The Art of Frugality

About 12 years ago I was trying to learn more about personal investing.
My good friend Bill Ackman, currently a hedge fund manager for Pershing Square
Capital Management, told me, "Read all of Warren Buffet's Berkshire-Hathaway
shareholder letters. That's all you need to know."

I've been reading them voraciously ever since. They teach the
principles of sound investing: Buy a stock only when you can purchase it at a
large discount from what any rational cash-paying buyer would pay per share to
own the whole business.

The best advice I was given was to "ignore the noise." Financial
markets are, by nature, volatile and messy. Successful long-term investing
emphasizes the fundamental underpinnings of the economy and companies. These
building blocks rarely shift quickly, although market prices can change
frequently and dramatically even during the course of a single trading session.
Wise investors make their decisions based on a few essential elements and
are not easily deterred by market gyrations. But wise investors are also willing
to adjust their views when the critical variables shift or do not play out as
expected. The source of this advice was my father, Raymond Joseph.

Professor Ed Zschau at Princeton University gave me a short but
powerful piece of advice. I had volunteered for the second time to clean erasers
and place name placards on desks before class to get to know him.

He said with a smile, "Don't get too good at the little things" and
explained that if you excel at the menial tasks, those are the responsibilities
people will associate you with and give you. Get noticed for doing things that
help the big picture, not for fetching coffee, and your financial picture will
grow just as fast as your reputation.

Back in some early grade at the Riverside Elementary School in Miami,
the teacher asked the class to imagine that we put one paramecium on one square
of a checkerboard and then it had two daughters that occupied the second square,
and the two daughters each had two daughters who occupied the third square and so on. How many would you have by the time you got to the 64th square?

A lot. If you lined up all the paramecia end to end, they would
reach the sun and back 6,000 times over. That lesson easily translated into
money: If someone had put aside $1,000 the day I was born, with a 9.5% annual
return it would be worth almost $210,000 today.

I got my number-one piece of financial advice in an investments course
at the University of Chicago business school in 1979. It may sound a little
self-serving: Index investing is a great way to gain exposure to the
marketplace.

The second-best advice I ever received came from a friend of my
parents. He said, if you think investments are going to do something within a
certain time frame, double that time frame. It could be anything from growth
stocks outperforming value stocks to the dollar strengthening. That kind of
advice gives you a dose of humility: It acknowledges that trying to exploit a
trend is very difficult, even if you're right about it, because your timing may
be all off.

I worked at the bank in Wauwatosa, Wisconsin, where I grew up, shortly
after I got out of the Navy in 1958. The president of the bank, Art Kohaske,
used to say, "Know your borrower." Mr. Kohaske drilled that into me: You had to
know the people, know the business. And I admired him greatly.

I translated that lesson into "Know your issuer." In other words -
to put it in CFA talk - know the specific risk that you're taking with a
particular investment. You can apply that advice to government agencies, munis,
corporate bonds, stocks - it applies big-time to stocks. That is really very,
very good advice. If you really know your companies, really know them, you have
a phenomenal advantage, particularly in markets like this where you get rapid
movements up and down that aren't related to individual companies.

Tom Mathers, founder of the Mathers Fund, shared these words of wisdom
at an early Morningstar Conference: "If you find a great growth company, don't
sell it just because it gets a little pricey - you may never get back in again."
He told a charming story about how he and his wife were redecorating their home
in the 1960s and wanted to buy a piano.

Tom held some shares in Disney, and while he liked the company, he
thought its stock price was a bit rich at the time, so he sold the Disney stock
to fund the purchase of the piano. Tom never got back into Disney and instead
watched it rise and rise. Years later Tom would walk through his living room,
see the piano and mutter to himself, "That's the most expensive damn piano on
the face of the planet!"

Back when I was in college, I remember watching Johnny Carson interview
Andrew Tobias, who was giving personal financial advice. Johnny asked: "What's
the best investment for someone who has only $1,000?" Mr. Tobias said,
"Nonperishable consumer staples."

Of course, the audience roared. But Mr. Tobias was being serious
and said that if you purchase nonperishables when they are on sale, the return
on investment is enormous. That answer focused me on the idea that investing
wasn't only about stocks and bonds but rather was a mind-set for making sense of
all of the transactions a consumer engaged in.