Between Rest and Overdrive: Are Great Investors Lazy?
Warren Buffett: "I have no stress whatsoever. Zero. You know, I mean, I get to do what I love to do every day. You know, and I’m surrounded by people that are terrific."
One of the arcs of Warren Buffett’s career is the shift from an aggressive search for opportunities to developing a reputation, network, and capital structure that unlocked a stream of inbound ideas. It is a key difference between the young entrepreneurial hustler and the market’s elder statesman. It illustrates that an active investor aspiring to a long career of compounding needs to think carefully about managing their energy and attention, their stress levels, and the structures that support or undermine each.
As a young investor, Buffett churned through “ten thousand pages in the Moody’s Manuals” in his search for attractive ideas among even the most obscure securities. But picking Ben Graham-style cigar butts created consistent churn in the portfolio. Buffett had to grind relentlessly to replace stocks that appreciated to fair value with new ideas. He explained to his partners that “we start from scratch each year” and that “the success of past methods and ideas does not transfer forward to future ones.”
Towards the end of his partnership days, Buffett was wrestling with both the market and his investment style. Already in 1967, he had admitted to being “out of step with present conditions”. It had become increasingly difficult for him to find compelling investments in an overheating market.
But more than that, the “all-out effort” required to construct the partnership’s deep value portfolio started to make “less sense”. Buffett craved time for other activities — or investment activities that were more enjoyable but not quite as profitable. This seemed impossible while running a fund and being “on stage” as he called it.
As long as I am publishing a regular record and assuming responsibility for management of what amounts to virtually 100% of the net worth of many partners, I will never be able to put sustained effort into any non-BPL activity.
Elementary self-analysis tells me that I will not be capable of less than all-out effort to achieve a publicly proclaimed goal to people who have entrusted their capital to me.
In 1969, he decided to liquidate the Buffett Partnership and “divorce” himself from the activity that had “consumed virtually all of [his] time and energies”.
I believe his decision was an example of both exceptional market timing and his struggle with an issue every active investor faces: what is the price for success? How can the effort be sustained over long periods of time?
Or as Buffett said:
Intensity is the price of excellence.
Decades later, a young Bill Miller asked Peter Lynch about how to succeed in the business. As William Green recounted in Richer, Wiser, Happier, Lynch explained to Miller the implications of an “overabundance of intelligent people” in the investment world.
“The only way you can beat them is to outwork them,” said Lynch, “because nobody is just so much smarter than the next person.”
Lynch continued his work after dinner and on weekends. He carpooled to the office so he could start reading research reports at 6.30 am (which reminded me of Michael Milken’s miner’s headlamp which he used to read research on the early morning bus). When Miller wondered about slowing down over time, Lynch disagreed. His view:
In this business, there are only two gears: overdrive and stop.
Like Buffett, Lynch chose to retire early when his track record was excellent. But unlike Buffett, he was clearly frustrated and burned out. And he never returned to the job of allocating capital professionally.
The Economy of Motion
A volatile year is coming to an end and in my conversations with professional investor friends I can feel how much energy it has cost to navigate this market. I previously explored the topic of resilience in my conversation with Dan McMurtrie and I continue to believe that investors underestimate the impact of health and wellbeing on their success.
In our conversation, Dan introduced the concept of the economy of motion from martial arts: the elimination of wasted movement and effort. Expert fighters conserve their energy to unleash it at the right time.
A lot of them have this ability to calmly sit and observe and not expend very much energy for long periods of time. And then strike very aggressively at a certain point in time. It’s not that they're doing nothing during the observation periods. They're just slowly accumulating information and observations and they're gaming things out in their head, but at a really low metabolic clip.
It reminds me a lot of looking at any physically large predator in the animal kingdom. They don't move a lot of time. They kind of sit there and are hanging out. It takes a lot of calories to move a 400 pound muscle machine that's designed for murder. They just have to sit there and look, and then they'll see something that looks like a lot of calories to them. And then they become these like horrifying murder monsters for 30 seconds to a minute. Then they eat all the calories they're going to get for three weeks.
It’s a metaphor we can apply to different types of investors. For example, passive investors and trend followers could be considered the market’s jellyfish, the Ocean’s Most Efficient Swimmers.
Jellyfish never stop. Twenty-four hours a day, seven days a week, they move through the water in search of food on journeys that can cover several kilometers a day. They are more efficient than any other swimmer, using less energy for their size than do graceful dolphins or cruising sharks.
In contrast, active investors invest significant time and energy to do a deal or solve a complex investment puzzle. In the framework of carnivory they are a large predator animal and facing a high cost of hunting. Granted, long days staring at documents and spreadsheets don’t seem as exciting as a cheetah’s high-speed chases. But like the big cats, these investors face the high cost of a focused effort in pursuit of an uncertain payoff.
Another framework is the athlete’s rotation between competition or practice and rest. It’s how David Tepper described his style of “laid-back competitiveness”:
I'm lazy competitive. You see that with some athletes that come in with earphones on and are hanging with the music. And then when you get them on the field, they’re focused and they’re fierce. So in the outside world, I’m that easy going person. But if I’m on the field, I wanna win. And we win a lot.
Or we can look at the lifestyle of hunter gatherers with “consecutive days of light to moderate physical activity, occasional days of strenuous exertion being followed by relatively easy days of rest and relaxation.” Lots of walking with the occasional sprint:
The Hiwi only hunted about 2–3 days a week and often told me they wouldn’t go out on a particular day because they were ‘tired’. They would stay home and work on tools, etc.
Nassim Taleb used this as a framework for exercise (lots of leisurely walking and occasional strenuous exercise).
A key question is whether the chase is followed by rest or another sprint.
Recognizing Special Days
In The Herald of the Change, I discussed George Soros’s search for big shifts in markets. His sense of timeliness was a key contributor to his success:
If you are looking for changes in the rules of the game, there must be days in the course of a career that are critical.
Soros inherited an interesting attitude to work from his father, a leisurely lawyer. “When I don’t have to, I don’t work,” Soros once explained, sounding a lot like a cheetah lying around, conserving energy.
When I have to, I work furiously because I am furious that I have to work.
He even called this attitude “an essential element” in his approach because it prevented him from becoming overly attached to his ideas.
Soros’s philosophy was also shaped by his experience as a young trading assistant:
Very early in my career, when I was an assistant in the trading box opposite the stock exchange in London, I had a boss who was a very meticulous person. He came in every morning and sharpened his pencil to a very sharp point. He said to me that if there is no business to be done, then the point of the pencil should be as sharp when you leave as it was when you came in. I have never forgotten his advice.
Now listen to Soros’ advice to his old friend Byron Wien:
The trouble with you is that you go to work every day and you think that because you go to work every day, you should do something.
And you do something every day and you don't realize when it's a special day. I don't go to work every day. I only go to work on the days that make sense to go to work. And I really do something on that day.
Soros recognized that the decisions made in those rare moments would prove more important than the daily busywork. He understood the value of managing energy and attention. Similarly, Jeff Bezos explained the importance of getting just a few crucial decisions right (hat tip to David Senra):
Sometimes getting eight hours is impossible, but I am very focused on it. I need eight hours. I think better. I have more energy. My mood is better. And think about it: As a senior executive, what do you really get paid to do? You get paid to make a small number of high-quality decisions. Your job is not to make thousands of decisions every day.
You need to be thinking two or three years in advance, and if you are, then why do I need to make a hundred decisions today? If I make, like, three good decisions a day, that’s enough, and they should just be as high quality as I can make them. Warren Buffet says he’s good if he makes three good decisions a year, and I really believe that. — Invent and Wander
One of Soros’s “special days” occurred in August of 2007. Soros had been out of the game for years. First he’d let Stanley Druckenmiller manage his funds. Following Druckenmiller’s departure, he’d moved his capital to outside managers and turned the family office into an endowment-style portfolio.
But that month he met a group of friends, hedge fund managers including Julian Robertson, Jim Chanos, and Byron Wien, at his Southampton estate.
The first tremors of what would become the global credit crunch had rippled out a week or so earlier, when the French bank BNP Paribas froze withdrawals from three of its funds.
Wien polled his friends: was a recession looming? Most didn't think so. Wien wrote in a memo:
The conclusion was that we were probably in an economic slowdown and a correction in the market, but we were not about to begin a recession or a bear market.
But two of the attendees disagreed. One of them was Soros “who finished the meal convinced that the global financial crisis he had been predicting – prematurely – for years had finally begun.”
Soros recognized that this was one of those rare moments when the game was changing. Even though he’d allocated his capital to other managers, it was time for him to act.
I did not want to see my accumulated wealth be severely impaired. So I came back and set up a macro-account within which I counterbalanced what I thought was the exposure of the firm.
Counterintuitively, it might have been beneficial that his focus had been on politics and philanthropy. He could look at markets with clear eyes. He was not tied up in other trades or exhausted from years of wrestling with the market. Remember that David Tepper blamed the exhausting Delphi bankruptcy for distracting him from “figuring out the best way to play” the subprime short opportunity. Soros Quantum fund “achieved a 32% return in 2007” and ended 2008 “up almost 10%”.
The Cost of Signaling
By the late 1980s, Buffett had shifted from cigar butts to wonderful businesses. He sought to acquire rare “business elephants”. This required preparation. For example, he raised debt when it was relatively cheap in anticipation of a shift to tighter conditions.
Our basic principle is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun.
It also required patience. He explained to George Goodman:
In the securities business, every day you have thousands of corporations offered to you. You don’t have to make any decision. Nothing is forced upon you. There are no called strikes in the business.
They throw U.S. Steel at 25 and they throw General Motors at 16. You don’t have to swing at any of them. They may be wonderful pitches to swing at but if you don’t know enough, you don’t have to swing. You can sit there and watch thousands of pitches and finally get one right there where you wanted. Then you swing.
How long might he wait, George Goodman asked. “I might not swing for two years,” Buffett answered.
