You Don't Have to Do Anything
I took a few weeks off from writing this newsletter, initially because I didn’t think I had anything to say. I had started looking into several cyber security companies. They had good growth numbers and the valuations looked like they might be reasonable. The more I researched them, the more I realized that I didn’t really understand the product.
Computer networking and cybersecurity are not topics I know much (read: anything) about. The 10-Ks and quarterly earnings calls were dense with acronyms and phrases I didn’t understand. I spent some time looking them up and I did start to get an understanding of what they were talking about. But I realized a few things.
First, even if I got an understanding of how their products worked now, I wouldn’t have enough knowledge to be sure they’d keep working in the future. I like a long time horizon on my investments - 10 years or more. Just because a certain type of firewall or networking switch is great now, what are the chances that it remains great in 10 years? Technology moves fast. Security will surely be different a decade from now. How will I know that the leading companies today remain the leading companies in the future? What guarantee do I have that some kids won’t come up with a revolutionary security protocol and start a company with it?
Second, I didn’t have enough interest in the topic to force myself to go deep enough into it to answer the questions I just posed above. With that, I threw those companies into the “too hard pile” and moved on. Days or weeks of research gone. Initially dead ends like this always feel like a disappointment to me. Then I remember that it’s what great investors do. They stay in their circle of competence.
You Don’t Have to Pick Every Winner
Warren Buffett has publicly talked about not investing in both Amazon and Google. When he looks back at both opportunities, he feels differently about them. Buffett and Munger have both said that there was no way they could have confidently predicted what Jeff Bezos eventually turned Amazon into. I mean, who would have said “that site that sells books will buy a bunch of servers and start a cloud computing business” in the early days of Amazon?
On Google, there is regret. Their own subsidiary, Geico was using Google ads very effectively. They knew what they were paying per click, they knew they got a return on the investment, and they knew that Google was the best place to spend that money. But they didn’t invest. The founders even came and visited Warren Buffett in Omaha.
But even without investments in companies like Google, Amazon, Microsoft or Nvidia, Berkshire Hathaway has consistently made great returns. You don’t have to pick every winner. For every Google, there was a competitor that looked good and turned out to be a poor investment. Yahoo was once the dominant search engine, was valued at $125 Billion and had the chance to buy Google for $1 million. Without a real understanding of each business, nobody would have bet on Google early on.
Doing Nothing Is a Strategy
Part of what attracts me to investing is that when it’s done well, it has a slowness to it. I’m lazy. I don’t want to have to do something every day, or every week. I don’t want to be a trader, constantly watching prices and making moves. I want to follow the “lethargy bordering on sloth” investing style. Based on the following quotes, it looks like I’m in good company.
“The stock market is a device for transferring money from the impatient to the patient.” — Warren Buffett
“Time is your friend; impulse is your enemy.” — John C. Bogle
“The big money is not in the buying and selling … but in the waiting.” — Charlie Munger
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson
Let’s not forget Terry Smith’s mantra:
Buy good companies, don't overpay and do nothing.
Sounds a lot like Mohnish Pabrai’s idea of “circling the wagons” to me.
During times like this when I’ve thrown a few ideas into the too hard pile, and I don’t have a lot of new ideas that excite me, I tell myself that I’m not being lazy, I’m being patient. I’m in good company with Warren, Charlie, Terry Smith, and John Bogle.
I also think about the idea of circular time, and seasons. I like Austin Kleon’s short post about that idea found here. Like making art or writing, investing is a never-ending, repetitive pursuit. There will be seasons to it, and we have to recognize where we are in the cycle.