The Cold Truth About Emotional Investing: New research shows that even the pros invest more from the heart than from logic

May 2, 2013, 3:58 p.m. ET

INTERVIEW

The Cold Truth About Emotional Investing

New research shows that even the pros invest more from the heart than from logic

By ANDREW BLACKMAN

When it comes to investing, emotion is commonly seen as a weakness that must be shunned. But new research from professors David Tuckett and Richard Taffler suggests that emotions play an inevitable part in all investing, by amateurs and pros alike.

In their recent book “Fund Management: An Emotional Finance Perspective,” the professors present the results of interviews with 52 experienced fund managers in the U.S., U.K., France and Asia. The picture that emerges is one of acute anxiety and emotional conflict.

The bottom line, they say: Individuals and pros perform better when they acknowledge that investing is inherently emotionally charged and when they understand how emotions affect their behavior.

We talked with Prof. Taffler, professor of finance and accounting at Warwick Business School in the U.K., and Prof. Tuckett, a fellow of the Institute of Psychoanalysis in London and visiting professor at University College London, about the role of emotions in investing. Here are edited excerpts of those conversations. Read more of this post

Buffett maps out hopes for Berkshire without him

Buffett maps out hopes for Berkshire without him

8:19pm EDT

By Jonathan Stempel and Jennifer Ablan

OMAHA, Nebraska (Reuters) – Warren Buffett on Saturday gave the most extensive comments to date about the future of Berkshire Hathaway Inc after he is gone, saying he still expects the conglomerate to be a partner of choice for distressed companies.

Buffett, 82, also defended his plan to install his son, Howard, who has little investing experience, as nonexecutive chairman, saying the younger man’s role would be to ensure that Berkshire had the right CEO in place.

During the financial crisis and its immediate aftermath, Berkshire helped prop up a number of companies, among them blue-chips such as General Electric and Goldman Sachs. Buffett’s investments were viewed by many shareholders as a seal of approval from one of the world’s most respected businessmen.

Short-seller Doug Kass, invited by Buffett to Berkshire’s annual meeting on Saturday to offer contrarian points of view, asked whether a successor would have the same heft. Buffett said it would not matter.

“Berkshire is the 800 number when there is really some panic in the markets, and people really need significant capital,” Buffett said. Read more of this post

The Smartest Thing Warren Buffett Ever Said

The Smartest Thing Warren Buffett Ever Said

By Matt Koppenheffer | More Articles | Save For Later
April 30, 2013 | Comments (1)

Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) CEO Warren Buffett is never shy about sharing wisdom. The brilliant investor is known for witty quips (“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”) as well as longer parables (such as “The Superinvestors of Graham-and-Doddsville“). But could any one of Buffett’s gems of wisdom be the best? Could there be one Buffett-ism to rule them all? To find out, I grabbed five game Fools to weigh in.

Scott Phillips: In trying to distill Warren Buffett’s brilliance, many Buffett-watchers lean heavily on the Oracle of Omaha’s formative years at the metaphorical knee of his mentor, the famed value investor Ben Graham. Graham was notoriously mechanical in his investing; seeking to find companies with specific financial characteristics, then buy them in bulk. However, Buffett — particularly after he met his business partner and Berkshire Vice-Chairman Charlie Munger — is far from the myopically mechanical investor some would paint him to be. Indeed, in his 1982 Chairman’s letter to Berkshire Hathaway shareholders, Warren Buffett wrote: Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation. Yes, the reported numbers matter — a lot — but they are a guide to starting to understand the business, not neatly packaged answers. Buffett’s brilliance was in taking the fundamental lessons he’d learned from Graham and improving on them by understanding the factors that build and sustain great companies. Buffett has said he has one message for the managers of Berkshire’s subsidiaries — “widen the moat.” He wants them to focus on doing those things that make the business stronger and less vulnerable to the competition. Talking about Coca-Cola (NYSE: KO  ) , he said “Give me $10 billion and how much can I hurt Coca-Cola? I can’t do it.” That fact won’t show up in black and white on the financial statements, but is far more important than the numbers themselves.

