Lecture by Mark Sellers for students of Harvard Business School
One thing I have to tell you directly.: I'm not here for that, to teach you how to be a great investor. Against, I'm here for this, to tell you, that only a few will be able to achieve this status.
If you spend enough time researching investors, such as Charlie Munger, Warren Buffett, Брюс Берковиц, Билл Миллер, Eddie Lampert, Bill Achman, and other people, which have been successful in the investment world, вы поймете, what I mean.
I know, that all of you in this room are extremely smart. You've all worked hard, to be here. You are the best of the best. But you should remember just one thing from this lecture., even if you forget everything else:you have almost no chance of becoming a big investor. The probability of this is very low., less 2%. And that's adjusted for that., that you all have a high IQ, you are hardworking and will soon graduate from one of the best business schools in the country. If there was a random sample of the population in this audience., then the probability of becoming a great investor would be even lower, less 1%. You all have many advantages over a simple "investor Joe", and yet you have virtually no chance of standing out from the crowd for an extended period of time..
And what is the reason?? In your IQ? That's how many books, magazines and newspapers you have read? How much experience you have or will have in the future? This is what, what many people do and have, but almost none of them achieve average returns in 20% за карьеру.
I know, this is a controversial point and I don't want to offend anyone in the audience. But I'm saying that any of you have little chance of becoming great.. Perhaps one or two people in this audience will be able to reach 20% career returns. It is difficult to say in advance who it will be without knowing you personally.
Although I say, that you will not be able to achieve profitability 20% за карьеру, but many of you will be able to become investors better than average by studying at Harvard.. A person can learn to be above the average investor. You will be able to achieve good results if you are smart hardworking and well educated.. You can make millions without being a big investor.. You can learn to outperform the indices by a couple of points through hard work, IQ above average and excellent knowledge. But I'll say it again., you can't be the next Warren Buffett.
You will not be able to get a profitability in 20% for a career if you do not have the necessary qualities already at the age 11 or 12 years. I'm not sure, nature or nurture, but by adolescence, if you don't have them, then it won't be. By then, your brain will have developed and either you will be able to outperform other investors or not.. Being at Harvard won't change that, and reading all the books written about investing won't change that.. Experience won't change that.. All these things are necessary., if you want to become a great investor, but they are not enough, because they can all be duplicated by competitors.
As an analogy, think about competitive strategy in the corporate world. I'm sure you've had it or will be aware of the strategy.. Perhaps you will study research or Books Michael Porter, what I did before I went to business school. I took a lot from his books and still use it when analyzing companies..
Now answer, as President of the Company, what types of benefits protect you from competitors? Where you have a wide economic moat as Buffett calls it??
Technology is not the source of the economic ditch, since it can always be duplicated. The best, what can you do in such a situation?, it's to sell shares before that, how investors will understand that you do not have a sustainable advantage. Technology is one of the short-term benefits. There are others., such as a good management team or a catchy advertising campaign or hot fashion trends. These things provide temporary benefits., but they change over time, or may be duplicated by competitors.
The economic moat is a structural thing. It's like Southwest Airlines in the 1990s. (known for its outstanding level of service), so deeply rooted in the culture of the company and every employee, that no one could copy it, although everyone knew how to do it. If your competitors know your secret and still can't copy it, then it's a structural advantage.. It's an economic moat..
It seems to me that there are only four long-term sources of economic resources.. One of the sources — economies of scale.Examples of this would be Wal-Mart., Procter & Gamble and Home Depot. Another source — network effect. Examples: eBay, Mastercard, Visa and American Express. Third there will be intellectual property rights, such as patents, Trademarks, regulatory approvals or consumer confidence. Examples: Disney, Nike and Genentech. The fourth and last type of moat will be high switching cost for the client. Paychex and Microsoft, examples of companies, which benefit from high switching costs for the customer.
Only these four types of competitive advantages are durable., because they are very difficult to duplicate competitors. And just as a company should have a competitive advantage or suffer from mediocrity., the investor should also have an advantage or will suffer from mediocrity.
There is 8000 hedge funds and 10 000 mutual funds and millions of people trying to play in the stock market every day. How can you get an advantage over all these people?? What are the sources of the moat??
