What makes Warren Buffett a genius?  Does he have unique mathematical abilities, business insights, or simply a temperament more suited for capital allocation than all other investors?  These questions have long intrigued observers trying to understand what key factors account for Mr. Buffett’s unique investment track record.

Ronald Chan

Ronald Chan, author of Behind The Berkshire Hathaway Curtain, believes that Mr. Buffett’s temperament is the key factor that explains his success.  By keeping his emotion in check and using his considerable analytical skills, Mr. Buffett has been a classic outlier in terms of business achievement.  In an article in The Standard, a Honk Kong based newspaper, Mr. Chan makes the following comments:

People like to ask Buffett how he values an investment, but a question like that is not too meaningful. He does not do it any differently than an average investor. In fact, his investment calculation model is probably the same as what we all learn from financial textbooks. The real distinction, then, is how Buffett equips himself with the right mental capacity to stick to his investment principles year after year, regardless of the prevailing environment.

This does not mean that he is stubborn or unconcerned about the ever- changing market dynamics. Instead, he maintains the same attitude toward investing while evolving along with the market. Temperament is what makes Buffett an investment genius. He understands well enough that evaluating a business is not difficult.

While anyone who has observed Mr. Buffett over the years knows that his temperament is a major asset, there is a risk of glossing over his superior business insights if we attribute the bulk of his success to this one factor.  Understanding a business is not inherently easy and requires a tremendous amount of accumulated knowledge.  The circle of competence of any investor depends on years of experience and effort.  Making the appropriate judgment regarding key factors involved in valuation is anything but easy.

Advanced mathematics is not required to succeed in the field of investing, nor is it important to know everything about all industries.  Indeed, no one including Mr. Buffett has the ability to evaluate all businesses.  The key factors for success involve working hard to define your circle of competence and to always try to expand it.  There really is no substitute for years of experience which is why Warren Buffett and Charlie Munger are only getting better at their jobs as they get older.

Click on this link for a review of Behind the Berkshire Hathaway Curtain

Disclosure:  The author of this article owns shares of Berkshire Hathaway.

Temperament Makes Warren Buffett a Genius

3 thoughts on “Temperament Makes Warren Buffett a Genius

  • July 19, 2010 at 10:45 am

    Making the appropriate judgment regarding key factors involved in valuation is anything but easy.

    But the question being raised by this fellow’s comments is: Is investing intellectually difficult or emotionally difficult? My take is that the intellectual difficulty is much overestimated and the emotional difficulty is much underestimated. I agree with the thought that temperament is what really sets Buffett apart.


  • July 19, 2010 at 10:48 am

    I agree that the emotional aspect is often the most difficult. But I think it is equally risky to buy into the idea that Warren Buffett is just an average kind of guy with a great ability to be emotionally detached. He has that ability, obviously, but his business insights are also very unusual. The risk for investors who minimize the skill required is that they may think that they have a good emotional detachment and can therefore outperform without lots of hard work. But I don’t think that’s what Ronald Chan is saying because that’s not the message in his book.

  • July 20, 2010 at 8:44 pm

    Thanks for the article. You just drove home the point of what it takes to be a value investor and why this strategy will never become commonplace.

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