Invest Like Buffett

Larry Swedroe thought he was done writing books.  After having written a bunch of them, he was comfortable that he had said what he wanted to say.  Moreover, he still had his blog at CBS News MarketWatch as an outlet.  However, as he explained to me yesterday, he came to see that while he had pretty much said what he wanted to say, he hadn’t always been heard and hadn’t always said what he wanted to get across in such a way as to ensure a maximum hearing.  That realization led to the writing of his newest book, Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals.

Larry is a proponent of evidence-based investing, as I am.  The concept is a simple one even though it is honored mainly in the breach.  Evidence-based investing means that all investment decisions are undertaken only if and when there is good, objective evidence to support them.  Feelings, hunches and unevidenced beliefs don’t count.

During a major career on Wall Street and in active management, Larry came to believe that the available evidence was clear that passive investing is the best possible approach, that a clear plan consistent with one’s goals and make-up (that should be implemented and adhered to) is imperative, that market-timing is a fool’s errand, that costs and tax efficiencies matter a lot, and that economic and market forecasts are a waste of time.  I don’t agree entirely, but I wholeheartedly agree that such an approach would improve the investment planning and situation for the vast majority of consumers.

That strategy sounds pretty straightforward.  And the idea that investing ought to be evidence-based (I would say, consistent with my masthead, data-driven) seems obvious even.  But in working with consumers, Larry found, especially during times of stress (such as during the financial crisis of 2008-09), that many people were simply not swayed by good evidence.  Instead, they were driven by their emotions — such as those market stalwarts, greed and (especially during the crisis) fear. Accordingly, despite Larry’s best efforts to keep them from committing financial suicide, many acted in the worst possible ways at the worst possible times.

Through trial and error Larry recognized that some people who could not be reached by data could be reached in an alternate way.  This idea is consistent with research showing that in order to make people understand the implications of various findings and conclusions, we often need to do more than lay out the data-driven, logical argument.  Instead (or, better yet, in addition), we need to provide a sort of emotional charge.  Thus, for example, instead of simply showing them the numerical consequences of a certain action, we need to find a way to load the results with aversive emotion.

So Larry began asking these recalcitrant types who they thought was the best investor in the world.  I would say Seth Klarman, but the answer Larry got the vast majority of the time was “Warren Buffett.”  That’s obviously a very reasonable answer.  He would then follow-up that question with a second one:  If Warren Buffett gave investment advice, do you think it would make sense to follow it?  Since the answer to that question was almost always “Yes,” and since Buffett’s investment advice to consumers was consistent with his own, Larry could proceed to outline Buffett’s wisdom for consumers and usually get buy-in, even from those who had been reluctant or even hostile initially.

That ongoing success convinced Larry to write this new book — much shorter, easier to read and certainly less academic than his previous efforts — which lays out Buffett’s investment advice for retail consumers in simple yet powerful fashion.  It can be read in no more than an hour or two and provides excellent advice.  I commend it to you.