Buffett has invested for over 7 decades, where his investing style and approach has evolved. There are many lessons, quotes and soundbites that investors take from him. This episode looks at the lessons that we should ignore from Buffett.

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Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Mark LaMonica: All right. Well, we are back. People probably didn’t notice, but you were away for a while.

Jayamanne: I was.

LaMonica: But now you’re back.

Jayamanne: I’m back.

LaMonica: All right. And while you’re away, one thing, we obviously are putting these things on YouTube now. We had a lot of people, more and more people are watching these on YouTube.

Jayamanne: Yes.

LaMonica: And it upset Will. Now, that seems strange because well Will is the producer of the podcast, really what he does is work with video. So, but Will is upset because 92% of the people that watch this series on YouTube do not subscribe to our channel.

Jayamanne: So please subscribe to our channel.

LaMonica: Exactly. Make Will happy. And it’s exciting on YouTube. People make all these comments about my looks. So, you have to deal with that. But we have another exciting announcement today, Shani. Exciting for us.

Jayamanne: Is this the most exciting announcement we’ve had on Investing Compass before?

LaMonica: The most exciting announcement ever was your various promotions. There’s been like eight of them since we’ve been on there. None for me.

Jayamanne: You’ve had one.

LaMonica: Thanks, Shani. But this is also an exciting one. And hopefully some listeners are excited. We wrote a book.

Jayamanne: We wrote a book.

LaMonica: I guess there’s no other way of putting that. Well, anyone can write a book, but we got somebody to agree to publish our book.

Jayamanne: Yes. And that’ll be Wiley.

LaMonica: Yes. So real publisher. Why don’t you tell people a little bit about the book?

Jayamanne: Okay. So it’s called Investing Your Way. And it’s a personal finance book that combines foundational investing theory, real world application, and our own experiences as well. And it’s designed to help readers create a financial plan and investing strategy that’s tailored to their unique goals and circumstances.

LaMonica: Yes. So we are working with the editor right now, which is a new experience for us. And tentatively, it goes to print at the end of July. I don’t really know when it gets released. But anyway, we’ll keep you informed.

Jayamanne: We’ll keep you updated.

LaMonica: This is new for us. So as we find out, you will find out.

Jayamanne: Speaking of exciting news for those that participated in the Warren Buffett drinking game, this is going to be a really good episode for them because for obvious reasons we’re going to be talking about Buffett today.

LaMonica: Yeah. And for people that don’t know recently, Buffett announced that he would be stepping down as the CEO of Berkshire Hathaway at the end of the year. And so we’re going to look at a couple of different things. We’re going to look at what this means for Berkshire. And we’re going to look at Buffett’s legacy a little bit. And we’re going to talk about the things that we think investors get wrong.

Jayamanne: So lot’s about Buffett today?

LaMonica: Yes. A buffet of Buffett. That’s my dad joke. Let’s just shake your head.

Jayamanne: Let’s just get on with the episode.

LaMonica: Why don’t we start with Buffett’s departure and what that means for Berkshire. And we’re going to turn to our analysts for some insights here. They obviously follow the company closely. They’re good people to listen to with this. And anytime a CEO departs, it means a shift for a company. And in Buffett’s case, he’s 94. So this can’t exactly be surprising.

Jayamanne: But it was a bit of a surprise because the only people Buffett told were two of the Berkshire directors and his children. And one person he didn’t tell who happened to be sitting next to him during the announcement was Greg Abel, who will be taking over as CEO.

LaMonica: Which is crazy.

Jayamanne: It is crazy.

LaMonica: Strange way to find out.

Jayamanne: Yes. So why don’t we go through some of the questions our analysts are thinking about. And I think the first one is pretty appropriate for you, Mark.

LaMonica: Okay. That is true. So the question is, will Berkshire pay a dividend? So Buffett was a strong proponent of Berkshire not paying a dividend because he thought that he would do a better job at allocating capital than giving that capital back to shareholders as a dividend.

