Why is Warren Buffett Successful?

Why is Warren Buffett Successful? Answer this question correctly and you very well might learn how to build wealth powerfully yourself.

It's a very intriguing, not to mention important, question. If you're able to identify the source of Buffett's phenomenal success, then the next related question is crucial: can you tap into that success yourself?

Warren Buffett's Background

Buffett's brief bio is as follows:

He was famously a student (and later employee) of Benjamin Graham, author of Security Analysis and The Intelligent Investor and universally acknowledged to be the "Father of Value Investing."

Buffett would later start and run a successful investment partnership based in Omaha, Nebraska. He dissolved the partnership in 1969 when he felt the stock market was extremely overvalued.

All positions were liquidated save those shares of Berkshire Hathaway, a New England textile operation of which Buffett's partnership had aggressively acquired shares. This would be the investment vehicle that Buffett would grow into a massive $150 billion conglomerate (at the time of this writing).

Reasons for Warren Buffett's Success

Trying to identify a single reason to the question, Why is Warren Buffett successful may lead to an oversimplified answer. After all, the man has a lot going for him and his success is probably owing to several factors:

He's smart - Buffett is frequently self-deprecating in his humor, but the reality is he's extremely intelligent. If you're familiar with his annual shareholder letters, or if you've ever listened to him being interviewed, his intelligence is obvious. He has the uncanny ability to cut through layers of complexity and succinctly get to the essence of an issue without oversimplifying and without being pithy.
He's in control of his emotions - Perhaps this is the most difficult personality trait to master. He frequently speaks of being greedy when others are fearful and fearful when others are greedy. Intellectually, that makes perfect, dispassionate sense. But very few of us seem capable of pulling this off when the situation is in real time rather than hypothetical or after the fact.
He's hard-wired for success - Without getting into a nature vs. nurture debate or a philosophical discussion regarding the role of free will, an argument can still be made that Warren Buffett's own personality is a big reason for his success. It seems from an early age he had an entrepreneurial spirit. One example is that as a teenager he purchased a used pinball machine and placed it inside a barbershop. Humble beginnings perhaps, but what we do in youth prepares us for what we do in adulthood.

Doubtless there are additional factors that others might point to in response to the question, Why is Warren Buffett successful? But for me, there is one factor that I personally believe stands out above the others.

And it has little to do with personality or genetics or even innate intelligence.

Why Buffett is Buffett

In my opinion it's easy to answer the question, "Why is Warren Buffett successful?"

I simply repeat a quote from the man himself, one that a lot of investors may already familiar with: "It's far better to buy a wonderful business at a fair price than it is to buy a fair business at a wonderful price."

I'll be the first to admit that his ability to evaluate a business is second to none. But I would also contend that the majority of traders and investors end up with the fair companies, not the wonderful ones.

Why?

For traders, the underlying business either isn't a factor or it's only a small factor. The emphasis is primarily on technical analysis or a short to intermediate term economic forecast. Money isn't made from the operations of the underlying business but from what the trader considers to be a high probability or high reward trade.

And for investors, especially value investors, how often do we end up buying shares in companies that appear to be ridiculously cheap, even though the underlying business is less than superior? There's a fine line between "ridiculously cheap" and a skeptical market accurately pricing in a company's true prospects.

But I'm not even talking about companies with obvious problems. A bloated, unprofitable, debt-ridden company whose shares are trading as though it were actually going bankrupt (even though you don't believe it will do so) may not tempt you to open a position.

But what about those other companies? Sure they may have a moderate (or even heavy) debt load, but it appears that, for now at least, the debt is easily serviced from current cash flows. And sure there's significant competition in its industry, but the company still has a reasonably strong brand, or at least one that's widely recognized.

When shares of a mediocre company appear to be trading extremely cheaply, it's the easiest thing in the world to be rationalize to ourselves that the company is a "good" or "solid" operation. We convince ourselves that this kind of mediocre investing is safe investing or low risk investing.

But here's what I've learned: if you can't label, without reservations, a company "superior" or "great" (or "wonderful" in Buffett's terminology), then you should stay away from it no matter how cheaply its shares appear to be trading.

Chances are a less than superior business is never as good as we tell ourselves it is after we've purchased its shares.

The Benefit of Quality

I've written elsewhere about the importance of Quality Investing. The primary benefits of investing in only the highest quality businesses are that your wealth grows predictably, automatically, and effortlessly.

And it's this adherence to quality that I believe explains much of Buffett's greatness. To me, if I had to choose just one answer to the question, Why is Warren Buffett successful, it would be this. The focus on only high quality also makes it much easier to achieve another Buffett adage: "Never lose money."

In the end, only quality investing is safe investing or low risk investing.

The Purchase Price is Still Important

Although Warren Buffett is willing to pay for quality, he is still a value investor, and he isn't willing to overpay for it. As I've demonstrated elsewhere, there's great truth in the value investing principle that an investment's purchase price is more important than its selling price (e.g. the compounding implications are enormous).

That's what I love most about options-based Leveraged Investing. The purchase price (aka the cost basis) becomes dynamic and can be lowered repeatedly over time.

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