Transcription
Green: The essence of the game is incredibly simple, he said. You're you're valuing an asset and then buying it for much less.
Consuelo Mack: William Green, author of Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life, shares their winning traits on Consuelo Mack Wealthtrack.
Narrator: Funding provided by ClearBridge Investments, The Fairholme Foundation, First Eagle Investments, Bill Miller, Baird, Strategas Asset Management, Research Affiliates, Royce Investment Partners, Seafarer Capital Partners and Women Investing in Security and Education.
Consuelo Mack: Hello and welcome to this edition of WEALTHTRACK. I'm Consuelo Mack. When the late, great Charlie Munger, longtime Vice Chairman of Berkshire Hathaway and business partner of Warren Buffett, says a book is "one of the best investment books ever written," you have to pay attention. Well, this week's guest wrote the aforementioned book. He is William Greene. The title is "Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life." Greene is a veteran financial journalist who has interviewed many great investors over the years, some very familiar to WEALTHTRACK viewers, including Bruce Berkowitz, Joel Greenblatt, Matt McLennan, Bill Miller and Tom Russo. Munger is one of Greene's heroes in investing and in life. He features prominently in the book and has had enormous influence on numerous investors and followers of his best friend, Warren Buffett. Munger is himself the author and subject of several books that are well worth reading. One of my favorites is "Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger." It's a collection of 11 of Munger's talks over the years. It covers topics ranging from investing to the personal habits and qualities that will lead to success or failure in life. William Green's book is similarly broad in scope but with perspective from more than 40 exceptional investors. In the first of our two part discussion, I asked Green to start with the basics: his definition of a great investor.
William Green: For me, the great investors have to have endured. They have to have actually succeeded, ideally over many decades, which is also a problem, because often by the time we realize that they're great, they're ready to retire or they're they're ancient or their funds have become really bloated. But I think, I think this is one of those sports where you actually need to see that their principles have stood the test of time, that that they've they've won in multiple environments.
Consuelo Mack: Is there one overarching investment characteristic that they share?
William Green: They're all extraordinarily rational. They have to look at the market in this very rational way and step back and and not get carried away by what the tribe is doing. Francois Rochon, one of the great investors I interviewed, said to me that the best investors all have a non-tribal gene. There's something in most of us where we chase after the herd, especially in situations where it's very high stress. And he says there's a tiny percentage of the population that actually is perfectly happy to go in the other direction. And you saw this very visibly with someone like Charlie Munger, for example, in 2009, where what he described to me as the bottom tick in the market, in March 2009, he bought Wells Fargo at a time when nobody wanted to touch any financial companies. And I said to him, did you find it worrying or distressing or frightening? And he's like, no. And I said, so are you not actually fighting those emotions because you don't really have them? And he said, yeah, that's right. And he said, Warren Buffett's wired much the same way. You saw very similar thing with Howard Marks as well, during the Great Financial Crisis, where he invested something like $500 to $600 million a week for 15 weeks in the most toxic bonds and companies that nobody wanted to touch. And again, when I said to him, did you find it difficult? He said, no, I don't remember it being difficult at all. And I said, has have you always been unemotional? And he said, oh, yeah. And I said, you know, I knew that he'd been married twice, and I said, is has it been a problem in your relationships? And he said, oh, yeah, especially in my first marriage. He said, I've got a lot better at it since. So this, this ability to look at the markets dispassionately, without, uh, without emotion, without getting carried away by what other people are doing, is an enormous temperamental advantage.
Consuelo Mack: Is that a personality trait or is it something that they've learned over time? I'm thinking of the value investment approach. You and I have both talked to many value investors over our careers, and there is a discipline. There is an attitude. It's you know, there are two prices for every stock. There's what you determined to be the intrinsic value. And then there's what the market's offering you. And if the stock price goes far below the intrinsic value then you're going to buy regardless of what's going on in the greater environment.
