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Learning from your Mentor’s Mentors

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I make it a point to read everything I can find that is written by and about Warren Buffett.

The purpose is not to amass a $50 billion net worth as he did.  His talent is rare and unique.  But there is no harm in emulating what he accomplished on a more modest scale.

What I admire most is the distance he has placed between himself and the mainstream of thinking found in the investment/retirement complex headquartered in Wall Street.  That…and his focus on investing in what you know, and in putting together a more concentrated portfolio as opposed to being unfocused and scattered.

It was encouraging to see that Buffett had his own mentors…four in particular.  Most notable is his long term partner, Charlie Munger, still active in investing at the age of 89 as opposed to Buffet himself at just 83.

He also has drawn on the market wisdom passed on by Philip Fisher, the godfather of growth stock investing, as well as Benjamin Graham, the apostle of deep value investing.  And then there is a name you might not be as familiar with.  John Burr Williams, who authored the classic “The Theory of Investment Value” back in 1937.

This was not an easy book to track down, being long out of print, but through the inter-library loan service I found a dog eared copy in the SMU library in Dallas.

It was worth the exhaustive search.  This was the first textbook that explained the core theory of investment…which is that we value an investment as the net present value of its future income stream, whether it is interest on a bond or dividends from a stock.

Admittedly, the algebraic equations were tough sledding, but the text was priceless and ageless.

Remember, this was written during the high water mark of Roosevelt’s new deal agenda, which was a correspondingly low water mark for capitalism and what Keynes referred to as “animal spirits”.  It was especially poignant to read the section on Social Security, back when the ink was still wet on this historic and groundbreaking social legislation.

Williams wondered out loud if the administration were to be so bold and reckless as to raid the social security trust fund, in total violation of  how it was presented to the American people, as a means of shoring up and expanding government spending.  Even 77 years ago the threat was a clear and present danger, only made much worse by the long passage of time and continuous plundering of the trust fund that has taken place since its inception.

I think the lesson that Buffett learned from Williams is that there are two kinds of gains to be obtained from the market.  Real gains, in the form of free cash flow on your wholly owned businesses, and consistently growing dividends from your minority portfolio holdings.

And then there are the gains to be harvested in the future…the if, when, and maybe gains to be harvested when you sell a position for a greater price than you originally paid.  These are ephemeral and ethereal…and they may or may not materialize.

Better to pull your winnings out of the pot as you go along…then to let it all ride on the next roll of the dice.

 

 

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