BUFFETT: AN EVOLVING STRATEGY

BUFFETT:  AN EVOLVING STRATEGY
(exerpt from The Only Three Questions That Count by Ken Fisher, 2007)

Consider this... some category of stock outperforms the market for five years. A perponderance of investors jump on its band wagon, doing whatever it was that was so successful in those years. But those things stop working for the next five years or so, leading investors to think they will never work again. Because investors think they won't work anymore, it's very possible for them to start working again. They are no longer discounted into pricing but simply ignored because of cognitive error. They come through long periods where they haven't worked, so they are ignored for another long period. Then, when value comes back into favor they can and do work temporarily. Traditional craftsmen hate this kind of very real market phenomena because they want their tools to work the same way all the time.

This further illustrates the importance of continued testing and ongoing innovation... Let's take a sidestep on Warren Buffett. He doesn't or hasn't thought at all like I do, and my guess is he would say much of what I say is silly. Again, what other people think of me isn't my business. But I've spent a lot of time thinking about him for many obvious reasons. Among other things, I wrote the introduction to the second edition of The Warren Buffett Way by Robert Hagstrom (published by John Wiley, 2005)-- the bestselling biography of the man.

A quality standing out about Mr. Buffett is his ability to morph. If you read his materials from the 1960s, he said very different things than in the 1970s and early-1980s. Early on he was buying dirt-cheap stocks by simple statistical standards and typically smaller stocks-- which would today be referred to as small-cap value (although that term didn't exist until the late 1980s).

Later he bought what he called "franchises." Then he entered a period of buying great management of big companies and being a long-term holder-- otherwise thought of as big-cap growth today-- that many ascribed to the influence of my father (Philip Fisher) coupled with Charlie Munger. When Mr. Buffett was buying Coke and Gillette, you couldn't quite reconcile those activities with the kinds of things he owned two decades earlier.

Then, amazingly, seven years ago, at just the right time, he was buying smaller things dirt cheap again just as value came back into play as the twenty-first century began. I have other comments about Mr. Buffett throughout this book but I'd like you to see, while he never lost the core of what he was doing or what he was looking for, he tactically morphed steadily over the decades. Trying to freeze his tactics from any decade and replicate them in the next few would never have led you to his actual actions.

There is nothing wrong with that. It's as it should be. That he doesn't develop capital markets technology is just his way because-- I think-- he is mainly intuitive and in that regard very rare. But whether developing capital markets technology or being instinctual like Mr. Buffett, morphing, adapting, and changing are fundamental to success. Stagnancy is failure long term. Since I don't know how to be instinctual, I rely on the Three Questions and building capital markets technology.

Credits: This article is extracted, with minor modifications, from The Only Three Questions That Count, by Ken Fisher, 2007 (Wiley Finance).