Monday, September 15, 2008

The Perils of the “Mindless Imitation of One’s Peers”

Mr. Buffett made some comments when speaking to a group from Notre Dame in 1991 that are relevant to what's going on today:
The last thing I want to show you, before we get onto your questions, is an ad that was run June 16, 1969, for 1,000,000 shares of American Motors. This is a reproduction from the Wall Street Journal of that day. Now does anybody notice anything unusual about that ad?

[Guesses from audience.]

Everybody in that ad has disappeared. There are 37 investment bankers that sold that issue, plus American Motors, and they are all gone. Maybe that’s why they call them tombstone ads. Now the average business of the New York Stock exchange in 1969 was 11 million shares. Average volume now is fifteen times as large. Now here’s an industry whose volume has grown 15 to 1 in 20 years. Marvelous growth in the financial world. And here are 37 out of 37, and those are some of the biggest names on Wall Street, and some of them had been around the longest, and 37 out of 37 have disappeared. And that’s why I say you ought to think about [the long-term durability of a business?] because these people obviously didn’t.

These were run by people with high IQs, by people that worked ungodly hard. They were people that had an intense interest in success. They worked long hours. They all thought they were going to be leaders on Wall Street at some point, and they all went around, incidentally, giving advice to other companies about how to run their business. That’s sort of interesting.

You go to Wall Street today, and there’s some company the guy hadn’t heard of two weeks before and he’s trying to sell you. He will lay out this computer run of the next 10 years, yet he doesn’t have the faintest idea of what his own business is going to earn next week!

Here are a group of 37. And the question is, how can you get a result like that? That is not a result that you get by chance. How can people who are bright, who work hard, who have their own money in the business – these are not a bunch of absentee owners – how can they get such a bad result? And I suggest that’s a good thing to think about before you get a job and go out into the world.

I would say that if you had to pick one thing that did it more than anything else, it’s the mindless imitation of one’s peers that produced this result. Whatever the other guy did, the other 36 were like a bunch of lemmings in terms of following. That’s what’s gotten all the big banks in trouble for the past 15 years. Every time somebody big does something dumb, other people can hardly wait to copy it. If you do nothing else when you get out of here, do things only when they make sense to you. You ought to be able to write “I am going to work for General Motors because ... “I am buying 100 shares of Coca Coals stock because...” And if you can’t write an intelligent answer to those questions, don’t do it.