You’ve inherited some money, or sold a business. What now?
Most people don’t have the skill, time, or willingness to manage their own investments.
One option is to entrust your funds to a professional money manager. But how to choose one?
I would recommend the following checklist:
1. Skin in the game The first question I would ask: “What percentage of your net worth have you invested in the way you are recommending?” If it’s not a significant portion, I would quit the meeting right here and walk out.
Some years ago, I helped a friend get his finances in order. He owned some products that the private banker had recommended. “A great opportunity”, the banker said. I asked him: “Do you own any of these funds and certificates?” He smiled and said: “No, I’m saving to buy a rental property.” A prime example of “Don’t listen to what people say. Watch what they do.“
2. Aligned incentives Make sure that the incentives between the manager and yourself are aligned. How does the manager get paid? Does he charge a high management fee? Does he get paid when the performance is negative?
Personally, I prefer and recommend the old Warren Buffett Partnership model: 0% management fee, an annual hurdle, and then a 25% performance fee. A high water mark ensures that a negative performance needs to be made up before the manager is paid. Simply said: the manager should only make money when you make money. Here’s a clip of Charlie Munger commenting on this topic.
3. Aligned investing philosophy How does the manager choose investments? Which criteria are applied? What is the minimum time horizon? The approach needs to make sense to you, and you need to understand the basic concept. The manager should also be able to show a track record of the applied approach. Ideally his own, or at least of the people/organizations that inspired him to use this approach.
Applying this checklist does not guarantee investment success. But it might help you prevent painful mistakes, and stacking the odds in your favor for finding a good manager.
The style of investing that speaks most to me is value investing, as practiced by Warren Buffett and Benjamin Graham. I’m often asked: “What is value investing exactly?”
Here is my understanding of the core principles:
Have more purchasing power in the future The goal of all investing is laying out money today, so that you can enjoy more purchasing power in the future. The principle is: Instead of eating the seeds, plant them, so one day, you will have plenty more to enjoy.
Investing vs. Speculation The goal is to be an “investor” and not a “speculator”. Here is the definition by Benjamin Graham: “An investment operation is one which, upon thorough analysis promises safety of principle and an adequate return. Operations not meeting these requirements are speculative.” (The Intelligent Investor)
A stock is a partial ownership of a business A stock is not just an abstract ticker symbol with a constantly moving price. It is a partial ownership of a business. So no matter whether you are buying 0.000001%, 10% or 100% of a business, the decision process should be quite similar. You have to know what the whole business is worth, so that you can determine what each share of the business is worth.
Mr. Market is here to serve you, not to guide you Treat the market as your manic-depressive business partner called “Mr. Market“. He is emotional, euphoric, moody, and often irrational. Every day, he quotes you a new price for his shares. You can reject him every day, and the next day he always comes back with a new price. You can never know what price he will offer next and you don’t know why he offers you the price that he does. Your job is to simply listen to him every day, and only buy if when he offers you a low price. As opposed to “market timing”, this is “market pricing”. You simply recognize a good deal when you hear one, but can never know when it happens.
A great song about Mr. Market
Margin of safety Always have a margin of safety, as a buffer for errors and unforeseen situations. The principle is simple: If you are building a bridge that is supposed to support 20 tons of weight, you don’t build it for 21 tons. You build it for 40 tons, to have plenty of margin. The same is true for value investors: they try to be very conservative in their calculations. They don’t buy a stock because they think it’s 6% undervalued. They demand 50%.
Buy one dollar for 50 cents To summarize, and to quote Warren Buffett: “All investing is value investing.” In fact, Warren Buffett or Charlie Munger don’t even call themselves value investors. They simply master these principles. The goal is to find something worth one dollar and buy it for 50 cents. And even if your assessment was wrong and it turns out to be worth only 50 cents, you at least didn’t lose any money, thanks to your wide margin of safety.
Results By applying these principles, Warren Buffett has grown his net worth from $10,000 when he was 19 years old to more than $80 billion today, compounding at an average rate of more than 20 percent per year for more than 60 years straight.
If you’ve invested $1,000 into Warren Buffett’s publicly traded holding company Berkshire Hathaway in 1965, you would currently have $4.3 million.
So these principles are not just theory, they are achieving wonderful results.
It took me 11 years after becoming a Warren Buffett enthusiast to finally attend my first Berkshire Hathaway Annual Meeting in Omaha, Nebraska. Here are my notes and my guide for first-time attenders.
Key Learnings from 2019 Meeting
Write down your thesis Before you buy a stock, write down: “I’m buying this company for [insert market cap, e.g. $500 billion], because…” If you can’t answer this question, don’t buy the company. Remember: A stock is not a piece of paper, it’s a part ownership of a business.
Broad vs. narrow circle of competence You need to find what you can understand. There is much more competition today than when Buffett started. It’s always a good strategy to specialize. Read as much you can. Figure out what you are good at. You need an edge. Be smart in spots and try to stay around those spots. Having one edge is enough.
Environmental, social and governance (ESG) Don’t spend time creating ESG committees and writing long reports. Simply do the right thing. Example: Berkshire Hathaway’s utility is on a path to soon produce 100% renewable energy in Iowa.
The Future Performance of Berkshire Hathaway “Berkshire Hathaway won’t be the biggest compounder by a long shot. But it will and continue to be a very safe way to make decent returns for a long time.” — Warren Buffett
Keep trying things “If you keep doing enough things, some of them will work out.” — Warren Buffett
Figure out what works “Figure out what works, and go do it.” — Charlie Munger
How to attend / Guide for First-Timers
This guide by The Investors Podcast (TIP) is a great starting point. But there are a lot of additional details to figure out. Here is my guide for first-timers:
When to plan the trip? Next years meeting will take place on May 2, 2020. It’s advisable to plan the trip as soon as possible, optimally as early as October or November. I planned my trip in January and it was already quite difficult to find reasonably priced hotels (I was still lucky though, see below).
Credentials / Tickets You don’t need to be a shareholder to get tickets, and there aren’t any further controls once you have tickets. The easiest way is to order them on eBay directly from Berkshire Hathaway (brka_b is their user name) and send them to your hotel address. If you are a shareholder, then simply print out a recent broker statement, bring a matching ID/passport and pick them up at the CHI Health Center on Friday before the meeting at the “Will Call”. You can pick up as many as 4 credentials, so not all of your friends need to stand in line.
Accommodation / Hotels I highly recommend staying in Council Bluffs, right across the river in Iowa. I booked in January and was lucky to find a decent hotel for just $55 per night. It only takes 10 minutes to go Downtown and the traffic was always very smooth, because you take the freeway most of the way. If you are on a low budget or like to stay with locals, you might also consider Couchsurfing. If budget is not an issue, then you might stay near the Old Market area, so you have everything in walking distance.
Rental Car / Parking A rental car is highly recommended, and only costs around $30 per day. The alternative is using Uber/Lyft, but this can get quite expensive if you want to see many things. I never had parking problems, even in Downtown. Mostly you have parking meters which cost $1.25 per hour (payable with credit card or cash). I downloaded the “ParkOmaha App” which made the process even easier. (If you don’t mind walking 10-15 minutes, you can park for free on the bridge next to the Durham Museum. That’s what I did most days. But don’t tell others ;)
Join a WhatsApp / Telegram group One of the best things I did was to join WhatsApp / Telegram groups. That way I always knew what’s going on and was never alone. We ended up being a group of 4-5 people that did most things together. One group I found on the TIP Forum, and the other through Guy Spier’s mailing list. I’m pretty sure there are others as well.
The TIP WhatsApp group photo!
How to prepare for the meeting If you want to stand in line very early, I recommend to buy a $10 camping chair from Walmart. I did and it was a very good investment. Some Chinese people also brought blankets to lie on the ground, but I’d say this is optional. Other than that no special preparations needed.
When to stand in line for the meeting There are multiple entrances. Mohnish Pabrai recommends to go to the South Entrance, so I did that. We were there at 3.00am, which guaranteed us excellent seats. I think 3.30am would have been fine as well. Most people come after 4.00am and the line will get very long after that. I was sitting in my chair and was even able to take a few naps, as did several Chinese people next to me. In fact, most of the very early people at the South Entrance were Chinese.
Waiting in line with Mohnish Pabrai and thousands others.
How to get great seats When you pass the security check at the South Entrance, take the stairs down one floor, then continue straight until you see the Lexus Club. Take any door to the left to enter the hall (the sectors are not separated, so you can move freely within the hall). If you feel lucky, you might go all the way down to the ground floor and try to get a front row seat. We didn’t do that. We chose Sectors 104 which offers a fantastic view.
The Floor Plan. The South Entrance is on the left side near sectors 211/212.
Want to see Warren Buffett up close? After you have secured your seats around 7.15am, I recommend to go the the Exhibit Hall. Warren often takes a walk trough the hall before the meeting starts. The movie starts at 8.30am, so there is plenty of time to look for Warren. Don’t forget to go to the restroom before the event starts. The morning session is nonstop until noon.
Backpack / Security CHI Center’s clear bag policy doesn’t apply to the Berkshire Hathaway meeting. You can bring a backpack. Full bottles are not allowed (empty ones are okay).