“Isn’t that boring?” asked Goodman, clearly used to the frenetic pace of New York’s financial gunslingers.
Certainly boredom is a problem with most professional money managers. If they sit out an inning or two, not only do they get somewhat antsy, but their clients start yelling, “Swing you bum,” from the stands. And that’s very tough for people to do.
Buffett realized that patience could be an edge. Not only a behavioral edge, it was hard for others to resist the temptation to play, but a structural edge. It was hard for his competitors to be patient even if they wanted to.
Professional investors really have two jobs: to invest well and to attract and retain capital. They have to justify their fees and find ways to signal their value to their investors. This becomes especially important during times of underperformance when patience could be invaluable yet investors start to doubt the manager’s skill.
Actively trading the portfolio can create a smokescreen. It offers a chance to talk about new ideas and move on from the losers. It’s a way to reframe the conversation. In 1969, Buffett wrote to his investors:
One investment manager, representing an organization handling mutual funds aggregating well over $1 billion, said upon launching a new advisory service in 1968:
“The complexities of national and international economics make money management a full-time job. A good money manager cannot maintain a study of securities on a week-by-week or even a day-by-day basis. Securities must be studied in a minute-by-minute program.”
This sort of stuff makes me feel guilty when I go out for a Pepsi.
And even for Buffet, patience proved challenging at times. Facing a lengthy dearth of opportunities that decade, he made some missteps, notably the investment in Salomon.
While Buffett makes the occasional unforced error, the odds were stacked against his competitors who have to worry about performing well and putting up a good show for their clients. Somehow they have to pounce like a predator and signal like a peacock (another costly activity).
The book The Hour Between Dog and Wolf explores the relationship between stress and investing. Author John Coates writes that “financial risk taking is as much a biological activity, with as many medical consequences, as facing down a grizzly bear.”
But financial risk is different from facing brief moments of physical danger because “a change in income or social rank tends to linger.” The stress is sustained for long periods of time and Coates notes that “we are not built to handle such long-term disturbances to our biochemistry.”
An above-average win or loss in the markets, or an ongoing series of wins or losses, can change us, Jekyll-and-Hyde-like, beyond all recognition.
On a winning streak we can become euphoric, and our appetite for risk expands so much that we turn manic, foolhardy and puffed up with self-importance. On a losing streak we struggle with fear, reliving the bad moments over and over, so that stress hormones linger in our brains, promoting a pathological risk aversion, even depression, and circulate in our blood, contributing to recurrent viral infections, high blood pressure, abdominal fat build-up and gastric ulcers.
Some great investors learn this the hard way.
One example is Bill Miller. Right before the financial crisis, his mutual funds were flooded with billions. When markets plummeted and he mistook it for a buying opportunity, “the pressure was so unrelenting that he gained forty pounds” writes William Green.
Miller emerged with a new appreciation of stoicism and new priorities for a “radically simplified life” as Green describes it.
He has no desire to build a complicated business with a swarm of analysts… He prefers to work with a handful of trusted allies, including his son. As the owner of the firm, Miller has “a huge amount of freedom,” which he lacked at Legg Mason, a large public company where “the scrutiny became very intense.” He no longer has to explain himself at board meetings. His standard attire is a pair of jeans and a T-shirt. His calendar is mostly empty.
“I control my time and the content,” he says. Invited to speak at a black-tie gala, he declined, explaining that he’d thrown away his tuxedo and will never buy another one. For Miller, nothing beats being able to live and invest his own way—unconstrained, independent, beholden to nobody. “Oh, yeah,” he says. “That’s the best.”
In other words, Miller stripped sources of signaling and stress from his life.
It’s fascinating to me that both Buffett and Soros, despite their completely different styles, embody the economy of motion. They recognize that a few crucial decisions or deals define their careers. They understand that sustained stress and exhaustion, along with institutional pressures, make formidable enemies of great decisions. And both are among the rare players who persisted and survived in markets for decades.
In every way, Berkshire is structured to handle stresses. — Charlie Munger
Buffett set up Berkshire to withstand any imaginable financial stress and minimize stress for himself.
You know, I have no stress whatsoever. Zero. You know, I mean, I get to do what I love to do every day. You know, and I’m surrounded by people that are terrific.
I think he understood the impact of structure on results early on. He was notably cagey with his early investors, refusing to share his portfolio and limiting communication to annual and semi-annual letters. He minimized distractions and accepted that he would find fewer investors because of it.
Few investors find themselves in Buffett’s enviable position. Frankly, I am surprised we haven’t seen more creative structures by flexible long-term investors such as endowments and family offices. In a vehicle shared with impatient investors, their results will bear the cost of signaling.
Buffett’s comments about tap dancing to work reflect his efforts to create the right structures — capital structure, shareholder base, company culture — that allow him to be patient and not worry about costly signaling. Interestingly, key value investing concepts are framed as structures (competitive moat) or structural attributes (margin of safety).
Professional investing is not a game for the lazy. But it may be one for the “lazy competitive” who create the right structures and manage their energy and attention best.