He didn’t go and listen to Warren Buffett when he spoke at Harvard Business School where he was a student. That is how clueless he was about investing. His friend, noted hedge fund manager Bill Ackman of Pershing Square, was instrumental in the 47-year- old Whitney Tilson becoming an investor. Ackman advised Tilson to read all of Buffett’s annual letters since that was the only thing he needed to learn about investing. Tilson, deeply impressed by the Sage of Omaha, also read up on other noted investors, right from Philip Fisher to Charlie Munger and Peter Lynch. Tilson kickstarted his investment career in 1999 by co-founding T2 Partners and Tilson Mutual Funds. In 2012, he and co-founder Glenn Tongue began investing separately under Kase Capital and Deerhaven Fund, respectively. Kase has a concentrated long position in a particular conglomerate. No prizes for guessing, it’s Berkshire Hathaway.
Warren Buffett has been a big influence on you as an investor. Are there any Buffett principles that have you found difficult to imbibe?
The concept of intrinsic valuation and margin of safety is core to my investment philosophy. Though I haven’t followed it, Buffett’s philosophy relating to the analogy of a punch card with just 20 punches is an interesting intellectual framework. I try and make one good investment a month. So that’s 12 in a year, but multiplied over many years, it’s more than 20 in a lifetime. But then Buffett, too, has made thousands of investments over the years. So, it’s more of an intellectual framework rather than a hard and fast rule. But there are plenty of people who only made one investment decision in their lifetime and are worth an awful lot today. They bought Berkshire Hathaway stock and did nothing else.
Outside of investing, Buffett’s phrase — I don’t know whether he coined it originally — goes as follows, “The chains of habit are too light to be felt until they are too heavy to be broken.” It’s all the little things, the habits every day over time that make who you are. That is what I mean when I say Buffett has been a role model and influenced my life far beyond investing. He has helped me think about being a better person and that has made me happier and more successful outside of the world of investing.
When you started investing and were possibly faced with a difficult investment decision, did you find yourself asking what would Buffett have done?
I think it is true to this day. On my way to the office I was actually thinking about one of my latest purchases, Apple. I was not sure if I would be holding Apple for the next five or 10 years, but I felt it was a good bet over the next six to 12 months as a new product launch could dissipate the severe negativity around the stock. Today, it is quoting around $430 a share and I think it will get to $550-$600 at some point in the not too-distant future. At that point I may well sell it. Now, does that mean I am in it only for a trade? Am I violating the core Buffett principle?
While I was adhering to the core Buffett principle of a stock being safe and cheap, I am also being realistic that in the world of technology things change fast. So, in a way I am my own investor and don’t blindly follow Buffett or his philosophy. In fact, at times, I have been short Moody’s and Wells Fargo, which are part of Buffett’s core holdings. I admire him greatly and I have learnt a great deal from him. But I try and draw the best lessons from many great investors, including Munger who is a distinct from Buffett.
How does that work because temperamentally Peter Lynch’s approach is very different from that of Buffett’s? How do you manage that?
I don’t think of it in terms of temperament. Look, Netflix can be cheap at $100 a subscriber. Berkshire Hathaway can be cheap at 1 times book value. A little micro-cap retailer called Delia’s can be cheap at 5% of sales. In other words, there are a lot of different ways to value different types of investment situations. I like having a diverse portfolio of different types of investments, from big caps to small caps, from old Ben Graham and Walter Schloss type cigar butts to growth and momentum. I don’t do much of the latter but Netflix did very well. I think the most successful investors are the ones who are not only focused and disciplined, but also broad minded and see value in different situations and can spot opportunities in different markets.
Another theme that I have played quite successfully over the years is what I call piggybacking on activism. Bill Ackman is probably my favourite activist to follow in certain situations, not just because I know him well but because he has been very successful. My single most successful investment ever actually isn’t Netflix but is General Growth Properties. It was in bankruptcy. The stock was trading at a dollar.
Ackman gave a presentation to a roomful of investors making a case that the equity would maintain its value and that once the company comes out of bankruptcy. it could be worth $20. I said at $1 if he is right, it could be worth $20, I only need a 5% chance to cover the entire share price. Sure enough, I rode that thing from $1 to $20 all the way up.
Stick to your circle of competence is the first lesson you learn from Buffett. But if you look at his own investments his circle of competence has constantly expanded.
Rule No. 2 and a very important corollary to always stay in your circle of competence is always be working to expand that circle. But you have to be very humble about it. Just because you read a particular book or went to a conference in a particular industry doesn’t mean your circle of competence includes that particular industry. That can get you into a lot of trouble. Buffett now has to venture outside the US because he is much bigger now. He is making a very concerted effort to find more Iscars. He is working with friends in Europe and Asia and is making trips to meet with a much higher percentage of large businesses outside of the US, which are held privately in multi-generational families, just like Iscar was.
I am sure Buffett will find a lot more Iscars that need money, but have size or succession issues and don’t want to go public. Over the last few years, at an age when most people become narrow and dogmatic in their thinking, he is doing just the opposite by getting broader and nimble in his approach. It’s remarkable.
You mentioned earlier that, “Munger is a different investor from Buffett”. Can you elaborate on that a little?
I wouldn’t say different. I would say he is distinct. Buffett credits him from helping make the shift from a Ben Graham, Walter Schloss styled cigar butt investing to paying a higher price for better businesses. That has clearly resulted in Berkshire becoming more valuable over 40 years than it would have been otherwise. I would say Charlie is more willing to invest in BYD, for example. That was a classic example of a deal that was Munger’s idea. I doubt Buffett would have ever got comfortable with it on his own. $500 million is a bit of a rounding error for Berkshire.
