Warren Buffett on the best birthday present a billionaire can ever get: Luck
- It is Warren Buffett's 88th birthday Thursday.
- The Berkshire Hathaway CEO and chairman has long attributed a portion of his billionaire success to an overlooked factor: Luck.
- For investors and entrepreneurs who hope to replicate Buffett's success, accepting the role of luck and what that implies is a good, first step to developing a practical philosophy.
Today is Berkshire Hathaway chairman and CEO Warren Buffett's birthday. He is 88, but the best birthday present he ever received came long ago, before he made his first penny — before he was even born. It didn't come wrapped; it doesn't even take a physical form. It's called luck.
Of course Buffett's made a lot of money — for those who like playing around with numbers, like Buffett does, his fortune works out to millions of dollars per each day of his life. But even some of Berkshire Hathaway's most recent big bets paying off, led by Apple, Berkshire is trailing the the S&P 500 this year. Not a year goes by that people, including Buffett himself, don't comment on how much harder it is for him to keep up his long-term lucky streak against the index. (His estate plan for his wife is to have her invest 90 percent of her money in the S&P 500 and 10 percent in government bonds.)
The billionaire investor's long-term approach to the markets, shrewdness when it comes to valuing stocks and businesses, and temperament, are a unique skill set that Buffett has used to his advantage. He said in an HBO documentary about his life that he looked back with more sentimentality on old Moody's tomes on securities than family artifacts, which suggests something in his makeup was probably made for picking stocks. But luck, or winning the "ovarian lottery," as Buffett called it, has been an instrumental factor in building his billionaire fortune. And luck doesn't get the recognition it deserves as a success factor.
Analysis of the traits of billionaires and the effort to uncover their secret to success tend to go granular: Do they awake at 4 a.m.? Do they write handwritten notes from their CEO desk to everyone, even the little people? Or does success tend to circle around some new (and not necessarily improved) versions of habits already covered by the likes of Stephen Covey? Some billionaires feel the need to write treatises on what has made their success unique — such as hedge fund legend Ray Dalio's recent "Principles" or the Koch brothers philosophy of market-based management detailed in "The Science of Success."
Buffett has written a lot through annual letters to shareholders over the years on the right ways to invest, but he has never attempted to sum it all up in a easy-to-read self-help guide to success. That may be one reason why Twitter users were so easily fooled this week into thinking a series of fake Buffett tweets on lessons to live by were really from Buffett. (He told CNBC on Thursday that he has better things to do than tweet.)
Luck's role in success
Many successes start with luck.
"Having the good luck to win the 'ovarian lottery' is a major determinant in success in life in general — and in business in particular," Professor David Kass told CNBC. The clinical professor of finance for the Robert H. Smith School of Business at the University of Maryland was the first to publish the Buffett "ovarian lottery" comments, based on notes he took at a 2013 graduate student event where Buffett spoke.
Luck may seem like the least tangible, least controllable success factor. After all, what can one do about luck? But there's a perfect example from Buffett's business history that Kass shared with CNBC, showing how those who believe in luck are also on the lookout for luck when it delivers an opportunity into their lap:
When Buffett was a 20-year-old MBA student at Columbia University, he learned that the investor who was his role model and hero, Professor Benjamin Graham, was the Chairman of the Board of GEICO. Since Buffett was interested in anything that Graham was interested in, he took a train to Washington from New York (1950), arriving on a Saturday morning. Without calling or writing ahead of time, Buffett was very lucky that one employee was there, Lorimar Davidson, who spent four hours explaining both insurance and GEICO to Buffett. Buffett immediately grasped that GEICO would have an enduring competitive advantage. (Davidson subsequently became CEO of GEICO.) Insurance later became the primary business and building block of Berkshire Hathaway.
"Warren Buffett has stressed the importance of luck in his life, focusing not only on where he was born but also when. His primary skill of allocation of capital has worked well for him in the United States and in his lifetime," Kass said.
Michael Mauboussin, director of research at BlueMountain Capital Management and author of "The Success Equation," which looks at the role of skill and luck, said Buffett's example reveals something fundamental about business greatness: Positive outliers, including Buffett, "are the product of lots of skill and lots of luck ... in business dealings."
The one-in-seven billion slip that Buffett drew
Buffett's view of his own lucky draw is reflected in this key section from Professor Kass' notes:
"Just imagine that it is 24 hours before you are born. A genie comes and says to you in the womb, 'You look like an extraordinarily responsible, intelligent, potential human being. [You're] going to emerge in 24 hours and it is an enormous responsibility I am going to assign to you — determination of the political, economic and social system into which you are going to emerge. You set the rules, any political system, democracy, parliamentary, anything you wish — you can set the economic structure, communistic, capitalistic, set anything in motion, and I guarantee you that when you emerge, this world will exist for you, your children and grandchildren. What's the catch? One catch — just before you emerge, you have to go through a huge bucket with 7 billion slips, one for each human. Dip your hand in and that is what you get …"
Lawrence A. Cunningham, Henry St. George Tucker III Research Professor of Law at George Washington University and author of several books about Buffett, including "Berkshire Beyond Buffett," said Buffett borrowed this idea from Harvard philosopher John Rawls and his canonical work, "A Theory of Justice."
A just society is based on principles everyone would agree to if impartial and if starting from an original position behind a "veil of ignorance" — not knowing who they would be or which side of an argument they would be on.
Rawls' philosophical treatise on how to create a just society includes a much simpler message for those who want to build businesses and wealth: "Treat everyone on your team — whether employee, customer, supplier, financier — the way you would want to be treated if you were them. … The golden rule, in a nutshell," Cunningham said.
For entrepreneurs who hope to have as much luck for as long as Buffett has had it, Kass said the lesson is to be humble about your own contributions and the contributions from others upon which you depend. "Appreciating the contributions of the teachers we have had and the people before us who have assisted us is a critical attribute of luck and lasting business success," he said.
That's a practical philosophy wrapped in an overlooked birthday gift worth practicing every day of the year for those seeking success in either of Buffett's sweet spots — running businesses or making stock investments.
You can read Buffett's full quote on the nature of luck at Professor Kass' blog. CNBC's new Warren Buffett Archive offers in-depth access to Buffett's views on the economy and markets from years of Berkshire Hathaway annual meetings and CNBC interviews.
This story, originally published on August 30, 2016, has been updated to reflect Warren Buffett's 88th birthday and Berkshire Hathaway's investments and performance over the past year.