
“Becoming Warren Buffett,” the Man, Not the Investor - artsandsci
http://www.newyorker.com/business/currency/becoming-warren-buffett-the-man-not-the-investor?intcid=mod-latest
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valuearb
Lots of investors understand how to value companies, far fewer actually apply
it regularly. I'm always amused when some Wall Street advisor discusses a
businesses cash flow and growth rate using terms from his valuation courses,
then starts talking about market sentiment and concludes by analyzing it's
chart.

It's like a physicist laying out the math perfectly for an orbital launch, but
then starts analyzing launch times using Astrology.

Very, very few investors apply valuation methodologies so well they they
become true value investors, the name is really a marketing label for most
funds. One necessary part of being a value investor that Buffett harps on in
his letters is psychology, the ability to avoid bias in order to make
decisions and not undo them in a panic. He works really hard to insulate
himself from irrational fears, and focus on known facts.

For example, he tries to never know what a company's stock trades at when he
reads their annual reports and start making his own estimate of it's value. If
it's a great company and it's trading for $100, he doesn't want to be
subconsciously biased to raising his valuation estimate just to justify buying
it.

There is a great story from his partnership days. His partners were told up
front he'd never discuss what they were invested in, he didn't want anyone
front-running his trades at hurting the partnerships results. But one day
during a market tumble a partner rushes in and demands to know if Buffett had
invested in certain stocks that had crumbled. Warren just buzzes his
secretary, asks how much the partner's share was worth, and told her to write
him a check for that amount, and told the guy you're out.

He wasn't going to panic. He wasn't going to let others try to panic him.

~~~
nabla9
(disclaimer: I say this as someone who's has invested into Berkshire Hathaway)

Buffet's success is only partly his ability to value companies and buy them at
good price. He is good at that, no doubt, but it's just half of the story.

The real genius is the way Buffet has structured his business to give him
permanent advantage. The core of Berkshire Hathaway is the insurance business,
GEICO and Berkshire Reinsurance. These companies are very profitable and
generate huge cash inflow. This cash is cheaper compared to what other
investors get trough financial sector. Especially when times are tough and
money is tight. When other investors must sell something they own or get
expensive loan, Buffet is drowning in cash and looking ways to spend it.

Someone who is just as good at valuing companies starts several percentage
points behind Buffet when they scramble to finance their acquisition.

~~~
arbuge
This is all true but before he structured his businesses this way, he ran a
pure investment partnership for several years where his results were entirely
due to his security-picking abilities (the aforementioned anecdote about
returning the investor his money is from those days). He clobbered the Dow in
those years too.

~~~
dave_sullivan
Buffett is an interesting case.

When he got going, people were mostly just buying what their broker told them
to, which was some company the broker had heard about that morning on the
elevator. There was such little information out there that his philosophy (buy
and sell on fundamentals looking at various ratios) gave him a major
advantage. This was Ben Graham and The Intelligent Investor, who Buffett
studied under at Colombia, then worked with him.

I'd say Buffett's biggest innovation past that is realizing the role of
management. He talks about it in various ways, but I think his main rule comes
down to "avoid psychopaths in management; it's a fundamental people don't
understand how to discount correctly." There's a lot to that, it turns out.

Then he got into insurance, as you say, to get lots of cheap cash to invest.
Compare him to say, Jay Gold, who mostly got rich through stock manipulation
or Michael Milken who got rich by inventing the junk bond (a "new" financial
product) then went to jail.

Not many successful stock pickers out there; most rich finance people made it
from commissions of some form or another, not market gains.

The world is different now though; Graham's methodologies are so beat to death
at this point that there's no advantage to be had. Buffett's philosophies on
the importance of the management team (not being psychopaths) still apply
though.

~~~
valuearb
No one follows Grahams methodologies because you can't raise money doing it.
They pay lip service to it. Riches on wall street come from fees on other
peoples money, something Buffett voluntarily gave up in the late 60s.

And as far as "avoid psychopaths in management" that's actually nearly
opposite Buffett's real philosophy, which is "you want to own a business any
fool can run, because sooner or later a fool will be running it". He looks for
businesses with strong competitive barriers.

~~~
dave_sullivan
> No one follows Grahams methodologies because you can't raise money doing it.

Or because they're old and beat to death and don't work anymore? They used to
work and that's where Buffett started.

> Riches on wall street come from fees on other peoples money

Yes, that's mostly true, which is what I said (I said, "most rich finance
people made it from commissions of some form or another, not market gains.")

> And as far as "avoid psychopaths in management" that's actually nearly
> opposite Buffett's real philosophy,

No, it's really not.

> which is "you want to own a business any fool can run, because sooner or
> later a fool will be running it".

Didn't Peter Lynch say that? It's a good quote though; I've certainly used it.
My favorite Buffett quote is "Risk comes from not knowing what you're doing."

Also "Long ago, Ben Graham taught me that 'Price is what you pay; value is
what you get.' Whether we're talking about socks or stocks, I like buying
quality merchandise when it is marked down"

The guy has said lots of interesting things and is worth learning more about
if you're even tangentially interested in business and investing.

------
nappy-doo
I've been a longtime Buffett follower. I haven't seen the HBO documentary yet
but am looking forward to it.

I would recommend Buffett's authorized biography "The Snowball" by Alice
Schroeder. Before writing it, WB told AS that if she got different stories
from different tellers to go with the one that was least flattering to WB.

Since it was written, WB hasn't denounced the book, but has broken off what
were cordial ties with the author. Speculation abounds, but mostly it's
because she hints that Susie wasn't entirely faithful to Buffett when she left
Omaha and moved to California. (She never comes out and says it, but it's
implied.)

In any case, it's an excellent book, and the one written with the most access
to Buffett and his notes.

~~~
mudil
I also read The Snowball, and my take on it was that Buffett is a seriously
duplicitous man. He says one thing and does another. He believes in companies
that pay dividends, yet BH does not. He is a folksy family man that has two
wives. He is a big Democrat and believer in equality, and yet during the
Washington Post workers strike he was working very hard with Katharine Graham
to deliver the newspaper and counter the union's efforts.

~~~
soperj
Honestly though, why would you want him to pay dividends? He is going to
invest the money far better than I will.

~~~
walshemj
You might need an income not all investing is for 100% capital growth

~~~
derf_
So sell some shares. It can be better than a dividend for tax purposes. This
is a common topic at the annual meetings, and Buffett has addressed it in
detail before: [http://www.fool.com/retirement/2016/12/02/warren-buffetts-
st...](http://www.fool.com/retirement/2016/12/02/warren-buffetts-strategy-to-
get-income-from-any-st.aspx)

~~~
walshemj
What about the cost of the trade you don't pay to receive dividends. And in
the UK if you have your investments in an ISA or stay under your personal
allowance (5k£) - the UK is a little more sensible when it comes to tax on
investments.

~~~
derf_
BRK.B shares currently trade around US$160ish/share. The dividend equivalent
to selling even a _single_ share would incur $24 in taxes (15%), and the
transaction fee for a discount broker is around $7 or $8. So unless the shares
have tripled since you bought them, which would have had to have been in 2003
or prior, you're coming out ahead in the US after only one share (savings on
long-term capital gains taxes exceed the transaction fee cost). If you sell
two shares at a time, it gets you back to 1997.

Yes, tax-advantaged accounts are a different question, but Berkshire can't pay
a dividend to just "the people who need money in a tax-advantaged account". If
you want a smaller impact from fees, make fewer, larger transactions.

It's not like this requires particularly large sums. At 7 shares per
transaction you're already under the industry average stock index fund expense
ratio (0.76%), and unlike those funds, that's a cost that's incurred once on
just the shares you sell, not annually on your whole investment. People pay
higher (relative) fees to withdraw cash from an ATM.

~~~
kristianp
> US$160ish/share. The dividend equivalent to selling even a single share
> would incur $24 in taxes (15%),

You aren't taking the purchase price of that share into consideration. If you
bought the share at $140, your profit is only $20, and the tax on the
equivalent dividend would only be $3.

What's the equivalent CGT on that $20 profit?

------
BillShakespeare
I came across an interesting story the other day about his relationship with
Rose Blumkin, Founder of Nebraska Furniture Mart and how she tricked him into
buying NFM without a non-compete clause and he paid the price. Story:
[http://www.infoblizzard.com/the-blog-smog/a-humorous-
story-a...](http://www.infoblizzard.com/the-blog-smog/a-humorous-story-about-
rose-blumkin-the-founder-of-nebraska-furniture-mart-and-how-she-worked-over-
billionaire-warren-buffet)

~~~
supahfly_remix
I read the link and am left to wonder at the role of business ethics in a
business deal. Was it unethical for her to start a competing business? Seems
like an uncool move, but of course I'm reading this years after the fact.

~~~
drzaiusapelord
On a practical level, if I sell my small business, is a non-compete really
something that's practical? If all I know is furniture sales and all my
contacts are in the furniture business, etc what am I supposed to do now,
assuming the sale didn't make me incredibly wealthy to the point where I dont
need to work ever again?

