Matt Franz : Zealous For Knowledge

Act Like Owners

A few years ago I came across a Business Week interview with Bruce Berkowitz from 2000. Below is my favorite part.

Q: Very nice, but that’s only over about 10 months. Other than that good record over a short time, why should anyone give you money?

A: One, I think our philosophy makes a lot of sense. We’re doing nothing more than what the wealthiest individuals in the world have done. We act like owners. We focus on very few companies. We try and know what you can know. We try and only buy a few companies which we believe have been built to last in all environments. We recognize that you only need a few good ideas in a lifetime to be fabulously wealthy…. We’re always trying to wonder what can go wrong. We’re very focused on the downside.

When I read this I had an epiphany. How many billionaire market timers can you name? High-frequency traders? Asset allocaters? Sector rotaters? Momentum traders? But I bet that off the top of your head you could name several billionaires and the business they own.

In October the latest Forbes 400 was published. It lists the wealthiest 400 Americans. Here are the top ten:

  1. Jeff Bezos – Amazon
  2. Bill Gates – Microsoft
  3. Warren Buffett – Berkshire Hathaway
  4. Mark Zuckerberg – Facebook
  5. Larry Ellison – Oracle
  6. Larry Page – Google
  7. Charles Koch – Koch Industries
  8. David Koch – Koch Industries
  9. Sergey Brin – Google
  10. Michael Bloomberg – Bloomberg

You won’t find anyone one on the Forbes 400 except long-term business owners. No one got on the list by hoarding gold or owning bonds. They all got on there by owning high quality businesses for long periods of time. Even the money managers. They didn’t make the list because of their short-term trading ability. They made it because they owned hedge funds that collected huge management and incentive fees.

The formula is clear: buy/start/inherit a high-quality business and never sell it. You may not crack the Forbes 400, but you’re likely to do well.

Previously I wrote about how stock prices change. I showed that over short periods of time a large portion of a stock’s movement can be attributed to multiple expansion or contraction. But over long periods of time changes in earnings per share of a high quality business dwarf everything else. Therefore, focusing on the long-term prospects for net income is the most important thing a long-term investor can do.

This is exactly how owners think. They don’t get swept up in the market’s euphoria or despair. They have a deep understanding of their business and how to maximize its long term net income. They don’t diversify. They put all their eggs in one basket and watch that basket closely.

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