Saturday 10 August 2013

Warren Buffett baseball metaphor

To be honest I prefer to listen to Charlie Munger in comparison to Warren Buffett. The reason being that Warren can calculate quickly and make very fast judgements on if a deal is good or not but to listen to him talk about investment I do not find interesting at all. His brain works fast, he talks fast and does not have a teachers ability to bring out his knowledge. When he writes such as the letters to the shareholders in Berkshire Hathaway then it is very different and one can learn a lot by his written words. And I must admit myself that in my scientific field I have understood a lot of things for myself and I know how to apply and use that knowledge but to even try to explain it verbally to another person would be impossible. It is just a matter of how one is wired I guess.

Charlie Munger, on the other hand, is an extremely interesting person with a tremendous amount of character and is more of a verbal teacher or at least I find it easier to understand what he tries to tell. He seems to reflect for a long time not only over what he is saying but also the words that he uses when he says it. On YouTube you can find longer interviews with him which are highly interesting and in my opinion spot on in many cases.

But going back to the topic of the baseball metaphor from Warren Buffett. He is saying that an investor is waiting for the perfect pitch meaning that you are standing there with the bat in your hand and the pitcher is throwing ball after ball after ball (for an investor unlimited amounts!). When the perfect on comes you must realise it and hit as hard as you can. There are then three problems... how to realise the perfect pitch is there? do you have money left to push into this perfect pitch? and if you do how much money do you then push in there?

Charlie Munger once said in an interview that if one looked back at the performance of Berkshire Hathaway then they had not been better then index if it had not been for 20 real winning stocks and it is during 40 years of investing. So they invested in one excellent company every two years. It was based on this sentence that I realised that I can not follow the investment of Berkshire Hathaway because I can not buy all the stock that they buy and if I make a selection from their stocks how big is then the chance that I every second year pick the excellent one? So either I had to go my own way or I should just as well buy index funds directly.

Either way as a European I do not really like the baseball metaphor, sure I have seen part of the game in movies, but I have never watched an entire game on TV or live for that matter and I would therefore like to have a different metaphor to use.

Surf waves outside of Biarritz

I started thinking about this during a date that I was on recently. The woman was talking about how she had stopped going on winter vacation and instead went wave surfing during summer. She told me that surfing was a matter of a waiting game and that waves arrives in sevens she said. It is interesting on its own that she mentioned a number like that. She then also said that most beginners they directly go for the first wave and the professionals / more experienced wait a little bit longer before they then take wave number three or four which means that they are completely alone in riding that wave. Hard core surfers as such are also an interesting group of people. They are probably as hard wired when it comes to surfing and finding the great waves as an investor like Warren Buffett is for finding great investments. The surfers even educate themselves, probably empirically, as meteorologist to find where the best conditions will be for surfing the next day. This can in a way be thought of as macro economics and attempting to see where things will go in the future.

So my first personal metaphor then becomes: An investor should wait for the fourth wave to ride it alone. In this way you avoid the herd, you will jump in early on the investment and can hopefully step out before the wave breaks on to the sand because you could see the start of the wave.

I´m not fully happy with the metaphor sentence but I think that the surfing concept is an excellent comparison to investing. I am also sure that one can make many more and better surf metaphors then what I just contributed with. Maybe you are able to come up with better surf metaphors! Please post a comment.

I then also started to think about which other similar "waiting" games are out there. The ones I found was hunting, fishing and dating. If you can think of other ones then please just post a comment with which field the metaphor is from, with an explanation and then also a the metaphor sentence that compare to investing.

Still I will bring up the ones that I have... so hunting... I am personally not a hunter but there are of course several versions of hunting. Using dogs like when they are hunting fox in England (horrible!), there is the pulling where a chain of people are trying to push the animals towards the hunters (don´t really like this one either) and then there is the lone hunter sitting and waiting for animals to appear.

For the hunting metaphor I find that the lone hunter will be the best one. He is sitting there waiting for the animal to arrive and this can take a very long time. I even think that many hunters live a bit on the thrill from waiting. Knowing that when something does appear over at the border to the forrest they have only a few seconds to decide what to do and how to act. If they fail during those 10-60 seconds then the entire waiting period was for nothing. The questions they might ask themselves are: Am I allowed to shoot this animal due to regulations because there are after all hunting seasons of different animals at different times? Is the animal old/young enough to shoot? This also has to do with the taste of the meat? Is the animal well placed for a one shot one kill possibility?

The hunting metaphor would maybe be: An investor should be thrilled by waiting! Because if you are not thrilled then you have not been waiting long enough and you are then probably, as an investor, too impatient and buy stocks too frequently meaning that they are not all good. Do you have a better hunting metaphor?

Jumping fish outside Vilhelmina

Then we have the fishing metaphor. As a fisher you also sit around and wait for a long time before something start nibbling on your hook. Here you must wait a little because the first nibbling is usually not being made by the fish having its mouth on top of the hook. If you pull then you will loose the fish. Usually you then wait until the third time around. Then you pull hard to hook the fish. You then reel in the fish and if the fish is big enough you keep it and eat it for dinner and if it is too small you through it back in.

The fishing metaphor could then be: Each fish you hook should not be kept! Here it would have to do with you realising that the investment was not as good is it first looked and when you realise this then the response should be very quick.

And finally we then have the dating metaphor. At least as a guy when you do online dating you tend to see several women at the same time. There are many reasons for why it becomes like this but my experience is that it is always the case. First of all the women expect you to write to them and then based on those messages they decide upon which guy to meet. What you do as a guy then is that you write messages to ~100 women to make sure that you get some replies back. The average return rate is around 10-15% from these you then directly remove 50% because of uninteresting replies which then leaves you with 5 to 7 women that you then go on a first date with. based on the first date you clean out an additional 50% and you end up dating two to three women in parallel. From that you pick one or you discard all and start fresh with a new round of sending out messages. It looks bad when it is written down but I am afraid that is how it works.

The dating metaphor therefore becomes: When screening 100 companies only two to three will be worth the real effort! There are many companies out there that can directly be discarded from any further investigations and one should probably be more careful with ones time and learn to discard things early on. On this blog I am still not discarding things early on because I hope that I can always learn something from each analysis no matter if the company turns out to be extremely bad or one of the few excellent ones!

As mentioned above it would be interesting to hear better metaphors then mine based on your personal experience.

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