Kass: Lessons Never Learned

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"We learn from history that we do not learn from history."

-- Georg Wilhelm Friedrich Hegel

Back 45 years ago, a successful investment manager wrote what follows in a letter to his limited partners:

The investing environment ... has generally become more negative and frustrating as time has passed: Maybe I am merely suffering from a lack of mental flexibility. (One observer commenting on security analysts over 40 stated: "They know too many things that are no longer true.")

However, it seems to me that: (1) opportunities for investment that are open to the analyst who stresses quantitative factors have virtually disappeared, after rather steadily drying up over the past 20 years; (2) our $100 million of assets further eliminates a large portion of this seemingly barren investment world, since commitments of less than about $3 million cannot have a real impact on our overall performance, and this virtually rules out companies with less than about $100 million of common stock at market value; and (3) a swelling interest in investment performance has created an increasingly short-term-oriented and (in my opinion) more speculative market.

I feel very much like that 38-year-old investment manager, whose views arguably apply to the investment backdrop today.

That investment manager was Warren Buffett, and the paragraphs were extracted from the Buffett Partnership letter to limited partners in May 1969, in which Warren explained his decision to close his investment partnership. ("Therefore, before year-end, I intend to give all limited partners the required formal notice of my intention to retire.")

Warren went on in the letter:

Quite frankly, in spite of any factors set forth on the earlier pages, I would continue to operate the Partnership in 1970, or even 1971, if I had some really first-class ideas. Not because I want to but simply because I would so much rather end with a good year than a poor one. However, I just don't see anything available that gives any reasonable hope of delivering such a good year and I have no desire to grope around, hoping to "get lucky" with other people's money. I am not attuned to this market environment, and I don't want to spoil a decent record by trying to play a game I don't understand just so I can go out a hero.

Yesterday I highlighted my concerns with emerging sectors of market froth/speculation, and I referenced a 1997 Barron's editorial I wrote, " Kids Today." I authored that "Other Voices" contribution to Barron's when I was approximately the same age that the Oracle of Omaha was when he wrote his 1969 letter in which he said, "If I am going to participate publicly, I can't help being competitive. I know I don't want to be totally occupied with outpacing an investment rabbit all my life. The only way to slow down is to stop."

Warren closed his 1969 letter with the following paragraph:

Some of you are going to ask, "What do you plan to do?" I don't have an answer to that question. I do know that when I am 60, I should be attempting to achieve different personal goals that those which had priority at age 20. Therefore, unless I now divorce myself from the activity that has consumed virtually all of my time and energies during the first 18 years of my adult life, I am unlikely to develop activities that will be appropriate to new circumstances in subsequent years.

As we all know, Warren Buffett, it turned out, was just starting his remarkable and unparalleled investment career in 1969. As it is said, "the best was yet to come" with his stewardship of Berkshire Hathaway ( BRK.A)/ ( BRK.B) in the decades ahead. (That, as news commentator Paul Harvey used to remind us on the radio, is the rest of the story.)

And to this day, as illustrated in my opening missive " 'Buffett Being Buffett' Bracket Challenge," Warren has not slowed down, though he will be 84 years young this August.

In closing, Warren's 1969 words and my 1997 editorial are two reminders to us all of how markets might not repeat themselves but they certainly rhyme.

Be forewarned.

This column originally appeared on Real Money Pro at 8:04 a.m. EDT on March 18.
At the time of publication, Kass and/or his funds were short BRK.B, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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