Thursday, October 27, 2011


Whopper Investments
On 22-Apr-2011, Whopper Investments posted some articles from around the web. The post talks about deliberate practice, the "Dan Plan", becoming the next Warren Buffett, and number of other topics. Well worth a read.

On becoming Warren Buffett
In the PDF of becoming the next Warren Buffett, Mark Sellers basically says "you can't". He identifies four sources of economic moats that are hard to duplicate, and thus, long-lasting:
  1. economies of scale. e.g. Wal-Mart
  2. network effect. e.g. eBay
  3. intellectual property rights (patents, trademarks, regulatory approvals, or customer goodwill). E.g. Disney, Genentech
  4. high customer switching costs. E.g. Microsoft
He dismisses the following arguments for achieving great investment returns:
  • Lots of reading, be it books or newspapers. The problem with journalists is that they pump out too much garbage, and this tends to influence your thinking too much.
  • An MBA/CFA/PhD
  • Experience - it's good, but there are diminishing returns to it
Moving onto the positives, he says that the "moats for investors [i.e. as an investor] are structural", which are principally psychology-related.  He enumerates 7 traits that he thinks will give you an advantage:
  1. ability to buy stocks while others are panicking, and sell them when others are euphoric. 
  2. obsessiveness about playing the game and wanting to win
  3. willingness to learn from past mistakes
  4. a sense of risk based on common sense. He cites LTCM (Long Term Capital Management) as a counterexample, which had plenty of PhDs and risk models but they didn't spot the obvious: they were overleveraged in the extreme
  5. confidence in one's own conviction, even when facing criticism. e.g. Buffett's refusal to buy tech stocks in the late 90's. He also looks at the Kelly Formula: if you have a 2% position, then that works out as a probability of a 51% chance of going up, and a 49% chance of going down. "Why would you waste your time even making that bet?"
  6. you need to use both the left (maths) and right (creative) side of your brain
  7. ability to live with volatility - he identifies this as the most important and rarest traits. You need to be able to average down, and accept short-term pain for long-term results

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