Do you have an `Inner Scorecard´?
Here’s a quick test: The price of Berkshire Hathaway A shares dropped from $228,000 to $187,000 between December 2014 and January 2016. Did the value of A shares in this company, which is run by Warren Buffett, increase or decrease during that time?
An ‘outer scorecard’ person would say the value decreased. Warren Buffett on the other hand says it has increased. He bases his conclusions on what's going on in the company, not Wall Street's opinion. He’s an ‘inner scorecard’ type of guy.
The ‘inner scorecard’: some background
Near the end of 1999 many people believed in a ‘new economy’ in which profits and (discounted) cash flow were no longer relevant. Between 1996 and 1999 “Dot-com” stocks had reached ridiculous levels. Many longtime “value investors”, who followed Buffett’s method of comparing a stock’s value to its price, had either shuttered their businesses or given in and joined the herd by buying loss making “Dot-com” stocks like Pets.com and eToys.com (see https://en.wikipedia.org/wiki/Dot-com_bubble).
Buffett did not.
What he called his Inner Scorecard – a toughness about (financial) decisions that had infused him for as long as anyone could remember – kept him from wavering. He explained to Alice Schroeder in The Snowball:
“I feel like I’m on my back, and there’s the Sistine Chapel, and I’m painting away. I like it when people say, ‘Gee, that’s a pretty good-looking painting.’ But it’s my painting, and when somebody says, ‘Why don’t you use more red instead of blue?’ Good-bye. It’s my painting. And I don’t care what they sell it for. The painting itself will never be finished. That’s one of the great things about it.
“The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: ‘... If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?
“In teaching your kids, I think the lesson they’re learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world’s going to think about you, forgetting about how you really behave, you’ll wind up with an Outer Scorecard. Now my dad: He was a hundred percent Inner Scorecard guy.”
Another time Buffett said: “You can’t do well in investing unless you think independently. And the truth is, you are neither right nor wrong because people agree with you. You’re right because your facts and reasoning are right. In the end, that’s what counts.”
Buffett has always remained faithful to his Inner Scorecard. The one thing he will always be best at, is being himself.
Using simple formulas like the Benjamin Graham Number or tools like www.Valuespreadsheet.com you can set up your own Inner Scorecard and keep track of the intrinsic value of the companies in your portfolio. It is basically a management accounting (decision support) system. You’ll be less distracted by Mr. Market’s mood swings.
What is happening out in the field, on Main Street, not Wall Street, that is crucial. Is the business selling more? Have profits increased? Will the business still exist in 10 years? That is what determines the intrinsic value of a business, not the stock price at any given moment.
Keep track of what is most important. As Buffett wrote in 2014: “I thought only of what they would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”
With my own practice portfollio I track the Graham Number http://www.moneymakingmachines.nl/resultaat.html but if I am honest with myself, I can see I made a lot of mistakes last year such as trading too much (3% cost), buying companies with a lot of leverage (high risk, style drift) and buying too many oil companies (overconfidence in my ability to predict the future).
Hopefully I can stay intellectually honest and candid in future years by using my own innerscore card, but it won't be easy, it requires "a virtuous disposition to eschew deception when given an incentive for deception."