Buffet’s approach to life is interesting for the same reason an Olympic gymnast is interesting. He has specialized to an extreme and is taking advantage of the rewards of that specialization and natural talent in a unique way.
It’s easy for me to feel shame that I don’t read 8 hours per day, as Warren and Charlie do. Buffett is a phenomenal investor but by all accounts, rather odd. He eats like crap, doesn’t exercise, had a profoundly weird relationship with his wife, and seems addicted to his work at the expense of everything else.
My point is this: his practice of reading income statements and business reports 8 hours per day for 60 years doesn’t make him the kind of person I wish to emulate.
Don’t get me wrong, I respect his levelheadedness toward money, lack of polish wrt PR, and generous philanthropic efforts. There’s a lot of good. But it’s easy to idolize the guy.
Controversial take: Buffett is actually not a great investor in the way people think. Via the float in his insurance companies, he receives a 0% infinite maturity loan to plow into the market. That financial leverage gives him the ability to beat the market year after year - not his own stockpicking prowess.
If you were to start with $1B, then get an extra $2B that you never had to pay back, you too would do quite well holding Coca-Cola and other safe companies with moats. Your returns would be 3x everyone else's.
Buffett himself has tried to explain the impact of float on Berkshire Hathaway but it never seems to sink in with people.
I think by "actually not a great investor in the way people think", what you're saying is that he isn't a particularly outstanding stock picker. To the extent that that's the way in which people think he's a great investor, it's because lots of (most?) people think investing is just stock picking. But what makes him a great investor is exactly what you outlined. He found a great strategy - insurance float for leverage - and has executed it well for decades.
It seems weird to me to say, "he's not a great investor, he just found a great investment strategy and executed it really well!" What makes someone a great investor if not that?
He's also a good marketer. I have a mostly unsubstantiated theory that Buffet's celebrity 1) allows him to negotiate better deals than other investors and 2) moves the market after he's invested. Re: 2) if Warren buys something, other people will pile on and drive up the price, which helps drive his returns.
He's mentioned the effect that Berkshire's brand reputation has on investment returns in his annual reports. It's substantial, but not in the way you theorize.
Basically, Berkshire's reputation for 1.) being financially stable through good times and bad 2.) keeping existing management and place and 3.) being able to allocate capital from cash-rich but growth-poor businesses to growth-rich but cash-poor businesses makes them a "preferred buyer" for many strong private companies that are seeking to get liquidity for themselves or family members but don't want to kiss their baby goodbye forever. That a.) opens up dealflow to Berkshire that would never think of selling to other private equity firms and b.) gives them a good price on the deal, since the owners are not seeking to generate a competitive marketplace of bidders that might drive up the price.
Although Berkshire does invest in regular public companies on the open market, that hasn't driven the majority of their returns in decades. Instead, their modus operandi is usually to buy 80% (there was some tax reason why it was 80%) of highly profitable private businesses, and then use the cash generated by those profits to buy more highly profitable private businesses. They only invest in the public markets when there are no attractive private opportunities available, and in some cases they take formerly public companies (eg. BNSF) private. The subsequent share price matters little with this strategy, because the investments are illiquid and just spin off lots of cash from profits.
> 2) if Warren buys something, other people will pile on and drive up the price, which helps drive his returns.
While this is technically true, in the long-run the price of a firm will reflect reality as it exists, not as its perceived. And since Warren doesn't buy, then instantly sell when the price goes up, but rather holds for a long time. I don't believe we can attribute his returns to this phenomena.
As a side note, the reason the price goes up is because he built a reputation of being able to pick undervalued stocks, therefore his purchase is a signal.
Probably to some degree but you have to remember that to get to that point where that's even the case you have to do something right for a long time before that and during that period those particular benefits are non existent because the brand and celebrity hasn't been established yet.
That would be weird, but "he's not a great investor" is taken out of context from "he's not a great investor in the way people think". The way it would be said is "he's not a great investor in the way people think [stock picking], he's a great investor because he found this other strategy that works well."
What about he's "not a great investor in the way people think" leads you to believe "he's not a great investor"?
Buffett has been an amazing stock picker and used leverage.
In order to control for leverage, you typically look at volatility-adjusted measures of performance such as the Sharpe Ratio, not just absolute returns.
Berkshire's Sharpe Ratio from 1976-2011 was .76, vs. the S&P 500's .39. Even without the leverage, that's twice as good as the market.
I was unaware of this additional advantage he has.
Reading up on floats it seems they are the money his insurance companies receive from premiums that has yet to get paid out in claims. Essentially a reserve that can be invested. Since they have a large scale of customers, this float ends up being rather high.
I'm wondering how much trouble an insurance company of smaller scale would get into if they used their float in such a manner but then ended up needing that money due to some natural disaster. Is this type of risk betting money you technically don't own similar to the 2008 housing crisis or the often talked about 1930's issue with everyone wanting to take their money out of the market?
Yes, the tricky bit is not losing any advantage the float might bring via underwriting losses.
It requires understanding risks very well and being willing to stop selling insurance (and losing market share) if the market for insurance gets too competitive.
In addition to what sibling posters have said, insurers usually have their own insurance (called "reinsurance") that helps cover them in the event their claims exceed their cash on hand.
I would imagine, though, that reinsurers will price their premiums based on risk as well; e.g. if they know that one of their customers is parking too much of their float into risky investments, they might charge higher premiums.
Insurers typically don't insure for correlated risk (natural disasters, war etc) because no insurer actually has the reserves to pay it out.
Which is why water damage from a burst pipe will likely be insured but water damage from a flood is unlikely to be insured, even though from a homeowner's perspective they are effectively the same damage.
Even before the natural disaster they'd get shut down by the regulators for having insufficient reserves if their investments did badly. Or in the case of Arron Banks underwriter Eldon Insurance you hang out with rich Russians and fund Brexit and somehow it's all good again.
Ill take it even farther: Buffet isn't statistically different than average. He just found a strategy that happened to work, was stubborn enough to stick to it through bad times, and used copious amounts of leverage to juice returns.
A really interesting paper called "Buffet's Alpha" talks about this, and was able to replicate his performance by following a few simple rules. They found that he produced very little actual alpha. To his credit, he seems to have been observant enough to stumble into factors(value, quality, and low beta) before anyone else knew they existed, which is his real strength and contribution.