William Green: Some of it clearly is wiring. I mean, I think for someone like me who's actually quite fearful by nature, I'm just not wired particularly well to be unemotional in in extreme situations like market crashes and the like. But some of it is clearly learnable. And I think simply understanding the rules of the game is enormously powerful. It's a tremendous advantage. I remember once going to interview Joel Greenblatt, for example, who's one of the greatest fund managers of all time. And Joel said to me, look, over decades of investing and teaching at Columbia Business School and writing books, I've distilled it down to its essence. And he said, the essence of the game is incredibly simple. He said, you're valuing an asset and then buying it for much less. And so once you start to understand that actually these moments of turmoil are a tremendous gift to you, that that helps you to keep your emotions in check, because you're actually waiting for these moments when the market is going to get roiled and you're going to get these advantages. And so I think part of it actually is simply understanding intellectually, um, how the markets work, how and the ability to understand that the market is actually something you need to use. You don't want to be controlled by the market, but you actually you want to be waiting for disruption. And I think probably my my single favorite image of how to be as an investor came again from Charlie Munger, Buffett's partner, who said, you should be like a spear fisherman. So he said, you basically are waiting by the side of of the stream until a big, fat, juicy salmon comes along, and then you spear it, and then you basically just go back to sitting on your hands and fishing for the next six months, or whenever it might be that another succulent salmon comes along. Howard Marx once said to me he thought it would actually be an advantage if you could only trade one day a week. He said most of the time, really, the practice of investing is the practice of holding.
Consuelo Mack: I think it was either Charlie Munger or Warren Buffett saying how important patience is and the ability to say no.
William Green: The ability to say no is enormous. Really, the way to win this game is extreme patience and extreme selectivity. It requires you actually to set up a countercultural lifestyle. And it's striking to me that people like Munger would go fishing. They would play bridge. He would read 300, 500 books a year, often skimming books, but reading constantly. And so I think in some way, particularly in our very hyperactive era where there are so many inputs bombarding us, part of the great advantage that you can give yourself, even as a regular investor, is to set yourself up structurally so that your your ecosystem is a little bit slower, a little bit more patient, so that you're not reacting to to all of the noise. And part of it is also it's it's intellectual. It's just understanding that most of what people are engaged in is meaningless. There's a great investor I write about called Nick Sleep, who referred to wiggle guessing. And he said, there are all of these earnings per share junkies who are just reacting to all of these wiggles, these these predictions about what's going to happen in the next quarter. And what someone like Nick Sleep did with his partner, Qais Zakaria, is, is totally the opposite, where they would talk about destination analysis. So they would look at a company like Costco, which was one of their biggest holdings, or Amazon, which was one of their biggest holdings. And they would say, well, what's a desirable destination for a business like this? And so they would say, okay, well, is the company actually doing the things that are going to expand its, uh, its relationship with its with its customers to improve its relationship with its suppliers, to drive down costs of the inputs there that are going to help it reach this great destination in ten, 15, 20 years. And it led them really to say, well, there's a, there's a handful of, of great businesses that are run by these very idiosyncratic founders, typically, who are focused on the long term. So it's a totally different mindset than the speculative mindset that most of us fall into.
Consuelo Mack: It also sounds as if a lot of these great investors are more introverts than extroverts.
William Green: I remember Chris Davis, who is close to both Warren and Charlie, uh, and also was the son of a great investor and the grandson of a great investor. And Chris himself is an investor and is also a director of Berkshire Hathaway. He said to me that on the whole, the best investors tend to be lacking in EQ. They don't have that much emotional intelligence because, he said, as a successful investor, you need to be able to ignore what the crowd is doing. And he said it's actually quite helpful if you don't even really know what the crowd is doing, because you're so emotionally obtuse that that you're not really tuned in to their emotions, so you don't mind whether they're judging you and they're like, it's not entirely true, as Tom Gayner would say. It's directionally correct, but their emotions are strange. The best investors. I remember Bill Miller once saying to me that that he he cries sometimes when he's listening to music. But on 9/11, for example, I remember one of one of the people on his team, I was writing a profile of him at the time.
