Some Managers Really Don't Get It (#14)

My experience with bankers who should understand that stocks = businesses (but don't)

I spent over a decade in commercial banking. During that time I witnessed a perplexing phenomenon where bankers — individuals paid to assess businesses every day — looked at the stock market incorrectly.

These individuals ranged from credit analysts to lenders to bank presidents. They were paid to read financial statements, forecast cash flows, and identify risks that could lead to permanent capital impairment over the life of a loan, which sometimes stretched over a decade or more.

Reading financial statements, forecasting cash flows, and identifying risks is exactly the type of work an investor in the stock market does. Yet these individuals identified themselves as bankers, not stock pickers. For some reason, they just couldn’t grasp that stocks = businesses. Why, I asked, didn’t they approach investing in the stock market for their own account the same way they lent out money day-to-day?

I believe the answer to the conundrum stems from a fundamental disconnect. They viewed the market as some “thing” unto itself that they knew would provide long-term gains in wealth but was otherwise a mystery to them. They saw but didn’t really comprehend that a stock market is a business market. Noisy trading screens and flashy ticker symbols drowned out the business fundamentals crucial to understanding where those blips and bleeps on the screen would ultimately end up years down the road.

Here’s Warren Buffett answering a question at the 1994 Berkshire Hathaway annual meeting commenting on the same puzzle:

It’s very interesting to me, because they’ll say that — they’ll have somebody else manage their money in terms of portfolio securities. Well, all that is is a portfolio of businesses.

And I’ll say, “Well, why don’t you pick out your own portfolio?” And they’ll say, “That’s much too difficult.”

And then some guy will come along with some business that they never heard of a week before and give them some figures and a few projections, and the guy thinks he knows enough to buy that business. It’s very puzzling to me sometimes.

Their loss, and our gain.


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