Morningstar - Q1 2023 - 7

4 Integrity Made Simple
Buffett famously said to the employees of
Salomon Brothers when he stepped in to run the
company in 1991: " Lose money for the firm,
and I'll be understanding. Lose a shred of
reputation for the firm, and I'll be ruthless. " He
also suggested the following as a guide to
behavior: If you would be comfortable having your
actions described in detail on the front page
of your local newspaper, where your family and
friends will read it, go ahead and do it. At
Morningstar, we modified this to: Would you be
comfortable with this appearing on Page C1
of The Wall Street Journal?
5 Fund Boards Are Lap Dogs
That was Buffett's conclusion in his classic
2002 letter to shareholders, and it certainly jibes
with what Morningstar has seen over the
years. Despite their explicit role as guardians for
fund shareholders, fund directors-even
independent directors-rarely push back against
fund managers, and almost never vote to fire
the fund manager. The lesson: Look for board
members with business experience and skin in the
game, but even then don't expect much. Most
important is that the management team and
other employees have integrity (see previous point).
Hoping that a board of directors, no matter
how independent on paper, can effectively police
a management team is a pipe dream.
6 In Investing, It's OK to Do Nothing
Buffett compared investing to a baseball hitter
waiting for a fat pitch-a nice straight ball
down the heart of the plate. But unlike in baseball,
in investing you're not called out after three
strikes. You can let as many pitches whiz past as
you want. This concept of patience has influenced
the way we rate stocks at Morningstar in
that there's no minimum number we have to rate 5
stars; sometimes we have very few stocks we
recommend. In my personal portfolio, I've never
felt pressure to swing if I'm not comfortable.
Letting cash pile up is fine. There will usually be a
market correction at some point to bring prices
down again to attractive levels.
7 Always Be Learning
Both Buffett and Munger are always reading, and
Munger in particular emphasizes the importance
of science-including an understanding of
evolution-as essential for understanding what
makes people tick. Many of my favorite books
were Munger recommendations, including
Influence: The Psychology of Persuasion, by Robert
Cialdini, The Selfish Gene, by Richard Dawkins,
and Guns, Germs, and Steel, by Jared Diamond.
Such eclecticism has always influenced the hiring
philosophy at Morningstar. We'd much
rather hire someone with intellectual curiosity
than a narrow focus on finance.
8 The Markets Are Good, but Not Perfect
Having studied economics at the University
of Chicago, I started my professional career with
a firm faith in the wisdom of markets.
Fortunately (at least in retrospect), my first job
was analyzing Japanese stocks just as the
bubble in Japanese asset prices, arguably the
most egregious asset-price bubble in
history, was bursting. It was an early lesson that
sometimes markets go haywire-or more
precisely, the people who make up markets go
haywire and come to believe that trees
grow to the sky. It's amusing to think about it now,
but serious people in the late 1980s and early
1990s concocted stories about why price/earnings
ratios of 80 or 90, which were common in
Japan at the time, were reasonable. Reading
Buffett and the kinds of books Buffett and Munger
recommend, you come to internalize that
while markets usually do a wonderful job of
allocating capital, they're only as reliable as the
(imperfect) humans making up the market.
9 Index Funds Are a Wonderful Invention
This may appear at odds with the previous point
about imperfect markets, but it's actually not.
Markets may sometimes go haywire, but it's still
mighty hard to outperform them. When I started at
Morningstar in 1991, it seemed the only fans
of index funds were Jack Bogle, a few university
professors, and a handful of academically minded
financial advisors. Index funds made up a tiny
percentage of overall fund assets. My, how things
have changed. One might think Buffett-the
quintessential active investor-would have been
among the biggest detractors of index funds,
but he has consistently heaped praise on index
funds as the best way for most investors to
gain exposure to the stock market. He repeatedly
singled out Bogle for special praise for launching
the index revolution. Buffett showed that
intellectually you can embrace both active and
passive investing-it's not either/or.
10 No Good Investor Is Either 'Value' or 'Growth'
Munger famously helped induce Buffett to move
beyond Ben Graham's cigar-butt style of value
investing (looking for stocks with one good puff
left in them) and embrace great companies-
even if it means paying higher prices for them.
The key insight is that the worth of any company
is a function of its growth prospects and
how confident one can be that the growth will
materialize. You shouldn't analyze a " value "
company any differently than a " growth " company.
11 What It Means to Win the Birth Lottery
The final two lessons apply to life in general and
not just the little corner of life we spend
investing. Buffett has emphasized how lucky he
was to be born where he was (the United
States) and when he was (the 20th
he been born in another time and place, his
somewhat specialized talents of company
assessment would have been worthless. He's
called this the birth lottery. It's a good reminder
to all of us the role luck has played in our
lives. If you're reading this, chances are you've
been pretty darn lucky. I know I have.
12 The Key to Happiness
The key to a happy marriage isn't a beautiful
spouse, smart kids, or pleasant conversation. No,
say Buffett and Munger, the key to a happy
marriage is finding someone with low expectations.
The same holds for reading articles like this one;
I hope you read it with sufficiently low expectations.
And the same holds true for investment success.
I make a habit of mentally lopping off 30% of
whatever my portfolio value happens to be, simply
because stuff happens. Generalizing this bit
of wisdom, I'd suggest that low expectations are
pretty much the best way to ensure a lack of
regrets on one's deathbed. And the best way not
to be disappointed after death, too! K
Haywood Kelly, CFA, now retired, was head of global
research at Morningstar. He was a member of the editorial
board of Morningstar magazine.
century). Had
morningstar.com/products/magazine
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Morningstar - Q1 2023

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