I found myself watching the clock on Thursday, March 1. At 4:00 p.m. EST, Berkshire Hathaway was going to release its annual report. Bundled in the annual report was Warren Buffett’s letter to shareholders. A successful value manager told me that the best education he received on investing was reading Buffett’s letters. In his straight-to-the-point approach, Buffett has educated shareholders by making the complex simple. This year’s letter was a bit different. In addition to telling shareholders about Berkshire’s great year, recent acquisitions and stock selections, Buffett placed a help wanted ad. His replacement was to be Charlie Munger, vice chairman of Berkshire; however, Munger is 82 years old. Next in line was to be Lou Simpson, who manages GEICO’s equity portfolio, but he is only six years younger than Buffett, who is 76. He’ll do great for the short term, but a long-term replacement was needed.
In Buffett’s help wanted ad, he said he was looking for someone who is young to succeed him as Berkshire’s chief investment officer. Even in his ad, Buffett shared his insight into what makes a great investor. He said that it’s not hard to find smart people who have impressive track records. “Temperament is also important. Independent thinking, emotional stability and a keen understanding of both human and institutional behavior is vital to long-term investment success.” Buffett has spoken of these characteristics before. What I found most insightful was his aversion to the downside. “We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.”
Buffett has said many times before that there are two rules to investing: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” The big risks are those that can’t be quantified by computer models or created in spreadsheets. I think Buffett is looking for someone who, in addition to all the attributes mentioned above, has a healthy dose of common sense. His message to me is clear: if something doesn’t feel right, put it in the too-hard pile and walk away. The ability to trust your instincts and go with the gut is one of the main attributes a successful investor needs to have.
Buffet, Mary, and Clark, David, The Tao of Warren Buffett, Scribner, 2006, p. 3.