“Becoming Warren Buffett,” the Man, Not the Investor
newyorker.com
newyorker.com
It's like a physicist laying out the math perfectly for an orbital launch, but then starts analyzing launch times using Astrology.
Very, very few investors apply valuation methodologies so well they they become true value investors, the name is really a marketing label for most funds. One necessary part of being a value investor that Buffett harps on in his letters is psychology, the ability to avoid bias in order to make decisions and not undo them in a panic. He works really hard to insulate himself from irrational fears, and focus on known facts.
For example, he tries to never know what a company's stock trades at when he reads their annual reports and start making his own estimate of it's value. If it's a great company and it's trading for $100, he doesn't want to be subconsciously biased to raising his valuation estimate just to justify buying it.
There is a great story from his partnership days. His partners were told up front he'd never discuss what they were invested in, he didn't want anyone front-running his trades at hurting the partnerships results. But one day during a market tumble a partner rushes in and demands to know if Buffett had invested in certain stocks that had crumbled. Warren just buzzes his secretary, asks how much the partner's share was worth, and told her to write him a check for that amount, and told the guy you're out.
He wasn't going to panic. He wasn't going to let others try to panic him.
Buffet's success is only partly his ability to value companies and buy them at good price. He is good at that, no doubt, but it's just half of the story.
The real genius is the way Buffet has structured his business to give him permanent advantage. The core of Berkshire Hathaway is the insurance business, GEICO and Berkshire Reinsurance. These companies are very profitable and generate huge cash inflow. This cash is cheaper compared to what other investors get trough financial sector. Especially when times are tough and money is tight. When other investors must sell something they own or get expensive loan, Buffet is drowning in cash and looking ways to spend it.
Someone who is just as good at valuing companies starts several percentage points behind Buffet when they scramble to finance their acquisition.
When he got going, people were mostly just buying what their broker told them to, which was some company the broker had heard about that morning on the elevator. There was such little information out there that his philosophy (buy and sell on fundamentals looking at various ratios) gave him a major advantage. This was Ben Graham and The Intelligent Investor, who Buffett studied under at Colombia, then worked with him.
I'd say Buffett's biggest innovation past that is realizing the role of management. He talks about it in various ways, but I think his main rule comes down to "avoid psychopaths in management; it's a fundamental people don't understand how to discount correctly." There's a lot to that, it turns out.
Then he got into insurance, as you say, to get lots of cheap cash to invest. Compare him to say, Jay Gold, who mostly got rich through stock manipulation or Michael Milken who got rich by inventing the junk bond (a "new" financial product) then went to jail.
Not many successful stock pickers out there; most rich finance people made it from commissions of some form or another, not market gains.
The world is different now though; Graham's methodologies are so beat to death at this point that there's no advantage to be had. Buffett's philosophies on the importance of the management team (not being psychopaths) still apply though.
And as far as "avoid psychopaths in management" that's actually nearly opposite Buffett's real philosophy, which is "you want to own a business any fool can run, because sooner or later a fool will be running it". He looks for businesses with strong competitive barriers.
Or because they're old and beat to death and don't work anymore? They used to work and that's where Buffett started.
> Riches on wall street come from fees on other peoples money
Yes, that's mostly true, which is what I said (I said, "most rich finance people made it from commissions of some form or another, not market gains.")
> And as far as "avoid psychopaths in management" that's actually nearly opposite Buffett's real philosophy,
No, it's really not.
> which is "you want to own a business any fool can run, because sooner or later a fool will be running it".
Didn't Peter Lynch say that? It's a good quote though; I've certainly used it. My favorite Buffett quote is "Risk comes from not knowing what you're doing."
Also "Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down"
The guy has said lots of interesting things and is worth learning more about if you're even tangentially interested in business and investing.
You summarise my experience of the financial industry well. If you haven't already, read "Where Are The Customer's Yachts" by Fred Schwed - very entertaining and funny, in a kind of sad way: https://www.amazon.com/Where-Are-Customers-Yachts-Street/dp/...
http://brontecapital.blogspot.com.au/2017/01/valuation-and-i...
I would recommend Buffett's authorized biography "The Snowball" by Alice Schroeder. Before writing it, WB told AS that if she got different stories from different tellers to go with the one that was least flattering to WB.
Since it was written, WB hasn't denounced the book, but has broken off what were cordial ties with the author. Speculation abounds, but mostly it's because she hints that Susie wasn't entirely faithful to Buffett when she left Omaha and moved to California. (She never comes out and says it, but it's implied.)
