Why Does It Seem Like Buffett Knows Something Everyone Else Is Missing?

The patron saint of investors and LinkedIn influencers around the world, Warren Buffett has made a name for himself as a wildly successful and insightful investor, often outsmarting the market and finding success where everyone else sees failure. But what is his secret? Does he know something everyone else doesn’t?

We looked into Warren’s history, past the hype and the sensationalism and thought leadership to see what exactly has contributed to his success. Are there any secrets or insights to be had, or is Warren just a steady and calm investor in a world of panic and hype-chasing? Here is what we found out.

Why Are We Talking About This?

With an all-but-guaranteed recession looming in the near future, record-high income inequality, uncertainty surrounding our economic regulations and government stability, and the increasingly eccentric behavior of some of our most powerful leaders, people are looking to other places for advice on how to manage their finances. One of the most popular go-to resources for newcomers and investment veterans alike is Warren Buffet. But if his success is based on luck or a well-kept secret, it is something we need to explore.

Background on Warren Buffett

There is nothing we could say about Warren that hasn’t been said a thousand times all over the internet, but to set the foundation for our analysis, here is a quick history of Warren’s success.

Warren got his start at his father’s investment firm before quickly rising through other firms and becoming a millionaire early in his career. He then created a series of investment firms and invested in a variety of companies and industries.

He used his significant funds to invest in a textile manufacturing company called Berkshire Hathaway, eventually buying a majority of the shares, firing the owner, closing it to new investments, and transitioning the company to insurance.

He made several significant and well-rimed investments throughout his career that contributed to his wealth creation. He eventually became a billionaire and in 2008 he became the richest man in the world, replacing Bill Gates. By 2009, Berkshire Hathaway had become the 18th biggest corporation in the world.

In 2024, Berkshire Hathaway became the 8th U.S. company to reach a $1 trillion value — the first non-technology company to do so.

Warren’s Investment Philosophy

Warren is extremely skeptical that actively managed investments or funds can outperform the market. Instead, he is a strong supporter of index funds. He has repeatedly criticized people on Wall Street who manage funds for huge fees. These are the people who win when profits are made, not the investor or the customer.

Warren proved his point by making a bet that one index fund could outperform hedge funds. Several hedge fund managers took the bet in 2007. By 2017, his index fund was outperforming every single hedge fund that had accepted the bet.

Additionally, Warren strongly recommends against investment banks and has been a public critic of investment banks and their managers who charge exorbitant fees.

That being said, Warren has argued against the idea that beating the market is pure chance. By being patient and smart by investing in index funds and reliable companies, an investor can beat the market, but they have to keep realistic expectations and not judge their success on the performances of yesterday.

Finally, Warren has been vocal about his skepticism of gold as an investment. He has questioned its value in any investment portfolio since it has limited utility in the real world. Any investment should have some real-world value, and gold’s market value is far beyond its value in practical applications.

Warren’s Views on Wealth and Capitalism

Unlike other rich investors and billionaires, Warren’s personal views and values often contradict his business activities and let them guide his sales and divestitures from time to time. This has often left people scratching their heads as he continues to post high returns without following the greedy strategies of his peers.

First, Warren recognizes that in our current capitalist market economy, the rich “earn outsized rewards for their talents”. This means that just because you are rich, doesn’t mean you are necessarily better or smarter than those who are poor. This is one of the reasons why Warren has said that he will not pass on a significant portion of his wealth to his children who will only inherit enough to live comfortably but will still require them to work to survive. He also has repeated his intention to give most of his fortune away to charity, with 83% of his fortune being pledged to the Bill & Melinda Gates Foundation.

In keeping this mindset, Warren strongly supports the inheritance tax and views repealing it or weakening it as a tool of the wealthy to increase the gap between them and the poor. He believes that an inheritance tax is one of the best weapons we have against growing inequality.

Second, Warren believes our tax system is fundamentally unfair and needs to change. He used his own company to make his point when he compared his own effective tax rate of 19% which he paid on his income in 2006, against his employees’ effective tax rate of 33%, even though they made significantly less money than he did.

Of this injustice, he said, “How can this be fair? How can this be right? There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

Third, Warren is a passionate critic of the American healthcare system, and of the medical insurance industry as a whole. He has called the American healthcare system a parasite or a tapeworm to be more specific, that compromises our economy while greatly increasing medical manufacturing costs. He has said that our current system is not sustainable and that all other nations spend much less money on healthcare but receive better healthcare outcomes. He has criticized everything from the insurance model, medical incentives, and pricing variation between systems and states, to lobbying and limited reform.

Why mention this? Investment decisions aren’t made in a vacuum. If we are going to analyze Warren’s investment strategies, then it pays to understand the logic and the thought processes that contribute to those decisions.

What Is Warren’s Secret?

