The oracle has spoken. Last week’s BBC interview with Warren Buffett made for compelling watching, as much for finding out about the sage’s living arrangements and lack of technology in his private office as for his views on how to run an investment portfolio.
For starters, there was his interesting take on the use of derivatives and those who trade them. He opines that if there were only 50 people on an island that grew rice, you would not choose the five cleverest to create a derivatives market and then pay them more than anyone else.
And then he points out the downside of having such liquid stock markets is they become casinos for speculators, making some people focus on daily prices rather than longer-term value and turning the advantage of liquidity into a disadvantage.
However, before we all go off and repent our sins, Buffett did point out financial services companies do carry out some very useful functions. He highlights asset allocation and the efficient movement of capital is a valuable part of society, and he uses this to justify his investment in Goldman Sachs during the dark days of the financial crisis.
While Buffett may be the most successful investor alive, it is interesting to note he too suffers from certain restrictions. It is, after all, harder to compound larger amounts of money than smaller sums.
That effectively means all Investment Week readers can revel in at least one comparative competitive advantage over the richest man in the world. Congratulations!
And just in case any of us were starting to get nights of trouble-free sleep, he also reminds us we have definitely not seen the last major financial crisis and smart people will continue to do dumb stuff.
Indeed, while last week’s programme may have been a celebration of the wisdom of Buffett, it is worth remembering some of the most revered wise men in history have been guilty of participating in eye-watering investment catastrophes.
Take our very own Sir Isaac Newton, an early investor in what was to become known as the South Sea bubble. Here we have the most intelligent man of his age who not only participated in the bubble, but got out with a huge profit before it burst because he could sense it was unsustainable.
The only problem was he reinvested just before the bust because he feared he was missing out on even more returns. The man who discovered the law of physics also stumbled across the greater fool theory.
While there is no sign of Buffett repeating Newton’s mistake, it is reassuring to see the world’s richest man acknowledge how much of his fortune is down to luck. He cites his friend Bill Gates, who says if he had been born in a different place and time he would have been a snack for a carnivore rather than the second richest man in the world.
