The Investor's Temperament: Why Buffett Values Character Over Performance

Warren Buffett's Investment Best Practices

From Berkshire Hathaway's 2006 Annual Letter

Core Investment Principles

1. Focus on intrinsic business value - Not market fluctuations or short-term metrics, but the underlying economics of the business.
2. Look for businesses with excellent fundamentals - Seek companies that increase earnings consistently over time (Buffett highlights American Express, Coca-Cola, Procter & Gamble, and Wells Fargo increasing earnings by 18%, 9%, 8%, and 11% respectively).
3. Avoid investments requiring significant leverage - Berkshire's manufacturing, service, and retailing operations earned 25% on tangible net worth with minimal financial leverage.
4. Seek management with integrity and talent - "We have many managers who... have no financial need to work. But you'd never know it." Berkshire looks for owner-oriented management with skin in the game.
5. Wait for the right opportunities - "Be fearful when others are greedy, and be greedy when others are fearful." Patience is a virtue; don't feel pressured to deploy capital when conditions aren't favorable.
6. Avoid the "ratchet effect" in costs - Buffett criticizes the tendency for compensation and expenses to continually increase, often driven by consultants he jokingly calls "Ratchet, Ratchet and Bingo."
7. Recognize when industries face structural decline - "When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance."

Evaluating Investment Managers

When seeking investment talent, Buffett emphasizes:

1. Look beyond recent performance - "It's not hard to find smart people, among them individuals who have impressive investment records. But there is far more to successful long-term investing than brains and performance that has recently been good."
2. Risk detection is critical - "We need someone genetically programmed to recognize and avoid serious risks, including those never before encountered."
3. Value temperament highly - "Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success."
4. Simple strategies often win - Buffett praises his friend Walter Schloss whose investment approach was simply: "We try to buy stocks cheap." This approach dramatically outperformed the market over 47 years.

Market Wisdom

1. Markets are not always efficient - Buffett challenges the Efficient Market Theory taught at business schools, using examples of investors who consistently outperformed the market using simple, value-based approaches.
2. Beware of excessive fees - "The inexorable math of [the 2-and-20 fee structure] is certain to make investors poorer over time than they would have been had they never heard of these 'hyper-helpers.'"
3. Long-term thinking beats short-term trading - Berkshire's successful investments come from identifying great businesses and holding them for extended periods, not from frequent trading.
4. Different investment types require different approaches - Insurance float, operating businesses, and equity investments all have different characteristics and should be evaluated differently.

The Rare Investment Temperament

Successful investing requires a rare combination of:

• Patience and discipline
• Willingness to go against the crowd
• Focus on fundamentals rather than market noise
• Recognition of one's circle of competence
• The ability to admit and learn from mistakes

As Buffett concludes: "Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes."