What We Can Learn from Warren Buffett and Bill Gross

“Do not be puffed up because of your knowledge nor overconfident because you are a learned person.  Take counsel with the ignorant as well as with the wise, for the limits of proficiency cannot be reached, and no person is ever fully skilled.” – Egyptian Magistrate Ptah-Hotep, 2400 B.C.

Warren Buffett and Bill Gross are considered to be two of the greatest investors of all-time. Buffett specializes in stocks and buying entire businesses while Gross is widely known as the “Bond King.”

Both have generously shared their insights on the markets with the investing public for a number of years. I have learned enough from these two to fill a couple of books. But I thought I would try to boil it down to two very important lessons that you can learn from them and use to gain a better perspective on life and your investments.

Warren Buffett has been very open and honest about the mistakes he has made over the years. Even though he is considered the best investor of all-time that doesn’t mean he knocks it out of the park every single year.

In his annual shareholder letter he gives an update on how Berkshire Hathaway’s book value has performed against the S&P 500 Index each year going back to 1965 when he purchased the company and turned it into a vehicle for his investments.

His numbers are extraordinary to say the least. Berkshire has a compounded annual gain of 19.07% versus a 9.4% gain on the S&P from1965 to the end of 2012. That equates to a total return for Berkshire Hathaway in that time frame of 586,817% against the S&P return of 7,433%.

To put this in perspective, if you had invested $1,000 in Berkshire Hathaway stock in 1965, by the end of 2012 you would have had $4.35 million. By comparison, $1,000 invested in the S&P 500 in that time would have turned into $74,616.

But even he had his off years. In those forty-eight years of investing Buffett underperformed the S&P in nine of those years. So almost 20% of the time his results were worse than the index and his underperformance actually averaged 9.7% in those years.

Now, having a batting average greater than 80% is an unbelievable record but I just wanted to show you that there are going to be periods where even the greatest investor on Earth is going to underperform in the short-term. But if you can look past those periods of short-term pain, the long-term results can be extraordinary.

I’m not saying anyone is going to touch Buffett’s track record but the point is that you can achieve amazing results by having a long-term perspective with your investments even though you will have periods where you don’t do as well in the short-term.

Bill Gross, portfolio manager for PIMCO’s Total Return Fund, also has an enviable long-term track record. Since the fund’s inception in 1987, it is ranked number one among all other funds in its class. Since the fund’s inception it has returned 8.3% per year through April versus an average of 6.7% for PIMCO’s competitors.

That doesn’t sound nearly as impressive as Buffet’s outperformance but in the fixed income space 1.6% per year is a huge number considering how much lower the spread is for the returns on bond funds. One of the reasons for his success is the fact that Gross has a long-term secular outlook on the economy and global shifts in the factors that affect bond returns.

Every investor talks about the economy these days but Gross was ahead of his time and his bond investing peers by using long-term secular shifts as a way to structure his portfolio. His focus on the total return of his investments, both in price and yield, over the long-term has really set him apart.

Now that we have established the superior track record for Buffett and Gross let’s hear what they have to say about some of the reasons they think they have been successful over the years.

Gross gave a wonderful perspective in one of his recent PIMCO monthly updates about his thoughts on the possible reasons for his success as one of the greatest investors of all-time (emphasis his):

I must tell you, after 40 rather successful years, I still don’t know if I or PIMCO qualifies. I don’t know if anyone, including investing’s most esteemed “oracle” Warren Buffett, does, and here’s why.

There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience. Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of “greatness.” Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch.

Instead of championing himself for having a better investment process and being more intelligent or analytical than his competitors, Gross basically tells us he thinks he was lucky to be an investor in this period of time. It’s hard to believe that the “Bond King” could be so humble about his investing prowess.

Buffett discusses a similar line of thinking in his biography, Snowball: Warren Buffett and the Business of Life:

“I have been very lucky. I was born in the United States in 1930 and won the lottery the day I was born. I had terrific parents, a good education, and I was wired in a way that paid off disproportionately in this particular society. Had I been born long ago or in some other country, my particular wiring would not have paid off the way it has. But in a market system, where capital-allocation wiring is important, it pays off like no other place.

It would be easy for these two investment legends to be arrogant about their long-term track records, investment skill and knowledge of the markets, which are virtually unmatched. But instead of bragging about how great they are they choose to deflect praise and talk about how lucky they have been over their lifetimes and careers.

This may be hard to do for those that have had successes in their lives or are very intelligent. I think this attitude is probably one of the reasons that they have been able to sustain their long lasting performance in a brutal industry. By staying grounded they are able to continue to seek superior results even when they could have retired many years and many dollars ago.

I often discuss how overconfidence can negatively impact your investment decisions so it is very refreshing to hear these two greats stay so humble about their abilities and have such a grateful perspective on both life and investing.

Don’t get me wrong, they are very confident in their abilities, but they don’t go overboard because they know from their long careers that the market can be a humbling place if you have the wrong attitude.

Obviously both men are being modest about their skills and abilities. They are lucky to be in the positions that they are in, but they have also taken advantage of the opportunities presented to them and exceeded expectations many times over.

Buffett’s business partner, Charlie Munger, sums this up perfectly:

“Patience combined with opportunity is a great thing to have.”

Bill Gross and Warren Buffett have both taken advantage of their opportunities. They both think long-term and have stayed humble despite having track records that other investors can only dream about. The fact that they continue to share their wisdom with investors is priceless.

Snowball: Warren Buffett and the Business of Life
Berkshire Hathaway 2012 Shareholder Letter
Man in the Mirror

Please read the second part in my series on rising interest rates at Dividend Ninja: The Risks of High Yielding Investments.

And here are my weekly reads from around the web:

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  1. Shaun Hoobler commented on Jun 13

    Hi Ben! Many thanks for this. Good post. I’m a new reader to your blog so I thought I’d just add a quick thankyou.

  2. Bond Investment Strategies - A Wealth of Common Sense commented on Jun 28

    […] Bill Gross of PIMCO and Jeffery Gundlach of DoubleLine are two of the smartest bond fund managers alive right now. They both foresaw the crash in 2007-08 and played the recovery correctly as well. […]