They work at AQR, a firm which is notable for being one of the only successful hedge funds to actually publish meaningful research.
The paper's conclusion is noteworthy:
> The efficient market counterargument is that Buffett was simply lucky. Our findings suggest
that Buffett’s success is neither luck nor magic
but is a reward for a successful implementation of value and quality exposures that have historically produced high returns. Second, we illustrated how Buffett’s record can be viewed as an expression of the practical implementability of academic factor returns after transaction costs and financing costs. We simulated how investors can try to take advan- tage of similar investment principles. Buffett’s success shows that the high returns of these academic factors are not simply “paper” returns; these returns can be realized in the real world after transaction costs and funding costs, at least by Warren Buffett. Furthermore, Buffett’s exposure to the BAB factor and his unique access to leverage are consistent with the idea that the BAB factor represents reward to the use of leverage.
Compared to the S&P 500 going back to 1996, Berkshire Hathaway is up 845% vs 257% for S&P 500. Is this not a statistically significant result? (Or is there another average I should be looking at?)
"He just found a strategy that happened to work, was stubborn enough to stick to it through bad times, and used copious amounts of leverage to juice returns."
I dunno. I find certain entrepreneurs often have life stories where they start making money around pre-teen or early teen years. I find those people to be at the tail ends of the distribution.
Sure, today. But he had greater returns before he set up the float. (He's said they were greater because it's easier to find small overlooked bargains than big overlooked bargains - and when you're BH size, only huge investments will move the needle).
He made clever investments like buying American Express when others sold. (Other investors believed they'd lost trust due to fraud involving salad oil; but Warren verified that consumers still trusted their CCs).
He had a head-start: although he protrays himself as folksy, his father was a US Representative.
It's leverage, but like any leverage (even low cost leverage) it could as easily of sank the parent insurance company if he lost that money in bad investments.
Spot on. I think a salary is also more or less like float, at least part of it. For that part, you are answerable to no one and can choose to invest it the way Buffett does. As much as people say that you can't pick stocks, you can, if you just stick to a very niche that you really understand, spend hours researching that niche, and invest for a really long term (> 10 years)
"He has specialized to an extreme and is taking advantage of the rewards of that specialization and natural talent in a unique way."
Gates is another one of those people where most forget that his grandfather was a multi-millionaire, his mother was a director at IBM, and he had access to one of the first computers in the world.
I.e. he is not an example of a self-made person, so anything he says is not really applicable to anyone looking to "make it."
P.S. The last paragraph is all I am saying - I have nothing against Gates.
How basic is required to qualify as self-made in a meaningful sense? I’m not talking about “Should he have grounded up sand and made his own chips and boards?” stuff, I mean lots of people have similar circumstances to Gates and made nothing of themselves.
As it happens the high school I went to, as a kid from a mostly lower middle class family with severe issues being able to pay attention in school in the eighties, had a lot of kids of rich families. These kids had everything - expensive cars at 16, huge houses, nice places to live, etc.
I have followed them along. It’s been 25+ years and basically none of them did anything with their lives, though to be frank I think they could certainly have been much happier and have had more experiences. The other misfits and I have done ok.
So Gates started from a better place and did far, far better than his peers. Does he not get credit for that?
I would agree that wealth shouldn't negate his accomplishments.
I think a lot of people who point out Gates' family wealth are reacting to the current political/ideological climate which would say "look, Bill Gates is self-made, so anyone can be!" neglecting the ridiculous enabling impact that enormous family wealth has, and shaming poor people for not being able to pull themselves up by their bootstraps.
>are reacting to the current political/ideological climate
Which climate are you referring to? The current climate in the US on the left is being dominated by the narrative that rich people are only successful because of their environment so they don't have the claim to their money that they think they do.
This view is not a reaction to balance anything out, it's a policy position that billionaires should not exist because they do not deserve that much money.
I don't see talk of deserving things in your link, or of reasons for success. Someone could be both completely "deserving" of having received the income and "guilty" of "hoarding" it at the same time.
"The acquisition of that much wealth has bad consequences. A moral society needs guardrails against it."
"Moral society" isn't explored in that article, but "has bad consequences" is pretty far away from "isn't deserved." You can make a lot of policy-based arguments against extreme concentration - whether in a monopolistic company, a huge government, or in a billionaire - is a bad thing, overall, from various angles. And lots of people are making those different arguments. The "people are just lucky" argument is one, but I'm not seeing that one dominate my magazine and newspaper RSS feeds at the expense of any others.
You're claiming that 100 people in his position, would not do as well.
Therefore he was different. If it was simply a matter of self-made difference, all his peers could do that too. Which means whatever it is, is something he was born with.
Why does he get credit for being born different? Does he get credit for being male as well?
Either it's something any of his peers could do, and he's not special, so why praise him, or it's something nobody else could do, so he was born with it, and why praise him?
It’s been 25+ years and basically none of them did anything with their lives
Did any of them have the situation to be the provider of the dominant OS of the dominant computer platform of the last 30 years? Why do you think that isn't enough to account for "far, far better" all on its own?
Most of the people I was referring to most likely had opportunities and backing exceeding young Gates, yes. But I don't think your point is reasonable. In your model, there appears to be nothing anyone can take credit for, effort or not.
And yet, can you point to the specific thing that he deserves credit for? Maybe my model is right, and there is nothing anyone can take credit for.
Why did he put in effort, and others didn't? Was he born to work harder, then why praise him? Or was he taught to work harder? Then why praise him. Given a choice of comfort or effort, he chose effort - why did he choose that and others didn't? Because he's morally superior? Then why is he, was he born that way or taught to be that way? And either way, why praise him for it?
The other complaint I have is your framing where "not earning one of the largest fortunes ever seen on the planet" is the cutoff for "did nothing with their lives" and then using that to scorn the peers who didn't. When do you see a discussion about how worthless Mozart's school peers were, or how Dostoyevsky's peers didn't write any good books?
