I spent a good part of the weekend reading the 2009 Berkshire Hathaway shareholder letter. The letter is a window into the minds of two great investors — Warren Buffet and Charlie Munger. The letter is deceptively simple, riddled with a tone that often tricks the reader into a sense that Buffet’s and Munger’s results can be duplicated. The truth, however, is that these two men have a view of the world that is seasoned by many successful (and unsuccessful) years in business and built on a rational framework formed by their positive and negative experiences. The letter also outlines a few simple, yet extremely helpful rules for investing:
Invest in what you know and understand. “Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.”
Avoid leverage. “We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.”
Think of investing as a partnership in business. “We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur. If Charlie and I were to go into a small venture with a few partners, we would seek individuals in sync with us, knowing that common goals and a shared destiny make for a happy business ‘marriage’ between owners and managers.”
Commentators refer to the current economic cycle as “The Great Recession.” Very few writers, however, are brave enough to use the word “depression,” to describe the financial malaise that has blanketed the world economy. Judge Richard Posner bucks this trend. In a recent post on The Atlantic, he explored the psychological effects of the “depression.” Judge Posner observed “…the root error of the economists is failing to consider the emotional consequences of an economic downturn and how those consequences in turn generate both direct economic effects and indirect economic effects via politics.” Judge Posner cites the “tea party” movement as one of the indirect political effects borne of the depression.
The effect of emotion continues to be the blind side of academic and professional economics. The human element, be it irrational exuberance, the tea party rage, or politically leveraged hope, plays into the economic experience. The more difficult task is examining where these emotional side effects take the nation as a whole. Currently, we are saddled with the tea party movement that rages against the growth of the state and federal government (without ever thinking about what the government has done for them e.g. public colleges, city and state jobs, fire and police services, etc.)
While the tea party movement continues to attract fringe elements through fear mongering by highlighting the threat of socialism (and therefore, red communism, thank you for scaring my parents’ generation back under their school desks), I agree with Judge Posner that the movement poses no major threat. The real threats arise from a basic lack of public understanding of the fiscal crisis that occurred, the response by the government, and the long-term constraints on the future of our economy. A danger exists that the American economy will find itself stalled for a number of years. Without fiscal sacrifice (i.e. higher taxes, less government services or jobs, etc.), we may find ourselves adrift in the dead calm.
This year, I traveled a great deal. I spent a number of weekends in various American cities, a few weeks in Australia, and a month on the road in the States. I am headed to Mauritius in October. Until recently, I considered myself a bit of a homebody, opting to explore the local highlights over those beyond the reach of my travel competence.
I also traveled a great deal for work, but had never embraced a personal travel lifestyle beyond the local delights of Chicago and LA. Previously, I would have chosen a weekend away in Joshua Tree, rather than hop on a plane to another city in the West. While the cost benefit analysis was nearly equal for both trips, I would opt for the comfort of the relatively predictable and well known. International travel was a mysterious event, only appropriate for those people with fashionable accents or well-tread passports.
I was a travel neophyte, with the unfortunate thought that exploring the world was something “I would do in the future.” I had not left American soil for nearly ten years, hanging onto the idea that I could do it “someday.” When I abandoned this idea and finally started to travel, I realized the unique benefits. Here are a few of my observations.
Travel is good for the mind. In my day-to-day existence, I become comfortable with how the world around me works. Whether I am working in the office, having dinner at a local restaurant, or practicing other daily habits, I am not exploring new places. The scary thing is that after prolonged exposure to the grind, I often develop the thought that “this might be all there is in life.” Travel is a perfect remedy. Jumping on a plane and going to another country or driving to a national park can help cure the idea that life is mundane. Experiencing a new place can be a recharge for the brain, opening my mind to new experiences and different stimuli.
New ideas come from being in different places. The idea of the year for me, came in the dining room of a bed & breakfast in Melbourne, Australia. My fiance and I were talking with a couple from Brisbane who had come to Melbourne for a weekend away to look at real estate and shop for antiques. They were both in their late forties. He was a barrister. She was a solicitor. We are both attorneys here in the States, so we immediately connected.
We bonded over the personal and social investment other people in our lives had in us working as attorneys. All four of us agreed on the limits of the profession from both a financial and creative point of view. We also agreed that it became increasingly difficult for the people in our lives to understand why lawyers would leave the profession. The couple, who had struggled with the same issue, offered the perfect piece of advice: people need others to fit into a certain category; therefore why not just accept the moniker of attorney and do what ever pleases you, rather than trying to convince those around you of the need to change your profession.
The insight was so simple, (with a zen like quality since they were Buddhists), that we all laughed at the time and effort we had spent trying to convince others that we “were making the right decision” by contemplating career changes. By simply allowing people to see them as “attorneys” they had freed themselves from the debate and fashioned careers far beyond the confines of the law. This couple had found richness beyond title and allowed the people around them to see them as they needed. We could do the same. The lesson, while unrelated to the trip itself, was a direct result of our choice to travel.
My preconceived ideas of the world are silly. After a few days in Australia, I realized that I had been living in a cocoon. My perspectives as an American traveler were pretty dim, in comparison to the world around me. Inadvertently, I had become the person I feared as a young man. I thought that the world revolved around the American experience.
As it turns out, I had been living in the American experience for too long. I found a new perspective. In order to continue a passion for life-long learning, I would need to abandon the view that my daily existence in states would prepare me for establishing a relevant world view. It was necessary to become a student and citizen of the world. I learned that while I should bring many American values to my intellectual life, my American experience was not a reliable prism through which to see the rest of the world.
P.S. Thanks to Ben Canocha’s piece “Why I Travel” at http://ben.casnocha.com/ for spurring this piece from draft to final format.