Back in 1980, author/investor John Train wrote a bestseller called The Money Masters. Chapter one — all forty-plus pages of it — is just about Warren Buffett.
And here’s the thing about that chapter: it might be one of the best on-ramps into how Buffett actually thinks about money and markets that has ever been written.
Charlie Munger, in his own inimitable way, once described Train as “a gifted writer with moderate insights into the investment process”.
Which, oddly enough, is exactly why this chapter works so well. When a gifted writer focuses his instrument on one of the greatest capital allocators to ever walk this earth, that’s when the magic happens.
Case in point: Buffett’s brilliance and Train’s way with words produce passages like this, describing a walk the two men once took through the streets of Omaha.
I doubt if there exists in Omaha an important building or business with whose economic history Warren Buffett is not familiar. It is curious to walk around the downtown area with him and hear him rattle off the financial characteristics of every building and business he passes.
Some of these buildings are brick, others stone; some are turn-of-the-century Main Street, and others neo-Corbusier. I’m not sure, though, that Buffett actually sees their designs or remembers the colors. He seems to look through the walls into the financial dynamics: the ground lease foundation, the equity pillars, the mortgage roof, and the preferred stock buttresses supporting not a dome but the subordinated convertible debenture. Where the passerby contemplates a mural in the entrance of an office building, Buffett’s inner eye, one feels, sees projected onto the wall the highlights of the original prospectus.
This is not wordsmithing for wordsmithing’s sake — but, rather, a pretty insightful encapsulation of how Buffett’s mind actually works. That ability to filter out the noise and the aesthetics that distract others, to peer beneath (as if with x-ray vision) at the underlying business fundamentals of every company he meets.
Here are some of the other things I learned from a recent re-read of this chapter…
Warren Buffett’s investment process can appear maddeningly simple. He asks himself what he would pay to own the entire company outright — and then checks that number against what the market happens to be charging for it today.
Too many investors work backwards. They start with the price and reverse-engineer a story to justify it. Buffett won’t even let the price into the room until said business has already been appraised on its own terms.
This leads to lots and lots of no’s.
By the time a stock’s price enters the conversation, Buffett’s filter has already done a lot of the heavy lifting. Insisting on a business that’s both good and understandable knocks out nearly everything on the table before price even gets considered. And then price narrows down the list further still.
What’s left, most of the time, is nothing at all — and Buffett is perfectly fine with that. Inaction is not a failure of the process, but a sign that it’s working as intended.
But when a wonderful business does go on sale, Buffett never nibbles. He walks straight up to the pie counter and cuts himself a very large slice. He doesn’t care what gloomy headline caused the markdown. If the business itself is still performing up to snuff, a falling stock price is just noise — not a reason to talk yourself out of making a smart decision.
This only works because Buffett has internalized a level of patience that most people simply can’t stomach. He’s never trying to time an exit. He doesn’t worry about liquidity the way a trader does — because he never planned on selling tomorrow or next week or (hopefully) ever. When you don’t need a fast way out, it doesn’t much matter what the market thinks of you on any given day.
Diversification might be a wise policy for most investors, but Buffett prefers to run a very concentrated portfolio. He rejects what he calls the “Noah’s Ark approach” to investing — buying two of everything until you’ve built a zoo instead of a portfolio. If you’ve truly found a wonderful business, limiting yourself to just a sliver of it in order to “stay diversified” feels more like a self-imposed tax on your best idea.
