Friday, May 6, 2016

Hero Worship in Investing

Men almost always walk in paths beaten by others and act by imitation. Though he cannot hold strictly to the ways of others or match the ability of those he imitates, a prudent man must always tread the path of great men and imitate those who have excelled, so that even if his ability does not match theirs, at least he will achieve some semblance of it. -- Machiavelli, The Prince
Every discipline has its hall of heroes. Physicists hold up Einstein, Newton, and Hawking in great esteem. Artists revere the works of Picasso, Michelangelo, and Da Vinci. And basketball players grow up imitating Jordan, Bird, and Magic on the playground.

It's only natural, then, that as investors we similarly look up to those who've been successful at our craft and seek to learn from them. Study the masters long enough, the thinking goes, and perhaps we might, as Machiavelli put it, "achieve some semblance" of their success.

On the other hand, we could be setting ourselves up for massive disappointment if our investment results fail to measure up to our heroes' returns.
Shh...he's about to drop a new quote

A fine line to walk

Last weekend at the Berkshire Hathaway conference in Omaha, I spent a lot of time thinking about this topic, amid the hordes of my fellow Buffett and Munger devotees. What better place to do it?

The first thing to recognize is that there's nothing truly original in investing. Warren Buffett looked up to Ben Graham, who studied John Maynard Keynes, who was influenced by Adam Smith, and so on back to the Garden of Eden.

As such, there's no shame in having heroes and trying to dissect what produced their success, because it's through this process that we discover our own style.

To illustrate, in a recent Freakonomics podcast, Malcolm Gladwell - author of Outliers, David & Goliath, Blink, etc. - discussed how he came to find his own voice as a writer:
I know with my own writing, I began as a writer trying to write like William F. Buckley, my childhood hero. And if you read my early writing, it was insanely derivative. All I was doing was looking for models and copying them. And out of years of doing that emerges my own style. When I was 12, I didn’t write like I write now. I spent 10 years - 15 years – kind of absorbing the lessons of others and out of that came something reasonably creative. So I would say, to the contrary, when you absorb on a deep level the kind of lessons of your musical elders and betters, in many cases, that’s what makes the next step, the next creative step, possible. 
By studying the lessons of successful investors and thinking critically about those lessons, we reduce the likelihood of having to re-learn their mistakes and can more quickly recognize favorable patterns. This in turn frees up our minds to integrate our own experiences and talents and develop new variations.

Highway to the danger zone

Where we can get ourselves into trouble with hero worship is when we don't think critically and develop our own approach.

If your aim is to be the next Graham, Buffett, Munger, Lynch, etc. you're setting yourself up for disappointment. Their respective successes are a product of their own circumstances, experiences, natural gifts, and luck that we couldn't hope to replicate even if we tried.

  • The "net net" value opportunities that existed for Ben Graham in the 1930s, for example, are few and far between today. 
  • Buffett and Munger - two of the greatest finance minds the world has ever known - not only met each other by chance through a mutual acquaintance and forged a 50 year partnership, but also combined the value lessons of Graham and the quality approach of Philip Fisher to forge a new style of investing. 
  • Peter Lynch made a killing buying consumer stocks in the 1980s and 90s when the Baby Boomer generation was in its prime earnings years.

Right person, right place, right time. Impossible to replicate.

Take comfort

There's a pretty good chance that the next generation of investors won't make annual pilgrimages to your hometown from across the globe as they do with Buffett in Omaha today. This is not a tragedy.

By properly studying the masters of investing and reading widely, however, we can form our own styles that best suit our own interests and temperaments. This will put us in a much better position to achieve satisfactory returns than we otherwise would have. That's not a bad deal.

Stay patient, stay focused.

Best,

Todd


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