The name Warren Buffet is synonymous with success. His success in the investment world has led him to become the richest person in the world. His company, Berkshire Hathaway, has grown its book value per share from $19 to $300,000 – a compounded annual rate of 19.1%.
The results Warren Buffet has achieved are phenomenal. No other investor comes close to him over that time frame.
So what has been Warren Buffets success?
There is no better person to answer this than his business partner, Charlie Munger.
Munger answered the question on why Berkshire Hathaway was so successful during the 2007 DJCO meeting. Read, reread, and reflect on Munger’s response. They are golden nuggets and it contains all the information that one needs to lead a rational life.
Below is his answer.
A confluence of factors in the same direction caused Warren’s success. It’s very unlikely that a lollapalooza effect can come from anything else. So let’s look at the factors that contributed to this result: The first factor is the mental aptitude. Warren is seriously smart. On the other hand, he can’t beat all comers in chess blindfolded. He’s out-achieved his mental aptitude. Then there’s the good effect caused by his doing this since he was 10 years old. It’s very hard to succeed until you take the first step in what 10 you’re strongly interested in. There’s no substitute for strong interest and he got a very early start.
This is really crucial: Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you. Warren was lucky that he could still learn effectively and build his skills, even after he reached retirement age. Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is.
The work has been heavily concentrated in one mind. Sure, others have had input, but Berkshire enormously reflects the contributions of one great single mind. It’s hard to think of great success by committees in the investment world – or in physics. Many people miss this. Look at John Wooden, the greatest basketball coach ever: his record improved later in life when he got a great idea: be less egalitarian. Of 12 players on his team, the bottom five didn’t play – they were just sparring partners. Instead, he concentrated experience in his top players. That happened at Berkshire – there was concentrated experience and playing time.
This is not how we normally live: in a democracy, everyone takes turns. But if you really want a lot of wisdom, it’s better to concentrate decisions and process in one person. It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in one enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.
Lots of people are very, very smart in terms of passing tests and making rapid calculations, but they just make one asinine decision after another because they have terrible streaks of nuttiness. Like Nietzsche once said: “The man had a lame leg and he’s proud of it.” If you have a defect you try to increase, you’re on your way to the shallows. Envy, huge self pity, extreme ideology, intense loyalty to a particular identity – you’ve just taken your brain and started to pound on it with a hammer. You’ll find that Warren is very objective.
All human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you’re Warren Buffett, you’ll respond – and few things give more rewards than being a great investor. The money comes in, people look up to you and maybe some even envy you. And if you buy a whole lot of operating businesses and they win a lot of admiration, there’s a lot of reinforcement. Learn from this and find out how to prosper by reinforcing the people who are close to you. If you want to be happy in marriage, try to improve yourself as a spouse, not change your spouse. Warren has known this from an early age and it’s helped him a lot. 2007; DJCO Meeting
The key takeaway from Warren Buffett is that if you want to create a huge impact in one’s lifetime, like creating a successful conglomerate, then you need to compound at a high rates for a long time.