William Green: One of the members of his team said, we're all weepy. And Bill is just like, assess, assess, assess all day long, you know, just and he had actually been in military intelligence. So he had he had this ability always to think in terms of probabilities. But then when the financial crisis came, he made this, this terrible error, this analytical error. And I interviewed him about the impact it had had on him. And he said, well, look, over 100 people lost their jobs because of a mistake that I made. And and our shareholders lost lots of money, our investors lost lots of money. And he said, look, I put on 40 pounds. So even for someone like Bill, who I think is relatively unemotional and brilliantly clever, even for him, I think there are times where you're so out of sync with the market that it's actually torture. So I'm sort of fascinated by this question of of what we can learn from the great investors, even about how to be more resilient and how to manage our emotions, which I think is a huge part of investment success.
Consuelo Mack: That's so interesting because the analytical skills of these great investors is really off the charts. Some of the things that you write about in your book is the ability to play the odds. And one of the people that you profile is Ed Thorp. So tell us about that, the ability to play the odds and why that's an important skill as well.
William Green: Thorp is a really fascinating character, and I think along with Bill Miller and Charlie Munger, maybe the smartest investor I've ever encountered. I mean, just in terms of sheer horsepower, he was the guy who actually figured out how to beat the casino at blackjack by by card counting. So he's a kind of legendary figure in that in the world of gambling. And then he even figured out how to beat the casino at roulette. So he said to me, look, if if the odds are not in my favor, I don't play. And just that simple lesson has had a profound impact on me, because you start to think, well, any time I'm trying to decide how to invest, I have to decide, well, are the odds in my favor? Am I equipped to win this game? And so I see this again and again with the great investors, is that they'll say there is a way to win this game, right? You can stack the odds in your favor, for example, by having a very concentrated portfolio, being extremely patient, waiting for these succulent salmon to swim by once in a while. But for most people, you're just not equipped to win the game. And so people like Templeton, for example, said to me, look, you just need to stay away not only from your emotion, but from your ignorance. And so there's not really any shame in admitting that we're not wired for this game. It's a high stakes game. It's a little bit like skydiving, right? It's not something where you want to be self-deluded about your capabilities.
Consuelo Mack: One of the things, and along the same lines that you emphasize in the book that several of the great investors have told you is to have an edge.
William Green: You look at someone like Chuck Akre, for example, who's one of the great investors who's beaten the market over many decades. Chuck basically said to me at one point, look, we in his very charming accent, he said, look, we can't dance with all the ladies. So he basically took this one style of investing where he was investing in very high quality, long term businesses with high returns on invested capital. And he had a concentrated portfolio of these great companies that he would hold for many years, that he would typically buy when they were very undervalued or misunderstood or going through difficult times. And so that's a concentrated strategy, right? It's this one, one particular game that he mastered. Or think of someone like Howard Marks, who said to me that he had this moment when he was at Wharton as a student, when he had this, this, this revelation that he compared to the moment of Satori, of of insight and and enlightenment in Japanese Zen Buddhism, where he said when he first learned about efficient markets, he said, yeah, that's that's clearly true. Markets are clearly pretty efficient, that, um, if there are if there are all of these bargains just sitting there in plain view, most, you know, sooner or later somebody's going to tumble to them. And so the market's going to be relatively efficient because because those, those um opportunities are going to get, um, arbitraged away. But he said then there are these markets, like for example, distressed debt where it's kind of complicated. It's kind of difficult. It's a little bit tawdry. Who wanted to invest in bankrupt companies back then or, or really troubled companies? And so he said those become inefficient markets. So his strategy was to focus very much on things that people didn't like. And it all comes back to this fundamental understanding that if something is cheap enough, it doesn't really matter if it's glamorous and sexy or not.
Consuelo Mack: What are some of the other characteristics that that many of these great investors have in common?
William Green: I would say one of the more obvious, but more important ones is that they're fiercely competitive. I mean, unbelievably driven. And so there was a wonderful moment where Bill Miller told me about the first time he met Will Danoff decades ago, and they became friends. But they were they, I think, were both at an investment conference in Phoenix, Arizona, and someone introduced them. And they're both very garrulous, likeable people. And and Bill Miller sticks out his hand and says, uh, hi, Will, I'm Bill. And and he said Danoff didn't extend his hand and just said, I'm going to beat you, man. I'm going to beat you.
