Buffett & Munger

Buffett:   “The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient”.

Munger:  “It is remarkable how much long term advantage people like us (Buffett and Munger of Berkshire Hathaway) have gotten by trying to be consistently not stupid, instead of trying to be very intelligent”.

Patience and discipline are important attributes for investors.  It is no coincidence that the same attributes apply for health and well being — friendships/relationships.  It isn’t uncommon for the academics or highly intelligent to struggle with all three.  Investment, relationships, health and wellbeing.  That’s why at school reunions the ex dux are seldom “rich and wealthy”, “happy and healthy”.  Absolute – no, but common, yes.

So what?  Well the answer lies in why people’s behaviour has such influence over wealth accumulation and wealth protection.  It is the major issue that I, as a fee based financial adviser, need to struggle with.  That is my clients’ reaction to media, markets, and product mumbo jumbo — and males are worse than females.

As at year end 2013 – for the period 1926 through to 2013 inclusive.  US Stocks.

                   Large company common stocks                         10.1%

                   Small company common stocks                         12.3%

                   Long-term high quality corporate bonds             6.0%

                   Cost of living (inflation)                                            3.0% (similar to NZ)

If we net the inflation off the nominal returns that computation would suggest the following net returns:

                   Large company common stocks                       7.1%

                   Small company common stocks                       9.3%

                   Long-term high quality corporate bonds          3.0%

The ownership of companies (stocks) provided a compound return (net of inflation) between two and three times the return realised from lending to a broad portfolio of quality companies (bonds).

Guess what people want to do to their KiwiSaver asset allocation?  You guessed it – bonds and cash.
 

As the equity markets of US (49% world capital market) reach record highs, Americans are kicking themselves. How did they miss such dramatic growth?  They listened to the wrong person, that’s why.

As the equity markets of NZ (NZX 50) reaches record highs, people still struggle with journalism’s twin bogeys of risk and volatility.  But temporary decline and permanent loss are two very distinctly different things.  Equity markets are volatile – no question, but why they are volatile is better answered by the assertions that client behaviour is a constant concern.  Markets adjust with economics and social cataclysms but human nature means that at the either end of the scale volatility is exacerbated due to over reaction – euphoria or anxiety.

But permanent loss (risk), as the indices in the US and NZ in new high ground suggest , has yet to occur to the patient, disciplined lifetime investor.

When accumulation of wealth builders 30 years plus and “draw down” for wealth receivers can be 30 years plus, why are we even having this exposé?  Never has a well diversified portfolio of local and international equities experienced permanent loss (unlike debentures and synthetic cash products) over a twenty year time frame – let alone a 30 year time frame.

There is not likely to be another pair of investment gurus quite like Buffet and Munger – ever again.  But while we have them, we should listen to them – especially in their areas of expertise – investment.  They are both quirky and often bizarre when it comes to social etiquette – but isn’t that the case with most brilliant people?   It’s their investment expertise and legacy of philanthropy which will live on for years to come.  The message – patience and discipline.