Peter Kaufman: One Reason Investors May Never Replicate Buffett And Munger

Here’s a great presentation by Peter Kaufman at the Cal Poly Pomona Economics Clubs, in which he discusses his multidisciplinary approach to thinking. Part of his presentation focuses on one of the main reasons investors may never be able to replicate the success of Warren Buffett and Charlie Munger. Here’s an excerpt from the presentation, with special thanks to Richard Lewis at Latticework Investing, who transcribed the talk:

Now, because this is an economics club, right, everybody here is interested in economics? So let’s give an example of a model derived, multidisciplinary, same way we did before, but is just about as pure an economic model as you can find. So now we’re going to ask the question, what’s the most powerful force that we as human beings, both as individuals and groups, can potentially harness towards achieving our ends in life?

Ok. We go to bucket number one. We ask, what’s the most powerful force in bucket number one? I’m going to quote Albert Einstein again. He said, ‘The most powerful force in the universe is compound interest.’ But that’s not all he said about compound interest. He not only said it’s the most powerful force in the universe, he said it’s the greatest mathematical discovery of all time. He said it’s the eighth wonder of the world. And he said that those who understand it get paid by it and those who don’t pay for it.

He said all these things, Albert Einstein, about compound interest. Now what’s a good working definition of compound interest? I will propose one. You can have your own, but this is mine. I say compound interest is dogged incremental constant progress over a very long time-frame. Is that a fair definition? Alright? I think that’s the answer from bucket number one. The most powerful force that could be potentially harnessed is dogged incremental constant progress over a very long time frame.

We go to bucket number two, 3.5 billion years of biology. What’s the most powerful force in three and a half billion years of biology? It’s the machine of evolution. How does it work? Dogged incremental constant progress over a long time frame. This is the beauty of deriving these things multidisciplinary. You can’t be wrong! You see these things lined up they’re like three bars on a slot machine. Boy do you hit the jackpot!

What do you think we’re going to find when we go to bucket number three? 20,000 years of human experience on earth. You want to win a gold medal in the Olympics. You want to learn a musical instrument. You want to learn a foreign language. You want to build Berkshire Hathaway. What’s the formula?

Dogged incremental constant progress over a very long time frame. Look how simple this is?

This is above genius. It’s absolutely above genius because you can understand it. This isn’t somebody drawing all these formulas and things up here about, you know, how numbers multiply and amplify over time. The problem that human beings have is we don’t like to be constant.

Think of each one of those terms. Dogged incremental constant progress over a very long time frame. Nobody wants to be constant. We’re the functional equivalent of Sisyphus pushing his boulder up the mountain. You push it up half way, and you go, ‘Aw, I’ll come back and do this another time.’ It goes back down. I’ve got this great idea, I’m going to really work hard on it.’ You push it up half way and,’ Aw, you know I’ll get back to this next month.’ This is the human condition.

In geometric terms this is called variance drain. Whenever you interrupt the constant increase above a certain level of threshold you lose compounding, you’re no longer on the log curve. You fall back onto a linear curve or God forbid a step curve down. You have to be constant.

How many people do you know that are constant at what they do? I know a couple. Warren Buffett and Charlie Munger. Everybody wants to be rich like Warren Buffett amd Charlie Munger. I’m telling you how they got rich. They were constant. They were not intermittent.

You can listen to the entire presentation here: