Why is Warren Buffett a billionaire while you and I are not?
Is it luck? Skill? A combination of the two?
I've thought about this question a lot, not entirely out of envy, but rather out of curiosity.
What follows, in turn, are the 10 most salient features of Buffett's life that I believe have contributed to his unprecedented success as the greatest investor of all time.
1. Born at the right time
Buffett would have probably excelled regardless of when he was born, but not unlike the industrial titans of the Gilded Age, it didn't hurt that he came into the world on the eve of an unprecedented industrial expansion following a great war.
Born in 1930, he narrowly escaped the psychological trauma of the Great Depression and was able to hit the ground running just as the greatest bull market of all time took flight. For an investor with a long time horizon, he couldn't have wished for a better birthday.
2. Instinctively good with numbers
Business and numbers were ingrained in Buffett's soul from day one.
On a family vacation when he was six, he bought a six-pack of Cokes for $0.25 and then sold each one for $0.05, making a nickel profit. A year later, following an operation at the hospital, he told a nurse, "I don't have much money now, but someday I will, and I'll have my picture in the paper." He purchased his first stock at age 11. And he went on to make money selling used golf balls, renting out pinball machines, and delivering newspapers, to name only his most noteworthy pursuits.
The point is that, not unlike the prodigies discussed by Malcolm Gladwell in Outliers: The Story of Success, Buffett was imbued with a special talent and given the opportunity to cultivate it.
3. He's a bookworm
Buffett's reading habits are legendary.
According to Roger Lowenstein's biography of the Oracle of Omaha, Buffett: The Making of an American Capitalist, as a child, Buffett would "bury himself in a favorite book, One Thousand Ways to Make $1,000, an exhortation to further Rockefellers with stories such as 'Building a Business on Homemade Fudge' and 'Mrs. MacDougall Turned $38 into a Million.'"
It should come as no surprise, in turn, that when asked later in life how to get smarter, the blog Farnam Street recounts, Buffett once held up stacks of paper and said "read 500 pages like this every day. That's how knowledge builds up, like compound interest."
4. He got rejected from Harvard
In 1950, Buffett applied to Harvard Business School and was rejected. "They decided 19 was too young to get admitted and advised me to wait a year or two," he wrote to a good friend at the time.
It was without doubt one of the best things that ever happened to him.
His second choice was Columbia University, the home of Benjamin Graham, the father of securities analysis. "It was almost as if [Buffett] had found a god," a housemate observed.
5. He's a contrarian by nature
Buffett doesn't just say, "be fearful when others are greedy and greedy when others are fearful" -- he lives it.
He dissolved his first investment partnership at the height of the 1960's Go-Go Years, only to then reenter the market following the "truly epochal" market collapse of 1973-1974. While headlines like "Whistling Past the Graveyard" and "Why Buy Stocks?" were gracing the covers of financial publications, Buffett is reported to have said, "Now is the time to get rich."
This contrarian pattern has repeated itself time and again throughout Buffett's life, most recently at the nadir of the financial crisis, during which he staked large, and exceptionally lucrative, positions in Bank of America (BAC 1.53%) and Goldman Sachs (GS -0.20%), among others.
6. He hates to manage
Like getting rejected from Harvard, it may seem counterintuitive that Buffett's disdain for managing others is one of the keys to his success. But that is indeed the case. While Buffett built Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) into a massive industrial conglomerate with dozens of subsidiaries, the parent company itself employs less than two dozen people.
How does he do it? He delegates, choosing to buy businesses that will continue to be run by their founders or existing management team and then leaving them to do so. Toward the end of one such manager's 20-year tenure, he told Buffett: "I'll tell you why [our agreement] worked. You forgot you bought this business. And I forgot I sold it."
7. He loves his work
It's no coincidence that a recent book written about Buffett, authored by a longtime friend of his, is titled Tap Dancing to Work.
The reference comes from a conversation he had with Judge John Grant, a friend and fellow bridge player, in 1973 -- that is, right around the time the market had crashed. After Grant mentioned that he had enjoyed trying a particular case, Buffett responded by saying, "some days I get up and I want to tap-dance."
As Lowenstein goes onto elaborate, "His total delight in his work to the exclusion of all else ... had a juvenile quality not uncommon to prodigies."
8. A spiritual kinship with money
Most investors appreciate how money, if properly employed, can make more money. But what separates Buffett is his almost spiritual grasp of float, capital allocation, and compounding returns.
It's almost unbelievable to think that Berkshire Hathaway was once a struggling textile company based in New Bedford, Massachusetts. But it was with the comparatively meager cash flow from that dying business that Buffett was able to build Berkshire into what it is today.
By capturing and then reallocating Berkshire's cash into other companies and investments, many of which themselves generate float, Buffett has accomplished a track record of compound annual returns that is without precedent. Since 1964, it has delivered a compound annual growth rate of 19.8%, or more than double the S&P 500's (^GSPC -0.22%) 9.2%.
9. He recognizes his own circle of competence
In line with his contrarian nature, Buffett has been particularly adept at avoiding the countless investment fads that have sprouted up throughout his career. One of the reasons he's been so successful at this is because he limits his investments to those that are within his circle of competence.
As he noted in his 1970 letter to shareholders: "My approach to bonds is pretty much like my approach to stocks. If I can't understand something, I tend to forget it." Or, as he said three years earlier about technology stocks: "We will not go into business where technology which is way over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszez."
10. Non-dogmatic approach to investing
Most people associate Buffett with Benjamin Graham's philosophy of investing in only ultra-cheap companies trading far below their intrinsic value. But the reality is far more nuanced.
Aside from various arbitrage positions he has profited from throughout his career, one of Buffett's earliest departures from Graham's approach involved an investment in American Express (AXP -0.08%). As Lowenstein explains: "American Express did not have a margin of safety in the Ben Graham sense of the word, and it is unthinkable that Graham would have invested in it. ... But Buffett saw a type of asset that eluded Graham: the franchise value of American Express's name."
This same approach went on to inform Buffett's stakes in both Coca-Cola (KO 0.68%) and Wells Fargo (WFC 2.73%) and is now commonly associated with his concept of a competitive moat. As he said in his 1989 letter to shareholders, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
The bottom line
It goes without saying that some of the things on this list, and particularly the combination, are unique and immutable to Warren Buffett. But at the same time, many of them can also be learned and mimicked by others to improve their own investment returns. As his longtime business partner Charlie Munger has said, "I do not think that tens of thousands of people can perform as well. But hundreds of thousands can perform quite well -- materially better -- than they otherwise would."
