Warren Buffett Rediscovered

One of my favorite videos of all time was a speech Alice Schroeder gave at the University of Virginia Darden School of Business during 2008. The reason I like the video so much is because Ms. Schroeder did a fantastic job revealing a few facts that were relatively unknown, or misunderstood about the Oracle of Omaha.

I think the following quotes from Ms. Schroder are worth a good amount of pondering:

“He does have a way of making the difficult look easy.”

“He has a hard time understanding or perhaps admitting how hard he works. It's sort of like asking a fish to describe water.”

“Whenever Warren reads a book and especially when he was a child, he usually read it four or five times so he could memorize it all.”

“So much of Warren’s success has come from just training himself in good habits. Warren is an ultimate creature of habit and his first habit is hard work. He has a lot of reinforcement (of good habits) since an early age.”

“He was always thinking what more can I do, and especially what more can I do to get an edge over the other guys.”

“He’s chosen to learn in fields where knowledge adds and builds on top of each other.”

“Warren studied IBM since 1952 even though he has declared IBM out of his circle of competence.”

“The first step (in his thinking process) is what are the odds that this business can be subject to any kind of catastrophe risk that can make this business fail. And if there is any chance that any significant amount of his capital could be subject to catastrophe risk, he would just stop thinking. And it’s backwards to what most people invest. He starts with What Can Go Wrong. He saves himself a lot of time and energy by thinking of the ‘Cat Risk’ first.”

“He figures out the one or two factors that will make the business succeed or fail. And then he took all the historic data quarter by quarter and gets all the similar data for its competitors. He went through the data in great detail, just like a horse handicapper studying the tip sheet. He always wants a 15% day-one return on my investment and then compound from there with a satisfactory margin of safety. I saw him doing it over and over again with other companies. At times he has taken less than 15% and lowered his standards and he’s usually been sorry when he has.”

“He bought a lof of Phil Fisher type companies at Ben Graham prices.”

“He was only using historical data. (using probabilities) He’s handicapping that it’s the right price to buy. He doesn't care if it goes up or down next year or two he just knows at this price the odds are that it will do well.”

While all of the above are excellent points, I’d like to elaborate on a few points. First of all, I think Warren Buffett (Trades, Portfolio)’s success is first and mostly due to his early start and his extraordinary hard work. As described in Snowball:

"(Warren Buffett (Trades, Portfolio)’s obsession with making money) had led him to study a universe of thousands of stocks. It made him burrow into libraries and basements for records nobody else troubled to get. He sat up nights studying hundreds of thousands of numbers that would glaze anyone else's eyes. He read every word of several newspapers each morning and sucked down the Wall Street Journal like his morning Pepsi, then Coke. He dropped in on companies, spending hours talking about barrels with the woman who ran an outpost of Greif Bros. Cooperage or auto insurance with Lorimer Davidson. He read magazines like the "Progressive Grocer" to learn how to stock a meat department. He stuffed the backseat of his car with Moody's Manual and ledgers on his honeymoon. He spent months reading old newspaper dating back a century to learn the cycles of business, the history of Wall Street, the history of capitalism, the history of the modern corporation. He followed the world of politics intensely and recognized how it affected business. He analyzed economic statistics until he had a deep understanding of what they signified. Since childhood, he had read every biography he could find of people he admired, looking for the lessons he could learn from their lives.”

The second point I want to highlight is how smart Warren Buffett (Trades, Portfolio) works. To me, his genius lies in forming the good habit early on and reinforcing them down the road so that he works smarter and more efficient than anybody else. Lesson for us: Take a deep look at our investment routines, step back and think about what we could’ve done differently and what habits we should’ve formed. Are we focusing on the one or two factors that will make a horse succeed or fail? Are we thinking about catastrophe risk early in the decision making process? How do we calculate the margin of safety and what rate of return do we require? Can we adopt an “all I want is a 15% day one return on my investment and then compound from there” philosophy? If you really take the time and think about these questions, you may find some surprising answers like I did.

Last but not least, I want to touch on the subject of reading. Schroeder mentioned that Warren Buffett (Trades, Portfolio) usually reads a book four or five times so he can memorize it all. I have always wondered how Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) would read a book and remember what the book is about long afterwards. Repetition may play a good role here. But the point here is, for all investors, one of the best investments you can ever make is to invest in improving speed reading and comprehension courses or materials. You can read very fast, but not remember too much. Or you can remember well, but can’t read fast. If you can’t read fast and you can’t remember very well, you might want to size up the competition and do something about it. But if you can read really fast and you can comprehend and remember what you read, you’ve got a rare and very powerful edge.