The Absolute Investor
Board: Berkshire Hathaway
One difference between an “absolute” investor and a “relative” investor is that the “absolute” investor receives no solace when he experiences a 10% decline in the value of his assets simply because the market as a whole falls by a greater amount. But, it goes beyond that to mindset.
In 1999, any fool could have purchased the most aggressive internet and communications stocks and made a huge amount of money. Me? I lost money in 1999.
I knew why this happened. And, at the end of 1999 when I mentioned losing money in a period when it was never easier to make money, it was suggested to me that I change my methods. If I was chasing relative returns, I would have been forced to change what had been working well for me for many years. And I probably would have finished that change just in time to participate in the disaster in the internet and communications stocks that was 2000 and later. Fortunately I ignored this advice, and in 2000 while the gains from 1999 were being brutally removed, I had one of my best years ever.
My expectation of the “absolute” investor is that he cares very little about how well everyone else is performing. He has an internal critic that judges his performance based, not on the performance of others, but on what is a reasonable return based upon all the relevant factors. But, more important than that, his investment methodology completely ignores any consideration for when gains are recognized, only on how much they will be over long periods of time and what is the best way to get them.
This would be a complete luxury for those who run money for others. Their returns will be constantly compared to those of the markets. This is where individuals managing their own money have a great advantage. The professional money manager is expected to both beat the market and keep his returns within some undefined range of market results. Unless the individual creates a “relative” market seeking client of himself, all he needs to do is beat the market over long periods of time.