Jason Moser: I had the great fortune of attending the Berkshire meeting last year, and while I’ve followed Buffett for a while now, something he said during the Q&A session last year resonated with me. Someone asked him his opinion on gold, to which he replied (and I’m paraphrasing): Let’s say you own an ounce of gold today. You hold it, love it and caress it. In 50 years you’ll still own an ounce of gold. Now say you own 100 acres of farmland today. In 50 years you’ll still own that same 100 acres of farmland. The difference is you’ll also have had the time to produce crops to grow more stuff to buy more farmland and whatever else you want. In other words, there’s a tremendous cycle of production there. Gold on the other hand is more or less an unproductive asset. This, to me, is key to why Buffett has been such a successful investor all these years. Not only is he able to focus on longer periods of time, but also the ever-so-valuable cycles of production that can occur during that time. It should therefore come as no surprise that if you gave me a bar of gold today, I would sell it and go buy stocks.

Tim Beyers: While Buffett is often thought of as the patron saint of value investing, I find him in many ways to be the quintessential Rule Breaker. Just listen to what he said at last year’s confab: I would never spend a lot of time valuing declining businesses. The same amount of energy and intelligence brought to other businesses is just going to work out better. I’d never have believed it had I not heard it myself. After all, what is value investing if not for figuring the worth of an oversold business that may, in fact, be in decline? Buffett’s lesson here, I think, is to be open to a broad range of stock ideas. Don’t merely look for a low price-to-earnings ratio. Look instead for businesses that are surprisingly strong defenders of the majority share of a profitable niche, such as Walt Disney  (NYSE: DIS  ) . The House of Mouse isn’t cheap at 20 times earnings, but can you name an enterprise with more big-name brands under its belt? Marvel, Star Wars, Pixar, and all those princesses that seven-year-old girls worship? Don’t be surprised if Berkshire takes a close-up tour of the Magic Kingdom.

Jacob Roche:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. This quote always stuck with me because it’s so applicable to both life and business. It takes a long history of coming through for people to build a reputation with your friends, family, and coworkers, but one big mistake can shatter that reputation and leave a lasting bitter taste in the mouths of people who know you. Whether you’re the normally responsible friend who had too a few too many drinks at a party, or the go-to guy at work who told off the wrong client, a person’s worst impression of you is usually their most lasting. This is even more true for the highest levels of management in a large company. It can take decades for a company to earn the trust of its customers, shareholders, and employees. And while a big accounting scandal may take years to fully percolate, it starts with one bad decision. Whether it was the massive accounting scandals at Enron, Worldcom, or evenWaste Management, an unethical decision that could have been avoided can, at best, result in massive fines, like WM’s half-billion dollar shareholder suit, or even jail time in the case of Enron and Worldcom executives. These unfortunate fates could have been avoided by managers at the top simply deciding to do things differently in that crucial moment.

Dan Dzombak:

Buffett: I tell college students, when you get to be my age, you will be successful if the people who you hope to have love you, do love you. Charlie and I know people who have buildings named after them, receive great honors, etc., and nobody loves them — not even the people who give them honors. Charlie and I talk about wouldn’t it be great if we could buy love for $1 million. But the only way to be loved is to be lovable. You always get back more than you give away. If you don’t give any, you won’t get any. Everybody loves Don. There’s nobody I know who commands the love of others who doesn’t feel like a success. And I can’t imagine people who aren’t loved feel very successful.

Munger: You don’t want to be like the motion picture exec who had so many people at his funeral, but they were there just make sure he was dead. Or how about the guy who, at his funeral, the priest said, “Won’t anyone stand up and say anything nice for the deceased?” and finally someone said, “Well, his brother was worse.”

Buffett: Most people in this room and most college students I talk to will have plenty of money, but some will have few friends.

— 2003 Berkshire Hathaway Annual Meeting

Coming from one of the richest people in the world, the quote is a good reminder that there’s a lot more to a successful life than just money. My definition of success is long-term sustainable happiness, and having friends who love you is a key part of that. A close network of friends has been shown to help fight illness and depression, speed recovery, slow aging, and prolong life. While it takes effort to be lovable, Buffett has shown that the benefits are massive and certainly worth the effort.