In any case, it's an excellent book, and the one written with the most access to Buffett and his notes.
When asked about their broken-off relationship, she says that they aren't unfriendly or anything, but that she is basically no longer in his inner circle.
Her explanation is that he figuratively laid himself bare before her for the book, which was necessary for it, but that it made things afterward quite awkward. Kind of like seeing a close friend naked.
Second the recommendation for that book. I like it better than the Lowenstein book, but any Buffett-head should read both, of course, as each has some details the other doesn't.
I was also confused about the implications around Susie and just assumed that she had an affair with the tennis coach guy, as cliche as that sounds.
Edit: Dug out the AMA. Definitely read if you are a fan of Buffett / The Snowball.
https://www.reddit.com/r/investing/comments/2550vq/hi_im_ali...
Yes, tax-advantaged accounts are a different question, but Berkshire can't pay a dividend to just "the people who need money in a tax-advantaged account". If you want a smaller impact from fees, make fewer, larger transactions.
It's not like this requires particularly large sums. At 7 shares per transaction you're already under the industry average stock index fund expense ratio (0.76%), and unlike those funds, that's a cost that's incurred once on just the shares you sell, not annually on your whole investment. People pay higher (relative) fees to withdraw cash from an ATM.
You aren't taking the purchase price of that share into consideration. If you bought the share at $140, your profit is only $20, and the tax on the equivalent dividend would only be $3.
What's the equivalent CGT on that $20 profit?
Frankly, I think the Berkshire approach, or at least companies that offer a dividend reinvestment plan, makes a lot of sense. For the average investment, dividends are fiddly, modest amounts of income that you just need to do tax paperwork for and then deal with reinvesting. Much more convenient to do nothing during the accunulation phase of your wealth building, then sell shares when you want the money back.
The reason he likes companies that pay dividends is that often he can allocate capital better than the companies. CEOs are often tempted to reinvest profits in projects (such as mergers) that generate a sub-standard return. Berkshire is different in that its principal purpose is capital allocation. As long as Buffett succeeds in achieving better than average returns, it makes sense not to pay dividends. There is nothing duplicitous about that.
No, he believes in companies that correctly value the capital they employ. He's happy for a company to use its profit to repurchase shares or expand its business so long as it's likely to achieve a good return.
> He is a folksy family man that has two wives
I would hardly call his actions 'duplicitous'. My take is that Buffett and his first wife Susie grew apart. Susie wanted to separate from Buffett but she still cared for him, so she hired Astrid as a housekeeper and looked the other way when Buffett and Astrid fell in love. I don't understand why they did not officially divorce, but Buffett remained very close with Susie and was happy to leave his fortune to her when he died. Of all the failed marriages, this one seems to have the happiest outcome.
> He is a big Democrat and believer in equality, and yet during the Washington Post workers strike he was working very hard with Katharine Graham to deliver the newspaper and counter the union's efforts.
It's perfectly coherent to believe in civil rights yet feel that some union demands are unreasonable. As a counterpoint to the Washington Post strike, look at Buffett's 1985 comments about the BH textile mill [1]:
"In contract negotiations, union leaders and members were sensitive to our disadvantageous cost position and did not push for unrealistic wage increases or unproductive work practices. To the contrary, they tried just as hard as we did to keep us competitive. Even during our liquidation period they performed superbly."
Buffett clearly cares about his textile workers:
"Could we have found a buyer who would continue operations, I would have certainly preferred to sell the business rather than liquidate it, even if that meant somewhat lower proceeds for us. But the economics that were finally obvious to me were also obvious to others, and interest was nil."
“Susie and I and Astrid had an arrangement that worked maybe one time in a thousand,” Mr. Buffett said. https://www.nytimes.com/2017/01/29/arts/television/becoming-...
Its unrealistic to expect people to suddenly learn new skillsets later in life, especially if they have decades invested into these skillsets. I think this is why non-competes in many industries are ultimately unenforceable and why the courts or state legislatures never want to make non-competes powerful. People aren't machines. They can't really be retooled. If I get a job with Bigco and then switch to Smallco, Bigco shouldnt be able to tell me I can't be a programmer there. Corporations shouldn't have this level of power over us.
Even if we dismiss the first scenario as a 'business sale' I'd argue that sole proprietor businesses or any business with only a few people is much closer to being an employee somewhere. You can't expect someone to give up their only skills for 5 to 10 years for a modest sale. Not every sale is a SV-like billion dollar plus sale.
