Warren Buffett surprised the financial world this week when he announced that Todd Combs would take over the management of Berkshire Hathaway’s investment portfolio when Buffett steps aside or dies.
If Buffett is anything, he is consistent, and the selection of Combs only further shows Buffett’s adherence to his core principles.
Trust your own judgment
Many times over his career, Buffett has referred to Benjamin Graham’s maxim that, “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”
Most of us would reflexively pay lip service to this maxim, but in reality we tend to seek at least some level of comfort from the warmth of the herd. We may dress up our conclusions with the garb of facts, when indeed we are actually only justifying a position we came to as a result of being influenced by the opinions of others.
Buffett made up his own mind about Combs based on his own judgment and reasoning. He is perfectly comfortable in doing so because he has been operating this way his entire adult life. He is not looking for approval, and it means little to him how it was received by others.
For the record, Buffett has a pretty good track record picking talent. After Buffett interviewed Lou Simpson for the GEICO CIO job, he called then GEICO chairman Jack Byrne and said, “Stop the search. That’s the guy.” Simpson’s performance at GEICO has been outstanding.
When Buffett wound up his investment partnership, he referred limited partners to Bill Ruane, who started the Sequoia Fund to manage funds for former Buffett limited partners. Ruane went on to build a superlative long-term track record.
Process over outcome
Investors should focus on process instead of outcome in selecting both investments and investment managers, knowing that if you get the process right, the outcome will take care of itself. If you focus solely on the outcome you may be disappointed down the road to learn that is was achieved by chance or in conjunction with a dangerous level of risk.
Buffett obviously saw in Comb’s work an investment process that would serve Berkshire shareholders well over the long term – one that per Jason Zweig’s article yesterday in the Wall Street Journal, focuses, first and foremost, on the downside, that is grounded in deep fundamental research and staying within Comb’s circle of competence, that is long-term oriented, and that tends away from closet indexing towards concentration.
Temperament is key
Buffett has said that genius is wasted on investing and, given a certain level of intelligence (which Buffett pegs as an IQ of 130); the important thing is to have the right temperament. That temperament includes a great respect for risk, the ability to wait (and wait) for the right opportunity to come along, the ability to be fearful when others are greedy and greedy when others are fearful, the ability to think for yourself (see first point), and a high level of passion for what you’re doing.
I believe Buffett saw the right temperament in Todd Combs. Here’s Buffett, “He is a 100% fit for our culture. I can define the culture while I am here, but we want a culture that is so embedded that it doesn’t get tested when the founder of it isn’t around. Todd is perfect in that respect.”
Once again, Buffett has surprised us by doing the unanticipated. In reality, he was following a set of well-tested principles that date back to his mentor and friend Ben Graham. Time will tell, but I would be surprised if Combs does not work out well.