Sunday, October 26, 2014

Kill your investing gurus

Dwight MacDonald was a prominent cultural critic during the 1950s. In Masscult & Midcult, he argued that a common feature of bad art is an emphasis on the artist, his personality, and his supposed genius rather than on the art itself. He mentioned Lord Byron as an example of this:

Byron's reputation was different from that of Chaucer, Spenser, Shakespeare, Milton, Dryden and Pope because it was based on the man--or what the public conceived to be the man-- rather than on his work. His poems were taken not as artistic objects in themselves but as expressions of their creator's personality.

There is a similar phenomenon in investing, in which many investment gurus are famous less for their ideas than for their personalities. They are famous for being themselves.

Warren Buffett is the most prominent example of this. Buffett was originally known for making a string of great investments and publishing shareholder letters that explained his philosophy of investing. Today, he's known for being "Uncle Warren," a down-to-earth Midwesterner who dispenses homespun advice in the manner of Will Rogers.

Buffett's ideas are no longer discussed or debated on their own merits; instead, public discussion of Buffett revolves around his witty sayings, personality quirks, and past successes. To the extent his ideas are mentioned, they're cast as pronouncements from "the Oracle of Omaha"-- i.e., Buffett doesn't deserves respect because his ideas are good, his ideas automatically deserve respect because they're his and he's Buffett.

MacDonald claimed that Byron's private writing was different from-- and much more cynical than-- what he wrote for public consumption: "Of course it wasn't really Byron himself but a contrived persona which fitted into the contemporary public's idea of a poet."

Likewise, there's a wide chasm between Buffett's public persona and his more cynical private beliefs. It wasn't always this way: one need only compare Buffett's letters from the 1970s to his CNBC interviews today to see how much his persona has changed.

A parable

The prologue to The New Market Wizards, Jack Schwager's trader interview book, includes a story from Ed Seykota:

One cold winter morning a young man walks five miles through the snow. He knocks on the Jademaster's door.

The Jademaster answers with a broom in his hand. "Yes?"

"I want to learn about Jade."

"Very well then, come in out of the cold."

They sit by the fire sipping hot green tea. The Jademaster presses a green stone into the young man's hand and begins to talk about tree frogs. After a few minutes, the young man interrupts.

"Excuse me, I came here to leam about Jade, not tree frogs."

The Jademaster takes the stone and tells the young man to go home and return in a week. The following week the young man returns. The Jademaster presses another green stone into the young man's hand and continues the story. Again, the young man interrupts. Again, the Jademaster sends him home. Weeks pass.

The young man interrupts less and less. The young man also learns to brew the hot green tea, clean up the kitchen and sweep the floors. Spring comes. One day, the young man observes, "The stone I hold is not genuine Jade."

Ostensibly, the moral of this story is that patience precedes wisdom. If a trader wants to become successful, he can't depend on other people for tips and easy answers. He must learn how to think for himself.

I have a different interpretation. Like the story itself, my interpretation is hokey and not entirely serious, but like the story I think it makes a valid point.

The story's real message is that many respected gurus are full of crap. The young would-be apprentice thought the jademaster would teach him valuable lessons. Instead, the jademaster exploited the young man's adulation and got him to perform free domestic labor, all while pulling his leg with a ridiculous story about tree frogs.

Warren Buffett is a modern-day jademaster. Buffett has carved a lot of jade over the course of his career, but many of the stones he's pressed into the public's hands are merely quartz.

When Buffett describes how Rose Blumkin was thrifty and dedicated to her business, he may as well be talking about tree frogs. Everyone knows that thrift, industriousness, and dedication are good qualities. The obvious doesn't become profound just because a guru says it.

When Buffett bemoans Corporate America's ethical lapses, he's fingering a particularly cheap lump of quartz. Buffett has treated Berkshire's minority shareholders admirably, but he's also used his image as an honest outsider to cut insider deals. His reputation as a man of strong principles has given him cover to violate some of them.

When Buffett praises quality businesses, he may as well be talking about tree frogs again. Like the jademaster, Buffett can talk interminably about his favorite subject without ever revealing the foundation of his success. Like the would-be apprentice, investors have to endure lots of diversionary stories before they figure it out for themselves.

I don't think anyone has interpreted the jademaster story this way before, but my whimsical interpretation does have one thing in common with the original: it argues that people can't depend on a guru for easy answers. That's true whether the guru is a long-forgotten gem carver or the world's richest investor.


  1. Very nice post.

    Not going to go down well with the "value pretender" community.

    I think Charlie Munger is even worse than Buffett.

    1. Thank you. I agree about Munger-- most of his "worldly wisdom" is bland and obvious.

  2. stumbled upon your blog. thanks for the contrarian posts. have read them with interest and curiosity. will be reading the links in your above post.

    can you share which of munger's "worldly wisdom" comes across to you as disingenuous? here or perhaps in a separate post.


    1. Thanks, I've been meaning to do a post about Munger. My problem w/ him is that his ideas are all common sense, or they're things that other people noticed first-- he just gives them new names. His "mental models" are really just rules of thumb, "worldly wisdom" is common sense, the "availability-misweighing tendency" is the streetlight effect, the "liking/loving tendency" is the halo effect, etc.

      I also find his arrogance (e.g. the quote that O-tone posted) offputting. Saying that "Ben Graham had a lot to learn as an investor" takes a lot of chutzpah.

  3. Although I wasn´t asked, I'll give you one.

    I don’t love Ben Graham and his ideas (...) Ben Graham’s insights changed his whole life, (...) Ben Graham had a lot to learn as an investor (...) I think Ben Graham wasn’t nearly as good an investor as (...) I am. Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion (...)


  4. O-tone and James, thanks for your replies.

    I agree that Munger is arrogant. And arrogance can get irritating.

    I also agree that he has given somewhat fancy names and called his heuristics "mental models". But I for one still find them useful and am not equipped to use them the way he seems to be able to.

    More specifically,

    1. I wonder how much he means his recommendation for extreme concentration when investing. Although I agree with the idea of concentrating, I feel that there are always unknown risks in the world.

    2. The idea of buying cigar butts being a snare. I tend to agree. I think, cigar butt investing requires one to be extra smart in differentiating value traps from net-nets, very transactional in investing (because you want to spread your bets), not being able to use compound interest and not being able to defer cap gains. And that is hard and does not sound as much fun as investing in great companies... Thoughts?

    1. I think, cigar butt investing requires one to be extra smart in differentiating value traps from net-nets, very transactional in investing (because you want to spread your bets), not being able to use compound interest and not being able to defer cap gains. And that is hard and does not sound as much fun as investing in great companies... Thoughts?

      I think it's a matter of personal taste. I prefer net-nets because I don't really feel confident in my ability to find which companies are truly quality. But I understand the opposite attitude as well, and I can see why people would want to avoid the hassle of buying small, illiquid stocks and rebalancing every year or two.

      Re: compounding, I once heard someone say (I'm paraphrasing) "quality businesses compound themselves, with net-nets you have to do the compounding."


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