The world’s most famous nonagenarian turns 91 today and it’s always a good time to reflect on what makes him as famous (or successful or rich) as he is – of course, several books (The Warren Buffett Way, by Robert G. Hagstrom, is one that I recommend) have been written on this topic but I am going to try to cover a few points at a high level.
Simple and direct
“The one easy way to become worth 50 percent more than you are now — at least — is to hone your communication skills — both written and verbal… if you can’t communicate, it’s like winking at a girl in the dark — nothing happens. You can have all the brainpower in the world, but you have to be able to transmit it.”
Simple and direct – I think these are the most important tenants of Buffett’s communication style. It sounds easy to emulate, but it’s really not because most often our parents, schools, colleges, and workplaces push us in the opposite direction.
The importance of communication to Buffett can be seen from the significance he places on a public speaking course he took at Dale Carnegie (a workplace training and professional skills development organization) when he was younger.
“I actually have the diploma in the office. And I don’t have my diploma from college, I don’t have my diploma from graduate school, but I have got my Dale Carnegie diploma there because it changed my life,”.
A robust framework and the resolve to stick to it:
Buffett, much like his mentor i.e., Benjamin Graham, possesses the ability to cut through the fluff and think straight.
The reason why this is probably the most important lesson is that the nature of investing is such that (i) any long-term active investor will witness many periods (sometimes, years) of underperformance, and (ii) every portfolio will have its share of losers. Both apply to Buffett as well.
Instead of falling prey to herd mentality and letting Mr. Market’s prevalent emotional state bias his decision making, he is able to view businesses rationally.
Berkshire’s stock performance has lagged the benchmark in numerous years.
However, a “sound intellectual framework” focused on company fundamentals and the discipline to stick to has meant that the good years, which saw massive outperformance, more than made up for the bad ones.
Buffett has had his share of lemons too. In fact, as always, in the letter he openly admits that he made a big mistake on a $37 billion investment in Precision Castparts (PCC). He famously swore-off investing in airline stocks in the 1990s and early 2000s, referring to himself as an “air-o-holic.” This addiction seems to have reared its ugly head again, because in the throes of the pandemic Berkshire booked a loss on another set of airline stocks in 2020.
Again, for every bad airline investment, Buffett has made famously huge windfalls in the likes of Coca Cola, American Express or Apple. At the end of the day, every investor will make mistakes, the key is to remain undeterred if you have a sound system in place.Remember, since 1965, Berkshire Hathaway’s shares have returned ~20% annually compared to the ~10% for the benchmark, the S&P 500. In cumulative terms, that is a staggering ~28,00,000% rise vs. ~23,500% for the S&P!
“….That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet. Following criteria Charlie and I have long recommended, we made those purchases because we believed they would both enhance the intrinsic value per share for continuing shareholders.”
The quality of a company’s business is reflected in metrics like growth both in revenue and retained earnings, return on capital, among others. Of course, the price one pays in relation to these metrics is an important factor, but periodic fluctuations in price should not matter much to a fundamentals-focused investor.
Buffett has often emphasized that Berkshire’s portfolio is “a collection of businesses” not just tickers on a screen.
In the same vein, Buffett highlights Berkshire’s property/casualty insurance operations, BNSF and Berkshire Hathaway Energy, among many other privately owned businesses that don’t have daily stock prices. Hence, they probably don’t receive as much attention as Berkshire’s investment portfolio of “marketable stocks”.
However, it is clear from the letter that Berkshire remains focused on investing behind and growing these “family jewels”.
The same philosophy is behind Berkshire’s practice of regularly buying back its own stock. Just in 2020, it repurchased $25 billion worth of its shares. Buffett again chooses to focus his shareholders’ attention on the underlying effect of the action.
Trust and decentralizationIndian promoters are often accused of holding on to control and not delegating enough to professional managers. The Berkshire Hathaway Empire is built on the exact opposite – decentralization.
Over the years as it has expanded into a giant conglomerate, Buffett has made sure that its various subsidiaries (in many of which they own 100% stake) are autonomous units with near complete decision-making powers.
Buffett takes minutes to size people up and deals are often closed on an initial phone call. If Buffett has any doubt regarding sincerity or trustworthiness of a potential associate, he is known to promptly walk away.
A comment by Jim Weber, head of Berkshire unit Brooks Running Company, captures this approach: “I have never been given so much autonomy in my long business career, and have never felt so accountable and responsible.”
In a way, trust is at the heart of Berkshire Hathaway’s and Buffett’s business model.
Circle of competence
“What an investor need is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many.
You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
Buffett’s ability to live within his circle of competence means that he is often able to make important “informed” decisions about companies and industries; being a prodigious reader helps. He is able to avoid businesses he doesn’t understand, and hence doesn’t fall prey to trend-based investing.
He has pointed out how none of the top 20 companies by market cap in 1989 were in the top 20 today. He also highlighted that even in a booming industry over the last century, automobiles, there were over 2000 defunct companies.
By 2009, there were just three left, of which two had been rescued from bankruptcy by the US government.
“…there was a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.”
To end this piece, I want to leave you with words from the man himself that in a way capture the inspiration for starting my own investment firm:
“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”.
(The author is Co-founder of Upside AI)
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