So it is a bit of a flier, something more risky and speculative. If you go back and look at the Munger Partnership, for example, back in the 1960s, Charlie was much more an aggressive investor in terms of his use of leverage and also the types of things he bought. That probably remains to this day. But I don’t doubt for a second what Buffett once said which is, “Charlie and I have never had an argument in 40 years.” They talk things out. I don’t want to overstate the differences. They are enormously similar in their overall approach but there are a few distinctions if you really study them closely.
Charlie Munger once said, “If Warren Buffett had never learnt anything after graduating from Columbia Business School, Berkshire would be a pale shadow of its present reality.” What is it that makes Buffett such an incredible learning machine?
It starts with a brilliant mind. Secondly, he started very young...he bought his first stock as a boy. Thirdly, he had good teachers that helped fuel that passion and that wasn’t by accident. He went and sought out the best teachers. More importantly, he is incredibly focused on doing absolutely nothing apart from investing, right from the moment he wakes up till he goes to sleep. The kind of mathematical computations he can do in his head amazes people. I would have to think hard if there has ever been an investor in history, if you have to add up over the course of their life how many annual reports they have read, how many businesses they have visited, who has done even half of what Buffett has done.
So far, so good
Unlike CY12, Kase Capital’s CY13 year-to-date performance is looking good, thanks to the surge in its holdings
The big lesson from Buffett is how to simultaneously be extremely arrogant and extremely humble. To be a successful investor you need to be arrogant in the sense that you believe that it is your right to make any investment and everybody else out there with their collective wisdom and their supercomputers are wrong. He doesn’t say this very often but I found an old quote of his where he says, “My idea of a group decision is looking at a mirror.” When he is convinced he is right about something, it is either arrogance or enormous confidence that he is doing the right thing and he will stick with it and will buy more of it.
But he is also humble enough to recognise his limitations as a philanthropist and so he doesn’t try and do it. He is humble enough to recognise that he just can’t figure out where Apple is going to be in the next five years. He doesn’t own it and it doesn’t bother him that he missed a 30 bagger. Knowing when to be arrogant, when to be humble and when to have no opinion at all on various things in life and in business is extremely important.
Can you share a few instances that demonstrated to you Buffett’s enormous learning ability?
I remember years ago, I wrote him a letter about a small company that I owned stock in called Huttig Building Products. This was at least 10 years ago. I thought he might be interested because he had bought a lot of building products companies over time. It was a spin-off from a larger company called Crane. So I wrote to him saying, here is a quick overview of a company that I thought you might be interested in buying. He wrote back saying, “I remember that stock in the 1960s and at the time it was called Hutting Building and Sash.” He remembered it from 40 years earlier. Even friends with whom he had traded stock ideas with in the 1960s could never find a company that he wasn’t encyclopaedic about. They would call him up with these obscure little companies nobody had ever heard of. They would pick up the phone and say I have being doing research on XYZ company. He would know the whole story, the annual revenues for the past five years, he would have read their annual reports for the last 10 years.
Among Tilson’s holdings*, Netflix has been a blockbuster
The investments he is making today are rooted in a lifetime of hard work. So what looks easy for him, the things we can see — the investment in Burlington Northern, Lubrizol and Iscar. What you don’t see is that for every investment that he does make he says no to 99 others. It is easily a 100 to one ratio. He has the ability to immediately say no to something that lies outside his circle of competence, that he can’t predict where it will be in the next five years, that it is a value trap and looks cheap but it is really not, etc. So, he has made a few mistakes in the shoe business and the airline business a while ago even though that ended up being profitable. But he has an enormous high batting average. He may miss something and he has cited some of the things he has missed over time.
But he has incredible accumulated wisdom. The more time I spend in the investing business, the more I see how history, though it may never repeat itself exactly, always rhymes. When you see investment situations, you are able to quickly get to their root and see if they are interesting, so you know where to spend your time and to avoid the value traps and to figure out what is the right analogy for, say, Apple. Is Apple the next Nokia or RIM, formerly dominant tech companies that are headed towards oblivion, or is it going to be more like an Exxon, a mega company that continues to crank out profits and dividends and be a successful investment from here?
Another admirable quality of Buffett is admitting his investing mistakes. What have been your takeaways?
He has talked about his investment in US Air and Dexter Shoes that he bought for $400 million when it was actually very cheap. If you look at what that stock is worth today, that would be a multi-billion dollar mistake. In this case he was drawn in by its cheapness without fully factoring in the macroeconomic trends.
You could argue that he made the same mistake last year when he bought newspapers, which is a structurally challenged industry. But he bought the local papers with a very clear strategy: start charging for your digital content and focus 100% on local news, sports and gossip but do not try to compete on international news, sports. He believes that there will be room for them in the print and digital version catering to local needs: Who is getting married, who is getting divorced, what the local football team is doing. That is a unique niche and there is nobody else providing that.
Then, I recall Buffett talked about identifying Walmart as a good investment many, many years ago. He was buying the stock at $23 but stopped when it hit $23 and an eight because he waited for it to come back to $23. “How stupid could I be?”, though Buffett didn’t quite say it this way, his point was he was buying thinking it was worth $40 or $50. So, who cares if it is $23 or $23 and an eight? That lesson was 10 years ago but it almost never happens even today that I buy a stock at its 52-week low. You have to decide at today’s price if this is one of the most attractive investments that I can find. If it fits in with your portfolio then you should buy it today and not cry over the fact that it was cheaper at some point in the past and hope that it might get back down there again.