To the legions of wannabes hoping to replicate, or at least aspire to, Warren Buffett's success as the world's greatest stock market investor, it's a depressing thought, indeed.
What if the Oracle of Omaha's brain is simply a freak of nature—a wondrous but ultimately inimitable web of neurons that somehow allows him to deduce profits like no one else? What if Buffett's $52 billion fortune is all thanks to a rarefied double helix strung with the genes of the resolute Scandinavian forebears on his dad's side and the brainy Estonians and arithmetically inclined Iberians on his mom's?
Consider Buffett's typical day at the offices of Berkshire Hathaway, the company he has run for the past 42 years, and you might throw in the towel right now. The spry 76-year-old arrives on the early side—usually about 8:30 a.m.—not to prepare for meetings (he rarely takes them) or check his E-mail (he has no work computer) or even to tally his stock portfolio (there's no Bloomberg terminal or even a calculator on his desk). He doesn't read progress reports from his managers (he discourages them) or study the latest research from the top stock market analysts (he shuns them completely). He doesn't even talk on the phone much, save for the occasional call to his stockbroker, when he might give the nod to buy tens of millions of a company's shares in a single day—all without pumping its CEO for information or getting approval from Berkshire's directors or from anyone else except, maybe, a few words from his longtime confidant and Berkshire vice chairman, Charles Munger.
More than luck. Despite—or, quite possibly, thanks to—the dearth of input, Buffett's results are as impressive as they are his alone. His stock picks beat the Standard & Poor's 500 index in 20 out of 24 years, according to one recent study, and by a margin so wide that its authors conclude that even the rarest of lucky streaks can't explain how $1,000 invested with Buffett in 1956 was worth $27.6 million at the end of 2006.
So what can? To be sure, Buffett possesses one of the keenest intellects in business, with a knack for crunching numbers in his head. "His neurons are really good at thinking in a purely abstract, rational way," says law professor Lawrence Cunningham, author of How to Think Like Benjamin Graham and Invest Like Warren Buffett. "It's a way of thinking in terms of calculations, of instantly recognizing if a company generates profits at a given cost over time. It's something businessmen learn to do before making a capital allocation. But for him, it's an innate apparatus."
Cunningham and other Buffettologists nonetheless doubt that the superinvestor possesses some sort of superhuman intelligence. "If you think he's got different chemicals flowing around in his cranium, you've got it all wrong," says journalist Roger Lowenstein, author of Buffett: The Making of an American Capitalist, in which he makes the case that it's Buffett's strength of character, as much as his smarts, that has made him so successful. "It's a combination of hard work and good judgment, and having the disposition to go with your call whether it's popular or not."
For his part, Buffett has repeatedly discounted the importance of a big brain. "Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ," he says. "Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
Indeed, Buffett picks stocks not according to some inscrutable, savantlike intuition or some secret set of complex equations. ("Don't do equations with Greek letters in them," he jokingly warns of Wall Street-style derivatives.) Instead, he uses basic arithmetic to help analyze some 300 file-cabinet drawers full of annual reports, 10-Ks, and other readily available company financial documents. Fluent in accounting, Buffett pores over financials in search of the mostly obvious: a track record of high returns on equity capital, low debt, and a consistent, predictable business with sustainable advantages—like Coca Cola's soft-drink franchise.
Staying focused. But it's not just financial intelligence at play here. Buffett has plenty of behavioral intelligence as well, most notably a Zen-like patience to sit on the sidelines while other investors are greedily buying and then to pounce on bargains only after the rest have lost their heads and sold. Indeed, a group of academics called "behavioral economists" points to Buffett as the ultimate example of how a properly trained mind can overcome the sorts of emotions and flawed reasoning that can derail even the brainiest investors. "They buy a stock just because everyone else is but think they can get out before everyone else does, or they get stuck on a price in their head and refuse to budge," says Whitney Tilson, a longtime Buffett disciple and fund manager, of misjudgments like the classic "anchoring" mistake Buffett himself made when he first invested in Wal-Mart stock in the 1980s.
"I set out to buy up 100 million shares, pre-split, at $23," Buffett has said of his strategy. "We bought a little, and it moved up a bit [to $23 1/8], and I thought it might come back [down] a bit." But it never did. And because of what he calls his "thumb-sucking" reluctance to pay even a little more, he figures he lost out on $10 billion in profits.
So how does Buffett avoid repeating such mistakes? First and foremost, says Tilson, "he has the enormous humility to admit when he's wrong, and learn from it, and the enormous self-confidence to recognize that the crowd is almost always right. So you have to wait for the few times that the crowd isn't right to make your move."
And where does all that leave the rest of us? Well, perhaps not as bad off as one might think. For starters, Buffett's straightforward methods for evaluating companies are easy enough to ape—if not in one's head, then with the help of a computer. "You just press a button," mathematics professor John Price explains of software he designed to mimic Buffett's criteria for sizing up companies, such as a high return on equity, low levels of debt, and a strong probability of earning at least 10 percent pretax returns. Price readily admits that there are some things his program can't do, like sizing up company management or persuading a gun-shy investor to pull the trigger the day after the market crashes. "But it gives you an extra degree of confidence," he says, "to keep you on the path and stop yourself from getting drawn into the behavioral stuff."
Of course, those who don't trust themselves can still harness Buffett's brainpower by plunking down a mere $110,000 a share for Berkshire Hathaway Class A stock, a bet that value investors like Tilson believe is a sure thing. Using the same standards the master uses to pick stocks, he estimates that Berkshire shares are currently about 30 percent undervalued. "And that isn't even including what Warren Buffett adds to the business," Tilson says. "So having him there is just gravy."
Sounds like a no-brainer.
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