Dan Loeb recently drew attention to the many ways in which Warren Buffett contradicts himself and it became a pretty popular little quote. It became popular, I think, because there is a great deal of truth behind it. This is especially true when it comes to Buffett’s advice on investing.
Warren Buffett famously tells us to, ‘be greedy when others are fearful and fearful when others are greedy.’ Then he tells us not to try to time the market.
He tells us to evaluate stocks and bonds and put money into whichever offers the greatest prospective return. Then he says, ‘Screw it. Just put all your money in the stock market.’
He tells us that a “margin of safety” is the most important concept in investing. Then he says, ‘Never mind all that. Just buy stocks today at the prevailing price and focus on the very long-term.’
He tells us the best returns are to be had by owning only the highest quality companies. Then he says, ‘Forget that. Just buy an index fund.’
So what the heck is going on here?
I think part of it is his evolution as an investor. He started out managing a small amount of money which allowed him to take advantage of special situations and things that just aren’t possible when you’re managing over a hundred billion dollars. Now that he is almost forced to become a closet index fund manager, he has modified his philosophy to suit his situation.
The bigger reason, though, that I believe Buffett contradicts himself like this in public is he just doesn’t think you’re capable of becoming a “superinvestor” in the first place.
It’s very difficult to be “greedy when others are fearful.” It’s just as hard to be “fearful when others are greedy.” It takes a great discipline to be able to shut out the crowd and focus on what truly matters. This is an ability most people just don’t have – which is why there is a herd mentality in the first place.
It actually doesn’t take much specialized skill at all to evaluate stocks and bonds to determine which is more attractive at any given time or to recognize opportunities that offer a “margin of safety.” It does take discipline, though, to be able to take advantage of these opportunities when the crowd is screaming, ‘you’re wrong!’
Buffett clearly believes you’re not capable of this sort of discipline. And, based on how most of you have behaved over the past 20 years (see the dot-com and real estate bubbles), he’s probably right. For this reason, he hedges all of his advice and dumbs it down so that you don’t hurt yourself too badly. In the end, Buffett sounds like a hypocrite because he just doesn’t hold a very high opinion of you.
Now if you disagree and want to learn how to be a “superinvestor” like Buffett, I suggest you start right here. And pay no attention to Buffett’s dumbed down advice… unless, of course, you prefer to run with the crowd.