cheap land and he
was aggressive and intelligent and so forth and eventually he was the richest man
in the town and owned the bank, and highly regarded, and a huge
family, and a very happy life. He had the attitude…having come out
to Iowa when the land was not much more than a dollar an acre, and having
stayed there until that black topsoil created a modern rich civilization,
and some of the best land in the world.
His attitude was that in a favored life like
his, when you were located in the right place, you just got a few opportunities
if you lived to be about 90. And that the trick in coming out
well was seizing a few opportunities that were your fair share
that came along when they did. And he told that story over and over again to the grandchildren that hung around him all summer, and my mother who had no interest in money remembered the story and told it to me.
But I’m not my mother’s natural imitator and I knew Grandpa
Ingham was right. And so I always knew from…
when I was a little boy that the opportunities that were important…that were gonna come to me…were few and the trick was to prepare myself
for seizing the few that came.
This is not the attitude that they have at a
big investment counseling thing. They think if they study a million things
they can know a million things. And of course the result is that almost
nobody can outperform an index. Whereas I sit here with my Daily Journal stock, my
Berkshire Hathaway stock, my holdings in Li Lu’s Asian fund, my Costco stock, and of course, I’m outperforming everybody. (laughter) And I’m ninety-five years old. And I
practically never have a transaction. And the answer is that I’m right and they’re
And that’s why it’s worked for me and not for them. And now the question is do you
want to be more like me or more like them? The idea of diversification makes sense to a point if you don’t know what
you’re doing and you want the standard result and not be embarrassed, why course you can widely diverse. Nobody’s entitled to a lot of money for recognizing that because it’s a truism it’s
like knowing that two and two equals four. But the investment professionals
think they’re helping you by arranging diversification. An idiot could diversify
a portfolio! Or a computer for that matter. But the whole trick of the game is to
have a few times when you know that something is better than average
and to invest only where you have that extra knowledge.
And then if you get
just a few opportunities that’s enough. What the hell do you care if you own three
securities and J.P. Morgan Chase owns a hundred? What’s wrong with owning a few securities? Warren always says that if you
lived in a growing town and you owned stock in three of the best enterprises
in the town, isn’t that diversified enough? The answer is of course it is… if they’re all wonderful places. And that
Fortune’s formula which got so famous which was a formula to tell people how much
to bet on each transaction if you had an edge. And of course the bigger your edge, the more
close the transaction was to a certain winner, the more you should bet…
And of course there’s mathematics behind it… But of course it’s true.
possible to buy only one thing because the opportunity is so great and it’s such a cinch.
There are only two or three. So the whole idea of diversification when you’re
looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task. What fun is it to do an impossible
task over and over again? I find it agony. Who would want
to do it? And I don’t see a way. My father had a client, he was a lawyer in Omaha, he had a client whose husband
had a little soap company. The guy died and my father’s
sold the soap company. This woman was one of the richest people
in town in the middle of the depression, and what she had was a little soap company and
the biggest mansion in Omaha’s best neighborhood. When they sold the soap company she
had a mansion in the best neighborhood and three hundred thousand dollars.
But three hundred thousand dollars in 1930s something was
an incredible amount of money. A little hamburger it was a nickel a big hamburger
was a dime, and the all you can eat cafe in Omaha would feed you all needed to
stay alive for two bits a day.
I mean 300,000. Well she didn’t hire an investment counselor, she
didn’t do anything, she’s a wonderful old woman. She just took that, she divided it into
five chunks, and she bought five stocks. I remember three of them
because I probated her estate. One of them was General Electric, one was Dow,
one was Dupont, and I forget the other two. Then she never changed those stocks. She never
paid any adviser. She never did anything, and she bought some municipal
bonds, she never spent her income, and she bought some municipal bonds
from time to time with the (inaudible). By the time she died in the 50s she
had a million and a half dollars. No cost. No expenses. I said,
“How did you decide to do that?” And “Well…” she said, “I thought electricity
and chemistry were the coming things.” She just chucked it all in and sat on her
I always liked that little old woman. My kind of a girl. But it’s rare! But if you stop to think about it,
think of all the expense and palaver that she didn’t have to listen to and all the trouble she avoided,
and zero costs. And of course what people don’t realize, because
they’re so mathematically illiterate, is if you make 5 percent and
pay 2 of it to your advisors, you’re not losing 40 percent of your future you’re losing 90 percent.
Because over a
long period of time that little difference causes a 90 percent disadvantage
to you. So it’s hugely important for somebody who’s a long term holder
not to be paying a big annual toll out of the performance. And of course there are a few big time advisors
now who are using indexation very heavily. And of course they’re prospering
mightily. And of course every time they get somebody it’s just agony for the
rest of the investment counseling business. This is a very serious problem. And I think these people who were used
to winning as old-time value investors who are now just quitting the profession.
That’s a very understandable thing to do. I regarded it as more noble than staying
in…you know…playing along with the denial. It’s an interesting problem. You can see I’m not trying to make your morning. I’m just trying to describe
things the way they are. But this business… Why does Li Lu succeed so mightily? Well partly he’s sort of a Chinese Warren Buffet.
That really helps. And partly
he’s fishing in China! Not in this over-searched, over-populated, highly
competitive American market, and there’s still pockets of ignorance and lassitude in
China that gave him so unusual opportunities. The first rule in fishing has
always been fish where the fish are. And the second rule of fishing has always
been ‘Don’t forget rule number one’. And Li Lu just went where the fishing
was good and the rest of us are like cod fishermen who are trying to catch
cod where the fish have been fished out. It doesn’t matter how much you work,
when there’s that much competition. Every little idea I see in the world some are
going after. I sat once on an investment committee at the University of Michigan and in came one
of their successful investors located in London. And what had this investor done in London? He decided to invest in sub-Saharan Africa. And the only marginal securities were a
few banks that traded in the Pink Sheets, so he would buy very tiny
quantities of these banks.
And every time some poor person got tired
of having their money in the mattress and put it in a bank he did a little better.
And of course he made a lot of money. Nobody else was investing in
little tiny banks in Africa. But the niche was soon filled. What the
hell do you do for an encore after you put your client’s money in a bunch of
little tiny banks in sub-Saharan Africa? The niche gets filled quickly. How many
wonderful niches are there going to be when some guy in London is buying all these
tiny little bank stocks in Africa? It’s hard..