Sunday, September 17, 2006

The Slothful Investor

As Empty Spaces, who writes the tremendous blog, Adventures in Moneymaking (go check it out), notes in a comment to my last post, Warren Buffett remarks that successful investing consists of long periods of inactivity, bordering on sloth. So, perhaps I should have titled this blog The Slothful Investor, since this accurately describes my trading activity.

Before I continue, however, I would like to give a shout to the Oracle of Omaha, who finally married his long-term girlfriend. For those who do not know, the Buffetts separated in 1977, but incredibly never divorced. Susan Thomson Buffett, Warren's late wife, remained on the board of Berkshire, and by not going through divorce proceedings enabled him to keep control of Berkshire. With her death in 2004, however, the Oracle has changed his plans for his fortune and has decided to finally tie the knot with Astrid Menks.

Back to the issue of sloth, however. Slothful investing is the natural correlary of focus investing. Since your few best ideas are going to be much better than your other ideas, you spend alot of time just sitting on your existing positions and looking for something better. Only occasionally will you find it. Isn't this a major reason why trading is so much work? Following the market obsessively takes huge amounts of time. Worse, much like executive focus on meeting the quarterly numbers, it takes your focus off of what really counts - the intrinsic value of the businesses. Much, much worse, it tends to generate fees. Lots and lots of fees.

Buffett as a Slothful Investor
The best example of sloth I know is Buffett's purchase of the Washington Post in the early 1970s. This stock gets far less play than his investments in Coca-Cola, Geico, or even L3 Communications (a position that has since been liquidated). To understand this purchase, zou have to appreciate the publishing business and Buffett's timing.

Unlike most public companies, nearly all media outfits are controlled by a family or major shareholder. This is true regardless of the medium, everything from television (CBS, Fox) to to newsprint (NYT, Wall Street Journal, Washington Post, USAToday). Most newpaper companies operate with multiple classes of stock. This is the result of the fact that most of these companies were originally closely held family businesses. When they went public, the family wanted to make sure that it could maintain editorial control. Unusually for companies with multiple classes of stock, this has probably benefitted shareholders. News outlets obviously have editorial slants and their readers are often motivated to purchase that content based on their own views. A sudden change of control, and concomitant change of editorial direction could have readers scrambling for the exits. (Can you imagine the shrill cries of Daily Kos if the NYT were acquired by Rupert Murdoch?) So protecting the editorial direction is part of protecting the franchise.

But back to 1973. Buffett valued the company at $400 million. In one of his annual reports, he notes that anyone he asked felt the company was worth $400 million. Mr. Market was asleep that day, because it was valued at $80 million. Buffett purchased $11 million in a tender offer, which gave him a 15% share of the Class B stock.

He wanted to purchase more, but Katherine Graham, the publisher who had IPOed the paper after the death of her husband and ran it for years, was influenced by her son who felt that no one but the Graham family should have a larger share. Sticking with his strategy of investing only with management he likes, he complied with their request. (I actually had the tremendous pleasure of sharing a limo with Mrs. Graham on two occasions. She received the Benton Medal from the University of Chicago, my alma mater, and I was working in the office of special events. I picked her up at the airport and took her to the president's house. When she departed, I shared breakfast with Mrs. Graham, the University president and his wife, and then rode in the limo back with her. She was quite a conversationalist and down to earth.)

Today, his 1.7 million share position is worth $1.4 Billion ! The stock also continues to pay a solid dividend. At $7.80 per share, the annual dividend that Buffett collects exceeds his initial investment, and he has been able to use it to invest in other projects over the years. This one investment counts for the bulk of the tremendous outperformance of Berkshire since 1965. He has never sold shares in the company. Essentially, he has been able to sit on the position and experience rising dividends.

Life as a Slothful Investor
The best thing about slothful investing is that it enables you to live your life. Once your investments are on autopilot, you can focus on the things that are really important to you, like travel, or education, or your family.

In my case, I made very few moves last year. My three big changes were to liquidate a position in a small cap mutal fund. I sold FBRVX and kept PRCGX. While this hasn't been a horrible decision, it turns out I would have been better off with the FBR fund (I orginally purchase in 2001 and had made no move since). I sold it becuase I wanted to reduce my exposure to small cap funds.

Instead, I decided to make a "major purchase" of 200 shares of BAC. I will cover this in more detail in another post, but basically I purchased it because the stock was cheap, large cap financials were unloved, I expected a rally after the Fed stopped raising rates, and I was going to be paid handsomely to wait. I purchased in the mid 40s and one year later we are around $51, but I have also collected the dividends.

Finally I made a purchase in November that turns out to be my one position where trading would really have helped. TRLG is one of my favorite companies. Since we are now $10 above where I purchased last November, I need to reevaluate this stock, but had I traded, I could have sold at $24 only weeks after purchasing at $13. I could then have repurchased the stock at $15 and rode it all again to $22 where we are now. But the truth is, I am not looking to call tops or bottoms. I am simply looking to purchase dollars on the cheap.

I have not made a trade in nearly a year. Still, I am up over 20% since this time last year. My limited work on this has enabled me to refocus on my quadrant "e" work, apply and get accepted to business school, sail and still find a little time to remind my girlfriend why she is so important to me. (Ok, I could do better on this last point).


  1. Very interesting post. I like your take on Buffett's slothful style, and I follow it myself. My second stocck purchase ever was BAC, which you mentioned in your post. It had taken a hit for reasons forgotten in 1998 and I bought 50 shares or so.

    I still buy some every month in a DRiP, regardless of its share price. Though it hasn't been a meteoric rise - and it shouldn't be - it's a huge company - I've watched the dividend increase every year like clockwork. BAC currently pays me over $1000 in divs., which I obligingly funnel right back into the stock.

    I'm not sure how long it will be before the annual payout exceeds my initial investment of $3000, but I'm more than a third of the way there now.

  2. Well, since the dividends you are receiving are about 1/3rd of your initial investment, and dividends should increase between 8-10% per year; say 9%. That suggests that the dividend will double in 8 years, and would increase by a further 50% from there in another 5, so in 13 years or so your annual dividend should outstrip your initial investment (assuming that you continue to reinvest them).