One of the more legendary characters in the history of investing is Bernard Baruch. In his biography Jim Grant writes that Baruch was not as wealthy as most people imagine, but wealth enough to live the lifestyle “of a millionaire” (whatever that means). At various times in his life Baruch was an investor, philanthropist, statesman, and political consultant. The Dictionary of American Biography provides background:
In 1891 Baruch joined the brokerage firm of A. A. Housman and Company as a bond salesman and customers’ man. After some initial setbacks his personal speculations resulted in a series of successful plunges in sugar, tobacco, and railroad stocks. Baruch played a lone hand, followed his hunches, and achieved his greatest triumphs during bear markets, selling short as stock prices tumbled. His flamboyance did not gain him respectability among the Morgans, Warburgs, and other pillars of New York’s financial establishment, but he was a millionaire at thirty. In 1903 Baruch left Housman to establish his own firm. In frequent alliance with the Guggenheim brothers he speculated in copper, sulfur, gold, rubber, tungsten, zinc, and iron investments in the United States and abroad.
Baruch was influenced by several other investors, one of which was Scottish journalist Charles Mackay, the author of Extraordinary Popular Delusions and the Madness of Crowds.
Ben Graham was so successful early in his career as an investor that he was invited to be a partner of an older and more established Bernard Baruch. A passage of the book A Decade of Delusions provides backgrou8nd on this time in history:
At the quarter-century mark of 1925, the great bull market was under way, and Graham, then 31, developed what he later described as a “bad case of hubris.” During an early-1929 conversation with business associate Bernard Baruch (about whom he disparagingly observed, “He had the vanity that attenuates the greatness of some men”), both agreed that the market had advanced to “inordinate heights, that the speculators had gone crazy, that respected investment bankers were indulging in inexcusable high jinks, and that the whole thing would have to end up one day in a major crash.” Several years later he lamented, “What seems really strange now is that I could make a prediction of that kind in all seriousness, yet not have the sense to realize the dangers to which I continued to subject the Account’s4 capital.” In mid1929, the equity in the “Account” was a proud $2,500,000; by the end of 1932, it had shrunk to a mere $375,000.
Graham declined the invitation to join Baruch as a partner. But if you look at what Baruch said over the years it is impossible to conclude that he did not have a significant influence on Graham and the creation of the value investing system. The dozen quotes I have chosen below were chosen to help make this point.
- “Before you buy a security, find out everything you can about the company, it’s management and competitors, it’s earnings and possibilities for growth.” Treat a share of stock as a proportional ownership of the business. A share of stock is not the equivalent of a baseball card or a collectable car. It is a real business that you must understand deeply to be a successful investor. For someone like Buffett this process of learning about the business is the most fun part of investing. If you do not find understanding businesses interesting, I suggest that you find a low cost diversified portfolio of index funds/ETFs and be content with your profession and hobbies.
- “Don’t try to buy at the bottom and sell at the top. This can’t be done – except by liars.” “Bears can make money only if the bulls push up stocks to where they are overpriced and unsound.” “Whatever men attempt, they seem driven to overdo. When hopes are soaring, I always repeat to myself that two and two still make four.” “The main purpose of the stock market was to make fools of as many people as possible.” Make bi-polar Market your servant rather than your master. Trying to time markets in the short term is a fool’s errand. People, of course, fib about their success as stock speculators all the time — mostly to themselves. Mr. Market is a drunken psycho. Markets are not wise in the short tern nor always efficient. He is the source of opportunity since his bi-polar swings up and down produce the mis-pricing that allows some people to beat the market.
- “When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.” There is a big difference between investing and speculating. Investors are focused on value whereas speculators are focused on how the changing psychology of large numbers of people impacts price. In order to buy a stock at a discount to value you must do the work. Of course, if it is not work but fun to understand businesses then you have what Warren Buffett likes so much- something that is both profitable and fun.
- “In the search for facts I learned that one had to be as unimpassioned as a surgeon. And if one had the facts right, one could stand with confidence against the will or whims of those who were supposed to know best.” Being rational is the fourth bedrock principle of value investing. Charlie Munger calls rationality “a moral duty.” Unfortunately, it is hard to be rational all the time and in all situations given the many human biases that have been identified by behavioral economists. Even though it is not easy to be rational, it is worth the effort, especially in investing.
- “Don’t try to be a jack of all investments. Stick to the field you know best.” This statement by Baruch is another way of saying: stay within your circle of competence. Risk comes from not knowing what you are doing. Charlie Munger says: “There are a lot of things we pass on. We have three baskets: in, out, and too tough…We have to have a special insight, or we’ll put it in the ‘too tough’ basket. All of you have to look for a special area of competency and focus on that.”
- “Don’t buy too many different securities. Better to have only a few investments which can be watched.” Baruch is saying that he is a “focus investor” like Charlie Munger: “Our investment style has been given a name — focus investing — which implies 10 holdings, not 100 or 400.” Especially if you have a day job there are only so many business you can genuinely follow and understand.
- “Beware of barbers, beauticians, waiters – of anyone – bringing gifts of ‘inside’ information or ‘tips’. The longer I operated in Wall Street the more distrustful I became of tips and ‘inside’ information of every kind. Given time, I believe that inside information can break the Bank of England or the United States Treasury. A man with no special pipeline of information will study the economic facts of a situation and will act coldly on that basis. Give the same man inside information and he feels himself so much smarter than other people that he will disregard the most evident facts.” Perhaps there should be something called a “stock tip” heuristic/bias. People who get a stock tip will often suspend disbelief and stop being rational. It is best to “just say no” to stock tips.
- “Mankind has always sought to substitute energy for reason, as if running faster will give one a better sense of direction.” Baruch is pointing out that there is no prize for hyperactive trading in markets. There is in fact a penalty in the form of fees, costs and taxes. If stock prices drop some people think they can fix that with more activity when often leads to mistakes,
- “Always keep a good part of your capital in a cash reserve. Never invest all of your funds.” Cash is like financial Valium. Cash can keep an investor calm and more importantly given them the ability to buy a bargain when it becomes available.
- “The wisest course is to sell to the point where one stops worrying.” “Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.” Buffett makes the point that if your stock holdings make it hard for you to sleep you should be holding a greater percentage of less volatile assets in your portfolio like cash and bonds. Having said that he also says: “Over the long term, however, currency-denominated instruments are riskier investments — far riskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”
- “In the stock market one quickly learns how important it is to act swiftly.” Markets are not perfectly efficient, but they are mostly efficient. Bargains that you can spot within your circle of competence don’t come along that often and when they do you must be ready to pounce sinnce the bargains won’t be available for long. You must be patient and yet brave enough to act quickly and aggressively when an opportunity presents itself.
- “Nobody ever lost money taking a profit.” “It is one thing to make money and another thing to keep it. In fact, making money is often easier than keeping it.” There is an old saying that you can make a profit as a bull or bear but never a pig. Baruch is also saying once you take a profit it can be hard not to spend it. The more you spend the more you feel pressure to push the edge of the envelope which can lead to mistakes. I’ve never found that more expensive stuff makes you any happier.
Bernard Baruch, My Own Story: http://www.amazon.com/Baruch-My-Own-Story-Bernard/dp/156849095X
Josh Brown on Baruch: http://thereformedbroker.com/2013/02/17/bernard-baruchs-10-rules-of-investing/
The Dictionary of American Biography: http://www.sunnycv.com/steve/ar/d7/baruch.html
Bernard Baruch: Adventures of a Wall Street Legend (Jim Grant): http://www.amazon.com/Bernard-Baruch-Adventures-Street-Legend/dp/1604190663