Buffett's Sage Advice (Part I)

Warren Buffett’s advice has evolved over time — Today, his wisdom is watered down for his global audience — Buffett’s actions, though, continue to instruct.

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BUFFETT’S SAGE ADVICE (PART I)

Warren Buffett has, over time, adjusted his investment advice to his readers. As his audience has grown, Buffett increasingly gives high-level guidance on investment allocations as opposed to stock picking tips.

Buffett's actions, though, continue to instruct. Implementing an active style is Buffett’s recommended path to alpha. Notably, this conclusion must be drawn in spite of Buffett’s stated investment advice.

Invest Passively

"Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees." - Warren Buffett

Buffett knows it is possible to beat the market. He is literally a living demonstration of the ability to prudently apply value investing principles and drastically outperform.

At the same time, Buffett also recognizes the futility of his sage advice. He understands that his investing tips can lead to active management failure when implemented incorrectly.

When Buffett recommends buying quality businesses, their values rise so extremely that they become bad investments (see Costco). When Buffett recommends long-term hold periods, investors hear that they should never sell, even when the world changes (see Berkshire Hathaway’s exit of its textile operations). While Buffett advises against investing outside of one’s circle of competence, his circle is continuously expanding (see Apple).

Passive investing is a viable path for individuals without the time or desire to decode Buffett’s wisdom. But Buffett’s advice is falsely construed to be a recommendation against active management, despite Buffett’s continuing record of outperformance.

20 Pitches

“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”  - Warren Buffett

Although Buffett’s analogy highlights the value of making few investment decisions, and implicitly, holding investments for a long period, Buffett himself didn't follow this advice.

Buffett started his first partnership in 1956. He operated for roughly 14 years and compounded at 30%. During this time, Buffett was not shy about trading. Effectively employing a combination of Ben Graham’s deep value style and early glimpses of quality buy-and-hold, Buffett would have used up his entire punch card over this period.¹

Notably, this quote is from the late 1990s, after Buffett had achieved massive scale at Berkshire Hathaway. Once Buffett’s investable universe shrunk to a smaller subset of businesses, his punch card analogy arrived. 

Yes, fewer investment decisions are better investment decisions. But for an investor close to the markets, 20 investments are not a reasonable punch card number.

Never Sell

"Our favorite holding period is forever." - Warren Buffett

Buffett is known as the ultimate long-term investor. His followers have made millions holding his stock for generations. But, despite his continual recommendation of long hold periods, Buffett the genius investor knows when to sell.

Once businesses are incorporated into the Berkshire family, Buffett seems content to hold these businesses forever, but this extended hold period is enabled by Berkshire’s scale. Today, there is little point in monetizing legacy aspects of the portfolio, even if they are underperforming, as the financial impact is too small to matter.

Buffett’s equity portfolio is another matter. This portfolio could use a passive approach and hold forever. Instead, Buffett prefers active management. Other than a few legacy holdings where tax liability largely prevents selling, Buffett is not afraid to turn over his portfolio.

Yes, his hold periods are lengthy; no, they are not forever. 

Decoding Sage Advice

In the early years of Buffett’s career, he provided sage advice on active stock picking, largely to sophisticated investors. As his audience grew, Buffett realized the perilous nature of his wisdom.

Over time, his advice has become more generic. This advice—to invest passively, make few decisions, and buy & hold—is helpful, or at least protective, of his global audience. But his actions offer a different view.

Fortunately, investors can still follow his actions, if not his words, to benefit from his active investing wisdom.

¹ Buffett invested in at least 35 businesses over this period.