Its unrealistic to expect people to suddenly learn new skillsets later in
life, especially if they have decades invested into these skillsets. I think
this is why non-competes in many industries are ultimately unenforceable and
why the courts or state legislatures never want to make non-competes powerful.
People aren't machines. They can't really be retooled. If I get a job with
Bigco and then switch to Smallco, Bigco shouldnt be able to tell me I can't be
a programmer there. Corporations shouldn't have this level of power over us.

Even if we dismiss the first scenario as a 'business sale' I'd argue that sole
proprietor businesses or any business with only a few people is much closer to
being an employee somewhere. You can't expect someone to give up their only
skills for 5 to 10 years for a modest sale. Not every sale is a SV-like
billion dollar plus sale.

~~~
Spooky23
Usually a non-compete like that is geographically boxed.

When you're selling a business, you're selling the future. If you sell your
furniture business, then turn around and open up a store down the road, you're
attacking the ROI that you projected going forward and the buyer acted upon in
good faith. Sketchy.

Employees are a different matter, as it's a one-sided arrangement where the
employee has little bargaining power. Small businesses are different -- both
parties are free agents.

~~~
drzaiusapelord
My thinking is that I sell my furniture store but then get a job at a
different furniture store. I don't necessarily see that as an attack on their
ROI. But yes, starting a new company nearby I could see being blocked for x
amount of time. The problem I see is that NDA's aren't that granular. They're
fairly strict and can hurt one's ability to find work.

------
verelo
From the article: financial questions “are easy,” as Buffett says. “It’s the
human problems that are the tough ones.”

Preach. The more I 'practice business' the more I come to appreciate that the
only thing out of your control are people (and that's probably a good thing).
Everything else you can structure some kind of deal to resolve, but people are
emotional, untrusting, illogical and often good at hiding their true motives.

~~~
valuearb
I think Buffett would say not just people, but you are emotional, untrusting,
illogical and good at hiding your motives from yourself. Thats why he preaches
about how you live your life affects the quality of your decisions. He's not
on Wall Street for a reason, living in Nebraska shields him from a lot of
superfluous nonsense and allows him to focus on factual analysis and
decisions.

------
taivare
I find some of his dealings disturbing.
[https://www.publicintegrity.org/2015/04/03/17024/warren-
buff...](https://www.publicintegrity.org/2015/04/03/17024/warren-buffetts-
mobile-home-empire-preys-poor) On a personal level he took over a local
manufacturing co. in the city I live in. My former neighbor was working there
when he took over the company. In a press release he said he was pleased with
managements performance at the company and they should continue to operate as
they were. My neighbor in his early 60's was worked 7 days a week , 11 to 12
hr. days. It was apparent they were trying to force him out. They accomplished
their goal , he had a stroke on the job and died a few days later. I agree
Warren was not responsible personally , I don't know where the buck stops. I
lost a good neighbor soon after his dog passed.

~~~
valuearb
Sounds like you have a problem with the owners/managers, not Warren. Do you
really think he came all the way from Nebraska to point out your neighbor and
tell management to work him to death?

Warren is notoriously hands off with the businesses he buys. He typically buys
them because they are well run and he doesn't have time to fix anything.

~~~
taivare
By took over I meant he bought the company. If you read the bottom of my
comment . . ( I agree Warren was not responsible personally , I don't know
where the buck stops. )

------
tdk
OT, but it's annoying the way The New Yorker writes cooperation 'coöperation'
(ditto 'reëlect'). There's zero justification for this, etymologically or
orthographically, it's just pure pretension.

~~~
stephancoral
Lol typical hacker news blowhard going off on something they have no idea
about . "Orthographically" speaking there IS a justification and you would've
found it if you spent three seconds of effort:

diaeresis ‎(plural diaereses)

1\. (orthography) A diacritic ( ¨ ) placed over a vowel letter (especially the
second of two consecutive ones) indicating that it is sounded separately,
usually forming a distinct syllable, as in the English words naïve, Noël and
Brontë, the French haïr and the Dutch ruïne.

It makes perfect sense to use the diacritic in this way and it is part of
their style guide, has been for some time.

You couldn't even spend the time researching what you're complaining about.
Talk about pretension.

~~~
tdk
I'm well aware it's a diaeresis, and that it's part of their house style.
That's exactly what I'm objecting to. The diaeresis is obsolete modern English
(with rare exceptions) and putting it in interrupts the flow of reading. There
is no excuse for it in 'cooperation', and only the only reason they do it is
in order to show off they know about it - IOW pretension.