Yes, it's practical. If the non-compete is explicit and part of the conditions for the sale, the owner-seller is supposed to factor that into her selling price. E.g. if the owner has a mental price of $2 million to sell the furniture business but is unhappy about not being able to open another store, she needs to raise her price to $3 million to be content with not competing. In other words, the buyer of the business is partially paying the previous owner to not compete -- for a limited time such as 5 years.
Maybe you're thinking of employees and their unenforceable non-compete clauses trying to prevent them working for competitors in California. That doesn't apply to the owners selling their businesses.
When you're selling a business, you're selling the future. If you sell your furniture business, then turn around and open up a store down the road, you're attacking the ROI that you projected going forward and the buyer acted upon in good faith. Sketchy.
Employees are a different matter, as it's a one-sided arrangement where the employee has little bargaining power. Small businesses are different -- both parties are free agents.
We were once there to buy carpet; she's wheeled up to us in her cart (she had to be 80+ at the time), nearly hit my little sister and basically said "what price do you need to purchase this carpet today?".
She was famous for running the sales floor, even though she could have long retired prior.
Preach. The more I 'practice business' the more I come to appreciate that the only thing out of your control are people (and that's probably a good thing). Everything else you can structure some kind of deal to resolve, but people are emotional, untrusting, illogical and often good at hiding their true motives.
Warren is notoriously hands off with the businesses he buys. He typically buys them because they are well run and he doesn't have time to fix anything.
[0] http://www.newyorker.com/culture/culture-desk/the-curse-of-t...
diaeresis (plural diaereses)
1. (orthography) A diacritic ( ¨ ) placed over a vowel letter (especially the second of two consecutive ones) indicating that it is sounded separately, usually forming a distinct syllable, as in the English words naïve, Noël and Brontë, the French haïr and the Dutch ruïne.
It makes perfect sense to use the diacritic in this way and it is part of their style guide, has been for some time.
You couldn't even spend the time researching what you're complaining about. Talk about pretension.
Still pretentious :-)
Yes, there is. A) it is a perfectly grammatically and orthographically correct usage of the di B) There is no prescriptive body which governs usage of American English - there's no need for an "excuse" to use an orthographic feature of the language as if it is some clause violated.
The reason they do it is because it's the New Yorker. It's their house style. It's what their readers expect and understand and it has become a tradition and perhaps even emblematic of the magazine and its brand. Complaining about the "pretentiousness" of the New Yorker is like complaining about the convoluted commands in eMacs or vim - it's not a problem, it's a feature.
Good writing reveals something about the reader. Bad writing reveals something about the writer.
However since you now seem to agree that it's pretentious, which was my original point, I'll leave it there.
We get it, you don't like the style of the article (and you might not like the style of the New Yorker), but why does that matter? The article used paragraphs, was free of grammatical errors, and was highly readable.
Different forums have different conventions, and judging by the downvotes even flagged OT is not OK here. I've learned my lesson.
Those extra accent marks make it much more readable. Without them, I always mentally pronounce "employe resume" as "employee rezoom" and then backtrack to correct myself to pronounce it as "employee rayzoomay".
If you want to imagine how I read a word like that, this video is a helpful guide to pronounciation of ö: https://www.youtube.com/watch?v=mr-mCMtISfA
In his twenties and thirties he ran the Buffett Partnerships and averaged around 35% a year returns, over 13 or 14 years, beating the market by a massive amount.
He retired around age 40, then bored went back to full time work running a company he controlled, Berkshire Hathaway. At one point he had beaten the market all but a couple of 50 years.
In his shareholder letters he describes very clearly how he does it. Its a combination of being an excellent value investor, understanding which companies have competitive moats, and working very hard at reducing negative psychological biases.
We can't be as good as investor as WEB, but reading and understanding his shareholder letters will make you a much better one in anything you do (buying a house, car, etc), and understanding the psychological biases that drive you to bad investing decisions can be applied in many areas.
In contrast, when I read [auto]biographies of notable people today, we are ONLY seeing the life from a snapshot in time - n accumulation of their life, from deliberately chosen points of view - and we never get to see that relatable part of "what was this person thinking when they were 35 years old, stuck in a panicked business climate".