The other other complaint is that writing a good book is something a person does, guiding money into their bank account is something a Capitalist does. Many people don't like DOS or Windows or SharePoint as a technology, don't like Microsoft's business practices, and don't like unbalancedly wealthy CEOs - which bit of that is the credit-worthy part? Making a successful computer company in the 1980-1990s with family wealth and connections and funding while breaking the law to stop competition is surely "playing on easy mode" if anything is, right? Where's the praise for the people who achieved a lot smaller monetary success, but did so against harder odds?
Where do you think his ability and desire to "make good choices" comes from? Was he born with it - then why praise him? Or did he learn it - then why praise him instead of his childhood environment?
Why say that special results come from a special person, instead of saying that a special person comes from a special environment?
Why confuse "making money" with "good choices" just because you'd like to have a lot of money, even though lots of people were harmed along the way?
The way you describe it, he kind of sounds like a person with Aspergers with business as his special interest.
Not saying that's what's going on. I don't know much about Buffet, but it sounds like some people with Aspergers I know that have other interests (mainly science).
Personally, reading about the same thing 8 hours a day sounds like a dream job to me.
Warren Buffet is an outlier among outliers. Clearly there are things anyone can pick up from his approach. I think I'd struggle to keep everything in my memory :-) but I think there is a lot to say about the kind of knowledge that one should seek to acquire. On reading I read also on Farnham Street that Charlie Munger reads quite broadly I wonder if it is the same with Mr Buffet
Same here, my memory is one of my worst attributes. If you ask me about tasks I've done last week, I might have trouble remembering them (or any details) without looking up Jiras.
I get the argument of compounding knowledge, though. It should still apply to someone with bad memory. For instance, if I know that I'll be switching my career in about 3-5 years, won't I throw away a great deal of my knowledge and skills? Why do something like this in the first place? This goes in the same direction as focusing yourself on one thing and one thing only (in your career).
I greatly admire Warren Buffett. Sure, you wouldn't want to emulate a failed marriage or poor diet, but to me his positive qualities go beyond 'a lot of good'.
It's not his practice of reading income statements you may want to emulate - rather it's his focus and enjoyment of work.
It's his ability to ignore the naysayers and trust his own judgment - whether that be about the clothes he wears, the relationship he has with his wife, or the stocks he buys.
It's his approach of helping others - by explaining his investment decisions, supporting the Giving Pledge and of course by being so financially generous.
It's his approach to business - dealing honestly with employees, suppliers and shareholders, trusting others (eg. buying a billion dollar company on a handshake) and publicly admitting his investment mistakes. This contrasts particularly strongly with Donald Trump's approach to business.
And, you can get a lot of the benefit "for free" by just buying BRK.B shares, without all the pain of drinking cherry coke all day and reading SEC filings.
I'm not so sure thats true from a financial perspective, at least if you mean him being an outlier. The financial market should have priced in these benefits, that means you can expect only normal "market" returns from these shares. So you won't get them for free.
I don't need to. Past performance does not predict future performance, thats one of the most basic lessons in stock investment. Also you have to compare the growth to an index to make a sensible argument, just looking at the graph won't really help me.
This concept is essentially the reason why “being able to quickly google the answers to questions” is inferior to “learning, knowing and remembering the answer.” The former treats a piece of information as an independent, context-free item, while the latter allows you to “digest” the information and understand the answer at a deeper level, to the point where it changes the types of questions you ask.
Unfortunately our society doesn’t seem to recognize this and actively encourages not learning certain facts because they are easily googleable.
Fortunately, Google exists so you can learn new things and develop foundational knowledge. Its all about what you do with the knowledge, and has little to do with the fact that you're Googling.
For example, I was Googling how to create a VM hypervisor last night in FreeBSD. I know very little about hypervisors, but I've read many blog posts and now I know what they are, what they do, how to setup failover clusters, etc.
The point is, people don't really sit and read the things they look up. That's the bigger problem.
I think what he means is other people that have produced substantial works like books etc that are the actual resources you need to consume in order to gain the knowledge. Google helps you find peoples opinions of what good resources are to dive deep on a topic so you can then acquire and consume them.
Sometimes you can get linked directly to a great resource but IMHO the best stuff costs money and is usually worth it for the results that that particular incentive structure engenders.
There is a big difference between copy-pasting shit from stackoverflow and reading the whole documentation to understand why the hell this method was written this way.
Precisely. I work in Ops with a dash of devops thrown in. My coworkers will "document" something by copying and pasting the commands used into a confluence page and calling it done.
Which isn't very useful when you come to something 18 months later wondering "why" rather than "how". Because "why" is often more useful than "how" when you are trying to troubleshoot something.
I guess it could be condensed to wisdom over knowledge, but how do you tell people that wisdom is valuable when they clearly don't want to hear that? Wisdom takes time and effort, knowledge is a copy and paste away.
Totally. Everyone that says "I hate maths" would shit their pants at how much they loved math if it didn't hurt their feelings and they could see it's raw power.
It's not deep part of your mental model if you have to Google for it. Though sometimes just having an awareness of something so that you can recognize this is a situation where it's useful and now is when you should Google for it is useful.
Learning shit deeply is such a game changer. There is no substitute.
This seems to be written by the CEO of a company that provides the exact service the article describes. That doesn't necessarily invalidate it, but I'd read it more as a business pitch than an honest, unbiased opinion.
You're being generous. Thinly veiled as a blog post advertising is such a common thing and so so transparent. I wouldn't treat this any differently than a banner ad on a website.
Google itself tried to validate the idea but ended up shutting it down in 2015. Google Helpouts used Google Hangouts to connect people with experts. If someone could make it a two-way street, and use credits instead of cash, it could become a time bank, which is what I'd really like to see proliferate.
In cutting-edge domains, a lot of that won't be written down, so ungooglable by definition.
For example, in deep learning research, good labs were using good initialization functions before somebody bothered to write a research paper explaining why it was good idea. If you didn't work in one of those good labs and so were never told to do that, you would just struggle and say "yeah these deep nets suck they don't even converge".
If you know what to google for. It happened many times to me that I was unable to even know what/how to search for something or didn't know someone already solved that problem in ingenious ways and every specialist knew that, but I wasn't a specialist.
I'm a programmer but when I watch machining videos on YT I discover solutions to problems I've never thought would exist.
This is circle of competence, another common topic on Farnam Street. It's knowing what you don't know so you can find out rather than puff up and fake it.
