Warren Buffett Learned How To Invest When He Figured Out How To Live
Buffett’s big success began when he told his shareholders that he wasn’t happy.
Every great leader does many things exceedingly well. They know how to seize opportunity, are brilliant administrators or finds someone who is, are outcome-focused, and adhere to priorities. Unlike Warren Buffett, most of us aren’t so good at these things. As George Burns used to joke, “be thankful for your wife’s flaws because they are why she settled for you.”
The average manager does a few things well. They perform the routine work that isn’t hard to do but is heroic when performed over a lifetime. A very talented manager might be great at one thing, like the specialist you see when your knee hurts. There is also a flip side — leaders who lack the skills but not the ego. Those mediocrities drive an organization crazy or into oblivion. If they are the type that conceals their lack of competency, they might resort to criminal behavior, as dod Bernie Madoff and Elizabeth Holmes. It all comes down to competency and there are four of them that matter, at least in terms of leadership.
The four competencies, opportunity, organization, outcome, and continuity, are obvious in great leaders. Our sixteenth president, Abraham Lincoln, was a master at recognizing opportunity, he wrote the Emancipation Proclamation and used it to transform a nation. He relied on his organization skill to turn himself from a backwoods country lawyer into a capable commander in chief (read Doris Kearns Goodwin’s “Team of Rivals”). He also understood the power of continuity and learned to build personal resilience through a steadfast belief in a just cause. The outcome he created, including America’s most devastating war, one that killed more soldiers than all other wars we have fought, justified everything.
In short, a perfect leader.
Recognizing the right opportunity is usually the first sign of a leader’s competency, and by the time Warren Buffett was in his thirties, he realized at least five of them.
The first took place while Buffett was earning his MBA at Columbia where he had studied under professor Benjamin Graham who taught him value investing. Buffett would turn it into a personal philosophy that would garner the world’s greatest investing track record.
The second opportunity was meeting Charlie Munger in 1959 at a dinner party. Munger would become his lifelong partner in Berkshire Hathaway and a financial devil’s advocate and helped Buffett improve the way he thought about probabilities. Buffett told CNBC in 2018: “Charlie has given me a lot of good advice over time. I may hate to take it, but my decisions have been better.” Buffett added: “I’ve lived a better life because of Charlie.”
Buffett’s third opportunity came in 1969 after he started to have misgivings about his career. He was spending too much time beating the S&P 500 and wanted to spend more time understanding the inner workings of business. He also needed a steady, reliable source of capital. He scouted around for a solution.
Buffett’s organization competency kicked in after he recognized those opportunities. It comes through loud and clear, as he told shareholders: “An investment in a controlled business where I liked the people and the nature of the business even though alternative investments might offer a higher rate of return. Thus, I am likely to limit myself to things that are reasonably easy, safe, profitable, and pleasant.”
In 1967 he acquired National Indemnity for $8.6 million which today is the most valuable insurance company in the world. In 2004, he told shareholders that if Berkshire hadn’t acquired National Indemnity, “Berkshire would be lucky to be worth half of what it is today.” National Indemnity solved his capital needs, and Berkshire Hathway gave him a public company that relieved him of the burden of limited partners.
The decision to retire from his partnership was not an easy one. To exit the stage, he first had to resort to an old remedy for the blues, retreat, because there was no other way to stop the clock and change course.
To most of us about to hit the big time, retiring would be unthinkable. We admire our own achievement too much. Buffett wanted to do something different with his life and realized that evolving over the years would not do.
As he wrote his partners on May 29, 1969:
“I would like to have an economic goal that allows for considerable non-economic activity. An example might be an investment in a controlled business where I liked the people and the nature of the business even though alternative investments might offer a higher rate of return. Thus, I am likely to limit myself to things that are reasonably easy, safe, profitable, and pleasant.
Some of you are going to ask, “What do you plan to do?” I don’t have an answer. I know I don’t want to be totally occupied with ou-pacing an investment rabbit all my life. The only way to slow down is to stop. Therefore, I intend to give all partners notice of my intention to retire.” — Warren Buffett
His letter confirms the decision to take this giant step in the right direction. In making this precipitous move, Buffett illustrated a classic organization competency — priorities.
He was 39 years old.
After Buffett’s transformation, the best thing he could do was run things according to his principles. He took the opportunity to “slow down” to scale up his business into a public company, then manage it through outstanding CEOs instead of running it himself. Those organization skills enabled him to build a formidable track record and an enviable life while never again having to “chase the investment “rabbit.”
In keeping with his philosophy, he built a tiny headquarters. He runs Berkshire with 25 people so wastes little time on human resources, regulation, and internal issues. To those who wonder whether Buffett is a leader or a manager, the answer is he is focused on leading great managers.
Measured by outcomes, Buffett’s record speaks for itself. He has achieved a level of return that nothing else in the investment world can match on a sustainable basis. According to MarketWatch, Berkshire Hathaway under Buffett’s leadership has achieved a compounded return that yields $10,000 for every $100 invested since 1987 vs. $1700 invested in the S&P 500 index. At least seven people are billionaires because they bought Buffett’s stock.
Knowing what he has accomplished, Buffett’s life can be an unsettling comparison. Yet Buffett did nothing that an average person could not do. Even lacking his investment savvy, we can still take his approach to business and living, and just invest our money in Berkshire. We might only end up multi-millionaires and not billionaires, still a better outcome for most of us.
As Buffett approaches his early 90s, he continues to deliver for shareholders, eat breakfast at McDonald’s: “A hundred dollar meal wouldn’t make me happier,” and read books for five hours per day, compounding his wisdom to better lead the company. And then thinking a lot about how to give it all away to charity.
It is what makes Buffett so Lincolnesque.