Buffett Bear, Doug Kass, Adds Spice to Meeting as Rally Lulls Investors; Kass, 64, has shorted Berkshire stock in a bet the price will fall

Kass, Berkshire’s Bear, is ready to “surprise” Buffett

1:25am EDT

By Jennifer Ablan and Jonathan Stempel

(Reuters) – Hedge fund trader Doug Kass had his first brush with fame at the age of 10, when he appeared on a television quiz show, Tic-Tac-Dough, and won every day for a week.

More than five decades later, Kass might find another sort of celebrity this Saturday when he will have the opportunity to quiz billionaire investor Warren Buffett at Berkshire Hathaway Inc’s annual meeting in Omaha, Nebraska. Buffett in March handpicked Kass, founder of hedge fund Seabreeze Partners Management Inc, to be Berkshire’s first “credentialed bear” to attend the meeting, and “spice things up. Kass, 64, has shorted Berkshire stock in a bet the price will fall. He is one of three members of an analyst panel that, along with shareholders and journalists, gets to question Buffett and Berkshire Vice Chairman Charlie Munger for five hours at the meeting, which draws more than 35,000 people to Omaha each year. “I had a lot of fun going to the Woodstock music festival on Max Yasgur’s farm in Bethel, New York in August 1969. I expect to have almost as much fun – and remember it – going to the Woodstock of Capitalism in Omaha,” Kass said in an interview. He declined to disclose the size of his Berkshire short, but called it an “average-sized position” that he initiated only a few days before Buffett’s invitation. Kass is known for his maverick positions, and his stock picks and pans have been followed widely by virtue of his prolific writings for TheStreet.com. He has a column – at one time called “The Contrarian” – to discuss neglected or undervalued stocks and sectors that he calls “purchase candidates,” as well as fully exploited or overvalued investments that he thinks are worth selling short. In April, Kass told clients and readers that he was bearish on economic growth and stocks.

Read more of this post

Warren Buffett’s Analogy About About Boobs And Porn Shop Operators Is Just Brilliant

Warren Buffett’s Analogy About About Boobs And Porn Shop Operators Is Just Brilliant

Sam Ro | Apr. 30, 2013, 10:02 PM | 6,067 |

This week is the annual shareholder meeting for Berkshire Hathaway, the gigantic conglomerate run by billionaire Warren Buffett.

Buffett has a way of explaining complicated finance topics so that they’re fun and understandable.

Carleton English of Belus Capital Advisors points us to this gem of a quote from 2008 where he takes a jab at private equity.

Someone had asked the Oracle of Omaha why people sell their companies to him instead of private equity firms.  This is the type of question that you might hear later this week.  Here’s Buffett’s response: “You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever. Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.”

According to Bloomberg, Buffett delivered this doozy during some Q&A with a 300 executives in Toronto. He’s basically explaining that there is more than one way for a company to get to a certain market value. Private equity often involves a lot of debt, a lot of cuts, and usually a lot of risk before a company is turned around and sold back on the market. Berkshire and Buffett, on the other hand, often take a more passive approach.  Typically, Buffett seeks out what he considers to be undervalued, yet well run companies.  And then he just waits for them to get to their intrinsic values. Anyways, we hope this weekend’s events in Omaha yield some more great quotes.

Warren Buffett Says Sell to Me, Not `Porn Shop,’ as Growth Dips

By Richard Teitelbaum – Jun 25, 2008

June 25 (Bloomberg) — Warren Buffett is in Toronto, fielding questions from a crowd of 300 executives. One asks what makes people want to sell their companies to him.

The Berkshire Hathaway Inc. chief executive officer replies that he tells a prospective seller to think of the company as a work of art.