Yes, I'm incredibly more productive in Python because I know the stdlib and most frameworks and tools API by heart.
But it took me 10 years of practice, and my daily rate is way more than it used to be. I'll also refuse a lot of gigs outright.
You want juniors to be able to work too, and you can't expect them to know the entire world. Yet they can be useful, worth the money, and a great addition to your team.
Besides, even I don't know all the answers. I can't. The field of IT moves too quickly. I have to select what to learn, and what I set aside as "something I can google". There is no other choice, because we are limited in time and space.
But beyond that, you may want to sacrifice efficiency in some (or many) areas to preserve your energy, divide it in several activities, or just keep it to do something else that is not learning related.
That's if you limit the scope of the article to IT only though.
If you extend the scope to your entire life it's vastly different. It's easy to feel smart because you have all the (written) knowledge of the world at the tips of your fingers at any time.
I know people who constantly talk about articles they read earlier in the day, etc ... information get diluted from 10s studies, to an article, to a recap of the article this guy read, to this guy talking about the 10% of the article he remembers.
Sure it's fun and interesting but it's not "learning" or "knowledge", in 2 weeks he won't even remember it.
Actually, I find having a superficial knowledge of a lot of topics pretty useful as well. It opens perspectives, and opportunities. And there is not enough time in a day to read everything, listen to everything, watch everything, practice everything. Shortcuts are fine.
But as you say, "It's easy to feel smart". That's the real problem: you don't know what you don't know, and you should not get cocky.
I completely agree on that, but as you said, there is just so many things to read / watch / learn, and it's so easily reachable that we often end up with "choice paralysis".
I don't have a crystallised opinion on the subject but instinctively I'd argue that picking a few topics and getting a good in depth knowledge of them is more valuable than splitting your attention span on so many things that in 10 years from now you won't really have anything to show.
Personally I see that as any other kind of distractions, it's easy to hop on from topics to topics, learn the absolute minimum about it, get our quick fix of dopamine making us feel good about "learning something" while you haven't actually learned anything valuable and will most likely forget about it in the next days or weeks. Not saying that we should avoid that at all cost, but it's nice to be aware of it.
Edit: seems like I could end all my posts by a quote from Seneca.
"Accordingly, since you cannot read all the books which you may possess, it is enough to possess only as many books as you can read. "But," you reply, "I wish to dip first into one book and then into another." I tell you that it is the sign of an overnice appetite to toy with many dishes; for when they are manifold and varied, they cloy but do not nourish. So you should always read standard authors; and when you crave a change, fall back upon those whom you read before."
Google is inherently a shallow net, it does not trawl the depths of information. It's made for finding what's easily seen on the surface, what's most interconnected/viewed by others/what Google wants to be on the surface.
If you learn to use Google scholar, for instance, you'll quickly find a skilled scholar searcher can find really great, really specific material. The question then is can you integrate and internalize that information, as Buffett does?
I'm working on this problem myself [0]. The app allows you to map out topics of interest as though making a mind map, building out subtopics that are as specific as needed to really become acquainted with an area of knowledge. And later on you'll be able to come back and refresh your memory about what you reviewed, and possibly drill down into some of the articles people recommended but you didn't have time to read at the time.
Interestingly, I chose the name "Digraph" independently of the repo that a sibling comment refers to, after observing the way the topics relate to one another.
The "knowledge graph" and "personal knowledge base" community is working on it! Although in a lot of little projects; nothing unified that I know of. Here's a project I worked on for a while, which lets you maintain a Neo4j database via an Emacs frontend:
Yes that is interesting, remembering stuff is LITERALLY what our brains are supposed to do yet the very idea of spaced repetition is treated with immediate suspicion.
Worth mentioning that looking things up vs. learning and then knowing everything isn't a binary choice, there are degrees.
Just as an example, there is a difference between knowing roughly what to google and then looking up everything you need to know for a task, and knowing exactly what you want to do and googling to look up the execution details which you don't remember.
This reminded me of what Jeff Bezos told the founders of Basecamp: "Focus on the things that don't change". In software, the global implementation-specific knowledge changes quickly, but the global first principles knowledge expands much more slowly. Implementation-specific knowledge is "crumbly"; it can't compound effectively over time because the foundational premises for its usage disappear. Investing in knowing first principles may pay off more in this regards because first principles actively build upon each other (compilers --> just-in-time compilation, distributed memory models | distributed systems, etc.)
I wonder to what extent Warren Buffet is Warren Buffet because of how he thinks and acts (like all of these non-fiction authors selling books by using his name would have us believe), and to what extent he is the product of media selection bias. -- If you take a large enough group of people who take risky stakes that are large enough (like the world of financial asset management), then one of them is bound to be as successful as Warren Buffet, even if they all behave randomly.
Funnily enough, Buffett actually calculated this in his essay "The Super Investors of Graham and Doddsville"
Basically, advocates of the Free Market Hypotheses believed that it was impossible for anyone to deliberately, repeatedly generate alpha. The market was rational, and success was probabilistically distributed. With a large enough population, you will get Buffett level returns - therefor Buffett is a fluke.
However, Buffett calculated that there weren't enough investors for his success to be a factor of random distribution, plus there were 2 dozen others who followed a similar strategy who also consistently generate alpha
It's worth noting that Fama has since then walked back on the strong statement of the Efficient Market Hypothesis. I don't know that he ever intended to say beating the market is impossible; rather that beating the market must be impossible, under the rigorously definition of an idealized, "efficient" market.
Unfortunately a lot of proponents of the EMH (especially non-academics) have taken this concept and run with it in ways Fama didn't intend. His position would be more accurately stated as the claim that modern markets are eventually informationally efficient, for any given instance of information asymmetry.
It's a useful model that approximates markets, not an empirical claim about the world.
He definitely never said that beating the market is impossible. He said you can beat the market long term by taking on more risk, but not by market timing and stock selection. Everyone leaves out risk when talking about the EMH.
> The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds generating long-term returns above the market index.
Not over the time period he has been successful. Or at least the longer he lasts as a successful person doing what he does the less likely he's just acting at random. It's possible to get 1000000 heads in a row flipping a fair coin, but around 20 I'm going to be suspicious.
edit:
With Buffet, he's not actually getting everything right, so I guess a better metaphor would be like 70% heads over 1000000 flips... more likely under random circumstances, but still pretty suspicious.
