Berkshire Hathaway
Stepping on Toes

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By gdefelice
August 29, 2002

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Hey there, if I bash a company you own...sorry. But, instead of freaking out and calling me a moron and lightweight, etc. Ignore me. That's what I do when someone says they're sure QLogic is going to the moon. Unless they're a friend and I'm trying to protect them -- cause that's what friends do for one another -- I just ignore. Do the same with me. Forget it. Do you tell that bum on the street corner that he's got it all wrong?, you just ignore the ramblings.

If you own Wal-Mart and you're SURE about it...who cares what I say...why get in a big pissing match. Ignore my post on Costco. Wait a day. And write something up about Wal-Mart and why it is going to kick everyone's but. Your point will be clear.

I'm getting private emails now from those whose companies I have "attacked"...I feel like one of these short sellers locked out of a conference call question queue. This is all getting a little too serious for me. I have always hoped that I could turn to this place to learn something from other people who wanted to learn from the Master; to get someone to read the 1983 Appendix and tell me if they see what I see or if I'm kooky on it...I'm definitely NOT sure I'm reading it correctly. Yet, the most I usually get is someone bashing one of my analyses ONLY because it threatens their outlook or makes them worry about their own positions or, in truly twisted reality of human nature, because they didn't think of it first. I haven't yet found a person who really wants anything other than someone else's ideas to either agree with or kick around...everyone seems to want a debate format rather than an intellectual one....same thing I found at college. People protecting their turf; preventing at all costs from being proven wrong or being forced to face that a long held belief or theory is wrong, etc.

I know I'm never going to be a Warren Buffett or a Charlie Munger.

If I can beat the market averages over my investing lifetime, I will consider my "investing life" a success.

I know that I don't have much faith in my predictive abilities. I know that history repeats itself and that much can be learned from accepting that little reality. I know that things can always get worse than you imagine. I know that the marketplace of capitalism is competitive and if you don't have an advantage, your returns will eventually be average or worse. I know quite a bit about the human psychology of misjudgment as I took classes from the very people Munger discussed in his Harvard talk, recently posted. The classes were interesting; Munger is far, far ahead of them. That's about it.

Everything else I know about investing, that I think is truly useful, I've learned from reading Graham, Buffett and Munger. Yet, when I extol their genius, I get people who say: "I don't just blindly follow what Buffett or Munger say." Neither do I. But I sure as hell recognize they are (were, in the case of Graham) smarter than I am. To dismiss these three guys -- who are willing to pass on a life of accumulated wisdom and massive success -- is the height of arrogance. It is borne of a need -- a very human and understandable need, at that -- to want to be better than everyone else. Well, if you want to do better than Buffett and Munger, shouldn't you be at least be able to explain why what they say is wrong, if you disagree with it. And, if you agree with most of what they say, shouldn't you try to figure out if much of what they say is rather not overt but instead somewhat subtle...but no less important. When they drop their nuggets of wisdom to us, they very rarely tell us what is most important...I'm always trying to put it into a hierarchy. Though, Buffett has said the following:

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

That's a pretty bold statement and one that is hard to ignore. What does he mean? I mean, tons of people make money, buying companies that don't have sustainable competitive advantages, right? I think what he means is that, if you continually buy companies throughout, say, a 50 year investing lifetime, that do not have durable competitive advantages, the ODDS are (and that's all they are, ODDS) that you will do average (or worse). Because, just like if you flip a coin a million times, the ODDS are that you'll end up with just about 50/50 heads to tails. If you continually buy/own average companies over a long-enough time horizon, the odds are that you'll do average.

Sure, many people are successful over rather shorter periods of say 10 or 20 years without ever paying heed to this rule but, eventually, if you play long enough and make enough flips, you cannot win if you don't own companies with that have moats because durable moats mean outsized returns on capital.

If you don't think what Buffett says is true, why not? What is your thinking? Or, why does Buffett think this is the KEY to success? If it is the key, how does one determine what advantages are most durable? Etc., etc. I always thought this board would eventually be a place where that is what was talked about...but it is just counter to human nature to discuss the genius of someone else. I always picture what the scientists in Einstein's day thought of this little Jewish man invading their world with his idea. How many people wanted desperately for him to be wrong, to prove him wrong, to one-up him, etc.? All his contemporaries, I'm sure. And, again, it is only human nature. But, the nature of human thought and emotion doesn't change realities of long-term investing...just like it doesn't change the realities of relativity.

I like thinking about long-term business models. If I say "ADP is done" or "HD is done" that doesn't mean I think they're suddenly going out of business or that their stocks are bad or whatever. It simply means I don't think they have long-term competitive advantages. Then, I ask someone to explain to me what those long-term competitive advantages are...and, suddenly, they haven't got the time to do that...they just "own" them. Or, they read the 10K and that's that. Well, if Buffett and Munger can read the 10K of Fannie, for example, and even THEY don't know what is going on, I want someone out there who does own it to tell me what is going on. How, exactly, their positions are hedged against a sharp rise in interest rates, etc. Instead, someone just says: "I don't just listen to what Munger and Buffett say". Well, aren't you the independent thinker.

If you think what I say doesn't make sense, just ignore me. But, if you want to get into a pissing match...let's put some damn money on the table. This game isn't about being liked, about getting the most rec's, or having the "most people love you", having the most assets under management, or even your 10-year performance. It is about being right over your investing least, that is what I think it is about. If you go back to "Go", all you did before was meaningless.

I think many of the most virulent attacks against me are coming from people that are either money managers or are fully invested and are scared about their futures...I don't blame you. And, of course, it is human nature to be angry and hateful towards the messenger even when it is the message that you actually find so distasteful.

I believe almost all businesses are facing headwinds in the coming years. I know that I have no ability to trade stocks well. I know that if you continually buy things that are over-valued, eventually, you'll get hurt. I know that my discipline (after many years of mistakes) would have prevented me from ever owning a Microsoft and that means they'll always be people getting richer faster than me. But, I know that I'm NEVER, EVER going to risk going back to go. I'll happily miss upside to avoid downside.

I believe we are still in one of the greatest stock market bubbles of all time and that the excesses have not been washed out. I believe we have not had a consumer recession yet. I believe real-estate prices, in general, are too high. I believe most bonds do not offer attractive returns. I believe corporate bonds are going to get killed. I believe municipal bonds in states like California are going to be hurt. I believe that the Fed isn't sure what to do. I believe that the Fed believes they must avoid deflation at all costs and thus I believe that we'll get some inflation down the road. I believe there aren't very many good places to put your money and so I'm simply settling for not losing much/making a little. And, I'm waiting and have been for some years now.

As I've said about the economy in general, I hope I'm wrong. If I am, I will not have lost much money and some people will have made lots more than me and can toss that in my face. But, if I'm right, I'll have made all the money and I WON'T toss it in your face...I'm doing that ahead of time because when the cards are finally laid on the table, it won't even be funny. I won't get points or feel good saying "I told you so". I'll get shot.

So, I'm getting my licks in now. I know if I do turn out to be wrong, I'll get it all thrown back at me.

I sincerely hope that I am wrong about the economy because, while I will have been wrong, I won't lose much. But, if I'm right, there will be an enormous amount of pain for my friends and for everyone in general. The whole thing will be quite unpleasant. But, as Munger has said: "I [think] one should recognize reality even when one doesn't like it, indeed especially when one doesn't like it."

I don't like the reality I see, but I see it nonetheless.


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