Aw, shucks. I'm just a little boy from Omaha. If I've made billions of dollars in the market, it's only because I've always followed the Golden Rule.
That's not an actual Warren Buffett quote, but it might be -- it's in line with his style of cornpone philosophizing, true to the spirit of much of what he has said about his career. That Buffett is a brilliant businessman with a keen sense of how to market himself, that he is savvy enough to understand how to deflect the inevitable criticism aimed at a man of his position, we should take for granted.
What we should not do is take his statements at face value altogether. That would be naive. Yet people do it all the time. Maybe because people see how value investing touches on traditional values such as hard work and looking beyond surfaces for deeper realities -- and then conflate this with personal goodness? Maybe because some of us have a psychological need to believe in a hero, an investing Superman who's on the side of all that is good and right and doesn't even drink alcohol?
In any case, it's not just naive but actively misses the point. First, because it overlooks some of Buffett's best qualities: his marketing savvy (a man who's amassed $67 billion yet is known for his patience rather than his rapacity knows something about marketing), his opportunism, and the versatility of his thought. Second, because it's intellectually lazy -- hero worship standing in for considered opinion.
We call all this the "cult of value investing." Here's one example in action. Take Bill Ackman -- CEO of the $14 billion hedge fund Pershing Square Capital Management. When Jim Cramer asked him at last year's CNBC Delivering Alpha conference why he doesn't invest in technology stocks, Ackman paraphrased Buffett by noting, "When you put 10%, 15%, 20% of your assets in a business, you want it to be an incredibly robust, stable, predictable business," adding that technology companies are "too dynamic," and that "you wake up one morning and there's a couple of guys in a garage a block from Stanford University ... and they're starting a new business that's disruptive." He added, "We like businesses that will withstand the test of time."
That's not to single out Ackman. There are dozens of quotes just like this from money managers around the world who seem content to adopt large chunks of their investment philosophies from glib statements from an 85-year-old man from Omaha -- and to treat these statements as though they're gospel, to parrot them. Essentially, they're copying and pasting Buffett's investment experiences over their own without grasping the broader applications.
The fact is that many technology companies today can be understood just as effectively as the Coca-Colas or McDonald's of the world, and although the words "this time it's different" are widely mocked in investment circles ... well, this time it's different.
Over the past, say, 15 years, a whole new breed of company has been created: companies that are essentially infinitely scalable and require little incremental capital to achieve their potential -- companies such as Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Visa (NYSE:V). (Visa's been around since 1958, but investors didn't have the chance to scoop up shares until its IPO in 2008.)
Yet when discussing these companies, many value investors fall back on their old-timey price-to-earnings ratios, Buffett quotes, and the smug self-satisfaction they seem to feel in being "right" -- even as they're left in the dust.
For Buffett's part, many of his own most successful investments wouldn't qualify as "value investments," at least in its most conventional form. GEICO's book value per share was around $27.66 when Buffett acquired the company for $70 per share in 1996, and Buffett has repeatedly acknowledged GEICO as one of his greatest investments ever.
One of the main things that attracted Buffett to GEICO, aside from its low-cost business model, was the float that insurance companies generate. Most value hounds are very familiar with the concept of float, if only in the context of insurance companies, as Buffett has written about it extensively in his annual letters to shareholders -- it's fair to say he popularized the concept, even. Meanwhile, his followers have largely missed Amazon.com (NASDAQ:AMZN), one of the greatest beneficiaries of float in the modern era.
Because Amazon generally collects payments from its customers before it has to pay its suppliers, it can scale almost infinitely to meet customer demand, financed by its suppliers instead of creditors or equity investors the whole way.
In short, many value investors love the concepts that Buffett pioneered and have at least a rudimentary understanding of them. But they aren't comfortable with their application beyond the basics that Buffett handed out to them as milk and cookies. And the opportunity cost on that misstep is huge.
On the plus side, you just have to get a little creative with your thinking to capitalize on it. (Maybe negative working capital is to our age what float was to Buffett's youth?)
So of course we don't mean to say learning from Buffett is wrong altogether; we personally count him as one of our biggest investing influences. There's a reason -- beyond his being a quasi-religious figure – that he's not often criticized in any way; he's a brilliant man who has been much more charitable than he needs to have been with his wisdom, cornpone and all. We're grateful to him for that. It's the fan boys who might want to tone it down.