Tuesday, January 12, 2010

Why nobody has been able to replicate Warren Buffett's success

I'm currently reading Snowball, and I wanted to address the issue as to why nobody has been able to replicate Warren Buffet's success as an investor.

Diana Sonis at UnitConnect pegged it right on the money in her blog (here) as to why nobody has been able to duplicate it: patience. Wall Street is the cross between a mosh pit and a cash register, and its very easy to get caught up in the whirlwind. CNBC doesn't help it with all that Fast Money stuff either. I feel like Pete Najarian sometimes wishes to go back to his heydey as a Minnesota Viking, and sack Rick Santelli: entertaining yes, but insightful, no.

Warren nailed it when he said that the equities market is a voting machine in the short term but a weighing machine in the long term. Common sense would dictate "do as Warren does," but as we know, common sense is not so common.

In fact, our very nature as human beings often prevents us from replicating another outlier's success. Being essentially animal by nature, human beings have a tendency to "herd." There is no shame in this, its actually a defense mechanism. Herding is evolutionary psychology's learned defense that in primitive times, there is safety in large numbers. And it makes perfect sense: if the edge of your herd is attacked and you're in the middle of the pack, you'll probably survive.

Unfortunately, our evolutionary computers are as outdated as Vic-20's. We find ourselves in new world circumstances, using practically prehistoric evolutionary mechanisms to survive. The truth we must face is that our evolutionary development as humans will never be able to catch up to the speed of the information age, because as it whole it takes millions of years to make a change. Quite contrasting to the speed of a stock ticker on the bottom of a TV screen, which can change in seconds.

Which leads us to reframe our initial question. Is it possible to replicate Warren Buffet's success? Without a doubt, yes. However, to do so requires a rebelliousness that contrasts to the standard activity of the Wall Street herd.

And as we see in Snowball, Warren's personality growing up almost lends itself to this certain rebelliousness. He was always different, awkward, and sometimes even annoying. He said himself he felt he never fit in socially, convention just fit him awkwardly. We see this anti-herd personality in Graham as well, which is probably a major reason why Warren looked up to him so much. Here was a man, much like himself, who is quirky and yet, successful by his own means...and is revered for it!

So if you do wish to produce fruitful gains in your portfolio as bountiful as Warren has, it will take a conscious effort to switch off that social calibration. The more socially calibrated you are, the more conscious effort it will take on your part.