What is the secret of Warren Buffett’s investment success?

The “letters to shareholders” are useful, but they never provide a satisfactory explanation of the success that Buffett can teach and replicate.

What is the secret of Warren Buffett's investment success?

There may be enough books about Buffett on the market to fill an entire bookshelf, but Lawrence Cunningham’s new book, “Buffett’s Carnival,” is still worth reading. Unlike most books that focus on Buffett’s investment experience and philosophy, this book brings together the visions of more than forty people from all walks of life who have attended Berkshire’s shareholder meetings and who have been up close and personal with Buffett and Munger himself.

These people include professional investors, partners, entrepreneurs, business school professors, and writers, among others, and what they all have in common, in addition to being Berkshire shareholders, is an attempt to understand the secrets of Buffett’s investment success from the perspective of their respective specialties. This article is taken from the first of Chapter 5 Experts, “Investing in People,” by Prem Jain, an accounting expert who sees in Warren Buffett what he doesn’t see in the financial statements.

In 1987, when I was still an assistant professor in a financial statement analysis class at the Wharton School of the University of Pennsylvania, an older colleague asked me, “Why is Warren Buffett so successful?” I couldn’t answer. He convinced me to study Buffett specifically to find out. From a scientific point of view, this colleague suggested, “Let’s look for special cases to learn more. And so my research journey began.

After reading many articles and talking to several researchers, I found that most scholars could cite examples of Mr. Buffett’s success, but no one could explain why he was successful. The prevailing answer at the time was that his great success should be attributed to serendipitous luck. I didn’t think that was a satisfactory answer at the time, and over the years that explanation has proven inadequate.

I thought Mr. Buffett was a special case, and decided to dig deeper. There were two reasons that motivated me to find the answer to my question. First, to be noble, to teach my students how to succeed. Second, selfishly, it was for myself. I wrote a letter to Berkshire Hathaway, asking for all of Mr. Buffett’s annual letters since 1979 and binding them into a book. I also asked Mr. Buffett to sign the cover, and I was overjoyed that he agreed to my request.

The annual “Letters to Shareholders” were useful, but they never provided a satisfactory explanation of the successes Mr. Buffett could teach and replicate. I knew from my own teaching experience that it was important to listen to the teacher because the tone, phrasing and specific examples would further tell us what was important and what was not. I knew I had to see it for myself.

In 1992, I had a breakthrough. That year, I decided to attend a Berkshire annual meeting. Once I arrived in Omaha, my first stop was Nebraska Furniture City. To my great surprise, it was just an ordinary furniture town. I thought, “What’s the big deal? I also went to the Bosun Jewelry Store and found it to be crowded. These visits did not impress me much. Once again, I thought I would not get the answers I wanted.

I spent the rest of the day listening to Messrs. Buffett and Munger, and I paid full attention, looking for the concepts they were emphasizing. In those days, many shareholders were looking for career and family advice. Much of the meeting seemed to be spent answering (in my opinion) “unnecessary” questions. However, I remained patient because to find wisdom-filled words from the prophet, one must listen to many mundane sounding stories.

When students don’t understand or can’t find the answer, the professor will give them some hints. Warren Buffett had a similar approach in that he never gave a direct answer. He never says exactly what to do when looking for a great company, or what to do when dealing with family matters.

The first important revelation came to me when an MBA student asked Mr. Buffett for advice on what kind of job he should pursue after graduation. Buffett’s advice was to follow your passion and not get stuck on a specific job.

By the end of that day, I kind of understood why Nebraska Furniture City had been successful. The reason was not just the company’s products or systems, but more importantly, Mrs. B’s passion for her work. To me, Mr. Buffett is now Professor Buffett. A great professor like Warren Buffett never gives esoteric answers through formulas; he lets his students discover the answers themselves.

Since then, I have noticed that Mr. Buffett talks a lot about passion, and I have come to understand the importance of passion. A passionate person learns faster, and that leads to success and wealth.

But the answer to the question I was exploring was much more than that. I went back and read Warren Buffett’s letter to shareholders, including his explanation of float, and other esoteric accounting and financial terms. I went through all the annual reports, but still couldn’t find the answer.

