Weekend reading: Buffett and Munger strut their stuff yet again

by The Investor on August 24, 2013

Good reads from around the Web.

I know some people get fed up with the endless praise heaped upon billionaire octogenarian Warren Buffett.

And there’s clearly a bit of a contradiction in a blog that champions passive investing giving props to a super stock picker.

But Buffett bashers better skip down to today’s links, because I am about to salute the man again – and his sidekick Charlie Munger.

In my defense, as regular readers will know I do actively invest for my sins (it’s my co-blogger The Accumulator who is 100% pure passive). And if you’re going to try the near-impossible, it’s best to study the greatest of magicians. (Or the best illusionists, if you prefer).

Secondly, Buffett is so consistently logical and far-sighted, I doubt he’ll ever be bested as the exception that proves the efficient market rules.

Buffett: Saviour of pensioners

This week Buffett was in the news after it was revealed that The Washington Post’s pension fund is $1 billion in surplus.

That’s a far healthier state than most big companies, and the fund’s robustness lies in the actions of former board member Warren Buffett, who laid out a rescue plan in the mid-1970s.

I suggest you read his ancient letter to CEO Katharine Graham (on Scribd as a PDF) for a refresher both on how pensions work, and also on Buffett’s thinking.

Buffett himself has said many times that most investors should use index funds. Larry Swedroe even cheekily exploited this for his book championing passive investing: Think, Act, and Invest Like Warren Buffett.

In the Graham memo on pensions – written in the mid-1970s, remember, when active investing was at its height and Bogle has barely got started with index funds – Buffett warned:

“If above-average performance is to be their yard stick, the vast majority of investment managers must fail.

Will a few succeed — due to either to chance or skill? Of course.

For some intermediate period of years a few are bound to look better than average due to chance — just as would be the case if 1,000 ‘coin managers’ engaged in a coin-flipping contest. There would be some ‘winners’ over a five or 10-flip measurement cycle.

(After five flips, you would expect to have 31 with uniformly ‘successful’ records — who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)”

I love that last bit. Buffett has always been a weird mix of humble and arrogant.

Munger did it in 2008

One criticism often made of Buffett – which may well be right, though I doubt it personally – is that he just happened to pick a style that worked for 50 years, and this lucky break made his fortune.

One reason I don’t agree with this theory is that Buffett changed his style several times over his career.

Another reason I don’t give it too much weight is that value investing still works for the few who can genuinely do it.

Indeed, in the US the SEC recently investigated a Californian legal publisher called The Daily Journal on the grounds that it was secretly a hedge fund.

The reason? The Daily Journal has two times as many assets in equities than it does in the usual assets you’d expect to see at a publisher.

Well, it turns out that another wrinkly investor has been at it, and this time it was none other than Buffett’s sidekick, Charlie Munger.

Munger is a director at The Daily Journal, for convoluted reasons buried in an old investment he made. The important bit for today, as Bloomberg reports, is that Munger has tripled the value of the publisher through money he deployed into stocks during the financial crisis:

“Two of the company’s directors, Charles Munger and J.P. Guerin, selected the securities which, given their experience and knowledge of investing, required very little time,” Daily Journal said in the letter.

“Also, there have been only purchases and no sales, so no time has been spent trading or ‘managing’ these marketable securities.”

They don’t make them like Buffett and Munger anymore.

Or perhaps they do – but we’ll have to wait another 45 years to find out.

From the blogs

Making good use of the things that we find…

Passive investing

Waiting to invest doesn’t make things easier – Oblivious Investor
Active investors have to learn their mistake themselves – The Big Picture
Factor investing part one and part two – Rick Ferri

Active investing

A field guide to market corrections – The Reformed Broker
Why a more diversified portfolio is less work – UK Value Investor
It’s easier to change a name than a balance sheet – The Value Perspective
It’s hard for managers to buy higher, and sell lower – The Aleph blog
Two mechanical strategies tried and tested over two years – mcturra2000

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

Harry Dent and the Chamber of Poor Returns – Swedroe/MoneyWatch
More stress tests for a [US] ‘bucket’ retirement portfolio – Morningstar

Active investing

Cheap emerging markets attract bargain hunters – Index Universe
Seen Morningstar’s ‘fair value’ [US] market indicator? – Morningstar
CAPE Fear: Siegel strikes back against PE10 – FT
Hedge funds are massively underperforming in 2013 – MoneyBeat
Does investing in gold have a future? [Search result] – FT