Legendary investor, now 80, looks back with long-view wisdom on investing, living, and giving.
“I have something he will never have... enough.”
Old epigram from nineteenth-century Great Britain:
Some men wrest a living from nature and with their hands; this is called work.
Some men wrest a living from those who wrest a living from nature and with their hands; this is called trade.
Some men wrest a living from those who wrest a living from those who wrest a living from nature and with their hands; this is called finance.
The wonderful magic of compounding returns has been overwhelmed by the powerful tyranny of compounding costs.
Investing is all about the long-term ownership of businesses. Speculation is precisely the opposite. It is all about the short-term trading, not long-term holding, of financial instruments—pieces of paper, not businesses—largely focused on the belief that their prices, as distinct from their intrinsic values, will rise.
Keynes defined investment - he called it “enterprise” - as “forecasting the prospective yield of an asset over its entire life.” He defined speculation as “the activity of forecasting the market.”
In the very long run, all of the returns earned by stocks are created not by speculation but by investment.
The message is clear: In the long run, stock returns have depended almost entirely on the reality of the relatively predictable investment returns earned by business.
The totally unpredictable perceptions of market participants, reflected in momentary stock prices and in the changing multiples that drive speculative returns, essentially have counted for nothing.
It is economics that controls long-term equity returns; the impact of emotions, so dominant in the short term, dissolves.
Therefore, as I wrote in my Little Book of Common Sense Investing, “the stock market is a giant distraction from the business of investing.”
In the real market of business, real companies spend real money and hire real people and invest in real capital equipment, to make real products and provide real services.
If they compete with real skill, they earn real profits, out of which they pay real dividends.
But to do so demands real strategy, real determination, and real capital expenditures, to say nothing of requiring real innovation and real foresight.
In the expectations market, by contrast, prices are set, not by the realities of business just described, but by the expectations of investors.
Crucially, these expectations are set by numbers, numbers that are to an important extent the product of what our managements want them to be, too easily managed, manipulated, and defined in multiple ways.
When the perception—interim stock prices—vastly departs from the reality—intrinsic corporate values—the gap can be reconciled only in favor of reality.
It is simply impossible to raise reality to perception in any short time frame; the tough and demanding task of building corporate value in a competitive world is a long-term proposition.
Still, whenever stock prices lose touch with corporate values and bubbles begin to form, too many market participants seem to anticipate that values will soon rise to justify prices, instead of the other way around.
The brilliant 2001 memoir, On Money and Markets, by economist and investor Henry Kaufman, one of the wisest of all the wise men in Wall Street’s long history.
Innovation in finance is designed largely to benefit those who create the complex new products, rather than those who own them.
Returns to expect from simple, broadly diversified portfolios of stocks and bonds over the next decade are 7 and 5 percent, respectively.
Warren Buffett: “What the wise man does in the beginning, the fool does in the end.”
Warren Buffett: “There are three i’s in every cycle: first the innovator, then the imitator, and finally the idiot.”
Commodities have no internal rate of return. Their prices are based entirely on supply and demand. That is why they are considered speculations.
The aggregate profits of our corporations are closely linked, indeed almost in lock-step, with the growth of our economy.
It has been a rare year when corporate profits accounted for less than 4.5 percent of U.S. gross domestic product (GDP), and profits only rarely account for as much as 9 percent.
Indeed, since 1929, after-tax profits have grown at an average rate of 5.6 percent annually, actually lagging the 6.6 percent growth rate of the GDP.
In a dog-eat-dog capitalistic economy where the competition is vigorous and largely unfettered and where the consumer is king, how could the profits of corporate America possibly grow faster than our GDP?
When corporations fail to meet their numeric targets the hard way—over the long term...
by raising productivity
by improving old products and creating new ones
by providing services on a more friendly, more timely, and more efficient basis
by challenging the people of the organization to work more effectively together
(and those are the ways that our best corporations achieve success)
... they are compelled to do it in other ways: ways that often subtract value from you, from me, and from society.
Vow: “I will create value for society, rather than extract it.”
Since 1950, direct ownership of U.S. stocks by individual investors has plummeted from 92 percent to 26 percent, while indirect ownership by institutional investors has soared from 8 percent to 74 percent.
The trite bromide “If you can measure it, you can manage it” has been a hindrance.
How can we possibly measure the qualities of human existence that give our lives and careers meaning?
How about grace, kindness, and integrity?
What value do we put on passion, devotion, and trust?
How much do cheerfulness, the lilt of a human voice, and a touch of pride add to our lives?
Tell me, please, if you can, how to value friendship, cooperation, dedication, and spirit.
Beware of the apparently easy shortcuts of life. If a job is to be done, best to do it right.
Joseph Schumpeter: In his Theory of Economic Development, written nearly a century ago, Schumpeter dismissed material and monetary gain as the prime mover of the entrepreneur, finding motivations like these to be far more powerful:
(1) The joy of creating, of getting things done, of simply exercising one’s energy and ingenuity
(2) The will to conquer: the impulse to fight... to succeed for the sake, not of the fruits of success, but of success
Benjamin Franklin’s creation of a mutual insurance company was the classic example of his community-minded approach to entrepreneurship.
He also founded a library, an academy and college, a hospital, and a learned society—none for his personal enrichment, all for the benefit of his community.
Benjamin Franklin believed that “Knowledge is not the personal property of its discoverer, but the common property of all. As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours, and this we should do freely and generously.”
He ultimately listed 13 virtues—including temperance, silence, order, frugality, industry, sincerity, and justice—even ranking them in order of importance.
He began each day with “The Morning Question: What Good shall I do this day?” and ended with “The Evening Question: What Good have I done today?”
Bill George book: Authentic Leadership
Ask ourselves whether we’re chasing the fake rabbit of success or the real rabbit of meaning, defined by the contributions to our society that stem from principle, virtue, and character.
No career is the right career if it is undertaken solely to get rich, or to gain public fame, or to throw one’s weight around.
Nor is it the right career if it is undertaken to meet the expectations of others.
And no success is the right success if it is achieved at society’s expense.
René Descartes reminded us four full centuries ago, “A man is incapable of comprehending any argument that interferes with his revenue.”
Albert Schweitzer got it exactly right. “Success is not the key to happiness. Happiness is the key to success.”
It’s not money that determines our happiness, but the presence of some combination of these three attributes:
(1) autonomy, the extent to which we have the ability to control our own lives, “to do our own thing”
(2) maintaining connectiveness with other human beings, in the form of love of our families, our pleasure in friends and colleagues, and an openness with those we meet in all walks of life
(3) exercising competence, using our God-given and self-motivated talents, inspired and striving to learn
I'll leave some resources behind for my six children (enough so that they can do anything they want, but not enough that they can do nothing).
Each of us who prospers in this great republic has a solemn obligation to recognize his or her good fortune by giving something back.