Blast from the past
I write this as a quick few thoughts on a really good read that was suggested to me by Jon on Twitter. I’ll write up a longer post on portfolio matters tomorrow, but this deserves some airing!
Buffet on pensions
Find the full piece here – it’s quite a long read, but worthwhile.
I don’t count myself among the fanatical Buffett fans (I don’t really follow any investors religiously, to be honest), but I do very much appreciate both his exceedingly well-tempered viewpoint on companies and the success he’s had pursuing it, and the broadly quality/value based approach that I find myself inching further and further closer to, though from a admittedly distant base. At the moment I’m enjoying reading his letters to shareholders, handily compiled at £2 via eBook, and which I consider an absolute steal for the thoughts its provoked – even though I’m only a little way through.
If you haven’t the time to read the piece, I’ll pick out a few choice quotes that made me chuckle, or think, or both. Buffett is writing specifically on pension plans and how they should be managed to best meet their (scarily advancing, as we see now and have seen) liabilities, but the points are relevant to investing generally. After all, investing for a pension pot is simply a long-term investment strategy. Not that you’d believe it with some companies!
“Wall Street abhors a commercial vacuum. If the will to believe stirs within the customer, the merchandise will be supplied – without warranty… if above-average investment performance is sought, it will be promised in abundance… initially, those who know better will resist promising the impossible. As the clientele first begins to drain away, advisors will argue the un-soundness of the new trend and the strengths of the old methods. But when the trickle gives signs of turning into a flood, business Darwinism will prevail and most organisations will adapt.”
On the expectation of widespread out-performance
“Any thought that 70% of the environment is going to substantially out-perform the total environment in analogous to the fellow sitting down with his friends at the poker table and announcing: “Well, fellows, if we all play carefully tonight, we all should be able to win a little”
“I am virtually certain that above-average performance cannot be maintained with large sums of managed money… … The evidence all seems to confirm that it is unwise to expect above-average investment results from a corporate pension plan, conventionally managed.”
“The unusual records – and there have been few that have been maintained – have been achieved by those who have worked relatively neglected fields in which competition was light. Your win-loss percentage in tennis will not be determined by the absolute level of ability that you possess. Rather, it will be determined by your ability to select inferior opponents.”
“My final option… involves treating portfolio management decisions much like business acquisition decisions by corporate managers… stock market prices may bounce wildly and irrationally but, if decisions regarding internal rates of return of the business are reasonably correct – and a small portion of the business is bought at a fraction of its private-owner value – a good return for the fund should be assured over the time span against which pension fund results should be measured. It might be asked what the difference is between this approach and simply picking stocks… It is, in large part, a matter of attitude, whereby the results of the business become the standard against which measurements are made rather than quarterly stock prices. It embodies a long time span for judgement confirmation, just as does an investment by a corporation in a major new division, plant or product.”
The key take away from reading most of what he’s written, in contrast to what I and most investors employ, is the time span. It really is, in intention, buy and hold. I like to think I have a long investment horizon, but I’m certainly not averse to selling when I think a company’s getting expensive – Buffett seems to want to just buy great companies when they’re cheap and then pretend he can’t sell them – just leave them to compound and reinvest money.
I’m still very dubious of company pension schemes, though. For vehicles with such long investment time spans, I’m often surprised to see so much of the money in bonds/cash/low-volatility vehicles. When you have a timespan well into the double-digit years, you can afford to absorb some volatility. Hell, not even some volatility – a lot of volatility. Perhaps the managers would say I’m being reckless with pensions that retiring employees lives rest on. In that sense, there’s surely a conflict of interest between the managers of the company and the custodians of the pension plans. Their job is to make sure the pensions pay out. What’s an easier way of doing that – increasing risk slightly with a more aggressive investment strategy, or squeezing more overpayments out of the parent?
The more I look at the market, the more I see discrepancies and inconsistencies between participants and their desires. That’s why I find its efficiency so doubtful!