There's a multiple-endpoints effect here. If there are 2^20 participants all doing that, one of them is going to flip 20 heads in a row. You only notice the one who did after the fact. Some participant has to be the most outlying result and that's the only one you notice.
(Not that that's necessarily the case for Buffett, but that's a general fallacy to be aware of.)
There is such a thing as information, knowledge, wisdom and finally free will.
Warren Buffet is Warren Buffet because of the way he consumed the information available to him, interpreted it and finally reacted to it.
Certainly, Warren does not control the many factors in the environments he found himself in, factors that was favorable for him to get to where he is today and factors that were obstacles to him. But his chosen actions are his, the paths he took, the burdens, the risks, and the responsibilities.
I would perhaps think of him as wise, not a genius or any such worship nonsense.
If they all behaved purely randomly WB would be a high sigma event - he's got to be loaded in some way - the issue here is which of WB's properties are behind his financial success - one strategy would be to emulate him as accurately as possible in all his idiosyncrasies or to use a more scientific method (e.g. looking at common traits among agents of his class).
A thought experiment: Say I have a database with 1024 e-mail addresses. I split them in two groups. I send an e-mail to 512 of them saying "tomorrow, IBM is going to go up". To the other 512, I send an e-mail saying "tomorrow, IBM is going to go down". The next day, IBM is up, and I discard from my database the 512 people to whom I've just sent an incorrect stock tip. Then I repeat. I send an e-mail to 256 people saying "tomorrow, Microsoft is going to go up", and so forth. ...at the end of the process I have someone who I've just sent 10 correct stock tips to. -- From the point of view of that person, I have been CONSISTENTLY successful. So that doesn't really mean anything.
Also: There is a saying: You only have to get rich once. It is much easier, if you come into money at one point in your life, to hold on to it, than it is to repeatedly go from zero to hero, since capital has a tendency to create more capital, and a lack of capital has a tendency to prevent you from accumulating any.
I know it goes against the mindset of the American entrepreneurially-minded crowd here. But it's a thought.
You can use the "[private] tournament winner" selection process up to a certain point, but at some point far below Warren Buffett's current level, you come into the public eye.
If it were akin to flipping coins, we'd almost surely have seen 16+ proto-Buffetts emerge into public consciousness only to see 15 of them blow up. Sure, there have been hedge fund failures and you could argue that Madoff was a public eye super-investor who turned out to fail, but I don't think there are enough examples of "this guy is a genius based on his track record" turning into "that guy we thought was a genius turned out to just be a lucky idiot" to suggest that all of Buffett's returns are luck.
While you are right, I think the parent's idea if that with a large enough sample, even if every actor is making decisions randomly, you will get actors that will just crush it.
I mean Warren Buffet invested in Apple about a year ago based on the idea that they have a sticky brand and went so far as to say that iPhones were underpriced (which is just flat out wrong given how poorly they sold relative to predictions). . .and it turned out to be a terrible investment decision (so far). While I find it hard to believe that WB is all luck I think you can't dismiss that argument entirely based on his track record, no matter how successful.
Warren Buffet would be the first to tell you that how the market prices an investment on any given day, has very little to do with the intrinsic value of that investment. Just because Apple went down relative to when he invested, that doesn't mean it was a bad investment. Markets go up and down in unpredictable ways. As they say, in the short term the market is a voting machine, in the long run it's a weighing machine.
By this time, I think it's become clear that Apple's disappointing results were entirely caused by the macroeconomic conditions in China and nothing else. Certainly not because of increases in their product prices like you speculate.
I am not an active investor. I do not claim to know as much as someone like WB. However, what you have just explained is all pretty obvious.
To buy Apple's explanation that most of their disappointing quarterly earnings were as a result of Chinese macroeconomic conditions is frankly being generous to them. Just focusing on the iPhone, it is a muddled offering where successive iterations don't stand out from the next as they did in previous generations. Now, this isn't just an Apple problem. Innovations in smartphone technology have slowed down across all handset makers. However, until Apple shows that they can successfully increase their service offering to get more money out of their users and are able to charge more for handsets then opportunities for growth seem pretty limited in that space. Moreover, when I see that apple is increasing credit on trade ins for newer iPhones a few months back. . .I take that as a sign that consumers see little value in upgrading. Not saying Apple is doomed but they don't show signs (to me) that they are on the path for growth.
My comments on the price of iphones was from misremembering WB comments about them 6 months ago. He said that the iPhone was underpriced but that Apple could not increase prices due to competition. I thought he made a statement saying he believed that prices should be increased on the iPhone range. I never claimed that their stagnant sales are from product prices, rather that worldwide sales demonstrate that the price should definitely not be higher than it is currently (unless they improve the product dramatically).
However, what you have just explained is all pretty obvious.
I was just addressing your notion that the investment was "terrible".
To buy Apple's explanation that most of their disappointing quarterly earnings were as a result of Chinese macroeconomic conditions is frankly being generous to them…
But we don't have to "buy" their explanation, because we can just look at numbers. Apple has released their quarterly results, and the iPhone grew in every region except China. Yes, growth has slowed, but this is not a new trend and is not the reason that this quarter has disappointed investors.
until Apple shows that they can successfully increase their service offering
But they have shown that! Service revenue grew by a very healthy 19% last quarter (relative to the same quarter yesteryear).
when I see that apple is increasing credit on trade ins for newer iPhones a few months back. . .I take that as a sign that consumers see little value in upgrading
Why would you look to signs, when you can look at the numbers? There is no reason to speculate when Apple has released the results.
On Apple; on a 1 year timeline APPL beats the S&P 500 by 5%. But I don't think Buffett measures his investments on a 1 year timeline; and to be honest to your comment, he made the underpriced comment on Aug 31, 6 months ago.
"I do not focus on the sales in the next quarter or the next year," he said. "I focus on the ... hundreds, hundreds, hundreds millions of people who practically live their lives by it [iPhone]."
Apple does continue to boost services income, keep cash on hand, pay dividends, and do share buybacks, all with a P/E below major utility stocks -- things Buffett traditionally considers.
