I’ve recently finished reading Jeremy Miller’s excellent book: Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor. The book is a collection of experts from Warren Buffett’s letters to his partners in the Buffett Partnership.
The book is jam packed with wisdom along with early glimpses of the inimitable Buffett style of self expression that regular readers of his Berkshire Hathaway annual letters know well.
There are two passages in particular that stood out to me. The first comes from a letter written mid-way through the life of the partnership. The partnership had been running for 8 years and fund had performed exceptionally well, much better than Buffett’s Dow Jones Industrials +10% (yes that’s right, +10%!) target annual return.
Buffett explains why he thinks he’s been able to achieve such spectacular results:
January 18, 1965
In the great majority of cases the lack of performance exceeding or even matching an unmanaged index in no way reflects lack of either intellectual capacity ore integrity. I think it is much more the product of: (1) group decisions – my perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size with all parties really participating in decisions; (2) a desire to conform to the policies and (to an extent) the portfolios of other well-regarded organization; (3) an institutional framework whereby average is “safe” and the personal rewards for independent action are in no way commensurate with the general risk attached to such action; (4) an adherence to certain diversification practices which are irrational; and finally and importantly, (5) inertia.
Notice that every factor listed by Buffett is behavioral. It’s not a lack of brains, information or effort that undoes the hard work of most investors; its the institutional environment that they work in and the effect that this has on their behavior.
Buffett decided to close the partnership in late 1969. He was finding it increasingly hard to find new opportunities as more and more investors got caught up in the Go-Go years, when the share prices of conglomerates were bid up to unsustainably high-levels. He was also now independently wealthy and looking for a new challenge in life.
In one of his last letters, Buffett sincerely thanks his partners for their support:
February 18, 1970
My activity has not been burdened by second-guessing, discussing non sequiturs, or hand holding. You have let me play the game without telling me what club to use, how to grip it, or how much better the other players are doing. I’ve appreciated this, and the results you have achieved have significantly reflected your attitudes and behavior. If you don’t feel this is the case, you underestimate the importance of personal and empathy in maximizing human effort and achievement.
The phrase that stands out to me is this: “the results you have achieved have significantly reflected your attitudes and behavior”.
I believe that there’s a lot of truth to this statement. Success or failure really does depend on our behavior and the culture of the organization that we work for.