Warren Buffett Tells a ...

Warren Buffett

It’s not enough that Warren Buffett has generated a net worth of around $62 billion, making him one of the richest men in the world.

He’s also a world-class storyteller. (If it makes you feel any better, at least he’s not handsome.)

With Warren Buffett in the spotlight for rescuing Goldman Sachs with a $5 billion infusion, lending his wisdom on the economic turmoil, and talk of landing the Secretary of the Treasury gig, I thought the timing was right to revisit his other gift.

No question, Warren – I’m adopting his propensity for down-home casual – knows how to turn a phrase. Referring to derivatives as “financial weapons of mass destruction” serves as exhibit A.

But to say that Warren has honed the art of a sound bite sells him short.

This is a guy who knows how to tell a story and effectively apply the technique to the business world as illustrated in his annual letter to shareholders. Yes, the letters contain the facts and figures behind Berkshire Hathaway’s financial performance, but they also bring an element of levity to the equation.

One of my favorite passages appeared in his 2006 shareholders letter:

To add to the Sunday fun Ariel Hsing will play table tennis (ping pong to the uninitiated) from 1 pm to 4 pm against anyone brave enough to take her on. Ariel, though only 11, is ranked number one among girls under 16 in the U.S. I played Ariel, then 9, thinking I would take it easy on her so as not to crush her young spirit. Instead she crushed me …

Self deprecation plays in Peoria.

That same 2006 document shows off Warren’s gift for narrative as he pays homage to friend and fellow investor Walter Schloss:

Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.

Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. Walter and Edwin never came within a mile of inside information. Indeed, they used “outside” information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.

Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It’s safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.

I first publicly discussed Walter’s remarkable record in 1984. At that time “efficient market theory” (EMT) was the centerpiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expected to overperform the stock market averages using only publicly-available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.

And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter’s performance and what it meant for the school’s cherished theory.

Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope.

Tens of thousands of students were therefore sent out into life believing that on every day the price of every stock was “right” (or, more accurately, not demonstrably wrong) and that attempts to evaluate businesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flat.

Maybe it was a good thing for his investors that Walter didn’t go to college.

Classic storytelling.

He builds both context and empathy for the main character. The drama comes in academia refusing to consider that there might be “life” beyond efficient market theory (EMT). Humor is woven throughout the story. And you don’t need to be a numbers jockey to appreciate the benefits of an open mind.

The same mentality comes out when Warren verbally articulated his views in a recent interview on the “Charlie Rose” show. (Thanks to my college fraternity buddy Jim Engle for passing that along.)

He’s definitely figured out a conversational tone trumps striving for the smartest-kid-in-the-class crown.


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