Yearly Focus

Warren Buffett – Exemplar Review

This year I picked Warren Buffett as my exemplar – a person I think demonstrates the trait I am trying to learn about – for 2020, the theme is ‘action economy’ which is a fancy way to say efficiently using your time to achieve your goals.

I write these reviews following a review template to help me get the most out of the process of having an exemplar. Below is my entry for Warren Buffett.

What did Warren Buffett achieve?

Warren Buffett is the most successful investor of all time. He founded an investment fund that achieved a yearly return that consistently beat the overall market for 50+ years. His ownership stake in that fund has made him one of the richest people in the world (in 2008 he took the top spot for one year, the only year where he has held it).

Why did he care about that?

In a funny way, Buffett seems to care deeply about investing but hardly any about having money. He lived most of his life on a salary of $100,000 per year, in the same house, eating the same meals. He could have lived a life of unimaginable luxury, but has not sold any of his shares of Berkshire Hathaway shares as their value climbed from $18 to $340,000.

As I’ve learned about Buffett, three things stand out to me as factors that have combined to cause him care so much about investing and his yearly return.

  1. His duty to his partners – Because his investment started as a partnership, he had an obligation to his partners who had invested with him to work to bring them the best return he could.
  2. A mental and emotional condition – I’m not qualified to name the mental and emotional conditions that impact Buffett, but reading his biography and writing, it is clear his investing success serves to mask some insecurities and fears he has. He seems to crave emotional connections to his past but excels in a world of rational figures and accounting ledgers. I suspect the fame his success has brought him has made continued success something that brings comfort.
  3. The clarity of a metric – so many of life’s goals are ambiguous and amorphous. There is something so simple about yearly return that makes it easy to become a benchmark. Buffett has started the annual Berkshire Hathaway report every year for 55 years with a statement about the past year’s return and the historical compounded return. I think the simplicity of that number and the looming expectation to publish it again in a year continues to drive him.

How did he think about the world differently than his contemporaries?

Buffett is known for being a value investor, someone who looks for the true value of a company and tries to buy companies that are undervalued. This stands in contrast to momentum or trend investors who try to purchase things based on what they think other people will value them at in the future.

I would argue that he was in fact a cashflow investor and tax optimizer. He sought to use every dollar in his control to achieve the best return on investment, which sometimes meant buying an undervalued company, but often meant buying government bonds or a fixed yield asset.

What are a few of Buffett’s behaviors that helped him?

  1. He was singularly focused – he has spend 10s of thousands of hours reading 10-K statements, analyzing accounting records and looking into the numbers behind potential investment companies.
  2. He was extremely conservative in his approach – not only did he stay away from leverage, a way to potentially earn more on investments while also potentially losing more, he also seemed to steer away from investments with big potential but also high uncertainty. Bill Gates, the founder of Microsoft became a good friend of his and founded one of the most successful companies ever, but Buffett never invested in Microsoft, despite recognizing the talent of Gates, likely because the business seemed too risky and indefensible. Buffett often mentioned he doesn’t care about potential and won’t touch turnarounds, he sticks to simple businesses that are creating profit and growing slowly a steadily. That stands in stark contrast to so many investors that hope to hit a big success and are willing to take huge risks to do so.
  3. His management style – by all accounts, Buffett was a hands-off manager. He found good people, he told them what he expected, he aligned their compensation to hitting that and then he disappeared, only periodically requesting performance metrics and making himself available if they wanted his advice on something.

What are some of the decisions he made that contributed to his success?

He refused to get caught up in the hype of others. He is often quoted for his saying “be fearful when others are greedy, and greedy when others are fearful” and has been known to hold a lot of cash when markets are at all time highs, and then buy up companies during recessions that follow. It would appear he was an amazing market timer and contrarian investor, but I believe he just remains unconcerned with the trends, focusing instead on intrinsic value and using markets only to learn the price he can purchase something at.

What was one thing about the Warren Buffett’s life journey that is encouraging to me?

He was 35 years old when he took control of Berkshire Hathaway, buying shares for $7 a piece. Over the following 55 years he turned that into $340,000 per share. His $85B in net worth isn’t the result of a single breakthrough invention, company founding or bit of sheer luck, it is simply 55 years of returns slightly above the market average.

What is one thing about Buffett’s life that makes me feel like I should do more with mine?

His investing success isn’t actually the big takeaway for me. The bigger inspiration is the way he structured his professional relationships. From what he says, and a long line of facts that back it up, he has optimized his life for being able to work with people he respects, trusts and admires. He has an amazing track record of manager loyalty, to the point where I still don’t fully understand why so many of his managers a) chose to sell their companies to him b) continued to work for him, sometimes well into their 70s, 80s’, or 100’s in at least one case c) did so at salaries that seem pretty meager.

What did Buffett believe about the world that I have already reflected on?

Buffett’s view on capitalism is somewhat refreshing. He cares deeply about the numbers, but he knows that people are at the heart of everything. He keeps his eye on return on investment, but steers away from the shortsighted ways to achieve it quickly. He doesn’t seem to pay anyone lavishly, but treats employees well. He looks for good investments, even talking about the benefit of monopolies but steers clear of morally gray companies, like tobacco. He wants consumers to buy more of his company’s products, using every platform at his disposal to promote them, but he also make sure those products are high quality and provide the customers with a benefit. He is a fan of hard work and low cost, two of the better parts of capitalism.

My views on the matter have been shifting a bit lately and I really like the emphasis he puts on people and of loving what you do.

Which of his motivations have I reflected most on?

I really resonate with Buffett’s obsession with multiplying his money without actually caring about money all that much. Perhaps I am projecting onto him, but I just love a good metric to compete against and it seems he does too. There is something self-edifying in having a test to bring out the best aspect of oneself and a metric is a nice way to ensure continued progress. I personally don’t often care if the metric is a race time, a board game score, fake internet points or company revenue – it is just a number I get to use to test my strategy and execution skills. It seems like Buffett works in a very similar way – he has devoted his life to the art of investing and he is going to do it as well as he can until the day he is not able to.

What is one of his behaviors that I would like to try out this year?

Buffett is a bit number obsessed. He loves the insurance industry and I think a big reason is that math is at the heart of actuarial models and their eventual profit. One thing that stood out to me in Buffett’s biography was a story about him using non-transitive dice to fool friends, like Bill Gates. I bought a set and was looking forward to using them some this year, but 2020 has made in-person dice fooling a bit tough. I’m looking forward to doing more with them in the future.

What decision making heuristics can I adopt from Buffett’s experience?

I love the criteria he uses to invest in companies:

  • “They must earn good returns on the net tangible capital required in their operations”
  • “They must be run by able and honest managers”
  • “They must be available at a sensible price”

It is so simple and yet so effective. As an investor, I’m sure it can help me, but many of the specifics likely also apply to career decisions I make, etc.

What are some of his failures I can avoid repeating?

Buffett’s focus on business earning a profit prevented him from investing in companies like Microsoft, Google, Facebook, Amazon, Salesforce, etc. I think this is a blind spot in his investing, though it certainly saved him from plenty of failures. I suspect this is a transition that some future Buffett student will write about using to improve the Buffett strategy, like Buffett himself improved on the strategy of his mentor, Benjamin Graham.

What other cool facts did I learn about Warren Buffett?

  • He is an expert bridge player
  • He doesn’t keep a calendar or schedule out his day
  • He used to fly coach, refusing to pay for first class, but then switched to private jets, before investing in a private jet company
  • His investment activity is oddly circular, he frequently bought companies he had previously encountered, worked for, sold the products of, etc.