Building Wealth Doc's note: Today I'm sharing an essay from Whitney Tilson. In today's special guest issue, Whitney is sharing the best advice he's ever received, how it improved his investing, and how you can use it to become a better investor.
I first discovered value investing in the mid-1990s. From the very beginning, I've had two mentors and heroes who have profoundly impacted my life: Berkshire Hathaway CEO Warren Buffett and Vice Chairman Charlie Munger.
Early on, I learned that value investing is like a religion: It has a revered founder (Ben Graham), a pope (Buffett), a senior cardinal (Munger), an Old Testament (Graham and Dodd's Security Analysis), a New Testament (Graham's The Intelligent Investor), and thousands of passionate disciples (like me) who study the historical texts and scrutinize new teachings by Buffett and Munger.
What I learned from these two wise men about investing was invaluable. In the early days of my career, I was very inexperienced – and they were such brilliant, inspiring, and patient teachers. Had I not absorbed all of the investing lessons they imparted, I never would have achieved anything close to the success I did.
I first discovered Buffett after I finished paying off my student loans and my wife and I had $10,000 sitting in our bank account – I thought we were rich!
I wanted to invest it, so I called Bill Ackman – a college buddy who has become one of the best-known hedge fund managers in the world and remains a close friend to this day. At the time, he was running his first hedge fund, called Gotham Partners.
I asked for his advice. He told me, "It's simple. Just read all of Warren Buffett's annual letters."
That's exactly what I did. It was the best advice anyone has ever given me.
Buffett is widely considered to be the greatest investor of all time, and his Berkshire Hathaway letters are world-class educational material.
For example, many investors become despondent when stock prices fall, but Buffett pointed out how silly this is in his 1997 annual letter. In it, he asked: If you were a hamburger lover, would you would wish for higher or lower prices for beef? And likewise, if you planned to buy a car, would you prefer a higher or lower price?
"These questions, of course, answer themselves," he wrote.
Your future investment returns are driven by the price you pay. If you can buy stocks and other assets for less, then you'll earn a bigger return. That's the heart of value investing.
Buffett's investment approach – especially the concept of buying dollar bills for 50 cents – resonated with me, so I kept reading and learning, and started to buy my first stocks. It was the late 1990s, at the tail end of a 17-year bull market, so most of them went up. One in particular stood out: I bought $20,000 of AOL in 1997.
Less than a year later, I'd made $100,000. I thought investing was the greatest thing ever – and that I was great at it.
I now realize that I had no idea what I was doing. I was just a bull market genius.
You see, value investing, while simple in concept (just buy stocks trading at a big discount to intrinsic value), is difficult in practice because it's so hard to determine what the intrinsic value of a company is. To do so requires accurately predicting what future cash flows will be – and the future is always uncertain.
Though difficult, value investing isn't impossible. But it takes a lot of work. Plus you have to be smart, experienced, humble, and disciplined. Nobody can value every stock – or even a small fraction of them – so you have to be patient and pick your spots.
Only invest your hard-earned capital when you've found the rare situation in which you're convinced that you're right... and the market is wrong.
I've been fortunate in my life to learn from brilliant men like Buffett, Munger, and many others.
I also didn't waste my time going down rabbit holes of various other types of investing, like technical analysis or rash speculation on things like bitcoin. I quickly recognized that value investing was the most sensible approach – and it also best suited my temperament – so I focused on putting effort into this area, which helped me rapidly move up the learning curve. Before I knew it, I was teaching others!
And that's what I've done for the past two decades.
Now, I'm trying something brand-new.
I'm starting a new business. But it's a business that will serve regular folks: teachers... doctors... lawyers... small-business owners... retirees...
It'll give you some of the same huge advantages that are typically only enjoyed by my hedge-fund friends in Manhattan.
It's the only place where I'll be sharing all my top investment recommendations, ideas, predictions, and warnings – basically, everything I think you need to know to make a fortune in the markets this year and in the years to come.
It's all happening on Wednesday, April 17 at 8 p.m. Eastern time.
During this free online event, I'll reveal the secrets of my strategy... and announce the biggest prediction of my career.
Plus, I'll reveal the No. 1 retirement stock in America that you should own right now... you'll get that just for tuning in.
This event – including my No. 1 retirement stock – is free. But a reservation is required. So click here to reserve your spot now.
Regards,
Whitney Tilson