I misremembered his comment on iPhone prices. He just said that they are undervalued relative to their utility. I thought he made a comment that Apple should look to increase iPhone prices, which, as he admits, would be a terrible move.
Listen, I was just trying to make an argument that even WB can misjudge a situation. It was not a convincing argument because half the example I used was not correct. Timing wise, buying apple stock in early 2018 before concerns about Apple being able to grow and stoke the hunger for their consumers to upgrade is not ideal. Hindsight is not a necessarily fair way to judge his decision because as you mentioned his horizon goes far beyond a year.
Maybe my personal bias is coming through because I just don't see it as such an exciting brand anymore and I struggle to see where they will find new areas for growth. Whereas 10 years ago I was looking to upgrade my laptop/smartphone every 1-2 years, now I've got my iPhone 7 and my 2013 macbook air and I'm sticking with them until they fail because nothing that Apple offers makes me go 'I want that'.
Yeah, the example was a pretty poor one. Your quote about pricing wasn't far off from what Apple was trying to do; I heard somebody say they're realizing that the smart phone market is saturated and seeing how high they can pump the price before it matters; and you and I both think they found it.
> I just don't see it as such an exciting brand anymore
The stock market also doesn't see it as exciting anymore. The market has had this view since Steve Jobs was alive; where Apple's P/E places it below value and dividend stock (it trades at half the multiple of Duke Energy). In order for you, or Warren Buffet to think Apple is a good value investment, it only has to be ~1/2 as exciting as Microsoft or Duke Energy.
Well, if you take the random-chance/selection-bias as the core of a snowball and add to it the various mechanisms which mean that the game of asset management is rigged in favour of the manager, then I think there is something to this. For example, asset managers get a part of their income from a MANAGEMENT fee which is a percentage of the assets under management, that they collect regardless of whether the fund actually does well. If you get a few bets right, make a name for yourself, more people will be putting money into your funds, and it all turns into a self-fulfilling prophecy.
I can't find the quote, but Buffett himself addresses this somewhere by saying that while you can get very lucky in finance, if the lucky ones all come from a particular city (Omaha) with a particular philosophy, something might be up.
The key to me, it seems, would be to evaluate his decision making process as opposed to merely examining the outcome. If the stated rationale used at the outset is validated (repeatedly), then it stands to reason his success is due to more than simply being lucky.
I'm not very familiar with Warren Buffet or the world he operates in, but my understanding is that he does not in fact take particularly risky stakes and explicitly stays away from verticals he's not familiar with. Hence my personal opinion would be that how he "thinks and acts" has directly contributed to his success - but happy to be proven wrong.
People like him, are made by many, many random acts, and of course dedication, around 10.000 hours is need it for be an expert in any field, any. What if "grandfather who was a grocer" was a plumber instead?
I Strongly recommend this book: Outliers by Malcolm Gladwell.
He studies outliers, their family, culture, timing. One of many fun facts is that almost every pro-hockey player in Canada is born in the early's month jan, feb, mar.
Why? they compete versus small children when their are kids, and those months of strength give them advantage, which sent them into better teams, with better coaches and so on..
Which academic sources would you recommend on this topic?
I've checked the sources from that book and they seem legit, including papers and articles[1]. Besides, the reviews of that book are very positive [2].
My recommendation is to read the academic sources, not the guy who simplified materials to an extent that things are lost in the translation leading to misrepresentation and misunderstanding.
Also, always read the negative reviews. Sometime, they are bunk, but they sometime can be very informative.
I spent many years learning how to do cloud architecture. Now I can briefly look at AWS documentation for new services out of the corner of my eye and know all I need to for the next 6 months.
Yet the other day I opened a book on Java, which I haven’t studied since college, and literally had no idea what in the world I was reading.
I’m curious as to how/why you could have spent years learning cloud architecture, it’s not that complicated surely. My company is recently transitioning to GCP and I’m architecting big data solutions. I started doing this in November or so and well, it’s not rocket science, in fact, it’s considerably easier than building systems ten years ago was.
I’d hazard a guess that you’re not learning particularly efficiently if it took you years to learn this. In my opinion, any smart engineer could learn cloud architecture in a month or two if they’re studying two/three hours per day in their own time.
There are like 50+ services from AWS alone, I doubt you have deep experience across those from a few hours a week of study, let alone learning about Azure, GCP and all the other cross platform offerings out there. And that’s not even touching the custom architecture required when you hit real scale.
Yes it’s easy to get going in the cloud, but becoming an expert, like anything, is hard and take time + experience.
You must joking right? Sure you can learn how to graph down some services using draw.io or something, but to actually implement the architecture and have it working without hiccups is another matter entirely. There is a vast amount of different types of application architectures with different requirements that require completely different architecting compared to some "big data solutions". Maybe try architecting massive scale game servers next time? Or some other highly specialized solution with very strict performance requirements, it's not that easy. Sure you can again just graph down some vague lines and boxes with draw.io but the actual implementation with Terraform or whatnot is definitely not something you learn in a "month or two". Jezus what arrogance.
I'm building Hadoop clusters in the cloud with massive streaming piplines using Kafka, then feeding stream processing jobs using Flink on Dataproc for driving machine learning models.
We're doing this at a massive scale, bigger than most production games. So I don't know why you're talking about massive scale game servers, we are literally doing this at massive scale.
Information arbitrage is also a factor. Here's an interesting case study using the Jan 3rd $75B Celgene acquisition 'Generating Alpha from Information Arbitrage in the Financial Markets with NLP Datasets: 水涨船高' https://hackernoon.com/profiting-from-information-arbitrage-...
The clusters were from back-tested stock data. Ie we knew ahead of the time that there were profits to be made.
Was this akin to p-hacking? That is where there more stocks selected with some sort of correlation without the profit potential.
The article alludes that there were more stocks without the raise in stock price after Celgene acquisition.
So the real 'show me the money', 'skin in the game' for this kind of research would be to make predictions on a real time event(merger, acquisition etc).
If his knowledge were compounding, we'd expect his performance to getting over time, not worse. But that's the opposite of what happened.
He's underperformed the S&P 500 over the last 10 years. And it's been decades since he's been able to match the great returns he had very early in his career which he built his reputation on.