“You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever,” he says at the February meeting. “Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.” Read more of this post

Berkshire size, Buffett age cloud annual gathering

Berkshire size, Buffett age cloud annual gathering

12:11pm EDT

By Jonathan Stempel and Jennifer Ablan

(Reuters) – Warren Buffett may be on safari for major acquisitions, which he likes to call elephants, but shareholders may wonder if his Berkshire Hathaway Inc has become the biggest elephant in the room. Berkshire has grown to look more and more like corporate America, as Buffett expands outside its core insurance business into such areas as energy, industrial products, newspapers, and in February ketchup, when he teamed up with Brazil’s 3G Capital investment firm to buy H.J. Heinz Co for $23.2 billion. Few of the 35,000 or more people who will this weekend make a pilgrimage to Berkshire’s hometown of Omaha, Nebraska for the company’s annual shareholder weekend, which Buffett calls “Woodstock for Capitalists,” are likely to criticize that strategy. While Buffett has managed to handily beat the Standard & Poor’s 500 so far this year, outperforming the overall market is getting tougher for Berkshire as it grows and diversifies, investors and analysts said.

Buffett, 82, and Vice Chairman Charlie Munger, 89, will at Saturday’s annual meeting field five hours of questions about the company, governance, the economy and – with a $15 billion cash cushion even after the Heinz purchase is completed – their next elephant. “Larger deals are needed to move the needle,” said Doug Kass, founder of hedge fund Seabreeze Partners Management Inc, who has shorted Berkshire stock partly because its size, including a $262 billion market value, makes it more difficult to record market-beating returns. Kass has been tapped by Buffett as a “credentialed bear” to ask questions and “spice up” the meeting. Buffett himself recognized the performance question when he noted in his March shareholder letter that Berkshire has lagged the broader market since the latter bottomed out four years ago. Read more of this post

New Book on Buffett: “The Oracle & Omaha: How Warren Buffett and His Hometown Shaped Each Other”

The Oracle & Omaha: How Warren Buffett and his hometown shaped each other

Warren Buffett, “The Oracle of Omaha,” often speaks fondly of his hometown. The city provided him a comfortable home base, away from Wall Street’s distractions. In return, Omaha benefited from the worldwide attention that came his way and from the generosity of his early investors. It turned out to be a profitable relationship for both The Oracle & Omaha.

Buffett’s decision to hire two investment lieutenants is paying off for Berkshire Hathaway, and it’s paying off for the two younger money managers, too.

PUBLISHED MONDAY, APRIL 29, 2013 AT 1:00 AM / UPDATED AT 7:28 AM

BERKSHIRE’S MONEYMAKERS

Investors earn handsome paychecks by handling Buffett’s business

By Steve Jordon
WORLD-HERALD STAFF WRITER

Warren Buffett’s decision to hire two investment lieutenants is paying off for Berkshire Hathaway, and it’s paying off for the two younger money managers, too. Todd Combs, 42, and Ted Weschler, 51, are expected to receive bonuses exceeding $50 million each based on their investment results in 2012, evidence that they and Buffett made the right choices when they connected. Weschler and Combs had admired Buffett long before meeting him, and both actively sought connections that led to their hiring.  Read more of this post

Buffett Tells Coke CEO Study Failure, Avoid Complacency; “You want a restlessness, a feeling that somebody’s always after you, but you’re going to stay ahead.”

Buffett Tells Coke CEO Study Failure, Avoid Complacency

Warren Buffett, who controls the largest stake in Coca-Cola Co. (KO), knows how to steal a show.

The billionaire investor showed up at the soda maker’s annual meeting today to help sell the company’s message to shareholders in an on-stage interview with Chief Executive Officer Muhtar Kent. The surprise appearance drew a standing ovation as Buffett advised Kent to stay ahead of competitors by reviewing what made other businesses falter.

“I like to study failure,” Buffett, 82, said at the meeting held in the Cobb Galleria Center in Atlanta. “We want to see what has caused businesses to go bad, and the biggest thing that kills them is complacency. You want a restlessness, a feeling that somebody’s always after you, but you’re going to stay ahead.”

Berkshire Hathaway Inc. (BRK/A), which Buffett has led for more than four decades, owns 400 million Coca-Cola shares after a share split last year, with a value of almost $17 billion. Berkshire, which owns See’s Candies and an equity stake in American Express Co. (AXP), favors companies that have loyal customers and can withstand competition, Buffett said. Read more of this post