First off I don’t know Warren Buffett personally so the intent of this discussion has nothing to do with his “person” however it does have everything to do with his “public” persona which people like you and I who do not know him (personally) can either read about or Google all day long.
The main reason for writing this is it scares me that first so much is written about Warren, where too many people talk themselves into the “Magic of Buffett” or the obsess over the concept that he is a “Business Genius” which writes only one letter a year telling the CEO’s of his companies what he wants done.
Well let’s get some of the myths out of the way up front, and as the head of Berkshire Hathaway a conglomerate holding company, Warren is the Chairman and CEO of this “holding company” however he isn’t the only one. He also has a very capable board and many smart people around him. Also if you look, there are so 217,000 employees in the BH family of companies and assure yourself many of these are also very able of mind too. Second and more importantly, Mr Buffett is a “stake holder” not a manager of these companies, remember the heavy stress above on “holding company“! Please do not confuse this fact, as how many letters to CEOs of companies which you hold stock in do you send letters per year? Ok the answer is most likely zero so one for each Buffett company is a lot! In addition like any big company there is a governance organization which set below Buffett as Chairman and CEO as in most organizations, so no magic under that rock.
Also I always love the story “he bought his first share of stock at age 11 and wish’s he would have started earlier“. The fact people are amazed by this is in itself scary as first common sense says teaching kids about money is important and would hope that in today’s world parents are sharing a broader view of finance other then simply letting Jenny or Johnny decide what to do with their 50 cent allowance.
Second, rule number one of investing, time is your friend the more you have the better off you will be. So why when Buffett says he wishes he would have started earlier does this surprise people? He is simply creating a shortened metaphor for the long version above and it’s not meant to say that your 10 year old should be given the rights to manage your 401k!
Ok so much for the myth of Buffett, let us move on to the “magic” that is Warren, and expose a few things much like a Chris Angel Magic set gone bad. First why do people like us read about people like Warren? Ok, you had to think about it that long? Alright the answer is because he has far and away more money than we do or will ever have even if we win the lottery twice over and pay no taxes. So is he a genius or just lucky? Well there are very few genius’s out there, however there are a lot of opportunistic people in the world and Warren happens to be one of them. Second, Warren is around 80 years old at the writing of this, so when he started, America was far more capitalistic then socialistic as it is now. Yes, we are far and away more socialistic today then 50 years ago, however this paradigm shift was a critical factor for Buffett’s past success.
So in short this where Buffett’s “Magic” took place, it wasn’t that he bought stock at 11 years of age or having an unnatural IQ, he just so happened to be at the right place at the right time. Now to the truly interesting part of the story, as the real “magic” is how Buffett as a textile mogul (after taking control of BH in the early 60’s) was able to weave himself a magic carpet to ride growing insurance wave. Here, Warren end up at the right spot at the right point in time with all the right rules in place (sorry this wouldn’t work under today socialistic laws, sorry). As a side bar I do give Warren credit because he is one of the few people who had the guts to speak against SOX, however that’s another post.
However the explanation to the “magic” is a simple one; it was the “Lindy Effect” which says “a man’s future success is directly proportional to his past exposure“. Whew, you say that’s just basic stuff right, if you have money you have a better chance at making more right? Well in short yes, however with a catch, the trend is not linear! As Buffett is not just your regular wealthy person (is there such a thing), he is super wealthy!
Let expand again on how the future Buffett ended up so well off, as because of the past regardless of how it started, people today follow him like the pied piper; think about it for a moment. Buffett says “I think I am going to buy Acme Inc” then bam, faster than Emeril Lagasse could add a dash of spice to a dish of fancy cooking, the stock of Acme Inc will have gone through the roof along with all of the other companies in the related field for no reason other than “because of Buffett“.
What is the reason we do this? Simple as “Lindy” says it because of his “past exposure to the medium“. If some new person with no record of success and buying his first share in the market where to make the headlines of the Wall Street Journal, would it create the same action in the markets, well of course not. This is why Buffett is more of a snowball then a genius as there is only one moment of “magic” in a snowballs life and that is it’s initial creation, all the rest is simply gravity as it rolls down hill gaining mass. The same holds true for Warren Buffett as while there might have been magic that “magic” happened at the start and is not there today. As the Warren Buffett of today, is simply carried forward by the inertia of his past.
This is also why you don’t see party store owners becoming multibillionaire like you do the folks in Internet startups, because as mentioned in Buffett’s day (again he is 80 years old) insurance grew at a viral rates (remember fringe benefits of the 70’s) and there he was before it happened riding the rapidly climbing “Lindy Effect” tail upward. Here we see clearly how his past career has added to his future opportunity which is the Buffett we see today.
So to me Warren is simply a bright (well hearted) guy that was lucky enough to be at the right place at the right time to ride along with gravity too, just like a snowball rolling downhill on a chilly winters afternoon gaining mass all the way down…