Events / Meetups There are a lot of events and meetups, and the best way to stay up to date is to join a WhatsApp/Telegram group. I highly recommend doing the 5k on Sunday. It’s a very nice and quite short run. As we’re in the US I expected 5 miles, and was pleasantly surprised to see the finish line after just 5 km :) After that I went to Borsheims to play against ping pong champion Ariel Hsing, which was a lot of fun.
Restaurants I really liked Jams in the Old Market. They have great salads. I also liked the Old Chicago pizza place in the Old Market. On weekdays they have great lunch deals.
Other fun things The Hollywood Candy store was fun. That’s where Buffett and Gates made the Sweet Nostalgia video. You can easily spend one or two hours there. Don’t forget to have a strawberry milkshake!
Disclaimer: All the above information is based on my 2019 trip. Things might change in the future, so keep your eyes and ears open.
The closest selfie I got with Warren and Charlie.My first meeting and I even made it into the Omaha World-Herald, thanks to my friend Marnix Troudes.
Every morning, I answer the question “What is important to me?” One of the answers is “Be useful”.
Benjamin Franklin has been teaching it 300 years ago. Charlie Munger is teaching it today.
The idea is simple:
Be a useful member of society.
Remember Charlie Munger’s Three Basic Rules: Don’t sell things you wouldn’t buy yourself. This alone would solve many problems of society.
Benjamin Franklin always tried to be useful. He started one of the first public subscription libraries. A volunteer fire department. He owned a newspaper. Published useful books. He started the American Philosophical Society, still existing today. And so many other things.
If we could all be a little more like Ben Franklin, the world would be a better place.
Earning money and making a profit are important. But more important is to always ask yourself: Is what I’m doing useful? How can I be more useful? How can I be of service to humanity?
One way I try to be useful is this blog. I try to share everything I learn, and making a tiny contribution to the improvement of humanity. May you find it helpful.
Charlie Munger, business partner of Warren Buffett, recently spoke at the 2019 Daily Journal Annual Meeting. You can watch the full recording here.
Here are my key takeaways:
#1: Fish where the fish are For Charlie, that means China. High-quality companies in China are currently available for cheaper prices than similar companies in the USA.
#2: China Charlie has outsourced his China investments to Li Lu. This is the only time he has ever given money to an external manager.
#3: Don’t be too active As a value investor, you need to be okay with inactivity. Be a good picker and then hold for a very long time. For example, Charlie has held Berkshire Hathaway and Costco for many decades.
#4: No exit strategy Charlie does not have an exit strategy or price target for his investments. He rarely sells.
#5: Have a “Too hard” bucket Charlie has three categories when evaluating investing opportunities: Yes / No / Too hard. Especially the last category solves many problems. Charlie looks for the easy and obvious opportunities, and discards the rest.
#6: Charlie on Stoicism He admires stoicism and has learned a lot from stoic thinkers. I didn’t expect anything else. In fact, I view Charlie and Warren as modern stoics!
Silicon Valley is mission-driven, pure, about making a dent in the universe. Abundance mindset. Copying is shameful.
China is market-driven, hyper-competitive, survival of the fittest. Scarcity mindset. Culture of copying.
In Beijing entrepreneurs often joke that Facebook is the most Chinese company in Silicon Valley, for its willingness to copy and its fierce competitiveness.
While you might be somewhat repelled by the aggressive, gladiator-style entrepreneurship in China, the results compared to the USA speak for themselves:
Rides on shared bikes 300:1
Mobile payments 50:1
Food delivery 10:1
E-commerce purchases 2:1
Let’s also not forget that Uber lost against Didi, eBay lost against Taobao, and Meituan is more successful than its role model Groupon ever was.
According to Marc Andreessen, the winning companies 20 years from now will be enormously large, maybe 10 or 100 times the size of today’s Google or Facebook. I’m pretty sure that a lot of them, if not the majority, will come from China.
It’s foolish for us Westerners not to watch China more closely. I know that Charlie Munger does. And that’s what I’ll be doing as well.
(I learned this lesson from AI Superpowers by Kai-Fu Lee.)
Recently I watched this Q&A with Charlie Munger. Pure wisdom, and two hours very well spent.
He talked about a key principle of (value) investing: Deferred gratification
We live in a world of instant gratification. It’s very hard to get rich if you eat your seeds, instead of planting them.
That’s what makes value investors rich. And that’s what transformed China into a rich country: they had a savings-rate of 50% and applied this principle masterfully.
Charlie also joked that people who have mastered this concept enjoy it so much, that they never harvest their fruit. They keep deferring until they die.
Personally, I’d rather die a rich deferrer than a poor pleasure-seeker. Even better, I’d prefer to die a poor deferrer. Having given away the fruit to people and causes who need them more than I do.
