When you study the personal lives of most great value investors, be it Charlie Munger, Warren Buffett, John Neff, Richard Cunniff, Bill Ruane, or Donald Yacktman, you will find that among the many things that they share in common, one of them is this: they have all been internally motivated. When you get your hands on biographies of their lives, you get the impression that even from an early age, they didn’t really care a whole lot what other people thought of them. They weren’t needlessly combative or anti-social, but they weren’t afraid to fade away and do their own thing.
This passage about Warren Buffett, written by Alice Schroeder in Snowball, is probably the most concise explanation of what I’m talking about:
“Warren also spent a lot of his spare time as a child hanging around at his father’s stockbrokerage house reading everything he could get his hands on. As a tenth birthday present, he asked his father to take him to the New York Stock Exchange in person. The young Warren was hooked from day one and loved everything he saw and experienced. He decided then and there that he wanted to be rich and set a goal to be a millionaire by the age of 35. This was a reasonably audacious goal for an eleven-year old kid to be making in the middle of The Great Depression but Warren was adamant. Warren said, “Money could make me independent. Then I could do what I wanted with my life. And the biggest thing I wanted was to work for myself. I didn’t want other people directing me. The idea of doing what I wanted to every day was important to me.”
The implications of reaching the point where you don’t let the judgmental/negative opinions of others affect your decision-making come with two significant advantages, both in terms of investing and your savings rate.
On the investing side, if you only limit yourself to purchasing stocks that you yourself truly understand, you will be able to hold onto them when they become unfashionable. And trust me, if you have any chance of holding onto a company for 10+ years, you will have to prepare for a moment when your holding becomes unfashionable.
Someone who bought McDonalds in 1995 had to get through 1997 and 2002-2003 when the national conversation turned to explicitly targeting McDonald’s as the culprit for the nation’s obesity epidemic (heck, McDonald’s doesn’t even sell Super Size fries anymore—our nation didn’t say the answer to the problem is to exercise restraint and refrain from buying the 1,000+ calorie side, but instead blamed the company for offering it until McDonald’s eventually caved and took it off the menu). Yet, holding through those rough political patches when the talking heads were ridiculing McDonald’s would have proven a highly lucrative endeavor, as every $1 invested in 1995 turned into $7.70 today with dividends paid out but not reinvested.
Heck, even long-term owners of General Mills had to deal with the problem of stagnation as flour and Cheerios remained highly lucrative and profitable, but the growth component was slumping for a bit. From 2000 to 2004, the dividend just froze at $0.55. And before that, the growth limping along at a rate of a penny here, a penny there each year. Since about 2004, though, the company has gotten its act together by making selective acquisitions that add immediate value to total profits generated, and that’s why every $1 invested in 1990 would now be worth $9.50. It’s one of those situations where a $10,000 investment held for twenty-five years ends up producing around $3,000 in annual dividend income per year. But it takes an independent streak to sit back and say, “Okay, I’m reasonably diversified, while those Exxon shares are jacking up their dividend now, I still have a balanced attack. Lo, and behold, when Exxon’s profits were tanking in 2008 and 2009, General Mills was there to pick up the slack.” Successful independent thinking recognizes that everything has its season, and it’s necessary to have patience while you wait for your objectives to be realized.
The other area where independence is important is when it comes to your savings rate. One of the tricks to wealth accumulation is receiving a raise or some kind of increase in household income that isn’t accompanied by an identical rise in household spending. The wealth creation process gets turbo-charged when you are able to prolong the amount of time where you can keep your spending constant after seeing your salary increase. Making $60,000 per year and spending $45,000 per year gets wealth built at a very nice rate, but if your salary increases to $80,000 and your spending goes up to $65,000, your wealth creation story remains the same. It’s when you keep that spending in the $45,000 zone after a pay increase that you have those “whoa, where’d all this money come from?” moments.
A lot of people can’t do that, because they feel the need to “prove” that they “made it” to someone. Thinking like that is bad not just for Aesop fable type of reasons, but more importantly, the only one you are harming is yourself. You’d be treading water at a time you could be swimming faster towards your goals, and I’m reminded of what one of my best friends says right before he is about to accomplish something significant, “Sometimes, I just have to get over my own bullshit.”
If you’re not someone who naturally possesses a fierce streak of independence, then you should ask yourself a few questions when you’re about to do something out of social conformity rather than what you truly want. First, ask yourself: What could I do otherwise with this money if I were seeking my own happiness rather than trying to impress someone else, and is the tradeoff worth it? That will stop most inquiries right there. If that isn’t enough, then you should ask yourself: What were the results the last few times I did stuff like this? Was I satisfied with the results? Taking ten seconds to just *stop*and*think* can curb a lot of bad behavior that got developed out of habit.
Everyone always talks about how Munger made these billions, or Buffett made those tens of billions. The end result is nice. But look at their demeanor as they go through the journey. They’re often laid back and satisfied with trusting their own judgment, and are able to live entirely on that inner evaluation of value (how else do you think Munger drove a beat-up yellow car that was decades old after his divorce?). If you follow in their path, you’ll be able to hold stocks through the turbulence that is inevitable with long-term investing, and be able to maintain higher savings rates than you otherwise would be able if you were seeking to impress others. It doesn’t get talked about a whole lot, but that inner sense of independence creates an outer shell that enables men like them to make great strides in their formative years that creates the results they desire, the ultimate byproduct of satisfaction and happiness.
Originally posted 2014-09-12 08:00:36.