In his recent interview with Tim Ferriss, Morgan Housel explains why investing like Warren Buffett sounds easy, but is really complex. Here’s an excerpt from the interview:
Morgan Housel: I think one of the things that’s easy to minimize is that Buffett is a very good communicator. He’s a very good writer. He is a very good speaker, that’s a big part of why he became a household name. When he writes his annual letters, when he goes on CNBC, it’s easy to understand it, anyone can understand it.
And that has created the impression that what he does is really simple and I think it’s led a lot of people to be like, “Oh, I can go out and pick a good business and read a balance sheet and I can do all this too,” because it sounds so easy when Warren does it. And it’s not, there’s so much nuance and I think gut feelings that have just accumulated over 80 years of doing this that has made — particularly in the early and mid-2000s value investing was very popular.
It’s not in this era, but in the last era it was. And there were a lot of people, a lot of fund managers, a lot of investors who would read a couple Warren Buffett annual letters and be like, “I could do this. I could totally do this.” And they go out and try to do it. And there’s a reason why quoting Warren Buffett is easier than being the next Warren Buffett.
Like it sounds so simple when you’re like, “Oh, be greedy when others are fearful.” It’s so simple. And then you go out and try to do it and October 2008 rolls around and you’re like, “Ah, this is actually way harder than I thought.” So I think it’s very easy to oversimplify what he’s done. And that’s why there are hundreds of books titled some version of “How to Invest Like Warren Buffett,” and it’s all so overly simplified when actually what they do is really complex.
And even if it’s not complex, they’re just at a, they being Berkshire and Buffett and Munger, are at a size now where they can do things that other people can’t. Whether it’s just picking up the phone and calling the CEO of Goldman Sachs to get a special preferred stock investment, that kind of stuff, just things that other people can’t do.
The other thing that’s I think easy to overlook is that Berkshire’s now a six or $700 billion company, something like that. So odds that they are going to achieve market-beating returns in any significant way I think round to zero. And it’s a casualty of its own success that when Berkshire was a tiny company in the ’70s and ’80s, they could go out and buy small cap companies and do things that — now Berkshire’s largest investment now is Apple.
And I think there’s two reasons for that, one is because it’s a great company, of course it’s a great company, two is that the number of publicly traded companies that can actually move the needle in Berkshire’s portfolio is probably like 10. There’s probably like 10 companies that are actually investible that he could actually look at and say, we can put some money to work there and Apple just happens to be one of them.
So I think the odds that Berkshire will outperform over the long term are very slim and if it does outperform, it’s going to be minuscule. That’s okay, there’s nothing wrong with that. But I think a lot of people have been disappointed because Buffett became famous in the mid-2000s. And a lot of people started buying Berkshire stock and becoming part of that cult and the stock since then has not done very well. And I think that’s almost inevitable at the size that it is that it’s not going to outperform anymore.
You can listen to the entire interview here:
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