Why Are Warren Buffett And His Creation Berkshire Hathaway So Unusually Successful?

Why Are Warren Buffett And His Creation Berkshire Hathaway So Unusually Successful?

Warren Buffett is, undoubtedly, one of the most successful investors in the world. He is a business magnate, with the Midas touch. Any investment that he makes, he converts it into gold! He has an outstanding record of picking the right stocks and buying the businesses at bargain prices. The book-value of the shares of his company has gone up from $19 to $146,186! Ever wondered what makes Warren Buffett so unique and so successful?

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Q2 hedge fund letters, conference, scoops etc

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The secret of Warren Buffett’s success lies in his own famous quote, which says, “Be fearful when others are greedy and be greedy when others are fearful.” It is his contrarian approach that helps him bring home huge profits, and of course huge losses too, at times. Another reason is that Buffett believes in buying the entire business and turn it around, instead of just buying the company’s stocks. He aims for businesses with low debt, competitive advantage and the ones that have the ability to run themselves. Warren Buffett also ensures that he keeps a margin of safety while investing.

This question was also very well answered by Charlie Munger, Vice Chairman of Berkshire Hathaway in the 2007 DJCO meeting. He considered the compounding effect of success as well and said,

“A confluence of factors in the same direction caused Warren’s success. It’s very unlikely that a lollapalooza effect can come from anything else. So let’s look at the factors that contributed to this result: The first factor is the mental aptitude. Warren is seriously smart. On the other hand, he can’t beat all comers in chess blindfolded. He’s out­ achieved his mental aptitude. Then there’s the good effect caused by his doing this since he was 10 years old. It’s very hard to succeed until you take the first step in what 10 you’re strongly interested in. There’s no substitute for strong interest and he got a very early start.

Here, Munger emphasises on the power of compounding, as one of the factors in Warren Buffett's success story. He compounded the per share book value of his company at 19.6%. Compounding is that effect that happens when your earnings from investment start generating income by their own right, independent of the principal invested. You receive interest not only on your original investments, but also on any interest or capital gains that it accumulates. This makes your investment grow at an accelerated pace as the years go by. It is always advisable to start investments at an early age as the interest earned on the money gets reinvested and earns a compounded income.

Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you. Warren was lucky that he could still learn effectively and build his skills, even after he reached retirement age.

Munger stresses that success comes with learning and never stopping the learning. Inspite of being highly successful, Warren Buffett never stopped learning and took every good and bad experience as an opportunity to learn.

The work has been heavily concentrated in one mind. Sure, others have had input, but Berkshire enormously reflects the contributions of one great single mind. It’s hard to think of great success by committees in the investment world – or in physics. Many people miss this. That happened at Berkshire – there was concentrated experience and playing time.

Lots of people are very, very smart in terms of passing tests and making rapid calculations, but they just make one asinine decision after another because they have terrible streaks of nuttiness. Like Nietzsche once said: “The man had a lame leg and he’s proud of it.” If you have a defect you try to increase, you’re on your way to the shallows. Envy, huge self­-pity, extreme ideology, intense loyalty to a particular identity – you’ve just taken your brain and started to pound on it with a hammer. You’ll find that Warren is very objective.

All human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you’re Warren Buffett, you’ll respond – and few things give more rewards than being a great investor. The money comes in, people look up to you and maybe some even envy you. And if you buy a whole lot of operating businesses and they win a lot of admiration, there’s a lot of reinforcement. Warren has known this from an early age and it’s helped him a lot.”

Thus, there is no big mystery behind Warren Buffett and Berkshire Hathaway’s success. The basic principles of investment were applied in a disciplined and strategic manner to obtain monumental results. He stressed building excellent communication skills, negotiating his terms effectively and being very knowledgable of one’s field to achieve success.

So, it is safe to say that Warren Buffett was not born successful; he made it for himself. It was the go-getter attitude, the fearlessness and the benefits of starting at an early age that have accumulated to the present day. His success and the company’s success can be attributed to his mental aptitude, deep interest in his work, early start, lots of learning, reinforcement, and staying away from destructive emotions like jealousy, vengeance and extreme ideology.

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