Sometimes I allow my mind to wander on topics such as, if different successful personalities were able to implement some of their strategies for our nation or the economy as a whole. For example, what if Congress were required to exemplify the financial discipline Dave Ramsey espouses? Or , what if all defined-benefit plans were converted to defined contribution plans with Ray Dalio’s “All-Weather” strategy? Or what if the MD&A (management’s discussion and analysis) required by the SEC in financial statement disclosures used the same vernacular as Warren Buffett’s plain-vanilla, conventional wisdom shareholder letters? In my opinion, these are just fun things to think about as I contemplate alternative outcomes and consider other perspectives.
I have taken some excerpts from the last time I listened or read all three of these guys and thought I would suggest one takeaway from what seems to be “unconventional” conventional wisdom and apply to investment strategy. Here is what I came up with:
From Mr. Ramsey….
Just in case you are not familiar with his show format, he answers calls on air from all types of people. The calls represent a good sample of the American population that have a similar message: “how do I get ahead”. Ramsey’s message is: human capital is your greatest asset and wealth-building vehicle, so maximize it by delaying gratification and staying out of debt. It is very simple. I find it difficult to believe this simple principle could not be applied to the US budget by our Congress. But then again, absent from Mr. Ramsey’s strategies are entitlement and laziness. These are two elements that will destroy any disciplined plan quickly. One of his mantras, “live like no else, so later you can live like no else” has the making of something ethereal instead of practical, but yet it is. One can only fix the problem of overspending (either personally or nationally) when you spend no more than you make. The Ramsey mindset does not allow any tolerance for consumption beyond your means. Why? Because eventually, the consumption for which you cannot pay for today becomes a future liability for which you will have to set aside future earnings to pay for which will decrease the amount you have to invest.
TAKEAWAY FOR INVESTMENT STRATEGY: Over consumption: 1) decreases one’s ability to maximize their human capital through investment and 2) increases your chance to accumulate debt.
From Mr. Buffett…
In my opinion, nothing is more refreshing than his transparency and plain talk. Most financial disclosures I read are fraught with industry-specific terms seemingly designed to hide something from the reader. Buffett’s words portray an honesty that makes what he is writing “trustworthy”. Since he understands his investments so well, he explains what he is doing very well. It probably follows that if you think you understand something but cannot explain it to someone else, you probably don’t know it that well. (smile!) Berkshire Hathaway’s investment philosophy is leaping off the page to the reader and it is “to increase intrinsic value”. Intrinsic. Now there’s a word you don’t hear every day. But this is just like Buffett to use a term from fundamental financial analysis to arrive at a comprehensible message to investors. I think the message is that when you invest, find a way to maximize cash flow through income earned. Investment earnings will provide current income to reinvest and thus increase the [intrinsic] value of the enterprise.
TAKEAWAY FOR INVESTMENT STRATEGY: Focus on the simplest tenet of investing…making money. Invest in assets that provide current income with the potential to increase in value. But here’s the caveat: “If you don’t understand it, don’t invest in it.”
From Mr. Dalio…
In all the interviews I have read or listened to there is one consistent message with Ray…radical honesty. Although this seems more of a moral boundary than anything, it has proved very useful from a business standpoint. For Bridgewater Associates, it has been a guiding light to understanding truth. It allows them to question things that seem to be hidden in “gray” areas and uncover what really underlies their motivations for making a decision. Not only has this proved successful from a business standpoint, it has helped to build an enviable corporate culture that few have been able to follow successfully. As the world’s largest hedge fund, they manage approximately $120 billion and have outperformed most investment strategies handily including the S&P 500. (Just Google their track record). Pushing one’s self to a modicum of excellence for the sake of delivering superior results can [and should] be everyone’s goal.
TAKEAWAY FOR INVESTMENT STRATEGY: Always seek alternative perspectives and better ideas than your own. Don’t be afraid to question what you think you know.