I also think its fascinating to see people's decision-making processes and attitudes change over time. For example, anyone who has read WB's shareholder letters see his attitude change from "buy cigar butts, and sell those" (basically, find OK assets which are undervalued) to "pay a premium for great things, and hold them forever". WB even reflects on this attitude change at times - some of his earlier purchases (like the actual textile mill) was an attempt to identify decent businesses in a bad spot, buy them on the cheap, and turn them around. Later, he basically said - that was just a bad idea, and it's buying trouble for years. Instead, pay a premium for a company which is solid, run by solid people... and let that naturally appreciate in value, and get out of its way.
WB mentions Dale Carnegie frequently - I do think reading both "How to Make Friends & Influence People" and Berkshire's Letters to Shareholders could basically be a business course itself - how to do business honorably, ethically, and respectfully. Lots of lessons to be learned there.
The letters starting from 1995 can be consulted at http://www.berkshirehathaway.com/reports.html.
They are also available in book form 'Berkshire Hathaway Letters to Shareholders', starting from 1965 (with the early partnership letters).
Charlie Munger's Wesco Letters to Shareholders are also interesting, especially the early ones: http://www.wescofinancial.com/.
As to worshipping rich people, anything you consider worth people's time can be similarly dismissed as perfunctory worship of it.
I didn't really know what to say, because she is right. Warren Buffet is good at picking companies who are undervalued and making money from that. That's a skill I guess. But do you want a country filled with Warren Buffets? Is there any reason to value this kind of parasitic success? The guy isn't really much different than the mafia or a loan shark. He loans money to companies he thinks will succeed, and wants interest paid back to him. At least Bill Gates provided value (and he was predatory in doing so) and his work changed the world. Aside from his eventual philanthropy, it's hard to see how Warren Buffet has changed the world.
Maybe I'm missing something. But how do you inspire a young person to be like Warren Buffet. And more importantly, should you?
I'm not sure you quite understand what Buffett does. Yes, his company invests in other companies. However, it's more typical for him to invest to: (1) gain a controlling share and (2) realign the company's management and strategy.
He often turning around companies through his own expertise. Not just "loaning them money and collecting interest".
Yes Buffett got rich, but he got rich by creating things, which requires new jobs. A lot of other people got rich along with him.
I guess my point wasn't that somebody else was losing out. But that Warren Buffet could have made 1/1000th the amount of profit as he did and the world itself would not have lost out. Only Warren Buffet gains, not the world as a whole. Ultimately what value does Warren Buffet's success in terms of dollars bring to the world? Again, ignoring his eventual philanthropic choices.
Don't get me wrong, I'm not saying he is a bad person or that he is not highly intelligent or even shouldn't be successful. What I am saying is that it's hard to justify that he has added proportional value to the world that is worth the money he has made. To each his own, but if this were a world full of people who only wanted to benefit upon the production done by others, then this would be a troublesome world. Just imagine, could Linus Torvalds have chosen to turn Linux into a profitable venture? Could he have been all about the money and not about producing a truly great OS that people could build upon? I just don't think it's wise to put Warren Buffet as a success story above, say, Linus because he made so much more money. I'd rather live in a world of mostly Linus' than a world of mostly Buffet's.
Donating almost everything back to society, that does not count?
Second, he's creating value for these businesses. The owners have worked hard, they need to sell to someone, and Warren provides them a way to keep building their lives work without having Wall Street force them to change how they do things.
Without buyers for shares, there can be no sellers, and then there are no capital markets, and we are all far poorer for it.
What your daughter could learn from Warren is
1) Basic investment valuation skills, which can be applied to any investment, business, or purchase (including cars and homes) and improve her live in many ways.
2) Business management skills. Understanding what makes a good vs. a bad company, competitive barriers, motivation, etc.
3) The need to avoid bias in decision making. He spends a great deal of time managing his own mental framework to ensure emotions and outside forces don't lead him to make less rational decisions.
She can read his investor letters for free online, and learn many of these skills just by reading them.
It's ironic that she's entrepreneurial, and all you can take from the documentary is that he intended to donate all his wealth to charity after he died and it had grown to the largest size possible, and his wife convinced him no, it was better to do it while he was still alive. And that somehow makes him a bad guy.
This critical edge that has been hiding in plain sight but validated by actual large funds using the same methods.
Someday, newyorker.com and HN will be reading how a "Korean Canadian stock whiz turns his $50,000 CAD tax free savings account into $50,000,000 CAD"
edit: due to downvotes I will not be revealing this prized strategy.
Naked options are not the problem; naked calls are, of course, far more risky and most investors are barred from writing naked calls on individual issues.
Thank you!