Next week the Berkshire Hathaway annual general meeting is taking place. Below are some excerpts from Mr. Buffett’s 2016 letter to shareholders which is always a colorful document.
No one could dispute that Mr. Buffett is a savvy investor. A detailed Yale analysis (2013) actually shows that his financial success relies on much more than luck, thereby challenging the fundamental notion of market efficiency. Mr. Buffett simply sees what most do not. He has demonstrated a knack for making profitable investments in “cheap, safe, quality stocks”1 boosted by leverage and with a differentiating long term perspective allowing him to stick to his strategy when markets are challenged.
But Mr. Buffett did something which goes beyond just exploiting a natural gift. His genius comes from intellectualizing it. From systematizing it. From creating a method out of it which is transferable to others, allowing the “gift” to be scaled up… to a market cap of $350 billion. This industrialization process is the equivalent of the revolutionary Ford Model T manufacturing process (1913) applied to investing. Indeed, in order to grow, art and intuition must take an intellectual, almost scientific dimension. Warren Buffett summarized this well when he said: “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in […] business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.”
Mr. Buffett’s pearls of wisdom are a lot more than folksy truisms. They are the fruit of his thinking sessions and represent the pillars of a well thought through operating system. Many successful sport champions implemented the same approach. Alain Prost, the quadruple world champion in Formula 1, was dubbed “Le Professeur” for his clinical approach to driving and competition. Through his exceptionally cerebral modus operandi, he developed a system allowing him to calculate what to do and when to do it to win repeatedly. Johan Cruyff, the legendary Dutch soccer player who on three occasions was voted the world player of the year, was also seen by many as the sport’s greatest thinker, famously declaring that “you play football with your head, and your legs are there to help you.” His systematic approach allowed him to move from world-class player to world-class coach.
Through the intellectualization of their actions (why we do what we do and how we do it), MM. Buffett, Prost and Cruyff achieved effectiveness, efficiency, scalability and sustainability. This would have not been possible if they had simply followed their instincts, however remarkable they are. At the corporate level, this approach takes the form of business operating systems which represent a key source of competitive advantages. Indeed, their objectives is to systematize processes leading to success so that it be not driven by luck, but by design. Genuine operating systems outlast their executives: Mr. Buffett is unique, and yet the market is relaxed about his succession at Berkshire Hathaway. That is his greatest achievement.