Investing attracts a lot of smart people. Investors are good with numbers, good with details, and competitive. Many smart investors are on a quest to find the perfect investment or investing style. Until he's surpassed Buffett holds the title of the best investor. He grew almost nothing to a pile of money that makes him one of the richest people in the world. He isn't just rich, he's also considered a sage with people looking to him for life advice alongside of investing advice.
I've held for a long time that the best investment style is Buffett's style if one can replicate it. Whether or not Buffett's style can be successfully replicated is up for debate, but his results are not. He is undeniably the best living investor, and possibly the best investor to have ever lived.
If Buffett is the best then why am I not following his investment style? Why do I invest in a manner that's similar to Benjamin Graham, Buffett's teacher? Graham and others who followed his style had great investing records, but none as great as Buffett. My sense is that many readers don't understand why I would chose to invest in an inferior strategy.
The path most investors take is they start out looking for statistically cheap stocks such as net-nets, low P/B stocks or depressed earners. Then once they've gained some experience they graduate to companies with moats and quality compounders. The Coke's of the world that a buy at any price will result in incredible wealth eventually. It seems to be accepted that investing like Graham is fine for those who are starting out, but all good investors eventually graduate to the big leagues.
Why am I investing in a knowingly inferior strategy when a better one (Buffett investing) is available? The answer is simple, value investing Graham style is 'good enough' for me.
A good friend uses a great analogy to discuss investing. He talks about his portfolio like a hardware store. One one shelf there are hammers, screw drivers, nuts and bolts, ladders and other small items. The owner makes a small margin on each item. They might make a few pennies on each nail sold, but in aggregate the pennies on the nails and dollars on hammers add up to a living for the owner. In contrast a Buffett style investor is like someone who owns a Maserati dealership. Not many cars are sold, or need to be sold, but the dealer makes a larger profit on each transaction. The Maserati dealer is mostly sitting on their hands, and one can say removes ignorance by sticking to only the best cars.
There isn't much pride in owning a hardware store. The store provides a living, but doesn't provide great conversation at a cocktail party. Owning a Maserati dealership is quite different, the owner is probably wealthy and their cars are always great topics for parties.
This analogy works well on many different levels. The hardware store owner is like a Graham investor. There is no pride in owning many different types of stocks that no one has heard of. But in aggregate buying cheap stocks below book value, or NCAV, selling once appreciated and repeating provides a living. At a party not many people are going to know who Decker Manufacturing, Conduril or West End Indiana Bank are. Buffett investors have a remarkably different experience, their portfolios are much more party topic worthy. There's a pride in owning stocks that rise 5x or 10x. No one wants to hear about little companies that can be churned for 50% gains, people want to hear about the big winners.
The hardware store owner isn't going to earn as much as the Maserati dealer, likewise a Graham investor probably won't ever be as successful as someone who can invest like Buffett. An obvious question is if someone had the ability to own either the hardware store, or the dealership why would they pick the hardware store? That same question can be asked about the two investing styles.
There is a cost to each style of investing, the cost is the time to research, the time to follow companies, and the emotional energy required to implement each strategy. The cost is less to invest in a manner similar to Graham. There are many companies that I've found, researched and invested in where the time I devoted to do so was less than two hours. Many of my holdings require an hour to an hour and a half of time annually to stay up to date.
Buffett's style of investing requires obsession. He is consumed with investing, he lives and breathes it and has since he started. It took priority in his marriage, in his relationship with his children, and with anything else in his life, investing is number one. The results of this obsession are apparent, he's become the most successful investor. I see this same level of obsession with many who are following in his path. On the Corner of Berkshire and Fairfax message board there are threads detailing Buffett-style companies that stretch into the hundreds of pages. Seemingly every possibly piece of legal information is rendered useful and important to the investment thesis of these sorts of companies.
I don't have the time or ability to become obsessed about my investments. I have a family, have a job, have a business and have lots of other activities that I enjoy outside of investing. In a lot of ways Graham's departure from the investing world later in life is attractive. He had enough money to pursue other interests that had his attention, didn't need more success, or more money, he had enough. I enjoy looking at companies and researching investments, but I also enjoy doing other things too. I enjoy playing with my kids on a warm summer after in the backyard. Time like that is priceless, is giving that up worth it for another 2/3/5% increase in my portfolio?
When I survey the value investing landscape Graham's methods are attractive. Over the long term they beat the market and reduce risk (the risk of permanent loss of capital). They aren't glamorous, but they work. When I look at my own needs, both monetary, and otherwise I realize that finding the best investment strategy isn't important. If over the next 30 years the market returns 10% annualized and I can earn 10-15% investing on my own I will have more than enough. It's possible that if I were to graduate to Buffett's style of investing that maybe I could do 15%+ annualized. I am not investing to impress anyone, and if what's considered beginner value investing achieves my goals why graduate to something more complicated?
Like a hardware store owner who might decide to own the store because of the hours, the location, or the speed of life, I've made a similar choice with investing. I've taken a path that might not be the best possible, but it's good enough. Over the long term I believe I'll have acceptable above market returns, but will also have time for life outside of investing. Because of this choice I'll probably never enter the world of the super rich, but that's something I'm alright with.
In the end I've chosen a good enough investing style, but not the best.