What are the most underrated and overrated parts of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO Warren Buffett's success? I recently asked Roger Lowenstein, a contributing writer for The New York Times and the best-selling author of five books, including Buffett: The Making of an American Capitalist and When Genius Failed. His new book is the The End of Wall Street.
Mac Greer: Roger, we recently spoke with Alice Schroeder and we asked her what she thought the most underrated and the most overrated aspects of Warren Buffett's success were, so I want to put those same questions to you. First of all, what do you think the most underrated part of Buffett's success is?
Roger Lowenstein: The most underrated part of his success would be his independence of character, his ability to just not do what everyone else is doing, to stand apart from it ... just not to be affected by it and not swing at pitches he is not sure about. How many times have we heard he's through? We heard that in the dot.com era and we heard it in the mortgage era again. Just bubble after bubble, he stands on the sidelines and lets other people take what seem to be easy gains until they come crashing down. It sounds easy in retrospect, but it just takes an awful lot of self-confidence.
Greer: And what do you think the most overrated part of his success is?
Lowenstein: The most overrated part of his success, his connections, the supposed advantages that some people say he has because of his connections. I don't think he really is overrated. He started with essentially nothing. Just through picking stocks and then as he got bigger, picking companies, never taking options or quick ways to personal fortune. Geez, how can you say any of that is overrated?
Greer: When I asked Alice, she said the underrated piece was just how hard he works --- people just don't understand how hard he works at it.
Lowenstein: That's good.
Greer: And in terms of overrated, she said that people attribute so much of his success to stock picking, but she really made the point that so much of his success came through choosing companies and businesses to buy and then really striking favorable deals and as she said, being "somewhat predatory." So with all that in mind, given the fact that most individual investors can't command those terms, we don't have the leverage, of course, that Buffett has. What is the most important thing that every investor can learn from Buffett and apply?
Lowenstein: If you look at the stocks that made him, The Washington Post (NYSE: WPO) was selling at four times earnings; anybody could have bought it. Same thing, the ad companies, same thing Coca-Cola (NYSE: KO) back when he bought it in the eighties. Just on and on and on. He didn't get a special deal on Burlington Northern recently. He didn't get a special deal when he went into the insurance business, but he sure does have the insight, intelligence and the courage to not write insurance policies when the premiums are too low, which is essentially the mistake that AIG (NYSE: AIG) made.
I think you should learn from Buffett these simple lessons that he keeps talking about. Alice and me and other Buffett writers have written about --- stick to stuff you know. If something is going up and other people are buying it, but you don't understand it, let that go by and buy something you would be confident for holding for three, four, five years. Don't buy on the basis of it's going to go up tomorrow or someone else is going to take it off your hands, but that if you were buying the whole business at that price, you would be happy owning and operating that business, having put that amount of capital on a per-share basis in. You can't go wrong doing that kind of stuff.
Greer: Roger, I was struck in terms of that "sticking to what you know." Buffett doesn't just apply that to investing, he also applies it to how he gives away his money, and it really struck me a few years back when he essentially said, "The Gates Foundation knows a lot more about how to best give away my money, so I am going to put them in charge of it."
Lowenstein: That's right. He had his career in investing. He shied away from the "own a little bit of 100 different stocks" approach. He said look, I am going to find a few where I can, where I really have an edge in terms of knowledge and in terms of insight, whatever, and go big in them. He wanted to do the same thing with his philanthropy. Instead of giving a little bit to a zillion causes, all of which probably are good and well meaning and so on, he wanted to say, where can [I put] my dollars now, and after I am gone, make a difference?
So he was lucky enough to have a friend, Bill Gates, who is a billionaire in his own right and philanthropist and he is younger and therefore has a life expectancy that he should be around for 20, 30 years longer than Buffett and is tackling a cause which is basically world health that Buffett believes in. So instead of trying to find 30 little Bill Gates just to replicate that, he said, bingo, I have got my man. He was willing to say, OK, there will be no Warren Buffett entity trolling around in Africa giving redounding glory to Warren Buffett, but the idea is maybe he can help more Africans and others in world health that way. So that is what he did.
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Mac Greer does not have a financial position in any of the stocks mentioned in this article. Berkshire Hathaway is a Stock Advisor recommendation and an Inside Value recommendation. The Fool owns shares of Berkshire Hathaway. The Fool also owns shares of Coca-Cola, which is a Motley Fool Inside Value selection and a Motley Fool Income Investor pick. The Fool has a disclosure policy that is neither underrated nor overrated.