Unbelievable – that old Biff could have chosen that particular date. It could mean that that point in time inherently contains some sort of cosmic significance.
Doc Brown, Back to the Future – Part II
For Marty McFly and Doc Brown in the Back to the Future trilogy, 12 November 1955 was a key date, around which their destinies appeared to revolve.
And while we cannot narrow things down to a single day, here on The Value Perspective, whenever we are looking to explain value investing in the context of history or argue why the strategy is still hugely relevant, we keep coming back to 1995.
Not that it was only a pivotal year for value investors – 1995 saw the floatation of web pioneer Netscape, which effectively opened up the internet to everyone rather than it simply being the domain of the US military and a handful of strange people in what we now know as Silicon Valley.
As such, it was also the year when the seeds of the dotcom boom were sown, which saw value underperform in the second half of the 1990s.
1995 was also the year value legend Warren Buffett’s Berkshire Hathaway investment vehicle took control of insurance business Geico.
Buffett actually made reference to this in his 2019 letter to investors, reckoning it was his most important exception to business partner Charlie Munger’s description of value as “cigar-butt investing” – discarded businesses that had ‘one free puff’ left in them.
Tech stock shock
Through the latter half of the 1990s, Buffett went on to buy other insurance and reinsurance businesses – while most other investors piled into technology, media and telecom stocks.
As we noted in Value doubters, his approach led US financial magazine Barron’s to run a piece in December 1999 entitled “What’s wrong, Warren?” and suggest Buffett was “too conservative, even passé”.
Two months later, the tech bubble burst.
As it happens, 1995 also saw Marvel teetering on the brink of bankruptcy before it embarked on one of our favourite turn-around stories – as we discussed, here on The Value Perspective, in Strangely deep-value.
Still, let’s stick with Buffett and Munger and focus on the answer they gave to Question 59 at the 1995 annual shareholders’ meeting on the sort of reading material you might favour to become a better investor.
Ways to become a better investor
Buffett suggests investing does not require “any great mathematical ability” – only “mathematical awareness and numeracy”.
“You are prioritising and selecting in some manner,” he continues. “My own feeling about the best way to apply that is just to read everything in sight. If you are reading a few hundred annual reports a year and you have read [Ben] Graham and [Philip] Fisher, you soon see whether it kind of falls into place.”
A little later, Buffett wraps up his answer by saying he likes “a lot of historical background” so he can see how a business has evolved over time – “what’s been permanent and what’s not been permanent” – and he concludes: “We’re trying to buy businesses we want to own forever and, if you’re thinking that way, you might as well see what it’s been like to own them forever and look back a-ways.”
For Buffett, then, history and context is crucial when evaluating a potential investment, while forecasts are just opinions – and that tallies very neatly with our own process, here on The Value Perspective.
In contrast with much of the investment sector – on both the ‘buy’ side and the ‘sell’ side – all our financial models are based on trying to understand as much of a business’s accounts as we can over the preceding 10 years.
Why 10 years? That is because we are trying to understand all of the most recent market or business cycle of that specific company.
And sometimes, when we do not believe 10 years is sufficiently representative of the business cycle – which would be the case for most mining and energy companies and some financials – then we will go even further back in time.
If we deem it appropriate, that could even be 20 or 25 years – which just so happens to take in 1995. “Almost as if it were the junction point for the entire space-time continuum,” as Doc Brown says of 12 November 1955. “On the other hand, it could just be an amazing coincidence.”