Jayamanne: And our analyst, Greg Warren, really never bought into this rationale, but he does think that paying a dividend would be a good way to retain shareholders who might consider selling with Buffett going out the door. So what do you think about this whole dividend, issue, Mark?

LaMonica: Well, I’m an income investor. I’ve talked about that a lot on here. So I wouldn’t buy a company that doesn’t pay a dividend. And I think this point that Buffett always makes, and he’s known as the greatest allocator of capital in history. And so that is, of course, over the course of his entire career. But I think the issue is that Berkshire has gotten bigger and bigger and bigger. And of course, that makes it harder for him to or anybody to efficiently allocate capital. So for a long time, and particularly recently, Berkshire has held a ton of cash. So personally, I can’t figure out how they can invest all that profitably. I don’t think they can figure it out or they wouldn’t be building up cash over time. So at a certain point, if you have enough cash or the company’s protected, I think you should give some back.

Jayamanne: So one point we made earlier is also something that our analysts touched on. Should investors in Berkshire be worried? And after acknowledging that this is a huge change, our analysts don’t seem to think so. And part of this is the way that Berkshire is set up. It’s a collection of private businesses, but it’s also very decentralized. So the people running those businesses do have a lot of autonomy. So hopefully, it’s pretty much just business as usual.

LaMonica: Hopefully. It’ll be interesting to see if there’s a big Buffett premium. Shares obviously can trade at premiums for certain reasons. I think it’ll just be interesting to see if slowly over time that goes away. But anyway, we’re going to turn to Buffett’s legacy. And I think we do need to acknowledge that generally your legacy changes and develops more over time. He obviously recently stepped down, or recently announced he was going to step down, but is still the CEO. But we’re going to give it a shot, Shani. So one of the things that I recently wrote about is that investors like to cherry pick lessons from people, and then they put them together into some sort of investment approach. And in some cases, it turns out to be a pretty incoherent strategy.

Jayamanne: Do you think that Morningstar has a LaMonica premium? Like when you retire? Hopefully, you only leave when you retire. But do you think that...

LaMonica: Is this another reference to my death?

Jayamanne: No. I mean, there is another option you could just go to another company.

LaMonica: I think you would be very happy about that.

Jayamanne: Do you think there’s a LaMonica premium?

LaMonica: No.

Jayamanne: Okay.

LaMonica: If anything probably a discount.

Jayamanne: All right. So I think the example that he used was people who looked at John Bogel’s advocacy for passive investing and decided that they’re just buy passive investments. But they ignore the part about investing passively and instead decide to time the market with the passive investments and use Buffett to justify that move with his valuation and counter cyclical approach.

LaMonica: Yep. And these are the investors. We’ve heard a lot about it recently with the dip in April and everything that’s going on. They like this quote that says, you know, be greedy when others are fearful and then they say valuation is why they are making these constant moves in their portfolio. And generally what they’re doing is they’re responding to price changes and fairly small price changes and they just declare shares are on sale and there they go. And this is kind of this, as I said, this classic buy the dip approach that we’ve seen happen so much, particularly in April.

Jayamanne: So why don’t we get into some of Buffett’s lessons? So Buffett started his career in 1951 and…

LaMonica: It’s not a lie, Shani.

Jayamanne: Close. And over a 74 year career where he spent much of the second half in the media spotlight, there are lots of things that Buffett has said about investing. So this is fertile ground for investors to pick and choose lots of things to justify lots of different actions.

LaMonica: Exactly. And so we’ll look at a couple of these. And I think the first thing I wanted to address is the lesson that many people take from Buffett. And I think that’s it. Building wealth and investing is this all consuming activity. And the reason, of course, they think that is because for Buffett, it is all consuming activity.

Jayamanne: And famously Buffett has been obsessed with compounding his wealth from when he was 10 years old and started investing. He worked all sorts of odd jobs to get money so that he could invest. And he didn’t want to spend any money, so he would have to have more to invest. So that’s where the $300,000 haircut came in. And his reluctance to buy a house because this was all money that he could have alternatively invested.

