Lawrence Cunningham: Why Buffett Is Impossible To Replicate

In his recent interview with Stig and Trey on The Investors Podcast, Lawrence Cunningham discusses the virtues and skills that make Warren Buffett impossible to replicate. Here’s an excerpt from the interview:

Trey Lockerbie:

So Lawrence, I want to start by talking about Warren Buffett the man, right? We know a lot about his philosophies which we’re going to get into, but you know him personally, have met him many times, even hosted a symposium with him back in 1996, that kind of led to this compilation or compendium of his essays. And I want to address all of that, but start by kind of what makes Buffett who he is. So for example, some of our listeners may have figured out by now that you can study Warren Buffett to death, but actually replicating his performance is highly unlikely. And I just want to know what you attribute that to most.

Lawrence Cunningham:

You’re right, it’s not replicable, or at least not likely to be replicated. It’s a combination of compelling traits. And most people will be happy to have one or two of them. But that’s it starts with rationality. He tries always to keep his emotions in check and focus on the facts, on the substance, on the probabilities.

Second is analytical acuity. He tries to think deeply and hard about any particular problem, whether it’s a business and industry or a person. And he’s humble. He’s got tremendous humility, particularly given his strengths and rationality and analytical acuity, he knows his strengths. He knows where he can do well, and he knows his limits.

The Circle of Competence is his famous phrase that defines the difference between what he knows and is good at, and what he doesn’t know and tries to avoid. And I think, if you’re trying to get the secret sauce, or maybe surprising things, I think the singular trader or skill that explains most of Warren’s success over that long period, and in particular settings, is his ability to size people up. He knows it’s an uncanny ability.

I mean, the others we can teach ourselves a little bit. We can create our own discipline, we can develop analytical acuity, and we can certainly define our circle of competence, but this uncanny ability to size other people up, he knows who’s trustworthy and who isn’t.

He can tell in a minute whether this CEO will be a faithful steward of Berkshire capital, he can tell pretty easily whether this family will be a reliable partner in a long term business, whether this CEO of this publicly traded company is worthy. How can he do that, or what can we get out of that? I’d say the skill is uncanny, it’s hard to teach. But here’s the tip I have, and the lesson I’ve taken from it. It’s another thing he does, at the slightest whiff of lack of trustworthiness, he goes away.

So he’s ultimately a very skeptical person of human nature of the incentives that drive us to be selfish or to be emotional, irrational. It’s a high hurdle to gain Warren’s trust. He runs a trust based organization, he delegates his managers enormous lee way as we’ll get into, but he does all that only with a handful of people. And that I think, helps him with this sort of ability to discern trustworthiness, his hurdle is very high.

He has the neat tests may be used for ordinary people thinking about how to do this themselves. He calls it the son in law test or the daughter in law test. He only wants to go into business with people he’d be happy to have his child marry or the other version of the test is the executive test, that people he’d be happy to have administer his will, carry out his wishes after he’s not around.

Those are pretty high hurdles that a lot of people go into business with people they wouldn’t want to watch a football game with over trust with their estate. But he’s been pretty rigid about that. And so when you look around at his inner circle, let’s say the CEOs of the companies, members of his board, top shareholders of the company, the CEOs, and investors are all very high grade people.

They’re very not just professionally competent, but ethical. And so there have been a couple of mistakes, everyone makes mistakes, including Warren. But so I think you’re right, it’s hard to replicate the skill set, I think any of us would be happy to have one or two of those four virtues or skills, combined with them. But I think we can all learn something from each of those.

You can listen to the entire interview here: