On Buffett and Intentional Ignorance

Sitting at what feels like the apex of technology here in 2012, we all like to believe we’re different.

When it comes to investing, especially, we like to believe we must know more than the pre-Bloomberg Luddites of decades ago. We like to believe we’re more rational. Have better tools. That buy and hold is for fools. Hasn’t our thinking has progressed so much more, after all, than the generations that came before us? We certainly have oodles more information, right at our fingertips, and for free, even. Shoot, never mind investing – we pretty much know how the entire world really works at this point, don’t we?

On July 6th, Warren Buffett wrote:

“I think you can be quite sure that over the next ten years there are going to be a few years when the general market is plus 20% or 25%, a few when it is minus on the same order, and a majority when it is in between. I haven’t any notion as to the sequence in which these will occur, nor do I think it is of any great importance for the long-term investor.”

That’s good advice for 2012, no?

It was actually written two generations ago…in 1962, to be exact. One of my investors – active duty, stationed overseas – cut out the newspaper version of this article on Buffett in Stars and Stripes and mailed it in to me a few weeks ago. Definitely a reminder that is worth a read.

We like to think we’re so much smarter than previous generations, but we’re still the same human beings with the same flaws. We’re emotional creatures. Our instincts too often trump our intellects. Our egos make us do things that aren’t good for us.

In the market, our aversion to risk outweighs our reason. Our fear of the market outweighs what we know about the market.

Buffett in his stock-picking prime had one big advantage over almost every other professional investor of his day: he was stuck in Omaha. Back then he couldn’t get 24/7 satellite news. He couldn’t get on the internet and get minute-by-minute market commentary. He couldn’t even pick up the phone to get up-to-the second quotes for his portfolio.

What did he get? A couple of newspapers each morning and twenty-two minutes of the evening news. And – most importantly – time. Time to think and contemplate. Time to process what was going on in the world before he acted.

With all our knowledge and information (and pride) we often forget the wisdom of what came before us. We like to think things are different. But really they aren’t. Never mind those rare earth metals…time spent sitting still and thinking about investing may now be more precious and rare than ever.

Despite all that we know, DALBAR reports year-after-year that investors always do worse than their investments. In 2011, for instance, the market was up 9.1% while the average investor earned only 3.3%. Why? Because that investor, with all his knowledge and information, kept jumping in and out of investments. Jumped out of solid investments when he feared he’d lose money, and jumped into a hot investment for fear he’d lose out on a gain.

So maybe the secret to becoming a great investor isn’t a secret after all. Perhaps you can find out half of what you need to know in a book that was first published in 1934. And perhaps the other half can be read online, right now, for free. And maybe, just maybe, you, like Buffett, will be better off ignoring all the other noise.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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2 Responses to On Buffett and Intentional Ignorance

  1. Cale, we greatly enjoyed our discussion today. I do want to point out though that the old adage of “timing is everything” is apropos to investing. As an example if you were looking at retirement within a few years in the late 90’s a buy and hold portfolio holding the best and the brightest at the time (ORCL, MSFT, WMT, HD, SUNW etc) lost 40% +/- What then happened to those plans? I have the highest regard for Mr. Buffett but in my opinion the older we are the less of a luxury we have regarding time and the more important risk management becomes. My two cents worth.

  2. Cale Smith says:

    Thanks, Carlos. I certainly agree that the market doesn’t care when you’re supposed to retire. But buying ORCL, MSFT, SUNW or anything else with a P/E above 30, especially in the late 90s, shouldn’t be confused with value investing, either. That and the Ibbotson data both underscore the case for following Buffett’s philosophy, I think…if you can’t count on indexing your way to retirement, and if buying the stocks that the popular financial media has crowned the best and brightest ends up being a dud of a strategy, how exactly can you best compound your own money? That’s when Graham and Buffett come in – and where the ‘risk management’ is in the buying.

    So, yes, I think timing is certainly important, but as it relates to valuations, specifically – in contrast to waiting for the time when the global macro traders finally run out of things to worry about. By then, it will be a lousy time to invest.