A reader recently asked me to publish my ROI (Return on Investment) for the last 5 years so he can have more confidence in what I'm saying on the blog. I think its a request that deserves a good response.
Many people do not ‘get’ Rule One investing. I’ve found it either makes sense to you or it doesn't. I can explain it until I'm blue in the face but people either get it right away or they don't ever get it. If they don’t get it, they ask for an ROI - as if that will help them understand Rule One Investing better or believe in it more firmly. It won’t.
It either makes sense to you to buy a wonderful business as it gets cheaper and cheaper or it doesn't. It makes sense to buy on fear and sell on greed or it doesn't. It makes sense that Mr. Market is commonly irrational or it doesn't. It makes sense that value and price are different things or it doesn't. If it doesn’t, you ask for an ROI.
But watch out what you ask for. You just might get it. The guys who ran Long Term Capital in the 1990's were Efficient Market Theorists and had the Nobel Prizes to prove it. Their fund had astonishing 5-year results. And then it went bankrupt in about ten minutes. People who decided to invest with them instead of Buffett did so because of ROI. They put lots of money into Long Term Capital. Lots. And they lost all of it.
My point is that 5-year results don't mean much on their own. But even if they did, my job here isn't to be your guru, to have you follow me slavishly or to provide you with the crystal ball to the future of specific stocks. I will publish my opinions here and show you why I hold those opinions. I will be as rational as I can. I expect push back and discussion and conflicting opinions. And I'll keep urging you to try not to get get caught up in short term ROI. Doing Rule One investing requires the conviction to stay steady, if necessary, in the face of years of negative ROI.
If I buy a stock at, say, $30 with the conviction that its worth $45 and it goes down for the next five years, am I a bad investor or a good investor if it is actually worth $45? Am I nuts if I buy more as it goes down to $20? If I am certain as I can be that it’s worth $45, I think I'd be nuts not to be buying all the way down, yet the ROI will be negative for all that time.
Most investors who have to worry about their public ROI are too afraid of the impact of short-term decisions on ROI to do what they know works - Rule One Investing. For example, many fund managers knew BNI was on sale at $80. But they also believed that it was not going to go up for a long time and they didn't want the short-term hit to their ROI if it went to $50. That’s precisely why mutual fund guys don’t do Rule One investing. They can’t stomach the short-term pain from investors who invest based on ROI. (Ironically, BNI doubled in less than a year when Buffett bought it.)
In addition, Rule One investing applies to every sort of investing including real estate, bonds, tax liens, private equity and venture capital. When your portfolio includes these sorts of things, as most Rule One investor's portfolios do, an ROI will require an Internal Rate of Return (IRR) analysis based on mark-to-market values on non-traded assets. But that's a problem, isn't it? For example, what's the value of a derivative on commercial real estate right this minute? I took such a position a couple of years ago. What's it worth now? Darned if I know and darned if I'm going to pay some appraiser to give me his opinion so I can mark it to a market price that doesn’t mean anything over the long run. And doesn't the same problem exist for public stocks? If the true equity value of BP is $50 a share, how can I create an ROI based on a price today of $44 or last year of $27? Mark to Market has its value but it can also make for a truly messed up ROI, so much so that Buffett simply uses the rising equity value of Berkshire to calculate his short and long-term ROI rather than the current price of Berkshire stock.
And really, what’s the point keeping score based on current prices? If you aren't selling, current prices are irrelevant unless they're far below the current value. At that point they matter because you want to buy. What really matters is that my family is financially better off in the future than it was in the past. That’s what should matter to you, too.
For all these reasons, I will continue to urge all of you readers to do your own work, make up your own mind about the investments you are interested in and use this blog only as an educational resource, not some kind of stock advisory service cum guru blog. I'm neither smart enough nor educated enough to have any clue what you should be investing in and I, too, am fully capable of having years of poor ROI.
What I'm doing with this blog is to give you my opinion is about what I like and don't like. You'll have to make up your own mind sans ROI about whether that opinion and the discussions that ensue are worth bothering with or participating in.
As to why I do this – well, Melissa keeps asking me the same thing. Like right now. It’s a beautiful day in The Hole. She wants to go for a hike. And I'm sitting here writing this for some guy who could be a professor at the University of Efficient Market Theory, for all I know. How do I explain that?
Now go play.