~~~
stephancoral
>There is no excuse for it in 'cooperation'

Yes, there is. A) it is a perfectly grammatically and orthographically correct
usage of the di B) There is no prescriptive body which governs usage of
American English - there's no need for an "excuse" to use an orthographic
feature of the language as if it is some clause violated.

The reason they do it is because it's the New Yorker. It's their house style.
It's what their readers expect and understand and it has become a tradition
and perhaps even emblematic of the magazine and its brand. Complaining about
the "pretentiousness" of the New Yorker is like complaining about the
convoluted commands in eMacs or vim - it's not a problem, it's a feature.

~~~
tdk
Any deviation from the norms of English calls attention to itself, and
distracts from the meaning. This can be done by great writers, but always with
reason.

Good writing reveals something about the reader. Bad writing reveals something
about the writer.

However since you now seem to agree that it's pretentious, which was my
original point, I'll leave it there.

------
mbillie1
This is just rich-people worship. What this has to do with tech, other than
that a bunch of tech people also worship the rich, is beyond me. Pass.

~~~
valuearb
If you could understand who Buffett is and what he does, it would broaden your
understanding of the world immensely.

~~~
logicalmind
I'm probably gonna be downvoted for this, but what the heck. I watched the
Warren Buffet documentary on HBO with my 11 year old daughter. Now, I've
raised my daughter to have an entrepreneurial mindset and to always look at
ways to add value to the world. The major points of the documentary that stood
out to her were that he has lots of money. He owns pieces of companies who do
well, and in turn he does well. His wife didn't feel that was an ideal way to
live her life and left to provide value to actual people.

I didn't really know what to say, because she is right. Warren Buffet is good
at picking companies who are undervalued and making money from that. That's a
skill I guess. But do you want a country filled with Warren Buffets? Is there
any reason to value this kind of parasitic success? The guy isn't really much
different than the mafia or a loan shark. He loans money to companies he
thinks will succeed, and wants interest paid back to him. At least Bill Gates
provided value (and he was predatory in doing so) and his work changed the
world. Aside from his eventual philanthropy, it's hard to see how Warren
Buffet has changed the world.

Maybe I'm missing something. But how do you inspire a young person to be like
Warren Buffet. And more importantly, should you?

~~~
refurb
_Is there any reason to value this kind of parasitic success?_

I'm not sure you quite understand what Buffett does. Yes, his company invests
in other companies. However, it's more typical for him to invest to: (1) gain
a controlling share and (2) realign the company's management and strategy.

He often _turning around_ companies through his own expertise. Not just
"loaning them money and collecting interest".

~~~
logicalmind
So I should have said, a benevolent Gordon Gekko.

~~~
refurb
So you would have preferred the companies to be less successful? Maybe laid
some people off?

Yes Buffett got rich, but he got rich by creating things, which requires new
jobs. A lot of other people got rich along with him.

------
brilliantcode
I've figured out how to produce returns using cash secured or naked option
strategies utilizing informational asymmetry gained from rigorous analysis of
corporate Q's and K's that will actually generate wealth not slowly build it
like value investing does.

This critical edge that has been hiding in plain sight but validated by actual
large funds using the same methods.

Someday, newyorker.com and HN will be reading how a "Korean Canadian stock
whiz turns his $50,000 CAD tax free savings account into $50,000,000 CAD"

edit: due to downvotes I will not be revealing this prized strategy.

~~~
ryankennedyio
The downvotes say it all, but don't ever write naked options. The strategy has
positive expectancy, except every few years you lose >100% of capital, since
the risk is almost unbounded.

~~~
sokoloff
I write naked puts almost every week. It's about the only way I buy highly
liquid tech stocks nowadays. The risk is absolutely bounded, of course (and
similar to buying a stock outright).

Naked _options_ are not the problem; naked calls are, of course, far more
risky and most investors are barred from writing naked calls on individual
issues.

------
iliconvalleys
It's interesting to note that Buffets wife was regularly active in supporting
civil rights as well as Buffet himself. Combine this with his $5Billion
bailout of Goldman Sachs along with Goldmans CEO joining the battle lines
along with the Linux community, white and black hat hackers and you've got a
perfect storm for an attack on the trump administration which will result in
its fiery demise.

~~~
bbctol
Man, I'm starting to hate elaborate fantasies about how Trump will finally go
down almost as much as I actually hate Trump, and that's a pretty high bar.

