Warren Buffett, Chairman and CEO of Berkshire
Hathaway, is perhaps the greatest investor of our time, if not ever. At buffettologist.com, we have been studying, practicing,
and learning from the teachings of the Oracle of Omaha for years. As such, we have created this blog to share our insights
on Mr. Buffett, other Buffett disciples, and value investing.
Thursday, June 18, 2009
More Box Checking
9:32 am edt | link
A lot of you have commented on the last article I wrote, “The
Box Checking Syndrome.” Some of you have agreed with me and given me some great examples of box checking in practice,
and others of you have vehemently disagreed with my opinion, which I also like, as it gives me different perspectives to think
about. But what really gets me excited about all the responses I have received, is that it has indicated to me that
this viewpoint has struck a chord with many of you, which means, of course, that this a good debate to have.
as I have thought more and more about the article, and more importantly all of your responses, it struck me that there are
several additional examples of box checking, rather than only the “financial advisors” that I singled out in the
first article. The first of these that comes to mind is the accounting industry, which I might add, Berkshire Hathaway
(BRK-A) Vice-Chairman Charlie Munger regularly pontificates about each year.
In my opinion, the accounting profession--and
for that matter most consultant practices--have made a huge push over the last several years for focusing entirely on a particular
firm’s process of doing things—rather than asking why a particular company does things a certain way during an
The reason for this, in my opinion, is not because it is better accounting, but rather, because it
is better for business for these firms to focus on process. If an accounting firm develops what it decides is “best
practices” for doing something a particular way, it helps to insulate them from potential lawsuits down the road should
something have run afoul during an audit. The defense thus becomes, well if everyone does this particular activity the
same way, how can it be wrong? To me, at least, that’s like saying, well if everyone decides to jump off the Golden
Gate Bridge, how can that be a bad idea? Doesn’t make a lot of sense now, does it?
The other main reason
that I think there is a focus on process, is because it helps the margins of the accounting firms. By developing what
they feel is a “best practices” process, they can, in effect, create a simple check-list that their employees
can run through during an audit, without ever having to even think about if something makes sense or not. As such, these
firms can hire throngs of folks right out of college, which helps to keep their compensation costs down, and effectively pay
the people to check boxes off their list, as long as the process is the same. Check, check, check, you’re done,
and then onto the next client. Again, any type of thought or rationality has been removed from—ironically—their
process, in favor of box checking.
What I find so ironic about all this, is that every four or five years or so,
there is some type of fallout or scandal in the markets, and each time most folks try to point their finger at the accounting
profession. And rather than examining if the box checking culture could be the culprit, laws are simply passed which
require even more “best practices,” processes, and box checking, without ever addressing the real problem.
Is it any wonder that accounting shenanigans get repeated over and over again every few years?
The other industry
that, in my view, is guilty of the “box checking syndrome” is the credit rating agencies. In my opinion,
several of these firms simply developed a bunch of ratios for each particular industry or group of securities, and then associated
a group of ratios with a particular credit rating. Then they had their analysts simply crunch a bunch of numbers, and
run a bunch of stress tests, and then assign several securities or companies certain ratings, depending on what boxes were--or
Given what has happened in the markets over the last couple years, I think it’s fairly
evident what the outcome of all this box checking was. In fact, the reputation of many credit rating firms is now on
life support, at best. What makes it even worse, though, is many investors were simply checking boxes of their own,
and overly relied on the credit rating firms to help them decide which investments to make. Scary, I know.
Essentially what all this box checking does is try to make shortcuts for things that require a lot of thought, analysis,
and judgment. The lesson from all this is not new, as there is simply no substitute for sitting down and rolling up
one’s sleeves, doing the analysis, and independently thinking about what makes sense. The bright side is, though,
that as long as the great majority of people keep going through life checking boxes, for those of us that don’t--and
also have the wherewithal to think sensibly--there is huge opportunity.
I welcome dialogue with my readers, so
please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up
for my free email alerts from buffettologist.com by emailing me at Justin@buffettologist.com.
© 2009 Buffettologist.com
The content contained
in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never
be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.
This content is intended solely for the entertainment of the reader, and the author
Tuesday, June 2, 2009
The Box Checking Syndrome
1:24 pm edt | link
If you, or perhaps you have a child, that has been in almost any school
system over the past twenty years, you must be keenly aware that there has been a distinct movement away from written tests
to multiple choice examinations, where all a student does is fill in an answer box. Even some students—and probably
parents, too—refer to these exams not as multiple choice tests, but as “multiple guess” exams, thereby implying
that there is even less thought and analysis given to the exam questions than you might already have believed.
see, when one is forced to write out an answer to a question, on the other hand, that person is forced to grapple with all
sides of a particular issue, form a cogent argument, and put it down on a piece of paper in a way that communicates their
point of view to the reader. That, my friends, is a real test (no pun intended) to see if someone actually comprehends
a particular concept. It is really quite obvious too. So if it is, why has this been discarded in favor of multiple
guess? This reason is also quite obvious, as it is simply easier to check boxes—for both takers and graders—than
And while this box checking syndrome, as I like to call it, perhaps started in schools, it has
become much more prevalent elsewhere. You’ll frequently overhear people explaining to friends the reason for their doing
something or even going somewhere, was that they wanted to check that box off their list in life (as if there really was some
end-all be-all list). Or, when someone applies for a new position, they often spend their application process checking
boxes on the Internet about their background, rather than having to write out their reasons why they desire this new role.
Or, ever been to a doctor lately? Some doctors simply check off boxes to see if someone’s test scores are all
in a “normal” range, and pronounce them healthy, without ever giving effect of whether those boxes or ranges really
make sense for the particular person.
While these are but a few of the examples that you might readily observe
today, one of the biggest offenders of box checking, in my opinion, is the investment industry. Many financial advisors—a
euphemism for sales person to be sure—blindly run through their checklist of questions when they meet with a client,
check-off boxes on their list based on the clients response, and then pronounce that the client should have a little bit of
everything from the firm (i.e. checking all of the investment product boxes) if they want to be fully diversified. Then
they move onto the next prospect and do the same thing. And this is practiced far and wide, despite, in my opinion,
being utter nonsense.
This financial advisor box checking, in effect, makes the client feel as though their unique
needs are being met--as if unique can be fit into a box--and that the sales person cares more about them than selling product.
But what it really is, though, is a systematized approach by many larger firms to simply gather client assets. And then
both the advisor and the firm hide behind this diversification—a euphemism for average—mantra, so that the even
though the client shouldn’t theoretically lose a lot, the flip side is that they shouldn’t make a lot either.
It’s perfect for the advisor, the clients performance will be average at best--without including the enormous downward
effect of fees--which means that the client will typically not get angry at any point, and decide to fire them.
But shouldn’t most clients aspire to have better than average performance over the long-term—net of fees?
And how many people who were supposed to be fully diversified, have done even worse than those that weren’t diversified
over the past year? And if someone has been sold—or I should say checked the boxes—on all the types of investment
products a firm has to offer, how is this unique, and how can their “advisor” actually know the intimate details
of each product, and more importantly, if it is actually appropriate for the client?
I think each client or prospect
should ask their particular “advisor” to write a personal essay—in plain English, no less—which describes
what they have learned about a clients personal financial and life circumstances, details why that “advisor” got
in the business in the first place, explains to their clients what they actually do all day (probably cold calling), and finally
describe the intimate details of each investment product and why it is appropriate for this particular client.
is then, and only then, that a client or prospect can ascertain whether or not a financial professional actually knows what
they are talking about, and has the ability to mentally grapple with the various issues in each person’s unique circumstances.
Anything less, and it would probably be very apparent that these “advisors” are just product of what has happened
to examinations in most schools. They are simply checking boxes to try and win a clients business.
dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already
done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at Justin@buffettologist.com.
Copyright © 2009 Buffettologist.com
content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice.
It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of
business. This content is intended solely for the entertainment of the reader, and the author
Justin Fuller, CFA provides his market and investment commentary on this website. Justin
has been following and studying Warren Buffett, Berkshire Hathaway, and other leading value investors for years. If
you'd like to be put on his distribution list, or to send him any questions or comments, he can be reached at: email@example.com.
The content contained in this blog
represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied
on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way.
This content is intended solely for the entertainment of the reader, and the author.