If we could summarize Warren’s investment secret in the most concise way possible it would be this: common sense. This common sense can be broken down into three main aspects, as far as we are concerned.

1. An investment must have real-world value and applications.
2. An investment must be easy to understand and explain.
3. An investment is just as much in a person as it is in a brand.

Regarding the first point, we have already covered how Warren avoids gold because its value is not justified by its real-world applications, but this philosophy extends to every other investment as well.

Of course, the inverse of this is also true. As a company or product’s real-world value drops, Warren has sold his shares or divested from those companies.

For example, Warren owns an energy company called PacifiCorp that had planned to build six new coal-fired power plants in 2007 but decided to cancel all of them after citizen groups protested the plans. As the pressure against fossil fuels grew, the future value of fossil-fuel-based companies began to fall, and Warren recognized this.

Additionally, Warren used to see the cigarette business as a no-brainer investment, since it was so cheap to manufacture and customers weren’t likely to stop smoking. However, as societal attitudes about smoking began to shift, Warren said that he “would not like to have a significant percentage of my net worth invested in tobacco businesses.” He said that even though the economy of the tobacco industry is fine and will survive, that doesn’t mean it has a particularly bright future ahead of it.

For the second point, Warren has repeatedly passed on some big-name investments and companies because he didn’t understand their business model or make sense of their future value. Some of the best examples of this include Facebook and Google. Warren said that their business models were too complex, too hard to understand, and too complicated to estimate a reasonable future value for.

He has publicly stated that the IPOs for these companies are “almost always” bad investments. This is something most of us know instinctually since IPOs are all based on speculation hype and future value which are not hard facts. Yet we always buy into the buzz and the fanciful stories about what a company ‘could be’ and most people end up losing money on IPO investments, which leads us to justify our investments and further hype up the company in the hope that we can eventually make our money back.

For this reason, Warren recommends that investors only look for companies that will have increased value in ten years. Those are the companies that make good investments.

This especially applies to cryptocurrencies and other blockchain products and companies. He has said that the current craze that surrounds these technologies won’t end well for anyone involved in that industry. Warren has called Bitcoin “rat poison squared” and refused to take short positions on Bitcoin or other cryptocurrencies. The fact that nobody actually understands how the technology works or why is reason enough to avoid these investments like the plague.

Regarding the third point, many of Warren’s most famous investments happened after he met the owner or CEO of a particular company. Warren understands that a company rises or falls based mostly on the actions and decisions of its leader, not just on news headlines and advertising campaigns. This means that many of his investments have left market analysts scratching their heads as he invests in boring or underperforming companies.

Keep in mind: Warren invests with his sights set on ten years in the future. Actively trading stocks is only effective in taking regular cuts of your profits to give to brokerage companies. As Warren gets to know the leaders or owners of particular companies, he gets valuable insight into the stability and economic future of a company. If he feels like a person, combined with the real-world value of their company, will have greater value in the future, then he invests. If they don’t, then he passes.

This is common sense. This is the secret. Invest for the future based on past results. Don’t invest in hollow promises or in hype. Invest based on your own knowledge and understanding. If you let someone else convince you to invest in something you don’t understand, then you’re not investing your money, they are.

So, Why Does It Seem Like He Knows Something We Don’t?

In our world of constantly breaking news, big headlines, big personalities, and perpetual entertainment, the one who quietly does the boring work and makes boring, regular investment returns is often seen as strange, weird, or out of touch. But that’s exactly who Warren Buffett is.

Warren developed an investment strategy that is often at odds with the high-profile personalities in the investment world, and he has stuck to his strategy despite his critics. This investment strategy is best summarized like this:

Invest in “evergreen businesses” that will generate predictable long-term returns (avoid companies that promise huge one-time returns without a proven history. Predictability is more valuable than promises), don’t invest in companies you don’t understand, don’t invest in companies that might go through large amounts of change, and avoid short-term speculation.

Yes, this means that Warren “missed out” on lucrative profits by not investing in Facebook and Google, but this is not something Warren focuses on, despite the media’s addiction to reminding everyone about it. A better question to ask would be, what other technology companies did he also not invest in that would have wiped out any profits he might have made with Facebook or Google? Also, why are high-profile investment personalities and publications so dedicated to reminding us that Warren missed out on investing in these big technology companies? Is it in their best interest to convince us to be more liberal with our investments instead of following Warren’s investment strategy? It might be worth considering.

Keep in mind, that Wall Street, as a group, is not an all-knowing entity. It is a group of people, mostly amateur, motivated by greed and panic to realize the most profits in the shortest amount of time. Warren’s investment strategy flies in the face of this mentality.

This might make it seem like he knows something everyone else is missing, but he’s really just not buying into the media buzz or the hype. He does his homework and follows through. It’s just that doing something like this today seems so difficult for most of us.

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