Seventeenth century French scientist Blaise Pascal best remembered for his contributions to the field of pure geometry and inventor of the syringe, the hydraulic press, and the first digital calculator, was also a profound philosopher. One of my favorite Pascal quotes is: “All man’s miseries derive from not being able to sit quietly in a room alone.” This is so relevant to fund managers and investors in today’s times.
Compared to nearly any other discipline, fund management is, in many respects, a bizarre field — where hard work and intellect don’t necessarily lead to satisfactory results. As Warren Buffett, the world’s most successful investor succinctly put it, “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely!”
The investment world is littered with several spectacular failures like D.E.Shaw and LTCM. Shaw was staffed by some of the brightest mathematicians, computer scientists and bond trading experts on the planet, and LTCM’s founders had among them Nobel Prize-winning economists. Yet their failures amply demonstrate that a high I.Q. need not lead to stellar investing results. As Buffett says, “Success in investing doesn’t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” Consider this: In 1970, showing his dismay at elevated stock prices, Buffett said: “I feel like a sex-starved man on a deserted island.” Between 1970 and 1974, he made virtually no public market investments. The P/E ratio for the S&P 500 dropped from 20 to 7 in those four years. In 1974, expressing his glee at the low levels to which the market had fallen, he said: “I feel like a sex-starved man in a harem filled with beautiful women!”
Again, from 1984 to 1987, Buffett did not buy a single new share. He was sitting on a mountain of cash, and still he did nothing. In the latter half of 1987, Berkshire used that cash pile to buy over a billion dollars’ worth of Coca-Cola (5% of the company).
What was Buffett doing during the periods 1970-1973 and 1984-1987? Buffet realizes that successful investing requires the patience and discipline to make big bets during the relatively infrequent intervals when the markets are undervalued, and to sit still during the long periods when markets are fully priced or overpriced.
The Buffett approach of multi-year periods of inactivity contrasts starkly with the frenzied activity that takes place daily at the major exchanges. Which brings me back to the fundamental question: Why have we set up portfolio managers as full-time professionals with the expectation that they “do something smart” every day? The fund management industry needs to reflect on Pascal’s potent words and why and how Warren Buffett has figured out a way to sit still quietly alone in a room, indefinitely.
Milan Sangani
Milan is a veteran stock market investor and educator on equity investing. Connect with him on milsang@gmail.com
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