During the third week of October in 1987 when stock prices declined by over 30% in two days, Peter Lynch (the legendary mutual fund manager that generated 29% annual returns over a thirteen-year stretch) learned that the Magellan Fund had lost $2 billion (about 20% of the fund’s assets under management) and had to deal with a rush of redemptions on the fund. Even though Lynch was the best mutual fund manager in his day, and even though his Magellan Fund owned a mixture of the highest quality and fastest growing companies in the world (a total of over 1,000 of them!), he still had to deal with so many redemptions that he had to strategically sell off some of his stocks (for the record, Lynch sold off most of the Magellan Fund’s British holdings because the British stocks had not gotten hit as badly as the American counterparts).
There is something to be said about arranging a small portion of your overall financial life so that it truly runs on autopilot and builds wealth organically without any additional effort on your behalf. The objective would be to create an infrastructure that allows you to convert one-time savings efforts into a literal dividend machine that creates permanent income without any further efforts on your part.
If you are interested in creating such a set-up, here’s how I’d go through the process.
Even back then, Warren Buffett had it.
I think I finally dug up the earliest known video footage of Warren Buffett, and it looks like it was an interview with an Omaha TV station that never actually managed to hit the airwaves.
For me, that’s the fun part to speculate: What was it that made KMTV desire to interview Warren Buffett in 1962, yet, upon actually conducting the interview, decide not to air it? My guess is that Buffett was too rational, sober, and precise in giving his opinions, and some executive producer decided that would not be appealing to a mass audience.
One of the bogeymen that we have to address when structuring our financial lives is the fact that every dollar that we create for ourselves will be worth around $0.97 next year, around $0.94 the year after that, and then $0.90 or so in the third year.
If you want to separate yourself from most people out there, you need to borrow a couple chapters from Irving Fisher’s The Money Illusion, and condition yourself to think in terms of purchasing power. Most people aren’t equipped to do that. Even if you had a guarantee that the United States would experience 3% inflation over the next year, my guess is that a lot of people would think that $10,000 deposited in the bank today was less than $10,250 deposited in the bank account next January.
When asked to compare himself to Warren Buffett in an interview with Charlie Rose, Klarman said:
“Warren evolved through three stages. He went from buying cigar-butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great businesses at so-so prices. And maybe even this new area of buying weird securities from crappy businesses at better than market prices—like B of A [Bank of America] preferred or whatever. I’m still in phase one. We’re still buying cigar butts, there’s a good business there in buying them and it’s a lot of fun.”