You make solid observations but there are good explanations for this.
1) Investment opportunities are inversely related to the size. Buffet has constantly warned shareholders that as the size of the company grows, it becomes harder and harder to find good investments. Assuming he can analyze only fixed number of companies, we should expect that there is less potential companies to buy. Buffet has changed his investment strategies several times to reflect changes in his opportunities.
2) Timing. BRK is a company with incredible patience. If you compare SP500TR and BRK over decades, you notice that BRK makes permanent break from SP500 during stock market crashes and long recessions. During stock market booms BRK starts to lose to to the inflated market prices.
We are currently riding on the top of 10 year stock market boom. BRK is patiently buying companies with long term steady profits. For example, Buffet is buying energy companies and electricity transmission businesses all over the the west. These companies are geographically linked and there will be benefits from smart grid investments in the future, especially if the future is solar.
I don't believe that's true. Looking at historic performance of BRK-A, it's out-performed the S&P 500 betwen pretty much any starting point and right now. The only exceptions I can see are midway through the '08-'09 financial crisis, where at times the S&P had sunken faster than BRK-A, leading to having a slightly larger recovery since.
Marketing himself as a folksy Nebraskan also does wonders for his dealflow, which is one of the secrets of his success. He gets first pass at a lot of privately-owned companies who agree to sell at a low price, because he’s Warren Buffett and won’t ruin their companies.
That's not just "marketing himself". That's a reputation earned over decades of buying companies and making the previous owners and managers into winners.
>YouTube is loaded with videos in which Buffet explains clearly how to get rich slowly but surely.
I need to see one good video. Yes there are lot of videos of him but I want to see a video of him that explains to a common Joe, with common means on how to achieve modest financial success.
Hi Dennis,
I just saw this note, I'll be glad to suggest.
Instead of YouTube, head on over to bogleheads.org.
Warren Buffet's investment philosophy largely aligned with Jack Bogle's. Bogle has a large group of enthusiastic followers who record it all, simply and backed up with free advice when sought.
If your prospects are even close to average, you should fare very well. Good luck!
I strongly believe that compunding knowledge is also helping to create good software.
And I think software companies should give a team the opportunity to invest time to know more about the subject.
For example when you write WMS software you should go to a warehouse and see what is going on, talk to the people who work there and understand why things are the way they are.
Because there is a huge difference between knowing that 1+1=2 and knowing why 1+1=2.
You're right but I think it actually needs so much more than that.
I've worked on both sides of enterprise software, firstly building and deploying Incredible Feats of Engineering in the face of Ludicrous Requests from the Idiot Clients, and then secondly as an actual front line worker, doing Work That Actually Matters in the face of ill-designed Utterly Broken Tools produced by Arrogant Engineers.
It's convinced me that "requirements gathering" in all it's forms just doesn't work, or at least is a currently unsolved problem.
If I ever set up a company it will be a kind of Gonzo software consultancy where my engineers take on long contracts, the first
year at least of which is just working entry level in the client company, actually carrying their actual workload, actually reporting up their chain of command. The only way anything is ever solved properly is when someone who genuinely understands and needs to solve the problem, also has the skills to do it. The current system of promoting talent away from real problems splits these two things up.
Human psychology, common social hierarchies, and management culture works against your ideal: ultra-rare is the manager who will humbly claim they do not know what their direct reports are doing in sufficient detail to adequetly convey requirements to an engineer.
I suspect a swing back towards in-house software development might become more attractive to decision makers, as big companies' boards of directors cotton onto the "Software Eats the World" trend, then panic-build before they're eaten by a competitor who got there first. AWS is just the beginning of what I suspect will turn out to be a marathon we're entering that even our great-grandchildren will run.
A lot of us are on the treadmill of consuming expiring information. Not Buffett. He filled his mental filing cabinet with information that had a long half-life.
I remember being in grad school, encountering fellow students who would say, "I want to learn X-Windows, so I can get a job doing that." Not such a huge market for that now. This is why you want to have a working knowledge about the whole stack. You won't necessarily build a compiler or write a low level library in your job, but if you actually needed something like that, you'd know enough to shop around for the right one or hire someone to build it for you.
I all you're learning is how to jockey around one opinionated framework, or just barely learning how to glue libraries together, you're not learning information with a long shelf life.
This book probably doesn't mention that he's given away over 71% to charity since Y2K. Or that it's really cold and windy and snowy in Omaha; which makes for lots of reading time.
"Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage" (2008) [1], "Buffetology" (1999) [2], and "The Intelligent Investor" (1949, 2009) [3] are more investment-strategy-focused texts.
People have been saying Buffet is a lucky outlier for decades. Is his success in the following decades survivorship bias or a valid ex post facto test of success? If you believed in Buffett's investment philosophy in the 1980s based on decades of results, and had a thousand bucks to buy a Berkshire A share, would it have been a lucky pick?
I didn't believe you could beat the market until about 2000, and I'm happy I started investing in Berkshire then. If I had bought Apple instead, it would have been a lucky pick imho. I think of investing in Berkshire to be based on ex post facto results, not survivorship bias.
A decade ago I did an analysis of the top 25 on the Forbes list[1], and the TL;DR is that they 1) inherited their wealth, 2) had bet on a single company, or 3) been a value investor. Nobody in the top 25 is a "trader" or "quant" (e.g. Paulson or Soros). That analysis is still true, btw.
> focus time and effort on knowledge and skills that endure
> read more seriously
> think for yourself don't just take the opinions of others
> focus in a particular domain so that pattern recognition develops
> persist over time so that real knowledge has opportunity to compound
What kinds of knowledge actually compound? Are there specific kinds of knowledge that deliver value now, make it easier to acquire knowledge later, make new knowledge more valuable because of rich context, or give us new models and paradigms for thinking?
Buffet is a smart investor and obviously he is successful, but I always wonder why articles like this don't realize there is a large component of survivorship-bias involved also.
I always like to think about this paragraph From "Fooled By Randomness" when I read this read articles on TechCrunch etc about how great and talented someone is (but it obviously easily maps to people like Buffet)
>Let’s push the argument further to make it more interesting. We create a cohort that is composed exclusively of incompetent managers. We will define an incompetent manager as someone who has a negative expected return, the equivalent of the odds being stacked against him. We instruct the Monte Carlo generator now to draw from an urn. The urn has 100 balls, 45 black and 55 red. By drawing with replacement, the ratio of red to black balls will remain the same. If we draw a black ball, the manager will earn $10,000. If we draw a red ball, he will lose $10,000. The manager is thus expected to earn $10,000 with 45% probability, and lose $10,000 with 55%. On average, the manager will lose $1,000 each round—but only on average. At the end of the first year, we still expect to have 4,500 managers turning a profit (45% of them), the second, 45% of that number, 2,025. The third, 911; the fourth, 410; the fifth, 184. Let us give the surviving managers names and dress them in business suits. True, they represent less than 2% of the original cohort. But they will get attention. Nobody will mention the other 98%.What can we conclude? The first counterintuitive point is that a population entirely composed of bad managers will produce a small amount of great track records. As a matter of fact, assuming the manager shows up unsolicited at your door, it will be practically impossible to figure out whether he is good or bad. The results would not markedly change even if the population were composed entirely of managers who are expected in the long run to lose money. Why? Because owing to volatility, some of them will make money. We can see here that volatility actually helps bad investment decisions. The second counterintuitive point is that the expectation of the maximum of track records, with which we are concerned, depends more on the size of the initial sample than on the individual odds per manager. In other words, the number of managers with great track records in a given market depends far more on the number of people who started in the investment business (in place of going to dental school), rather than on their ability to produce profits. It also depends on the volatility. Why do I use the notion of expectation of the maximum? Because I am not concerned at all with the average track record. I will get to see only the best of the managers, not all of the managers.
Warren Buffet is a pattern recognizing machine that can forecast trend growth by analyzing a boat load of data and has learned how to be a master of negotiation.
With that said, Warren Buffet is not someone who invents things and or is very creative such as Bill Gates, Jeff Bezos, Steve Jobs, etc..
But someone like Buffet can amplify adoption of products and ideas by investing early and seeing potential of the companies.
why “being able to quickly google the answers to questions” is inferior to “learning, knowing and remembering the answer
At least in the world of programming, this is not necessarily true. There is so much flux that you do need to rely on Google for the semantics at least. In some instances or in time crunch, it is a make or break scenario and how fast one can get to a solution trumps everything else. So the ability to quickly Google what you want is indeed not inferior.
To quickly quote an anecdote, a couple of my fellow programmers couldn't start a Flask application on AWS to listen on all interfaces. Smart guys but they couldn't figure this out. 'What' to google for is also valuable.
Of course, the ability to learn, know and remember is tremendously useful and this is what most of the interviews test for, but the ability to quickly Google and find answers in the nick of time is not inferior at all.
Understandable that you’d want to exploit any resource that can give you answers during a time crunch.
But if given enough time, going through the pain of debugging and fixing something on your own – with at the most some documentation – is still superior.
If one has learned, knows and remembers the first principles of their domain, then knowing what to Google becomes less valuable (not saying your colleagues don’t know their stuff). You can rely on yourself for even the trickier situations you get into.
Agreed, this is what I strive for but rarely do it in practice. Somehow, you are always in a hurry, you always want the solution now!. I think this has to change, the initial time spent on the understanding the debugging process has immense long term benefits.The time to solution decreases with time, in my kind of approach it remains linear or sometimes even increase.
1. WB came at a time where little IQ could get you a lot ahead. People were not skilled. There was a time where some knowledge of writing, reading and basic math could make a factory director. Now the same knowledge might not get you at the door of that same factory.
2. WB came at a time where it was easy to acquire and build. These were times when land was cheap. Competition was easy. And lots of sectors were not developed yet. Not the same circumstances now. Or, it is. I mean if I tell you there is some cheap land somewhere: let's go and build and invest. In 20 years it'll be worth a lot. Would you go for the deal?
3. WB age is 88. I'd rather have a couple million USD in my thirties than having a billion by the time I'm 80.
4. WB probably made extreme lifestyle sacrifices to have more digits in his bank account and more troubles/reports to read everyday.
TL;DR: WB suggests that you should be wise and reasonable. That's good. People suggests that you should follow WB. That's bad (unless reading financial statements is your hobby).
Warran Buffet did indeed have a couple million USD when he was in his 30s, back 55 years ago when a couple of million were worth around 20 million in today's money. Measured in today's money he probably had 2 million at some point in his mid/late 20s. He became a billionaire at 50-something.
> 4. WB probably made extreme lifestyle sacrifices to have more digits in his bank account and more troubles/reports to read everyday.
Possibly...I think those are just personal preferences. Apparently he rather likes his old house in the middle of nowhere. Apparently he prefers burgers and coca-cola to Michelin star restaurants with rare vintages. He seems to actually enjoy reading and buying up companies. He seems to be one of those few people who happened to get into a trade/profession that they had and aptitude for and enjoy.
In today's world things like "2 week sprints" or "move fast and break things" are considered cool. Not many people get the luxury of spending too much time on a topic unless of course you are Warren Buffet. The world around you pushes you or steals yours attention all the time.
It doesn't have to be like that for anyone though. Maybe in the short term, but you can get out of those situations if you need. Also 2 week sprints doesn't mean not focusing on one thing. It can mean breaking it down into chunks. Whatever Warren Buffet does, it comes down to stuff he does in 2 weeks every 2 weeks anyway.
It is more than 10ks. It is also understanding what people are doing and going to do. Coke isn't a great/bad investment because of the 10k numbers - it is great/bad because of people who will continue to buy Coke over the long term. If people change their coke buying habits that won't show up in the 10k until it is too late, but by watching other sources you can figure out people are not buying coke.
It’s easy for me to feel shame that I don’t read 8 hours per day, as Warren and Charlie do. Buffett is a phenomenal investor but by all accounts, rather odd. He eats like crap, doesn’t exercise, had a profoundly weird relationship with his wife, and seems addicted to his work at the expense of everything else.
My point is this: his practice of reading income statements and business reports 8 hours per day for 60 years doesn’t make him the kind of person I wish to emulate.
Don’t get me wrong, I respect his levelheadedness toward money, lack of polish wrt PR, and generous philanthropic efforts. There’s a lot of good. But it’s easy to idolize the guy.