Consuelo Mack: Was it was this when Bill had already beaten the market for 15 years running?
William Green: No, no, this was this was really early in their careers. So I think there's something really interesting and revealing just about that intensity. I think part of it is, is, is really to be an absolute top performer at anything. You've got to be a little bit crazy. You've got to be fanatical. And so it requires a strange balance, I think, of tremendous confidence and conviction to go against the crowd. But at the same time, this humility to say, well, let me let me search for disconfirming evidence, because what if I'm missing something? I mean, there was a beautiful moment where I was talking in the book about Nick Sleep and Qais Zakaria making this incredibly bold bet on Amazon. Nick went to an investment conference, and George Soros basically reveals that, you know, his biggest short position is Amazon. And Nick calls London, where his partner Qais Zakaria is. And he says, are we missing something? Because either we're absolutely brilliant or we're toast. I think that gets at some of the intellectual pressure here, right? You're never really sure that often you're buying things that that everyone disagrees with you. And so it requires a tremendous amount of intellectual courage.
Consuelo Mack: I think when you look at active managers who are very much out of favor now, for a whole number of reasons, what are the characteristics that you look for?
William Green: Well, I can say this personally because I've invested in I do own index funds, but I've invested in three actively managed funds. So I'm always looking for people who who understand this kind of Munger type philosophy of low turnover, extremely patient, extremely disciplined investing where you're looking for rare opportunities and then you're willing to hold for five, seven, ten years, you're using the market turbulence to to buy stuff cheap. They tend to be obsessed with quality. So they're looking for very resilient businesses that are that are likely to endure. They tend to be unemotional. Um, one friend of mine who I ended up investing with, a guy called Josh Tarasoff. The very first time we met most of our lunch, we talked about his meditation practice and my meditation practice, and it sounds kind of like a strange thing to say, but I take very seriously the fact that he's meditating because I think it's a... I think it gives him a kind of detachment, this, this ability to look at himself and look at his, his own emotions and see whether he's reacting to things. So I think I think that's really important. But I think also you want to look at the fee structure and you want to see if they're treating you with fairness and integrity. You want to know not only that the fee structure is fair and honest and honorable, but you also want to know that they have a lot of their money in it, that you need skin in the game. And so I and even then, even if you get all of these things right, it's still an unbelievably difficult game. And so this is one of the reasons why I index as well, is because I'm sort of hedging against my own capacity for self-delusion. What if I'm wrong in my judgments of these people?
Consuelo Mack: If you were to boil it down to kind of the essence of what you've learned from these great investors, that's helped you as an investor, what have you learned from them?
William Green: I think this fundamental teaching from, uh, from Joel Greenblatt is immensely important that the essential skill, the essential rule, is that you're figuring out what an asset is worth and then trying to buy it for much less. That's absolutely critical. And that leads me to say to myself, well, do I actually want to sit around analyzing companies, figuring out whether they have great balance sheet, whether they have a competitive advantage that's going to endure? Not really. And so for me, part of what's been so helpful is to say, okay, I need to outsource this. I need to get somebody else who's got a better temperament than me, who's less fearful, um, who's less likely to check their portfolio too often. Um, let me outsource it to them. And then I would say the other aspect of this is that because I know just how difficult it is to win this game, even if you have all of these traits and all of these principles, I always want to have some index funds as well. I just think it's it's a it's a really important hedge against my own capacity for self-delusion because there's a, there's a tendency for me to think, okay, the one edge I have like you, is I've interviewed so many great investors that perhaps I have the judgment and the access to say, well, yeah, I really trust this person, but what if I'm wrong? I would say one of the things that really helped me is, is that people like Templeton and also Jeffrey Gundlach, who is often described as the king of bonds, both said to me, independently, we're wrong about a third of the time. That made me think is, okay, well, if guys as smart as Gundlach and Templeton are wrong a third of the time, I need to accept the fact that I'm going to be wrong a great deal. And so I tried to internalize one of the things that Gundlach said to me, which is you have to ask yourself before you make any investment, what's the consequence if I'm wrong? I think that's a hugely valuable, uh, hugely valuable insight for any of us really, as investors is just to say, okay, given given how hard this game is, given how little we know about the future, let me at least guard against the potential for my own mistakes. Guard against my potential for, um, just bad luck. Um, and so to have a margin of safety, to diversify, um, to live within your means, not to have leverage, not to have too much debt. I think these things have had a huge impact on me. It's this it's not really for us as regular investors about beating the market. The importance of survival is, of avoiding catastrophe, is key. I need a sense that I'm going to be financially free and independent, and that doesn't really require me to take incredible risks. It it requires me not to push the envelope too much.
