Saturday, 20 December 2014

What Is So Great About Warren Buffett?

  • He doesn't give a hoot about money.
  • He still wiped the floor with everyone else, and is the most successful investor of his time.
  • He runs $50 billion in float and a $200 billion company with only 18 staff. Most startups have more reportable staff than Buffett does.
  • Just to rub it in, he will give away 85% of his wealth.
  • He still lives in the home he bought way back in the 50s.
  • Most people have better offices than he does.
  • Most people drive better cars than he does.
  • I have a better phone than he does. But then again - he does have a jet - which he jokingly called "The Indefensible".
  • He does not suffer from the Halo effect and is unimpressed with wealth, both his and others.
  • He is empathetic towards the poor and doesn't suffer from the just-world fallacy that most rich people suffer from.
  • He understands how his privileged upbringing made him, and understands why it is important not to attribute success to personal traits but rather environmental factors .
  • He is extremely rational.
  • He sees through bullshit.
  • He constantly looks to the data in making decisions on mega-cat risk and future cash flows of his businesses (actuaries are his favourite friends).
  • He saw the GFC driven derivative blow up way back in 2002, and acted more or less accordingly. I think he was one of the few individuals to have ~$30 billion in cash at the height of the crash. Safe to say he bought everything.
  • He knows that mark-to-market or mark-to-volatility is bullshit. I think he called it mark-to-imagination or something.
  • He has an impressive memory and a savant like knowledge of most of finance, an edge he applies with almost merciless glee to exploit the huge gaping hole that are inefficient capital markets.
  • He knows that true risk is the height of the cliff that the drunk man walks along, and not his various second-by-second stumbling.
  • He knows that the market doesn't provide useful information and any incremental trade should be of as much import as a comment on a Perez Hilton blog.
  • He understands the importance of staying within one's circle of competence, the Dunning-Kruger effect and how easy it is for people to get tricked into thinking that they know something when they don't.
  • He understands that whether or not you have made money means nothing - what matters is the rationale behind it - the outcome is irrelevant, the prior probabilities aren't.
  • He understands that he is nothing without society and believes that "claim checks" should go to those who can best use them while being alive.
  • He finds modern financial theory a grand joke and a mere extension of the anchoring bias.
  • He mocks investment bankers, MBAs and many volatility absorbed quants with glee.
  • He moves billions of dollars in capital through public markets without moving them and without you knowing what he is entering or exiting. 
  • He understands the value of the option present in cash.
  • He understands that derivatives have nothing to do with derivatives, and everything to do with the fundamental underlying assets. He sees the trees from the forests.
  • He understands the power of compounding interest.
  • He understands the value of deferred taxes, float, cash, other people's money and having the balls to say that everyone else is wrong during a crisis.
  • He doesn't care what you think and he doesn't care what the market thinks.
  • He is cool under pressure. How would you feel when you had to run $50 billion in capital during the GFC?
  • He has returned a ~20% CAGR over 50 years.
  • He has made his early investors into hundred millionaires.
  • He understands that at the end of the day all that matters is catastrophic risk and cash in the bank. Everything else is noise
  • He is the ultimate contrarian, and changes his mind with ease.
  • He is hilarious, humble and nice.
  • He finds goldbugs idiotic.

Warren Buffett is the Chuck Norris of investing. This guy is untouchable, he crushes all the competition and he has outclassed everyone for more than half a century.

That is why Buffett is a boss.

Lessons learned: Trust nothing. Everything is quicksand. Maximum catastrophic VAR is always 100% of all capital. All correlations go to one - always assume worst case loss. Everybody lies. Accounting reports cannot be trusted. Fraud is everywhere. Real investors have cojones. Most investors are morons. Leverage is a bitch. Forced liquidation is the root of all evil. Margin should be marginalized. Sell cat insurance after cats. Never take on unnecessary counterparty risk - make deals on your own terms. Uncapped risk is a crime. You're not a real investor until you've lost ~60-100% on a trade and felt nothing. Cash is king (a cheap unlimited term call option on the world), concentration is queen, and real alpha comes from supplying liquidity to lemmings at a ridiculous haircut.

And most importantly of all - markets have no idea what they are doing.

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