As the old joke goes, Saint-Pierre had bad news for an oil prospector who appeared at the pearly gates of heaven: “You are qualified for admission,” Saint-Pierre said, “but, as you can See it, the section for oil prospectors is packed, there’s no way you can fit in.
After a while, the prospector asked to say only four words to the current occupants. It seemed harmless to Saint-Pierre, so the prospector shouted, “Oil found in hell!” Immediately, most of the oil prospectors rushed to the lower regions. Impressed, Saint-Pierre invited the prospector to move in and make himself comfortable. The prospector paused, saying, âNo, I think I’m going with the others. There may be some truth to this rumor after all.
Let this be a warning to CEOs and shareholders. Avoiding rumors and self-delusion has been one of the key rules of Warren Buffett, rooted in Berkshire Hathaway BRK.A,
shareholders for years. We all need to hear such lessons over and over because the temptations of reality are always at war with our ideals.
Serial frenzies in meme stocks like GameStop GME,
and crypto-currencies like the dogecoin DOGEUSD,
make it a good time to compare what investors should be doing with what many seem to be doing. Comparing Berkshire and crypto loyalists is appropriate given their outsized following: around 30 million Americans have traded cryptocurrency and 30 million are expected to air this year’s virtual Berkshire annual meeting on May 1.
Buffett defines Berkshire as a company with an attitude of partnership. The value of each investor’s stake will increase (or decrease) in stages. This contrasts with the number of them who seem to see companies with meme stocks or most of the crypto space. There, the culture is that of a casino, where a few can reap unimaginable riches while the overwhelming majority lose their shirts.
Additionally, Berkshire culture emphasizes patience and permanence. The company ideally holds investments and businesses forever and encourages its shareholders to hold it indefinitely, through the thickets. In the world of meme stocks and cryptocurrency trading, a strong standard favors the immediate withdrawal of payday profits.
Similarly, the Berkshire Ideal recognizes that it takes decades to build up capital, and that accumulating wealth involves skill and time – as well as a little luck. In contrast, there are those who strive to get rich quickly – and effortlessly. Today, some players in the investment market even seem to believe that everyone should be rich, as a right.
The ideal Berkshire investor focuses on business, operating strategies, products or services and competitive advantages. For many in the crypto-meme world, what matters is the hype and adrenaline, not if there is a business plan, let alone operations or customers. The Berkshire model is skeptical of fads, fads and trends, while dogecoin and other cryptos thrive on the latter.
This leads to the cardinal principle of the Berkshire canon: the circle of competence. He prescribes investing only in what you can understand with moderate effort. That at least rules out some meme stocks and many IPO mergers that are currently in fashion. For most people, cryptocurrencies are outside of their skill set. Indeed, a large number of investors today seem to be outside their circle of competence.
For investments in its circle of expertise, Berkshire affiliates appreciate that prices fluctuate widely and that no one can predict such volatility. “Mr. Market” is a brooding maniac, always ready to bargain with you at the going price, sometimes high, sometimes depressed.
Coming both from the limits of personal skill and the vagaries of the markets, the Berkshire playbook demands a large margin between the price paid and the value received. In Berkshire’s value-driven investing lexicon, this is called the “safety margin,” and Buffett has long said that these are the three most important words when it comes to investing.
Finally, in addition to avoiding rumors and self-delusion, the Berkshire playbook says to beware of other people’s delusions. Berkshire Vice President Charlie Munger tells a story about fishing for musks at Leech Lake in Minnesota. A visiting angler asked the local guide, “Are there muskellunge caught in this lake?”
âMore musks are caught in this lake than in any other lake in Minnesota,â the guide replied. “This lake is famous for its musks.”
“How long have you been fishing here?”
âNineteen years old,â the guide said.
“And how many musks have you caught?”
So the next time someone tells you about the untold riches of day trading, ask them, “How much money have you put in the bank?”
Lawrence A. Cunningham is a professor at George Washington University, a long-time shareholder of Berkshire Hathaway, and editor, since 1997, of Warren Buffett’s Essays: Lessons for American Businesses. For updates, including an invitation to his exclusive webinar at the 2021 Berkshire Hathaway Annual Meeting, register here.
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