Financial Freedom

Is Warren Buffett Smart… or Just Lucky?

  • Warren Buffett has achieved tremendous investment success in his 89 years. Many people attribute his success to hard work and dedication.
  • Today, Nicholas Vardy explains why it comes down to luck more than anything else.

Last week, Warren Buffett celebrated his 89th birthday.

That makes the Oracle of Omaha just 18 days younger than the other great investor of his generation, global speculator George Soros.

Over his 89 years, Warren Buffett became the third-richest person in the world, worth an estimated $79.7 billion. (Soros is far poorer, clocking in at $8.3 billion. But he has given away more than $30 billion since the late 1970s.)

Conventional wisdom is that Buffett accumulated his billions thanks to hard work and dedication to his craft. The hundreds of books that reveal the secrets of Buffett’s investment success share this view.

But you may be surprised to learn that Buffett famously attributes his success less to his brilliance than to another factor: simple good luck. His friend Bill Gates – also a billionaire – shares in this view.

I also believe Buffett is right in attributing his world-beating success to luck. But it’s the kind of luck that is far rarer than the kind Buffett himself uses to explain his success.

Let me explain…

Buffett’s View of Luck

Buffett has repeatedly spoken about how he won the “ovarian lottery” just by being born in the United States.

At the time he was born in 1930, only 1 out of 30 babies in the world had that privilege.

This highlights Buffett’s belief that many of the advantages you get in life – your nationality, your temperament, your health, etc. – are determined by chance.

As Buffett once said, “Gates says that if I’d been born 3 million years ago, I would’ve been some animal’s lunch. He says, ‘You can’t run very fast, you can’t climb trees, you can’t do anything. You’d just be chewed up the first day.”

None of this thinking is unique to Buffett.

Students of law will realize that it very much reflects the views of Harvard legal philosopher and left-wing darling John Rawls in his iconic A Theory of Justice.

The Role of Luck in Life

Many billionaires realize the importance that luck has played in their success.

As David Tepper, a retired hedge fund manager and owner of the Carolina Panthers, observed, “I’ll take luck over smarts anytime. You can be very smart – but still, end up being wrong. But if you’re lucky, you’re always right.”

Still, I find Buffett’s “Aw, shucks. I was just lucky” shtick unconvincing. I can’t help but think he has to know better.

First, as countless immigrant success stories confirm (think of Scottish immigrant Andrew Carnegie), you don’t need to be born in the United States to be rich.

Hungarian immigrant George Soros attributes his success as the world’s greatest speculator to the instincts he honed as a teenager while hiding fellow Jews from the Nazis in his native Budapest.

You’d be hard-pressed to find a more different environment than going to high school in Omaha, Nebraska.

Second, being born in the U.S. is helpful. But it’s hardly the lottery ticket that makes you a billionaire.

Tens of millions have been born in the U.S. since 1930. Yet few have achieved Buffett’s level of success.

Sure, hard work matters. It’s what gets you into law school or medical school – and puts you on a trajectory for a comfortable life.

But massive outlier successes like Buffett or Gates also demand a good dose of luck. And it’s a far rarer kind of luck than just winning the “ovarian lottery.”

Buffett: Running Out of Luck?

Signs are, as he enters his twilight years, Buffett has run out of luck.

Yes, Berkshire boasted stellar returns for the first part of his career. But those days are long gone.

Berkshire’s total returns have trailed the U.S. stock market index over the last one, five, 10 and 15 years.

Put another way, an S&P 500 index fund has beaten the greatest investor in stock market history going back to 2004.

(No wonder Buffett’s estate plan for his wife is to have her invest 90% of her money in the S&P 500 and 10% in government bonds.)

Now imagine that Buffett had started his career with these same market-trailing returns…

Chances are none of us would have ever heard of him. Buffett was lucky to get his timing right.

So yes, I believe that hard work and talent will take you far.

But guess what?

A lot of talented people work hard.

I have Harvard Law School classmates who have an insane work ethic and are partners at law firms making $7 million a year. One is sitting on the Supreme Court. Another is a retired president of the United States.

Still, in financial terms, each of these accomplishments is a long, long way from Warren Buffett’s.

Market wizard Ed Seykota put it this way:

Some people are born smart.

Some people are born lucky.

Some people are smart enough to be born lucky.

Warren Buffett is lucky enough to be all of these.

Good investing,

Nicholas


About

A widely recognized expert on the exploding asset class of exchange-traded funds (ETFs), Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street JournalFinancial TimesNewsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and master’s degree from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking ETF content is published regularly in the free daily e-letter Liberty Through Wealth.

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