Munger-Peterson Mentality of Patience
Interview with fund manager Matthew Peterson
1. Investing Gurus from the Last Few Weeks
The situation is fluid. Huge market crash on Thursday. Big upturn on Friday. It’s times like this that I love not being someone who tries to time the market. I don’t know when it’s going to up and when it’s going to go down, and the impression I’ve gotten from this week is that people desperately want to own stocks because they have nowhere else good to put their money, and will buy on the slightest positive-leaning news. Will that continue? No idea. I bought a bit of stock this week when I thought a certain company I wanted to own was cheap. I don’t know if I was buying at the bottom or not and I don’t really care. If it goes down more, I’ll buy more. If it goes up, I’ll be happy I bought. Either way, I win. And THAT emotional stability, not worrying what other people may or may not do, is what makes me sleep very well at night.
Very Smart People have been putting out their opinions regarding the impact of the virus and it’s really nice to read through multiple thought processes and get some perspective. It’s cool that this issue just happens to be the one featuring a value investor, Matthew Peterson, who cares deeply about preparing for crisis. (Obviously, I had no idea this would be the week the US markets would finally figure out there’s a crisis out there!) Perspective is everything, and these guys have seen a lot of ups and downs in the markets. Here’s a short list (also repeated down below in Let’s Get Practical). Use this for Wandering Practice and see which ones spark some ideas.
Warren Buffett’s Berkshire Hathaway 2019 letter to shareholders
Memo from Howard Marks, Oaktree Capital
Ray Dalio on the virus
This one is meant for private companies, but it’s extremely instructive for any person evaluating a company’s ability to withstand a recession. Sequoia Capital, THE venture capital firm in Silicon Valley, publicly released this memo to warn startups of the challenges they may face due to the slowdown of business caused by coronavirus.
2. Munger-Peterson Mentality of Patience
“[Investing is] a puzzle and it’s a game, and it’s a very fun profession to have.” -Matthew Peterson
I was lucky to grab an interview with investor Matthew Peterson, featured in today’s issue up at the top. He’s made roughly 15% annually since the start of his fund nine years ago, and he is someone I’ve noticed thinks very deeply about HOW he treats his investing practice, so I was excited to talk to him about this virus situation and how he stays grounded during times of volatility. Check out this recent interview with Matthew in the Graham & Doddsville Columbia Business School newsletter, which I referenced a few times in this interview. Also worth reading is the profile of Mohnish Pabrai in that same issue.
My favorite takeaways from my chat with Matthew Peterson were that he treats emotions and uncertainty as part of being human and, therefore, equally as part of being an investor. He also gave us some names of investors he looks to in his 13-F research process and how he’s handling this coronavirus situation.
On dealing with fear and emotional volatility: “There are short-term fixes and long-term fixes.” I love this point. Obsessively. He’s saying that there are two levels to fear in times like this, and the first is to address what I need in this moment, today, right now.
Matthew uses a checklist for crisis, and the first thing on the checklist is do not make a trade. He says very likely the worst thing he could do would be to make a trade, so he actually has it right there on his checklist that he should stop and wait and consult before taking action.
That rang a loud bell for me, having heard Charlie Munger’s constant admonitions to be patient, do nothing, and only when you have an edge (which is often when everyone else is panicking) then and only then, strike. Jason Zweig wrote, in a short piece about Charlie Munger for the Wall Street Journal, “Mr. Munger favors what he calls “sitting on your a—,” regardless of what the investing crowd is doing, until a good investment finally materializes.” Matthew waits. Uncle Charlie waits. When I feel like doing something, take a step back, check it out, run the checklist, and then if it checks out, pounce.
One of Matthew’s checklist items is that, if things are serious in a crisis, to send his family on a vacation so they’re not pulled into his stress. SO real. So smart. These little tidbits like that one help me so much to hear, because it’s not a checklist point that’s even about investing. It’s about environment. Every little thing we can do to make our environment support good investing decisions is worth doing – especially in a stressful moment.
Matthew also has on his checklist to eat properly, exercise, and get sleep. He’s right – those are all the actions that we, in a crisis situation, tend to ignore. Sometimes we even intentionally don’t sleep or eat well, because “it’s a crazy time” or “I need to be up at all hours” or whatever the given excuse is. Using those excuses is amateur hour, and investing is never a competition for who can put more hours in or get more tired or sleep the least. It’s always a competition for who can make the most simple, grounded, intelligent, rational decision when everyone else is fearful. That requires sleep and good blood flow to the brain. Period.
Finally, there’s the second part of his method – to steady deeper emotions from the inside. Part of that is learning about human psychology, another interest he and Charlie share, but it’s also doing extensive research into companies, as he does by starting with 13-F filings.
It’s with that deep confidence of having done the work. Having done the homework. That lets us wait, wait, wait…and then take action. None of this matters if we never take the action. It’s knowing WHEN, at the right price, that makes the difference.
