What Accounts for Warren Buffett's Success?
Michael Lewis's long review of the new biography of Warren Buffett is about as good as you'd expect. That is to say, it's very, very good. For instance:
A shrewd evaluator of businesses and the people who ran them, Buffett turned himself, at a young age, into a kind of odds-calculating machine. As Schroeder puts it, "he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong it eventually will." This habit of mind informed not just his investment decisions but also much else--for instance, his obsession with nuclear proliferation. In Buffett's mind, it is not a question of if but when a nuclear bomb explodes in a big city, and the goal should be not to prevent it but to reduce the odds, and put the terrible day off for as long as possible.
That "over time" bit is important. Buffett has the credibility to make long investments and eschew short-term considerations. Despite being best of class, his approach is curiously marginal. On the other hand, maybe that's because his approach only works for him. And not because he's the only guy able to implement it. Maybe Warren Buffett is just very, very lucky:
Suppose that there were ten thousand investment managers out there, which is not an outlandish number, and that every year half of them, entirely by chance, made money and half of them, entirely by chance, lost money. And suppose that every year the losers were tossed out, and the game replayed with those who remained. At the end of five years, there would be three hundred and thirteen people who had made money in every one of those years, and after ten years there would be nine people who had made money every single year in a row, all out of pure luck. Niederhoffer, like Buffett and Soros, was a brilliant man. He had a Ph.D. in economics from the University of Chicago. He had pioneered the idea that through close mathematical analysis of patterns in the market an investor could identify profitable anomalies. But who was to say that he wasn't one of those lucky nine?
Or maybe we're seeing a a mixture of uncommon talent and historical anomaly. Honestly, it's hard to say.
May 19, 2009; 4:59 PM ET
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