Thing, which is definitely not a source is reading many books, magazines and newspapers. Anyone can read the book. Reading is incredibly important, but it will not give you an advantage over others. It will only allow you to go level.. Everyone in this business reads a lot.. Some more than others, but I don't think there's a correlation between reading and success in investment.. As soon as you reach a certain point in your knowledge, there is a decreasing return on a large amount of reading.. Indeed, reading too much news can be harmful.. You begin to believe in all the nonsense that journalists write to sell more newspapers..
The other thing, which will not make you a great investeur this education. You can get an MBA or CFA or any other title you can get.. Harvard won't teach you how to become a great investor. No university will teach. More often than not, a good education is the antithesis of that., what great investors do. Education is not a moat. It just makes it easier for you to get a good salary..
Experience is another overrated thing. Experience is very important, but he won't give you a moat. He, as well as reading at some point comes a point of diminishing returns.. If experience gave a moat then great investment managers would have their best years - the 60s, 70-is, 80-is. But we know it's not.. Opyat is needed to be in the game but he is not the source of the moat.. Charlie Munger says that you can always understand that a person has everything to become a big investor without having experience yet..
So what are the sources of competitive advantage for the investor?? Same way, as with companies or industries, Ritches for investors are structural. They relate to psychology and it is very difficult to change.. It is unlikely that you can do anything about it even if you read a lot of books about it..
I think there are at least seven traits of uniting great investors., which are true sources of advantage. Most of these traits you can't work out.. You need to be born with them..
Line No 1 is the ability to buy shares during panic and sell during euphoria. Everybody thinks they can do it., but when 19 October 1987 almost no one has the desire to buy. When in 1999 Year the market goes up every day you can't bring yourself to sell because otherwise you will fall behind your colleagues. The vast majority of people who manage money have an excellent education, high IQ and read many books. By the end 1999 All these people knew the stock was overvalued and still couldn't bring themselves to sell.. Сработало то, what Buffett calls the institutional imperative.
Second trait the character of a great investor is expressed in the thirst for the game and the desire to win.. They don't just enjoy investing., they live it. When they wake up, the game is the first thing they think about. What research needs to be done? Which stocks pose the greatest risk in the portfolio? How best to neutralize this risk. They often have a hard time with personal relationships., they devote too little time to them. They're always obsessed with stocks.. You can't learn obsession. If you weren't born with that, you won't be the next Brusoy Berkowitz..
Third trait – willingness to learn from past mistakes and not to repeat them again. The thing is, it's very difficult for most people.. Most people will just go ahead and ignore past mistakes.. If you ignore mistakes, chances are you'll repeat them later in your career.. Even if you analyze errors, it does not guarantee that you will not repeat them later..
The fourth sign is an innate sense sense of risk. Most people know the history of Long Term Capital Management., where the command from 60 or 70 doctors of science with complex risk models did not understand that, what, Retrospectively, seemed obvious. No one wondered if it made sense in real life., everything was built on computer models. I guess, that the biggest risk control is common sense, but people often ignore it. Ignoring common sense is the most common mistake in the investment world..
Trait No 5: Great investors are confident in their own beliefs and adhere to them., facing criticism. Buffett during the dot-committee bubble was sharply criticized for his reluctance to invest in technology stocks.. He stood his ground when others abandoned the old principles..
Sixth line is the simultaneous use of the right and left hemispheres. I've met a lot of very smart people., strong in mathematics. But using only left-brain analytical thinking is not enough to be different from others and think differently.. If you are a right-brained person, then you will be weak in mathematics. I believe that a great investor should have both kinds of thinking equally.. Calculations and analysis using the left hemisphere. Evaluation of management and the ability to see the whole picture - the right hemisphere.
And finally, the most important and rare feature: the ability to overcome volatility without changing your investment thought process. When the decisive moment comes, most people simply won't be able to sell their shares at a loss.. It is difficult or impossible for them to average out their losing positions or just buy when the market falls.. Very few can suffer short-term losses even if it leads to better long-term results.. Most equate short-term volatility with risk.. Risk is the loss of money if you make a mistake.Short-term fluctuations are not a loss, but most people can't tell the difference between one and the other..
I think none of these traits can be developed after coming of age.. By this time, your potential as an investor has already been determined.. These traits can be honed but not acquired from scratch. That doesn't mean financial education., reading and investing experience are not important. These things are required to be in the game.. But those are the wrong things., that cannot be copied. The seven traits listed above are a real moat.. That, what distinguishes the great from all the others.
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