In the words of Charlie’s business partner Warren Buffet:
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
By contrast, the growth investor requires a somewhat different personality – generally an optimist by nature, they make decisions where the difficult to track earnings growth number is their core focus, believing that even an expensive price to pay is justified when earnings growth will be significantly higher than average. Typically, they will arrive at a low dividend yield, high PE, high growth portfolio. At the extremes, this is characterized by technology shares and other disruptive industries such as biotech or electric driver-less cars. Mentally, they need to be risk-taking rather than conservative, they need to ride the winners rather than sell down, and they also tend to trade more often, contrary to both Value and Quality investors. Their pitfalls? Overconfidence in their ability to pick the winners, not recognizing that there is often a limit to what price can be paid for a share.
Charlie also explains how it’s not all about price paid:
"Over the long term, it's hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you're not going to make much different than a six percent return - even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result."
These examples illustrate that while all fund managers may see the world differently and require different ‘DNA’ to make effective
decisions, they are in fact playing the same game and so the overlap between these examples is high (just refer back to the quotes,
where the same individuals have made compelling arguments for value, growth and quality investing!).
We incorporate this subjective assessment in the funds we research so that we can gauge firstly if the individual is up to the task at hand given their chosen approach to investing, and so that we can understand their decision making dynamic and how it relates to what we employ them to do as investors.
Two final quotes from Charlie about manager behaviour:
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.”
Temperament is an evaluation we make across individuals and their respective teams, quite often extending to the entire organization.
"Envy, huge self-pity, extreme ideology, intense loyalty to a particular identity – you've just taken your brain and started to pound on it
with a hammer."
These highlight that having a keen sense of a manager’s personality and decision culture – how they think - is a critical outcome of our fund research work.
data provided by Reuters and Datastream