How to Internalize The Buffett Principals with Peter Keefe
"There’s this huge gap between being able to talk, as you said, fluent Buffett and Mungerese, but actually doing it, boy, is that hard."
Does the name Peter Keefe sound familiar?
He is one of the few outstanding money managers who has kept a lower profile while trouncing the market over the last 30 years.
His company, Avenir Corporation, has outperformed the index by ~3% points a year since he joined the firm back in 1991. He has done so by directing his efforts to identify great businesses, buying a handful of them, and then holding for decades.
Recently, Peter gave an interview with William Greene on Richer Wiser Happier where he breaks down how an investor can go about applying the investment principles that are taught by Buffett and Munger.
“Articulating this stuff is easy. Internalizing it is not” - Nick Sleep on Buffett and Munger Philosophy
After listening and re-reading the transcript of the interview multiple times I did my best to organize his thinking so we can all internalize Buffett and Munger a little bit better. If you asked me, any effort to move in their direction is worth it.
Here are my biggest takeaways
Do you want to be an Investor or an Economist?
“Not many people can be both, and I don’t know any wealthy economists, so I’d rather be an investor.” - Peter on RWH
An economist is someone who views the world from the top down.
They start an investment thesis with the environment, try to forecast where the economy will go, and then structure their portfolio to match that view. Peter tried to do this once when he had Pool Corp and sold it after it appreciated 500% because he was worried about the economy and the direction of the construction cycle.
Pool Corp went on to appreciate 10-fold after he sold it.
“I just try to tune out some of this economic stuff that can infect your thinking unusually negatively.” -Peter on RWH
There is always a reason to sell because of macroeconomic news. The worst part, it always sounds logical. This makes it easy to convince yourself you are being rational. You have allowed the outside world into your own decision-making and are letting the fears of others influence you.
Pessimism sounds so smart but when it comes to good investing, macroeconomics does not matter.
An investor is someone who looks at a situation from the bottom up. They focus on the fundamentals of the business and allow the track record to aid in their decision-making. They are not in the business of predicting the tide, but finding the best swimmer.
We should care less about what the weather will be and focus on the durability of the boat we are in.
“We don’t try to predict rain, we build arcs”
Focus on the 4%
Arizona State University conducted a study that asked the question, Do stocks outperform treasury bills over the long run? Based on the findings of the study, only 4% of listed companies accounted for all of the net gain for the entire market since 1926. The remaining 96% collectively matched Treasury Bills.
“I said, hallelujah, this means someone who’s got the ability to figure out what those 4% are going to kill it. And, you know, if you’re going to be in this business, I think you have to have an internal belief that, yeah, I can find those great businesses after all, what are we all doing every day?” - Peter on RWH
When you are in the weeds, buried in a 10K, and rifling through documents to test a thesis, it is easy to forget what you are playing for.
Easier said than done.
As described, the odds of finding one of these big winners are slim. but the rewards are incredible if you can find one.
“Most of the people that I know and respect in this business are doing nothing but looking for those 4%. And so, yeah, I said, this is really good news. This means someone who’s got a quality bent and a concentrated portfolio is going to win.” - Peter on RWH
If the goal is to implement the teachings of Buffett and Munger, most of our efforts should be working to identify the 4% of companies that will produce the majority of our outperformance.
What are we looking for?
A durable moat
A nice tailwind
High Returns on Equity without too much debt
Run by competent managers who have skin in the game.
A price that isn’t egregious
Some other notable mentions are high margins and a track record of growing sales, income, Free cash flow, and EPS over time.
Don’t put money in your 40th best idea
I can’t keep the up-to-date financials of 40 companies in my head at any given time and neither can Peter. This is why the majority of his portfolio is concentrated in 10-12 names, not 40.
“Who is smart enough? To find 40 businesses that are that good. Well, I’m certainly not one of them” -Peter on RWH
If 40 is too much, what is a manageable number?
For the individual investor, who is both the portfolio manager and the research analyst, this comes down to personal preference.
“20 sounds like a lot, 15 sounds okay, 10 sounds even better because, you know, I just can’t keep the financial details of 15 businesses in my head with any with any depth.” - Peter on RWH
Our constraints are bandwidth and base rates.
96% of stocks don’t outperform.
With the odds stacked against us, we need to focus our time trying to find the 4%. If we find one, the job of the investor is to leave it alone and allow compounding to do the majority of the work.
If you give a great business a long runway, your portfolio will likely concentrate over time.
To me, the sweet spot seems to float around a watchlist of about 40-50 names with a portfolio concentrated in 10-12 of those names.
Avoid Flower Cutting
Every investor runs into a problem on the way:
What happens when a stock runs too much?
“You know, nobody has a good answer for this because nobody knows where the old time forever top is in a business, you know, Chuck somewhat loconically says, you know, they let them compound until they stop compounding.
And I don’t have a better answer than that. But I do know that these businesses are scarce and once you own one, you want to hold on to it for forever. That’s the best I can come up with.” - Peter on RWH
For the individual investors, this is a strength.
Let them compound until they don’t.
If there is anything the 4% study has taught us it is that a small amount of winners produce the majority of the return, so over a long investing period the job for an investor is to identify those in the 4% and fight to keep them in the portfolio.
You don’t make money buying and selling, you make money waiting and allowing the winners to run.
“The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.” - Warren Buffett, 2022 Annual Letter
Implementation not Articulation
The implementation of the ideas above will make you wealthy if you can execute them.
This is why the game is so hard.
If you want to embrace and embody the investing principles of Munger and Buffett you have to do plenty of things that are nonconventional. You have to:
Disregard the macro
Focus on finding the small majority of wonderful businesses
Hold a concentrated basket of them (10-15)
Let them compound for decades
In the investment markets, these characteristics are the exceptions, not the rule. But if you want to get better at implementing the investing principles of the greatest investor of all time, you have to look a little different from the crowd.
Peter Keefe is a living example.
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Please be advised, Wall St Gunslinger is not an investment adviser and does not give personal investment advice. All content is for educational and entertainment purposes only and should not be interpreted as anything other than such. Investing entails a lot of risks and should be managed appropriately. Please do your own research and consult with an investment professional before making any investing decisions. Thank you.