LaMonica: Yeah, and starting at 10. And when you’re 94, that’s a long time ago.

Jayamanne: It is.

William Ton: I’m Will producer of Investing Compass and here are this week’s must reads on Morningstar.com.au. We always have market skeptics, including us at times, declare that there’s a bear market on the horizon. However, we’ve had significant economic and social disruption in the form of a pandemic and a volatility and uncertainty of President Trump. Still, the market continues to rise. In Mark’s latest column, he has explored the reasons for why the market continues to rise and whether the trend will continue. Stock market participants can broadly be split into two camps, investors and speculators.

In the next edition of Bookworm, Joseph shows how Warren Buffett’s teacher Benjamin Graham distinguishes between the two in a single paragraph of text and shares his view on a five word approach to markets that Graham recommends. Shani’s latest edition of her column looked at a tax targeting super account over $3 million. In this edition, she broadens the lens. Australia has had a national financial capability strategy, but it is inactive. She runs through the dire impacts that putting financial literacy on the back burner can have on Aussies. She writes an open letter to the newly re-elected government, urging an immediate focus on improving financial literacy.

60% of Aussies report not feeling confident about managing their own retirement. The relationship between you and your super fund might end up being one of the longest relationships you’ll ever have. Just like in life, you’re at liberty to chop and change as you go. But much like picking a good partner, who you start with matters. In this week’s Young and Invested, Sim explores some of the things you should consider when picking between super funds. These articles and more, they’re now in the show notes and let’s get back to Mark and Shani.

LaMonica: What were you doing at 10?

Jayamanne: Reading Harry Potter.

LaMonica: Were you investing and compounding your wealth?

Jayamanne: No.

LaMonica: Interestingly enough, that’s the same thing you’re doing now. So much like Buffett, you’re doing the same thing.

Jayamanne: Nothing has changed.

LaMonica: And we talked about this before and I’m not going to get too into Buffett’s personal life, but seemingly in that book, Snowball, he was so consumed with investing that he basically checked out of his marriage, checked out of raising his kids because he was just spending all of his time investing. And we’ll leave the story, although you like telling it.

Jayamanne: I think we’ve told the story on the podcast before.

LaMonica: And we didn’t get fired. But anyway, we’ll leave that out.

Jayamanne: We shouldn’t tempt fate. So I think even more damaging is that people that aren’t that interested in spending all their time analyzing shares think investing isn’t for them. So they don’t invest.

LaMonica: And we think there’s a better lesson that you can take from his all consuming obsession with investing. And I don’t think Buffett has ever been great at articulating this, but Charlie Munger, who of course was his longtime business partner, was a bit better. And he said, and I’m going to quote him, Munger said, neither of us wanted to be lowly subordinate in some dominant hierarchy that told us what to do and what to think. That’s why we got the money primarily because we wanted independence.

Jayamanne: And that’s definitely along the lines of why Mark and I invest and what we want in our own lives and what we advocate for. And it’s really just working towards financial independence so that you have the freedom to do more of what you want.

LaMonica: And the thing with Buffett, the irony is he wanted to invest and compound his money because what he was interested in was investing and compounding his money. So, you know, he got financial freedom and that allowed him to keep investing. That doesn’t mean it has to be for you. What he really didn’t want to do is he didn’t want to work at an investment firm. So when he first started his career, he worked at an investment firm. He didn’t want that. He didn’t want to work in New York. He didn’t want to have anyone tell him what to do. And he just wanted to invest on his own. So worked out very well. Now, you know, he famously just sits in his office and reads annual reports all day.

Jayamanne: So the lesson is you really don’t have to be obsessed with investing. You have to strive to keep giving yourself more independence to live the life that you want.

LaMonica: You can be obsessed with investing podcasts, though.

Jayamanne: You can, ours.

LaMonica: Exactly.

Jayamanne: And investing books.

LaMonica: Yes.

Jayamanne: Soon.

