Warren Buffett's revenge

A timely new book about the Sage of Omaha's management practices shows how, after Enron and the dot-com bubble, the multibillionaire was right about everything.

By Andrew Leonard

Jan 24, 2003 | Trust, fairness, reciprocity -- these are the secrets to Warren Buffett's success, writes author James O'Loughlin, in "The Real Warren Buffett: Managing Capital, Leading People." Buffett runs his astoundingly successful company, Berkshire-Hathaway -- a conglomerate that owns more than 40 companies, employs nearly 150,000 people, and has averaged a phenomenal 25 percent return on investment over the last three decades, turning Buffett into the second-richest man in the United States -- with a staff of barely more than a dozen. And he pulls off this magic trick without a strategic plan, without any "synergy" between his disparate holdings, without micromanaging or any of what O'Loughlin calls the "normal tools of management."

Instead, as he likes to say, he buys companies that are run by the right people and then he gets the hell out of their way. "Paradoxically," writes O'Loughlin, "this creates loyalty among his managers and obedience to his wishes manifesting themselves in an overwhelming eagerness to please ... This should not be surprising. Trust, fairness, and reciprocity form the basis of the same social glue that has carried successful human organizations all the way from the savannah plains of Africa, where it evolved as the first-best solution to cooperation, exchange, and progress."

So why aren't there more business leaders like Buffett? Enough skeptical journalists have devoted their attention to Buffett (most notably, Roger Lowenstein, author of the splendid "Buffett: The Making of an American Capitalist") that it is reasonable to believe that this guy is exactly what he seems: a plain-speaking, teetotaling man of uncrackable integrity who works really, really hard and sticks to his investing and management principles through boom and bust. Which makes him, in the circles of corporate America as we have come to know it over the past few years, a freak of nature. Like a comet streaking through the heavens every 75 years or so, Buffett isn't exactly a guy that you can emulate, or model yourself on. You can only watch in amazement, shaking your head, before returning to the real world, where people are conniving and corrupt.

Buffett is usually analyzed in terms of his unparalleled success as a stock picker. O'Loughlin, drawing primarily from Buffett's own published writings -- in particular, his annual letter to investors in Berkshire-Hathaway -- bucks that trend by focusing on the man as a leader and "allocator of capital." It's an interesting and worthwhile approach. As a leader, Buffett offers an instructive contrast to the blustery, take-no-prisoners approach of executives like G.E.'s infamous Jack Welch. And as an allocator of capital, Buffett is brilliant: He's not concerned with growth for the sake of growth, he's concerned with maximizing return on capital. That is his primary strategy, and it guides all his investment and management decisions. Whatever light O'Loughlin sheds on Buffett's radical rejection of the philosophy that growth is, by definition, good, is worth one's attention.

Unfortunately, "The Real Warren Buffett" could have benefited from a good bit more reported detail about the companies that Buffett owns and a good deal less bland repetition of the same maxims over and over again. O'Loughlin has a tendency to distill Buffett's plainspokenness and transform it into pseudo-business-school jargon that distracts more than it illuminates. For example, O'Loughlin plucks a perfectly normal phrase that Buffett likes to use to describe the areas he feels comfortable working in, his "circle of competence," and, waving a magic capitalizing wand over it, turns it into "The Circle of Competence." Suddenly, a straightforward statement that means "I'll buy a company if I understand the market it operates in" turns into a bogus nostrum, suitable for embroidering, framing and hanging up on a wall in a therapist's office.

A more interesting approach would have been to spend more time delving into how much Buffett's management style and investment strategy differed from the schools of thought that flourished during the new-economy heyday, and how sharply they clashed with the values represented by such popular (at the time) icons of capitalism as Enron. O'Loughlin makes some glancing references to this theme, and they pique reader interest. In some ways, the dot-com bubble was Buffett's toughest test -- the market value of Berkshire-Hathaway dropped by half during the bubble, all the way back to 1985 levels, and Buffett came under severe criticism for failing to embrace technology stocks, or otherwise kowtowing to new-economy management paradigms (such as compensation via stock options or, again, the belief that growth was the most important measure of a company).

Buffett was a lone voice in the wilderness during the bubble, but his strategy has been vindicated by the rebound of Berkshire-Hathaway while the rest of the stock market continues to flounder. Now, more than ever, it's time to listen to Buffett.

But there's a problem. The implicit assumption in "The Real Warren Buffett" is that CEOs should take notes and run their businesses accordingly. But what if Buffett's isn't a duplicable model? What does that mean for average investors and, more important, market regulators? It's unlikely that we can, as individuals, become mini-Warren Buffetts -- I, for one, have no desire to spend every waking hour poring over financial reports, with only the odd sip of Cherry Coke to comfort me. But what about the opposite -- can we stop people from being anti-Buffetts?

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