2002: Are great investors born or made?

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. My name is Kevin Hewitt (PH) and I’m a shareholder from Chicago, Illinois. This question is for you, Mr. Buffett, and Mr. Munger.

Mr. Buffett, I’ve followed your career since I first read about you in the first edition of the Forbes 400 that came out in ’82.

Reading your profile also led me to Ben Graham’s book, The Intelligent Investor.

Since that time, I’ve followed the careers of — I’ve also followed the careers of other successful investors, such as Walter Schloss, Bill Ruane, Richard Rainwater, Robert Bass, and Edward Lampert.

In following your career, and the careers of these other highly successful investors, it’s my observation and my firm belief that despite their obvious high level of intelligence and some of them having gone to some of the best schools in the country, none of these people, including yourself, were born great investors.

Every one of these, including yourself, learned to be a great investor. Graham learned from his experience. You, Bill Ruane, Walter Schloss, learned from Graham.

Richard Rainwater learned from you, Bill Fisher, and Charlie Allen, and from reading Graham.

Robert Bass and Ed Lampert learned from Richard Rainwater and, most likely, from reading Graham and Fisher as well.

These observations lead me to the conclusion that despite intellectual brilliance, although that probably helps, I’ve come to the conclusion that great investors are made, not born.

Do you and Mr. Munger agree with this conclusion? If so, why? If not, why not?

And if you do agree, what things would you recommend that someone do if they wanted to become a great investor?

Also, what mental attributes do you think a person should have if they want to try to become a great investor? Thank you very much.

WARREN BUFFETT: Yeah, I’d largely agree with what you said.

I would say that there — I don’t know to what extent — an ability to detach yourself from the crowd, for example — I don’t know to what extent that’s innate or to what extent that’s learned — but that’s a quality you need.

I would agree totally with you that a great IQ is not needed. I mean, you do not have to be terrifically smart to do well as an investor, at all.

I would say you’re 100 percent right that I learned from Graham first in a very, very big way, and I learned something additionally from Bill Fisher, and I learned a lot from Charlie.

And the proof is in my record, actually. From 11 to 19, I was reading Garfield Drew, and Edwards and Magee, and all kinds of — I mean, I read every book — Gerald M. Loeb — I mean, I read every book there was on investments, and I didn’t do well at all.

And I had no real investment philosophy. I had a lot of things I tried. I was having a lot of fun. I wasn’t making any money.

And I read Ben’s book in 1949 when I was at University of Nebraska, and that actually just changed my whole view of investing. And it really did, basically, told me to think about a stock as a part of a business.

Now, that seems so obvious. You can say, you know, that why should you regard that as the Rosetta Stone? But it is a Rosetta Stone, in a sense.

Once you crank into your mental apparatus that you’re not looking at things that wiggle up and down on charts, or that people send you little missives on, you know, saying buy this because it’s going up next week, or it’s going to split, or the dividend’s going to get increased, or whatever, but instead you’re buying a business.

You’ve now set a foundation for going on and thinking rationally about investing. And there’s no reason why you need a high IQ to do that. There’s no reason why you have to be born in some way.

I do think there’s certain matters of temperament that may be innate, they may be learned, they may be intensified by experience as you go on, partially innate, but then reinforced in various ways by your experience as you go through life, but that’s enormously important.

I mean, you have to be realistic. You have to just define your circle of competence accurately. You have to know what you don’t know and not get enticed by it.

You can’t be — you’ve got to have an interest in money, I think, or you won’t be good in investing. But I think if you’re very greedy, it’ll be a disaster, because that will overcome rationality.

But I think the same books I read had really molded what I — how I — thought about businesses and investing. I think that they’re just as valid now.

I mean, I haven’t seen anything in the last 25 years, and I read — I glance through — most of the books. I’ve seen nothing to improve on Graham and Fisher in terms of the basic approach of going about investing, which is to think about stocks as businesses, and then think about what makes a good business.

And really, that’s all there is to investing, and having a margin of safety, which Ben talks about, and so on.

It’s not a complicated process, but it definitely requires a discipline.

It requires insulating yourself from popular opinion. You just simply cannot — you can’t pay any attention to it. It doesn’t mean anything.

So you can’t — the idea of listening to lots of people tell you things, it’s just a waste of time, you know. You’d be better off just sitting and thinking a little bit.

I mean, there were no analyst reports on custom frame makers, you know. It just doesn’t — and they wouldn’t have been any good anyway.

You just have to think, but you have to think about them in terms of their business characteristics and what they can earn on capital employed, and that sort of thing.

I would just read the, you know, I would read the Graham and the Phil Fisher books. And then read lots of annual reports, think about businesses, and try and think about which businesses you understand and which you don’t understand.

And you don’t have to understand them all. Just forget about the ones that you don’t understand.

Charlie?

CHARLIE MUNGER: Yeah, I have a deeper level of generality.

If you have a passionate interest in knowing why things are happening, you always are trying to figure out the world in terms of why is this happening or why is this not happening, that cast of mind, kept over long periods, gradually improves your ability to cope with reality.

And if you don’t have that cast of mind, I think you’re destined, probably, for failure, even if you’ve got a pretty high IQ.

WARREN BUFFETT: I would say we’ve seen relatively little correlation between investment results and IQ.

I mean, not that there are a whole bunch of people out there with 80 IQs that are knocking, you know, the cover off the ball, but there are all kinds of people with high IQs that get no place.

And, yet, it’s probably, in a sense, it’s more interesting to look at why people with high IQs don’t succeed, and then sort of cast out those factors, see if you can cast them out in yourself, and leave a residual that will work.

Because it’s like Charlie always says, “All I want to know is where I’m going to die, so I’ll never go there.” (Laughter)

If you study the people who die financially, you know, with high IQs and say why do they die, you know, you’ll see certain overwhelming characteristics that are present in most of the cases.

And you’ve just got to make sure that either you don’t possess them, or if you do possess them, that you can get rid of them or control them in some manner.