LaMonica: All right, we’re going to turn to my pet peeve now, Shani. I know this is always your favorite part of every podcast, but only one of them. Not all of them. So as we said earlier, Buffett has had a long career and he said all these different things about investing. And because, of course, he’s Buffett, he’s the most famous investor in the world. There is a benefit, of course, attaching any sort of action or product to Buffett’s name. And people and companies have done that a lot. And I’ve got a list of things, but I will say it’s only private tip of the iceberg of how Buffett’s been used.

Jayamanne: Okay. Well, let’s go through the list.

LaMonica: Okay. I’m going to keep it short, though, Shani. So we have 50s and 60s Buffett. So for people that know about his life, he was a deep value investor then. So he was in the kind of pure Ben Graham school of thought there. So investors, of course, use that to justify taking a deep value approach. But then there’s the more modern Buffett. And so that’s after he met Charlie Munger, which is, I guess, a quality or growth at a reasonable price investing approach. So of course, people latch on and use Buffett for that. Passive investors, even though Buffett is not a passive investor, passive investors use Buffett to justify passive investing because he made a statement that a lot of people should just put their money in the S&P 500 and not do anything else. Buy and hold investors like Buffett because he said his favorite holding period was forever.

But market timers also like Buffett because they use that whole statement about greedy when others are fearful to justify moving in and out of the market at different times. People say that Buffett runs a concentrated risky portfolio because they look at his public shares. Then other people say that he’s a conservative investor because they look at all the private companies that Berkshire owns and the mountain of cash that they have. So that’s really, really diversified portfolio. Buffett hates dividends because he never paid them. But then Buffett likes dividends because he buys companies that pay dividends and wants that cash flow to go to him. So the point is that he’s used to justify all of these different things, which is where we get into that incoherent strategy we talked about before. I’m going to breathe now.

Jayamanne: Okay. Well, that was a lot. Thank you for that. I think the point is that using Buffett as an endorsement of a certain approach does carry weight and you can use Buffett to endorse all sorts of different moves. And if it isn’t done in a disciplined way, it’s the same as having no strategy at all.

LaMonica: Right. And we talk a lot about a strategy and whatever your strategy is, and we think there’s a lot of different ways you can be a great investor, strategy is important because it brings structure to decision making. So that reduces the mistakes that investors make. And of course, that leads to better outcomes.

Jayamanne: And one of the problems with Buffett is that his investing approach has evolved over time, which makes perfect sense because the world and markets have changed over his 74 year career.

LaMonica: And I think more than like the types of investments and investing it’s really those principles that he’s maintained over time that really underpin his investment philosophy. And this matters no matter what way you invest. So some of them are a focus on valuation, investing with a margin of safety because he acknowledges that you don’t know what the future holds and that you can’t really value anything precisely.

Jayamanne: And I think perhaps more than anything Buffett shows the power of time. And our colleague James Gruber perhaps put it best in a story that he took from Morgan Housel, who is the author of The Psychology of Money. And the question is, what would Buffett be like if he started investing in his 30s and he retired in his 60s?

LaMonica: Yeah, which is a little more realistic than starting investing at 10 and then retiring when you’re 94.

Jayamanne: Yes. So if Buffett started investing at the age of 30 and he had $25,000 and earned incredible returns, he has earned, which is 22% a year. How much money would he end up with?

LaMonica: And the answer is $11.9 million. So that’s obviously pretty good. I don’t think there’s a lot of people that would turn down $11.9 million. But if we look at what he’s actually amassed, that is 99.9% less than his wealth.

Jayamanne: So the best lesson from Buffett is that whoever you are and however much money you have invested, the best time to invest more is today.

LaMonica: Exactly. Good, good point to end this. So just remember that what matters most is coming up with a coherent and personalized investment strategy that’s based on your temperament, your goals and your personal circumstances. We can’t all be Warren Buffett, but we can all work for more financial independence.

Thank you guys for listening. If you made it to the end of the YouTube video, you definitely should subscribe.

Jayamanne: That’s a good request.

LaMonica: Yeah, here we go. So thank you guys. We appreciate it.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)