The Disciplined Investor
A Lesson on Long-Term Perspectives From Warren Buffett and Charlie Munger
I was fortunate to attend the Berkshire Hathaway Annual Meeting recently with Dave Bromelkamp, Dave’s brother Mike Bromelkamp, and Derek Van Calligan. If you’d like to get a sense of the meeting’s atmosphere, check out Derek’s blog here: https://www.allodium.com/resources-2/allodium-blogs/the-responsible-investor.html.
The venue was full of excitement as the crowd anticipated soaking up the wisdom of Warren Buffett and Charlie Munger. The meeting format consisted of audience members asking the panel (including two other Berkshire Hathaway employees for the first half of the day) around 60 questions on topics ranging from why Berkshire Hathaway has invested in specific companies to their thoughts on estate planning. Many of the questions were regarding world events and current financial issues. The stories and perspectives shared by Warren and Charlie, each having nearly a century of life experience, were fascinating.
The recent bank failures came up early in the questions. Warren said, “The situation in banking is very similar to what it’s always been in banking…fear is contagious, always. As many as 2000 banks failed in one year after WWI…bank runs were just part of the picture.”
Warren shared that his father lost his job in 1931 due to a bank run. “If you saw people lining up at a bank, the proper response was to get into the line [to withdraw your money].” Warren shared a story that during a bank run around 1907, one man got in line at a bank, and as he approached the front, he sold his spot! He didn’t even have an account at the bank but knew his spot would be valuable. Long gone are the days when bank tellers could try to delay bank runs by slowly counting out gold as long lines of customers waited to withdraw money. These days cash can be transferred online instantaneously. Warren expressed his belief that bank executives should be punished when banks make mistakes that lead to failure. Charlie expressed disdain for banks focusing too much on ways to make money instead of keeping deposits secure.
Warren discussed the negative effects of partisanship when addressing current global and societal challenges. He recalled a “unity of purpose” that occurred during WWII and expressed that this sense of urgency and unity would be needed to make real progress toward today’s challenges. One topic that was top of mind for many attendees was artificial intelligence (AI) and its potential impacts on society and investing. Warren referenced the splitting of the atom and the resulting atom bomb when saying, “Inventing cannot be undone,” a solemn warning for the potential negative effects of new technology. In the past, Warren has spoken extensively about technological advancements, including the societal shift to automobiles and the invention of air travel. Warren is well known for not investing in technology he does not understand. He continued, “There will not be a change in opportunity,” investing in new technology. “What gives you opportunities is other people doing dumb things.” Charlie simply stated, “I think old-fashioned intelligence works pretty well.” Both investors emphasized that avoiding making emotionally driven investment decisions is prudent.
This long-term perspective and disciplined focus reminded me of a psychological shortcoming that we are all prone to called recency bias. Recency bias is the tendency for people to emphasize what has happened in the recent past and extrapolate that the future will look similar instead of considering the objective probabilities of those events over the long run. It is easy to form opinions and make decisions based on the recent past instead of looking at the big picture. This tendency is one of the main reasons that many individual investors underperform the market. When we hear about a particular investment in the news that is currently hot (growth tech stocks, etc.), it is natural to think they will likely continue to do well, and we want to get in on the action. Likewise, when an investment has not been doing well, it is not our natural tendency to want to buy it. This view leads to buying high instead of buying low, the opposite of what we want to do. The same bias affects us when we may decide to sell something. As certain investments decline in value, it can be tough to see your portfolio value decrease, and you may want to sell at precisely the wrong time.
One of the best ways to avoid the pitfalls of recency bias is to have a disciplined investment plan based on decades of investment research and stick with it. Perhaps one of the most important questions that someone asked Warren was, “Do you ever make bad investment decisions because of your emotions?” Warren replied that “we make bad investment decisions plenty of times, but I cannot recall any time in the history of Berkshire that we made an emotional decision.” As Warren and Charlie advocate, let others make the emotional investing mistakes.
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