Investing guru Buffet learned early to heed his own counsel

By DAVID MOON, Moon Capital Management
February 2, 2003

In 1941, 11 year-old Warren Buffett and his older sister bought a few shares of Cities Services preferred stock at $38 dollars a share. It was the first stock purchase ever made by the future 'Oracle of Omaha.' Buffett's influence on the market as an 11 year-old was a bit less than it is now; the stock promptly declined 30 percent. Every morning as they walked to school, Warren's sister reminded him of their purchase price, encouraging him to sell his shares if the price ever rebounded. It eventually rebounded to $40 a share, two dollars more than their purchase price. Surrendering to the pressure from his older and presumably wiser sister, Warren dumped his shares, netting a total profit of about five dollars.

The shares continued their ascent and eventually peaked at $212 a share. So much for market timing.

Buffett says his lesson from this experience was to think for himself and not let others drive his thought process and decisions. At an age most kids are influenced by peer pressure, he decided to march to the beat of his own drummer, regardless of what others thought or said. He proceeded to create one of the most enviable track records in investment history, from the relative obscurity of Omaha, Nebraska. No cocktails with other money managers each afternoon. No golf course (or bridge table) chatter about what the Dow is about to do or the impact of war on stock prices. Buffett understands his core competencies, avoids areas outside that core and makes his own decisions.

While this may be a boring model, it has been successful. Why don't more people use it? Many people continue to let themselves be influenced, excited and panicked by others. And often the influencers are less knowledgeable about investing than the influencees.

If the allure of the masses pulled you into the stock market (or, heaven forbid, the technology bubble) at its height in 2000, there is nothing you can do about that now. Quit trying to get back to where you were in March 2000. That is an artificial goal. You should be focused on where you need to be, not where you've been.

The difficulty is that there are several industries with an incentive to feed off your emotion about the stock market. (Aside: my advice is to remove emotions from your investment decision making.) These folks want to sell you on whatever emotion they think they can most easily evoke. If you're afraid of stocks, be sure that an army of bond salesmen will find you. Burned by the Internet? Here comes a guaranteed CD, with returns linked to the stock market. Upset because you missed Microsoft in 1990? There are scores of people ready to sell you shares of the next Microsoft - and you can get in on the ground floor, if you act now.

Several years ago, Buffett's partner, Charlie Munger, was fishing with a friend who owned a fishing lure manufacturing company. Sharing Buffett's natural curiosity, Munger asked, 'do fish really like purple rubber worms?' His friend replied, 'Charlie, I don't sell those worms to fish.'

Too many people are in the business of selling purple worms - and too many of us eagerly accommodate them.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website