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Warren Buffett's Biggest "Secret"

August 31, 2013 | About:

To may value investors, the achievement of Mr. Warren Buffett, the greatest investor of all time, has been their ultimate goal in investing. Many value investors would study the companies Warren Buffett invested in, read his letters to partners and to Berkshire Hathaway's shareholders, read all books about Warren Buffett, hoping to copy or emulate his success. Mr. Buffett has also publicly made his success sound very simple, although not easy: just buy businesses you can understand, with a moat around it and an outstanding management team in place, at a reasonable price. What he did not reveal, was the most important part in my opinion. Namely, how did he do it?

I found the answers in Ms. Alice Schroeder's book "Snowball" when I was reading it for the second time. Here is an excerpt from the book that explains his success.

"(His passion for money making) 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. He attached himself to everyone who could help him and coattailed anyone he could find who was smart. He ruled out paying attention to almost anything but business- art, literature, science, travel, architecture - so that he could focus on his passion. He defined a circle of competence to avoid making mistakes. To limit risk he never used any significant amount of debt. He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. He had an unusual way of turning problems around in his head, which gave him insights nobody else had. He developed a network of people who - for the sake of his friendship as well as his sagacity - not only helped him but also stayed out of his way when he wanted them to. In hard times or easy, he never stopped thinking about ways to make money. And all of this energy and intensity became the motor that powered his innate intelligence, temperament, and skills. "

What a remarkable summary from Ms. Schroeder. This reminds me of a great little book by Albert Gray, The Common Denominator of Success. To quote Mr. Gray,

“The common denominator of success – the secret of success of every man who has ever been successful – lies in the fact that he formed the habit of doing things that failures don’t like to do.”

And this, in my opinion, is Warren Buffett's biggest secret.

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Hmcustodio - 7 years ago    Report SPAM
I'm sure doing all these things helped Buffet achieve success. However, it does not follow that he became successful because he did them.

Study and practice helps, but does not necessarily make one the best or even very good at anything. It just helps one to be better.

So, if you decide to follow Buffet's formula, don't expect the same results. If you factor luck into the process, the result is even more unpredictable.
William.b.thomson - 7 years ago    Report SPAM

One element of the 'secret" sauce that is not discussed enough is the fact, that although he did not use leverage by the traditional measures, he employed significant leverage via his ownership of insurance companies. I have many definitions of what an insurance policy is but from a cash flow standpoint it is "float" to be used as wanted. Again, not considered to be leverage, but it certainly is effective leverage even if not traditionally defined as such.
20punches - 7 years ago    Report SPAM
Hucustodio: I definitely agree with you. I don't think anyone can follow Buffett's formula. Every value investor will have a different story and luck is a factor, although may not be the deciding factor in my opinion. Warren Buffett did a lot of things that others value investors simply weren't willing to do. That was the point I wanted to make. Thank you for your comment.

William.b.thomson: I just read an article by someone who argues that if counting insurance premium as debt, BRK's leverage ratio is something like 1.6. I think his use of insurance premium is widely known, although not widely copied. It's definitely a question one should ponder. Thank you for bringing that up.
AlbertaSunwapta - 7 years ago    Report SPAM
The float hasn't always been available to Buffett and his past returns were probably much higher in his pre-float days. It would be interesting to put the sources of financing together side by side with his returns to see how he's adjusted his methods with the scale of the capital he's burdened with.

...but that's a a huge deviation from the main point of this thread. Great topic and quote above. Thank you for presenting it.
Poolgmac premium member - 7 years ago
His real secret which takes intellect but also guts is to be greedy when all are fearful and fearful when all are greedy. He was a good investor from 1965 to 1982/84 when during that bear market he invested one forth of his entire portfolio $1 billion in one company. Over the next 3 yrs he turned it into $4 B that co was KO. He shut down the co that gave him his name Berkshire Hathaway in New Bedford, MA and invested tens of millions in a co almost bankrupt, which was partially driven to save his mentor's Ben Graham portfolio - that co was GEICO which opened his eyes to the power of billions in float aka the insurance industry.
Vgm - 7 years ago    Report SPAM

Thanks for the fabulous quote. Alice Schroeder writes well and she excelled herself with this mighty statement.

The advice often given to students to 'Follow your bliss' or 'Do what makes your heart sing' is what Buffett himself did. Capital allocation was in his DNA and powered by his huge intellect (which sometimes gets played down) and total dedication (even to an excess we might say) it became the perfect storm of investing.

I agree with Hmcustodio above. We each need to find our own path, but taking a spoonful of Buffett wisdom on a daily basis cannot but help.

Regarding luck, Buffett arguably personifies Thomas Jefferson's observation that "I'm a great believer in luck and I find that the harder I work, the more I have of it." Buffett was willing to go the extra mile, as you said.

I found your quote inspirational and am back reading Snowball.

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