Over the years, we’ve consistently discussed our four part investment process of searching for profitable businesses with good returns on capital, run by honest and talented management teams, with reinvestment opportunities or capital discipline, at fair prices. I believe that each and every word of that distilled statement packs incredible freight. As such, I’m reluctant to pick any single notion as more or less important than another. They all tie together.
That said, if you held a gun to my head and said which of the four ideas is most important, I would respond with point #3, reinvestment opportunities and capital discipline.
One of the reasons that I propose such a simplification is that the idea of reinvestment and capital discipline embeds the other concepts. If the business is not profitable, there is no money to reinvest. If the management team is not talented and honest, there will either be no money to reinvest or it will be hived off by the management before it ever gets to the shareholders. And finally, and this is the most nuanced and misunderstood aspect of investing, a fair price may be a lot more than you would think if profitable reinvestment really can take place.
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Most of the time and effort in the investment business is spent trying to figure out what something is worth in a very short time period. Professionals are consumed by questions such as, “Can a security be traded for more or less in a few nano-seconds through high frequency trading mechanisms?”, “Are interest rates going to move up or down and what will that mean to this security trading price?”, “Is Putin going to invade Ukraine, or Poland or ……… and what will that do to stock prices?”, “Will we reduce the federal budget deficit?” and so on and so on and so on.
While those are all important questions, they pale in comparison to the task of finding a manager who can successfully produce earnings from a business, and reinvest those earnings profitably over long periods of time. As the example of Berkshire shows, there is no more important business task.
The great financial writer John Train once said that if you had been on the property committee of the Sistine Chapel and tasked with getting the ceiling painted, you shouldn’t have focused on the training of various painters, what kind of paints they used, where they went to school, how many were on the staff and what kind of process they followed. Instead, you should have gone out into the world and asked the question, “Are you Michelangelo?”
We continue to spend all of our time trying to find the Michelangelo’s of today. Sometimes they are specific individuals. Sometimes, they are teams and systems that produce incredible results over time. The biggest single, and most important, sector of our portfolio of individual security holdings represents a congealed pudding of our vision of companies and leaders that fit this idea. If we get just one or two ideas right in this area, we will continue to produce outstanding overall investment results.
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One change that is different about me today compared to what would have been the case 25 years ago is how I look at the list in the Wall Street Journal of the new highs and new lows.
I looked at that list every day and I always used to look at the new low list first. Because that is where you see what’s beaten up, what’s cheap, what’s on sale?
It’s just my natural inclination to do that. I think 25 years ago I didn’t even look at the new highs, because if I owned something that was on there, I would know if it was up even without looking at the list in the paper. Today I still look at that list every day, but I look at the new high list first. Because I think there might be more informational value in that than the new lows. The new highs might be showing you where somebody is doing well. Maybe, just maybe they can keep doing it.
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