I decided to attend the Berkshire annual meeting again and spend more time talking with the shareholder community, Furniture City Nebraska and other company employees. It was during these conversations that I learned that Berkshire has a unique approach to issues such as dividend policy, stock splits and the types of companies sought for merger and acquisition targets. On some important issues and fundamental questions, Berkshire’s approach almost always differs from the traditional academic model found in textbooks.

One year at the annual meeting, Mr. Buffett spoke passionately about Ajit Jain. Since my last name is also Jain (we are not related), this aroused my curiosity. In India, the Jains (Jains) are a small social and religious group.

I learned about Ajit Jain’s background and his education in India, and Mr. Buffett added the rest. I guessed that Jain was a very smart associate, a brilliant man who created wealth through his insurance business, but that didn’t tell me how to understand Mr. Buffett and the admiration Jain had for him.

Then, I made an incredible discovery. I have a friend who is a psychiatrist, good at meditation and a keen Buddhist. He said that Mr. Buffett does not seem to be bothered by market emotions like other market participants. He believes that Buffett is like a devout, peaceful Buddhist. I began to understand Buffett better. (It was a useful discovery that inspired me to delve into positive meditation in the years to come.)

At the annual shareholders meeting, Buffett and Mr. Munger continued to talk at length about Berkshire’s management and employees. As a professor of accounting and finance, I couldn’t understand why they were talking so much about personnel. In my opinion, the focus should be on past and future financial metrics and analysis. I continue to be very frustrated in my quest to try to fully understand why Mr. Buffett is so successful.

One year, Mr. Buffett gave a shout-out to Lou Simpson. Simpson is a legendary investor who manages a portfolio of government employee insurance companies. That discussion reminded me of Warren Buffett’s famous article, “Superinvestors of Graham-and Doddsville”.

But as a skeptical researcher, I noted that the examples Mr. Buffett gave in that article – nine highly successful fund managers – were handpicked. No mention is made of those who tried the same approach but failed or were merely average. In research, this is often referred to as “survivorship bias.

Maybe my colleagues are right, and Buffett just got lucky with some of his decisions, just as one can correctly predict the outcome of several coin flips. But I didn’t want to give up yet, and I kept returning to the annual meeting to find answers, sometimes with my students in tow.

Year after year, Messrs. Buffett and Munger consistently talk about the Berkshire Hathaway managers they admire. They often spoke enthusiastically about their managers, and the two men always agreed on their judgments about those managers, but they often disagreed on both acquisition prospects and national economic affairs. They rarely (if ever) forecast future cash flows, even though, in the professors’ view, future cash flows were the cornerstone of valuation.

Years later, I suddenly realized that the deeper answer I had been searching for was right in front of me. The answer had surfaced when Mr. Buffett and Mr. Munger talked about Ajit Jain, Lou Simpson, and dozens of other savvy, trustworthy, and passionate managers in Berkshire. This is how Mr. Buffett succeeds: he has the ability to know people well.

I have come to the conclusion that when Mr. Buffett invests, he invests in good managers, rather than thinking of the company separately from management. He allocates capital to the right people, not just the company. Product, operational and financial metrics are all important, but they are only secondary compared to people.

However, it is those secondary things that we professors focus on most when assessing the value of a company. When Warren Buffett invests in a paint company, a furniture store or a wall tile manufacturer, or when I visit different company booths during the annual meeting, I always ask, what do these companies have in common? The most important thing they have in common is that they all have great managers.

After figuring that out, I did two things. First, I perfected notes on Buffett-style investing for my students, and second, I wrote a book emphasizing the importance of great managers.

I also realized that I couldn’t be as good an investor as Warren Buffett or as good a teacher as Warren Buffett. Prior to that, my investments in Berkshire were only half of my total investments, and the rest of my money went to finding great companies. When I found the answer, I invested almost all of my money in Berkshire and have been resting on my laurels and sleeping at night ever since.

I am so glad that Mr. Buffett taught me the lessons of finding outstanding people, and I found out that Mr. Buffett is both a rich man and a professor. Attending the annual conference is that key that opens the door to wealth.

(This article is for the reader’s information only and does not constitute investment, accounting, legal or tax advice given or relied upon.)

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-is-the-secret-of-warren-buffetts-investment-success/
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