A few weeks ago at dinner I was getting set to order a brisket sandwich. Then I saw that this tower of goodness, which was covered with beer braised bacon and other accoutrements, came with a hefty price tag of 1400 calories. I thought better and went for the grilled chicken instead.
Investors could use something that would act like a calorie counter. Something that said, “hey moron, that stock you just bought was sold to you by Renaissance Technologies. Still think this is a good idea?”
In 1952 when Warren Buffett was twenty-one years old, these calorie counters existed. While he was a broker at his father’s company, Buffett-Falk, the first stock he bought for his clients was GEICO. The thing is, they were buying from a very sophisticated seller. From Alice Schroeder’s The Snowball:
When I first started selling GEICO to people, Buffett-Falk had this little office downtown, and the stock certificates would come in and Jerome Newman’s name would be on those certificates. He was the seller I was buying from. And the guys at Buffett-Falk said, “What the hell. If you think you’re smarter than Jerry Newman…”
In this case, Buffett was smarter than Jerry Newman (Ben Graham’s partner), but ordinary investors would be well served if they thought for a second about who they were transacting with. Over 90% of today’s volume is done by institutions, so chances are that your counter party has done their homework. You’re much more likely to be transacting with a computer program built by a team of rocket scientists than you are with the proverbial patsy.
Want some weekly calls? Sold to you by D.E. Shaw!
Thinking about buying some downside protection? Sold to you by Bridgewater Associates!
Want to sell your gold? Euro Pacific Capital will be happy to take that off your hands.
Before making your next transaction, ask yourself, what do I know that my counterparty doesn’t?