3. Berkshire Clarity and Confusion
On the topic of creating the confidence to wait, and then to pounce, Mr. Buffett, in his recent Berkshire Hathaway annual letter, reiterated Charlie’s four principles in short, and skipped the first one, which is that we have to understand the business. He wrote, “we constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”
Same principles, still in effect, and for me, still the words I keep in my mind as these markets bounce up and down. I am NOT trying to time this market. I am finding value according to those principles.
He reiterated that he buys companies. He does not bet on “stocks”. “Charlie and I do not view the $248 billion detailed above as a collection of stock market wagers — dalliances to be terminated because of downgrades by “the Street,” an earnings “miss,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour. What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt.”
These are the principles. That’s it. That plus patience.
We’ve got the Berkshire Hathaway annual shareholder meeting coming up, and in his recent CNBC interview, Becky Quick asked Mr. Buffett about, considering all the coronavirus-related cancelations of large gatherings, whether the Berkshire Hathaway annual shareholder meeting would be held this year (at minute 46:00 of the video). His reply cracked me up – he said the meeting certainly will be affected, and he laughed about how he and Charlie are probably amongst the most susceptible. “incidentally, I mean, flu is particularly tough on old people. You are going to have two guys on the stage whose combined age is 185. So, we’ll– we won’t be looking for people that show are getting signs of contagion.”
It was a surprise, then, that Berkshire Hathaway posted a short note a few days ago on its website announcing its annual shareholder meeting, held every year on the first Saturday in May, will indeed be held this year. In the midst of gathering after conference after meeting being canceled, Berkshire posting confirmation the meeting would be held…odd. The beginning of May is still about six weeks away, for one, and a LOT will probably change in the pandemic between now and then. We have no idea how this is going to develop. Furthermore, the people who seem to be most vulnerable to the virus are those over eighty, and Mr. Buffett and Mr. Munger are well north of that mark. No shareholder attending that meeting wants one hair on either of their heads harmed, much less their bronchial systems. I’d prefer they encase themselves in breathable plastic and live in a clean room for the next few months. Not talk for six hours in a large room filled with people from all over the globe (or, considering the travel restrictions going into effect these days, at least from around the US).
Therefore, I don’t think this message actually means the meeting will be held in person, in a big room, with lots of people. Companies are required by law to hold an annual shareholder meeting. Berkshire Hathaway’s will be held on May 2, 2020. BUT it could (probably will) look different than usual. By the way, an exciting change was going to happen this year at the Berkshire meeting: Greg Abel and Ajit Jain would be on stage to take questions from the audience. I wonder if that will still happen.
I am waiting to see what happens over the next month or so before I decide if I’m going. Will keep you updated.
Update: The meeting has been moved entirely online. All events are canceled. What that means for us in The Invested Practice community, I’m not sure – maybe we have a group video call to discuss the meeting? Email me your ideas. Let’s use this to become more connected, not less.
4. Dalio on Emotional Markets
Ray Dalio posted a short memo with his thoughts regarding the impact of the virus, and section three of his memo has the meat.
He describes three impacts. First, that corporate revenues will probably drop precipitously and then return as business and social activity returns, which will hit companies with a lot of debt quite hard as they won’t have their typical influx of cash to service their debt, while companies with little debt won’t have that stressor. However, Dalio points out, the market may not distinguish between the two sorts of companies.
“My guess is that the markets will probably not distinguish well between those which can and cannot withstand well the temporary shock and will focus more on their temporary hit to revenues than they should and underweight the credit impact—e.g., a company with plenty of cash and a big temporary economic hit will probably be exaggeratedly hit relative to one that is less economically hit but has a lot of short-term debt.”
That could equal a buying opportunity for us (and, presumably, for Dalio).
Second, those who employed extreme insurance schemes or did not insure themselves at all will be hit by the market volatility, and prices will move around because “because of these sorts of market players getting squeezed and forced to make market moves because of cash-flow issues rather than because of thoughtful fundamental analysis.” Another reason for opportunity for us.
Finally, third, he sounds unsure whether monetary policy will be able to affect markets much more because interest rates are so low already and rate cuts won’t make a huge difference, so he expects any useful help to come from targeted policies – which sound, to me, like bailouts.
Stay calm as others are fearful, remember? What’s happening right now out there is what it looks like as others are fearful. I’m focused on being mindful of my own reactions, of not getting too excited or too worried, and sticking to my principles as set forth by Mr. Buffett up at the top of Section 3. Remember my practice and all will come.
Stay safe and healthy, and in the midst of all this, enjoy your investing practice! ======
LET’S GET PRACTICAL
Warren Buffett’s Berkshire Hathaway 2019 letter to shareholders
CNBC interview with Warren Buffett, February 24, 2020
Memo from Howard Marks, Oaktree Capital
Ray Dalio on the virus