A letter a day!

A letter a day.

Letter 11#1964

Key learnings

1.The first job of any investment management organization is to analyze its own techniques and results before pronouncing judgment on the managerial abilities and performance of the other corporate entities. For the fund managers of marquee mutual funds unable to beat the index, Buffett states the following reasons

“I think it is much more the product of: (1) group decisions – my perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size with all parties really participating in decisions; (2) a desire to conform to the
policies and (to an extent) the portfolios of other large well-regarded organizations; (3) an institutional
framework whereby average is “safe” and the personal rewards for independent action are in no way
commensurate with the general risk attached to such action; (4) an adherence to certain diversification practices which are irrational; and finally and importantly, (5) inertia.”

Further on importance of evaluating the performance of fund managers he states that

“People who watch their weight, golf scores, and fuel bills seem to shun quantitative evaluation of their investment management skills although it involves the most important client in the world – themselves. While it may be of academic interest to evaluate the management accomplishments of Massachusetts Investors Trust or Lehman Corporation, it is of enormous dollars-and-cents importance to evaluate objectively the accomplishments of the fellow who is actually handling your money – even if it’s you.”

2.Truly conservative actions arise from intelligent hypothesis , correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy.

3. A public opinion is no substitute for your own thought and conviction. If the facts for investment are ascertainable and clear, whther others agree or disagree, keep investing in a conservative manner.

4.One rational way to evaluate your performance is to study them in the declining markets.

5. If a 20% or 30% drop in the market value of your equity holdings is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet – Harry Truman – “If you can’t stand the heat, stay out of the kitchen. It is preferable, of course, to consider the problem before you enter the “kitchen.”

5.Addition of new category in the investment division “ Generals-relatively undervalued” this category consists of securities selling at prices relatively cheap compared to securities of the same general quality.

4. Buffett shares how investors are worried about taxes due to portfolio change. He advices his investors on how to save taxes

“There are only three ways to avoid ultimately paying the tax: (1) die with the asset – and that’s a little too ultimate for me even the zealots would have to view this “cure” with mixed emotions; (2) give the asset away – you certainly don’t pay any taxes this way, but of course you don’t pay for any groceries, rent, etc., either; and (3) lose back the gain if your mouth waters at this tax-saver, I have to admire you -you certainly have the courage of your convictions.”