How Buffett Has Failed the True Test of Leadership

I recently finished reading the new Buffett biographay, Snowball. I’m not going to write a proper review of it as I didn’t enjoy the book much and am not sure if my views on it would be helpful for those who are considering the book. Perhaps it was my own expectation that prevented me from enjoying Alice Schroeder’s book.  I was hoping for more insight into Buffett’s investing methodology; instead, I got reams of pages discussing Buffett’s strained relationship with his mother, his absentee relationship with his children and Susie Buffett’s (his first wife) bohemian relationship with the world.  But Schroeder promised a biography, not a how-to investing Buffettology, so the fault lays with me.

Despite the minutiae delving into Buffett’s personal life, I did glean some investment insights.  I appreciated Buffett’s enthusiastic endorsement of coattailing (piggybacking, whale-watching, copycatting, etc.) and I will discuss that in another post.

Reading the book crystallized my feeling that Berkshire Hathaway (BRK.A, BRK.B) deserves a Buffett discount, not a premium. Obviously, this discount is premised largely on Buffett’s advanced age but also on my impression that Buffett has failed one of the true tests of leadership: developing new leaders.

Buffett has always been credited with finding great managers to run Berkshire’s various enterprises: Ken Chace at the Berkshire textile business, Ajit Jain with insurance, Lou Simpson at GEICO, even Mrs. B. at Nebraska Furniture.  The problem is these managers were largely self-formed — one could hardly credit Buffett as being a primary factor in their development.

Contrast that with Buffett’s investing mentor, Benjamin Graham.  In fact, Buffett himself has discussed the many oaks which have fallen from the tree of Graham-and-Doddsville.  While Graham wasn’t trying to create a new generation of followers to carry his mantle, by all accounts, he was generous with his time and knowledge. Buffett acknowledges that Graham put him on the true path of value investing.

Buffett, despite his fondness for holding an audience, has never been as generous a teacher. His shareholder letters, the Partnership letters, his various speeches and articles through the years are all valuable study guides, hinting at the path to investment success.  But these pale in comparison to the work Benjamin Graham left behind in Security Analysis and The Intelligent Investor, which laid the path bare for all who chose to follow it.

As Schroeder portrays in her book, Buffett is given more to “preaching”, which is quite different than teaching/mentoring.  Ultimately, Buffett has always been too much of a “taker” to give enough to develop leaders.

Bringing it back to Berkshire, one of Buffett’s most well-known witticisms talks about buying great companies that can be run by a ham sandwich because one of these days, it probably will be run by one.  There is a high risk of Berkshire being run counter to Buffett’s core values or competencies.  To this day, Buffett keeps his succession plans under wrap; Schroeder implies some combination of ego and mortality prevents Buffett from sharing the spotlight with his chosen successor.

Investors should be wary that there is only one Warren Buffett.  As he has never taken the time to mentor another, any combination of successors would likely be far different in approach, temperament and perhaps, ability.

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4 Responses to “How Buffett Has Failed the True Test of Leadership”

  1. Jae Jun Says:

    As much as I respect the man and his intellect, he is by far less of a teacher than Ben Graham. Just trying to understand everything in the intelligent investor and security analysis is mind boggling but after reading a couple of Buffett’s books and listening to his lectures, you have his whole investment theory understood.

    So in terms of generic theory, Buffett is the man but when it comes down to trying to learn how to apply it, Buffett has left it to the masses to figure it out.

  2. Davy Bui Says:

    Hi Jae,

    Learning to apply it is where I would appreciate the most help! :-)

    Also, I think Buffett has kept some tricks close to his sleeve. He made a comment a few years back that if he were to start over with $1M, he could make 50% annually by pursuing a much different strategy than Berkshire. Unfortunately, he didn’t include this strategy in the Berkshire owner’s manual.

    And just to clarify, Buffett has never published a book.

  3. Wide Moat Says:

    Davy, in the transcript of the 2008 Berkshire annual meeting, someone asked a similar question, and here was Buffett’s response.

    “Q. With small sums of money, what strategies would you pursue?

    Buffett: If I were working with small sums of money, it would open up thousands of possibilities. We have found very mispriced bonds. We found them in Korea a few years ago. You could make big returns but had to be of small size. I wouldn’t be in currencies with a small amount of money. I had a friend who used to buy tax liens. I’d look in small stocks or specialized bonds…”

    So, small stocks and specialized bonds. For the bonds, you’d need a better broker than I have. For the small stocks, it just takes a lot of work. I have almost all of my holdings in companies smaller than 100 million, and in general, there is more mispricing in small companies, because larger, smarter investors aren’t sufficiently compensated to exploit them.

  4. Chris H. Says:

    Though Buffett hasn’t explicitly trained someone under his wing, what is to say he doesn’t have a dossier in his office in Kiewit plaza that doesn’t highlight some important concepts that he doesn’t want to be made public? Buffett has always been secretive, particularly back in his partnership days, but also early on in Berkshire, when he would get exemptions from filing his holdings (and he still does when he’s building a position–see recently Conoco Phillips).

    Buffett’s strategy in picking managers stems from this: he’s better at picking good people, than training new ones. He’s content with people having a different style so long as their reasoning is sound, and their record is excellent.

    In any case, Berkshire will change when he’s gone. There will be no doubt about that. But what’s to prevent it becoming an operating company that pays dividends, instead of allocating all of the excess cash it generates? While investing float will always be an important part of the insurance business, Berkshire could very easily start to divest itself of operating businesses or remain a conglomerate and just pay an annual dividend (perhaps like Fairfax Financial Holdings, and its yearly dividend).

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