Consuelo Mack: We always ask each WEALTHTRACK guest at the end of every episode, what is the one investment we should all own some of in a long term diversified portfolio?
William Green: I think there's a strong argument for owning one or possibly two concentrated funds that take the kind of approach we've talked about. So very concentrated, very low turnover. I think if we're actually going to try to win the game of investing, it makes sense to use that strategy. Um, but I would combine it with index funds or something much more diversified. Jack Bogle, the founder of Vanguard, once said to me that the ultimate in simplicity is to own a single balanced index fund that gives you access to U.S. and foreign stocks and US and foreign bonds. And I took this very much to heart, and I invested a chunk of my own money and my wife's money many years ago, uh, in in a fund called Vanguard LifeStrategy Growth, which is, um, I think it's VASGX and and what I like about it is the elegant simplicity of this one, this one fund that in a way you can have at the heart of your retirement portfolio. Because I think when I checked last, it's something like 48% of the assets maybe are in US stocks, something like that, 33% in foreign stocks, and the rest is in US and foreign bonds.
William Green: And there's something very elegant about this single solution that you know is not optimal, but it's good enough. And one of the things that that Bogle said to me is you don't have to be great. And that was a huge relief to me. He said, you know, all of these great investors. He said, I saw so many of these great investors over the decades who were like these meteorites. They would sort of light up the sky for a moment, and then you would see their ashes flutter down to the ground. And and there's something about this approach of buying a fund like this very diversified single fund that really, really what it does is it owns four underlying index funds that you're getting tremendous diversification at a very low cost. Just one solution. Done. And then you can get on with hanging out with your family and doing your job and being a decent member of society and the like. It's elegantly simple.
Consuelo Mack: Sounds lovely. William Green, thank you so much for joining us on this edition of WEALTHTRACK. We are going to see you for another episode as well to talk about the life lessons from great investors. Thank you so much, William.
William Green: Thank you. It was a total delight.
Consuelo Mack: At the close of every WEALTHTRACK, we try to give you one suggestion to help you build and protect your wealth over the long term. This week, we asked William Green to share the best piece of investment advice he has ever received. This week's action point is know thyself as an investor.
William Green: The best piece of investment advice that I received was actually from Ed Thorp, this extraordinary, uh, hedge fund manager and game player. And he said to me when I asked him, how do I know if I have an edge? He said, well, if you have to ask that, if you don't have a rational reason for believing that you have an edge, then you probably don't. And I found this really disconcerting and slightly chilling and a little bit insulting, but actually it was incredibly helpful and liberating because it freed me to say, okay, let me play other games that I'm better at. Like, maybe I'm better at writing. Maybe I'm better at interviewing people. Maybe I should not spend half my life trying to pick stocks, which even these people who are much smarter and more rational and less emotional than me, even they struggle to add any value. So it's such a difficult game. Let me focus on games where I actually do have an advantage. And so that led me to a combination of owning a handful of of actively managed funds and at the same time, a couple of index funds.
Consuelo Mack: Next week, William Green shares the life lessons he has learned from these very successful investors, some to emulate, some not. Please follow us on Facebook, X and our YouTube channel. Thanks for spending time with us. Have a great weekend and make the week ahead a healthy, profitable, and productive one.