The Berkshire Hathaway meeting is always interesting.
Sometimes you learn new things, and sometimes you get important reminders.
Ajit Jain give me one of those reminders that I want to share with you today.
Who is Ajit Jain?
Ajit Jain is the Vice Chairman of Insurance Operations for Berkshire Hathaway.
He’s widely considered the greatest insurance mind in history.
When he joined Berkshire in 1986, he had zero experience in the insurance industry.
Warren Buffett had a single meeting with him, and hired him on the spot.
He said that talking to Ajit for 2 hours before hiring him was ‘like striking gold.’
A $100 Billion Man
Jain essentially built Berkshire’s reinsurance business from scratch.
His specialty is ‘super-cat’ (super-catastrophe) insurance that underwrites massive, complex risks that no other firm in the world has the stomach or the capital to handle.
It is estimated that Jain has created well over $100 billion in value for Berkshire shareholders.
He is the architect of Berkshire’s massive insurance float (premiums collected before claims are paid), that provided the capital for Buffett’s stock investments and acquisitions.
In his 2022 Annual Letter, Buffett wrote that Berkshire’s success was the result of “about a dozen truly good decisions” made over 58 years.
Buffett didn’t provide a list in that letter, but the consensus among Buffett experts (and Charlie Munger) is that hiring Ajit Jain is almost certainly #1.
Charlie Munger famously stated that the search fee Berkshire paid to find Ajit was the single best investment the company ever made.
“If Charlie [Munger], I, and Ajit are ever in a sinking boat and you can only save one, save Ajit.”
-Warren Buffett
Ajit’s Reminder
For those who prefer reading to video (I’m with you), here’s the transcript of what Ajit said.
“You know, insurance, much like investing, is a game that requires patience. And it is very difficult to get people to sit back and do nothing.
When I recruit people, my modus operandi—I tell them right up front—I said, I tell them, ‘Your job is to say no.‘ You will get bombarded with deals day in and day out, but your base case is just say no.
I said every now and then, you will come across a deal that will hit you with a 2x4 and it’ll be screaming money. That’s when you come to me and we’ll make a decision whether to do it or not.
You know, all kidding aside, it is very difficult to sit there and do nothing while everyone else is being wined and dined by brokers and taken to London. So I think the real test of being successful, certainly in insurance and therefore investing as well, is the ability to say no.”
Why Saying ‘No’ Is Important
Having ‘no’ as your base case as an investor is the right position.
Here’s why.
You have limited time.
There are 60,000 stocks in the world.
You can’t possibly look at every single one.
Your first goal should be to find reasons to say ‘no’ as fast as possible.
For each company, you look at, ask:
Do I understand how the company makes money?
Does this company interest me?
Can I make an educated guess about where this company will be in 10 years?
As soon as you say ‘no’ to any of these questions, move on.
Warren Buffett famously went through the Moody’s Manuals page by page.
How much time do you think he spent looking at each company?
Results are not equally distributed.
You’ve probably heard of the Pareto Principle.
It says that 80% of your results comes from 20% of your effort.
Pareto originally observed his distribution in land ownership in Italy, where 20% of the population owned 80% of the land.
But there’s another, less well-known idea that might apply even better to investing.
Price’s Law.
Derek de Solla Price noticed that in any scientific field, a small number of scientists published a lot of the research.
He discovered that half of the published research comes from the square root of the total number of authors in that field.
The important difference of Price’s Law compared to the Pareto Principle is that in Price’s Law, the ratio isn’t fixed.
The bigger the group gets, the more concentrated the results become.
Investment returns aren’t equally distributed.
Just like land ownership, wealth, and academic output, investment returns aren’t equally distributed either.
Buffett’s 12 good decisions
Mohnish Pabrai estimated that Warren Buffett made about 300 investing decisions.
We said earlier that Buffett says Berkshire’s success is the result of about 12 of those.
That’s a 4% hit rate.
By the way the square root of 300 is 17…
Bessembinder’s 86 stocks
Hendrik Bessmebinder did a pretty well-known study on long term stock returns.
Here’s what he found:
86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years
All of the wealth creation can be attributed to the 1,000 top-performing stocks
The other 96% of stocks collectively matched one-month T-bills
46 stocks drive the S&P 500
Another version of this concentration comes from Bridgeway Capital Management.
They found that even though the S&P 500 index includes 503 stocks, the recent returns of the index are the result of 46 of them.
Stay Disciplined
The math of investing is clear whether you look at Price’s Law, the Pareto Principle, or Bessembinder’s data, extraordinary returns are always concentrated in a tiny minority of outcomes.
If a very small number of investments will drive the majority of your returns, then your most valuable skill is your ability to say no.
Ajit Jain didn’t create $100 billion in value by saying yes to every reinsurance contract that crossed his desk.
He did it by saying no to most of them, and waiting for the rare deal that screamed money.
Do Less
In most jobs, doing more leads to more.
In investing, more activity doesn’t usually lead to higher returns.
Make No your default. If you don’t understand the business, the moat, or the 10-year outlook, move on immediately.
Remember the Power Laws. Most of your picks will be average, but stay disciplined so you have the capital and the courage to swing when a 2x4 deal hits you over the head
Embrace Boredom. As Ajit says, it’s very hard to do nothing while everyone else is busy.
Don’t look for more things to buy.
Look for reasons to say no until you find something that’s obvious to you.
One Dividend At A Time,
-TJ
Used sources
Interactive Brokers: Portfolio data and executing all transactions
Fiscal.ai: Financial data
