Saint Warren Of Omaha It's easier to worship Warren Buffett than it is to understand what makes him a great investor.
By Joseph Nocera

(MONEY Magazine) – And then the skies parted for Warren Buffett. No, really. They did. It was the first Saturday in May, Omaha, Nebraska, the beginning of a three-day extravaganza known as the Berkshire Hathaway annual meeting. The chairman and CEO of Berkshire Hathaway, of course, is Warren Buffett. But what investor doesn't know that already? And who among us hasn't heard how he turned this failing textile company into the vehicle through which he created what is perhaps the best sustained investment performance ever? And how, in the process, he turned his disciples--a.k.a. his shareholders--into millionaires, and transformed himself into the second richest man in America, worth around $34 billion. I mean, is this the greatest investment story ever told, or what?

Buffett uses this yearly event as an excuse to throw a gigantic party for the faithful. On Sunday, there would be a monster cocktail party at Borsheim's, the famous Omaha jewelry store Berkshire Hathaway owns (shareholders are welcome to buy jewelry!), followed by a trip to Buffett's favorite steakhouse, Gorat's, then another huge fete at the Dairy Queen on 108th Street, where Buffett would be on display slurping down a sundae. (Berkshire Hathaway bought the Dairy Queen chain last year.) On Monday would come the annual meeting itself, and some 11,000 Buffett followers would crowd into Omaha's largest arena to soak up the wisdom of their guru and his legendarily laconic sidekick, Charlie Munger, in an all-day session more closely resembling an investment teach-in than a typical corporate annual meeting. The tone of the whole weekend, in fact, would have less to do with gaining insight into the genius that truly sets Buffett apart--something not easily reduced to a sound bite or folksy remark--than with a seductively simple kind of blind faith.

Which was what made Saturday's threatening skies so fascinating. The only shareholder event that day--other than the opportunity to buy furniture (at the employee discount!) at the Buffett-owned Nebraska Furniture Mart--was an Omaha Royals baseball game. Buffett, who owns 25% of the team, likes to start the weekend by throwing out the first ball before heading to the upper deck, where, amid a jostling horde of cameramen, he signs autographs and poses for pictures with shareholders until the game ends.

But this year it had been raining all day, the kind of hard, steady downpour that doesn't offer much hope. The weather reports were equally grim. Shareholders, who had been arriving at the Omaha airport from all over the world, began muttering darkly about alternate plans; what would they do if the game was canceled? It was an awful thought. But then the clock struck 5 p.m., and the rain suddenly stopped, and the sun broke through the clouds. Two hours later, when Buffett threw out the first pitch, the field was dry enough to play on and the weather just about perfect. It stayed that way for the duration of the game. And wouldn't you know it? The moment the game ended and Buffett headed for home, the skies darkened. By the time the stands emptied, the downpour had begun again in earnest.

Among the Buffett faithful, no one seemed the least bit surprised.

Is it too much to call Warren Buffett a modern-day miracle worker? Oh, probably. It's not as if he walks on water, though I suppose one could argue that an investment record like his--an average annual gain of over 30% since 1965--is a kind of modern equivalent. He is certainly a living, breathing refutation of the "random walk" theory so beloved by academics--the notion that stock movement is random because all information about the future prospects of a company has already been built into the share price. The academics explain away Buffett by pointing out that in any game of chance someone has to come out on top--it just happens to be him.

But you know that's not true; it's like saying that the reason the ball goes in the basket more often for Michael Jordan has to do with luck, not skill. No, like Jordan, Buffett has something we mere mortals have no real hope of emulating. And hence the real Buffett paradox, which is quite the opposite of the supposed random walk paradox. Just as Jordan is far more likely to ascribe his success to hard work than to his supernatural talent, so too does the greatest investor of our time make investing seem easier than it actually is. Listening to him speak, reading his many writings on investing, absorbing his message, even watching his investment moves over the years, one is far more likely to gain hope than to lose it. How difficult can it be, after all, to buy Coca-Cola and hold it forever--which is at the core of Buffett's methodology? All the fancy trading techniques so beloved by modern Wall Street--the techniques that make it seem as though the big boys have an insurmountable advantage over the rest of us--Buffett eschews. He won't even invest in technology companies--because, he says, he can never hope to fully understand them--preferring to stick with his old standbys: the Washington Post Co., Gillette, Geico and the rest of them.

And yet I came away from the Berkshire Hathaway weekend utterly convinced that what Buffett does is, in its own way, as unreachable as anything Michael Jordan does. So I take it back: What Buffett has accomplished in the course of his long career--and especially the way he's done it--really is miraculous.

Part of the reason Buffett creates the illusion that he can be emulated is that he himself seems so perfectly ordinary. He is neither strikingly handsome nor particularly charismatic; on the contrary, he seems rumpled most of the time. For a man worth $34 billion, he lives amazingly simply--his house is the same one he's lived in for decades, for instance, and everyone in Omaha knows where it is. Yes, Bill Gates is his friend, but so are a lot of the people in Omaha he grew up with. Some years ago, the Wall Street Journal tried to paint Buffett as a hypocrite because--so the Journal alleged--he bought expensive suits and owned a private jet. But the story was a stretch. Buffett has long acknowledged the jet as his one indulgence--the Indefensible, he calls it, with appealing frankness. And as for the expensive suits, if Warren Buffett really is a clotheshorse, it was manifestly not in evidence during the weekend of the annual meeting.

Indeed, rather than hypocrisy, it is the opposite trait that is the most striking thing about Buffett. He comes across as someone refreshingly lacking in guile--someone who says what he thinks, who hasn't a trace of the paranoia that can often afflict corporate bigwigs, who doesn't worry about what the papers will say about him and who tries to accommodate people whenever possible. (In fact, the entire Berkshire Hathaway weekend is, in one sense, a giant attempt to accommodate his shareholders, who hunger for the chance to meet him and ask him questions.) All weekend long, the only times he got squirrelly were when reporters tried to pin him down on where he thought the market was headed. But who can blame him for dodging that loaded question? He is also, by the way, very funny, which is another part of his appeal. "If I taught a class in valuation," he said at one point during the annual meeting, "I would ask the students, for the final exam, to pick an Internet company and tell me how much it's worth." Pause. "Anyone who gave me an answer would flunk."

Then there are his business principles, which are equally appealing--at least in part because they are so at odds with standard operating procedure in corporate America. Buffett believes that investors should be buying a business, not simply a stock. He believes that, as the CEO of a giant holding company (in addition to its famous stockholdings, Berkshire Hathaway owns dozens of businesses outright and employs nearly 40,000 people), his job is to give his managers whatever support they need and otherwise stay out of their way. He isn't hankering to change the tax code so he can pay less. "I'd rather be the one paying the taxes than be the person on the other side, someone who needs help from the government," he says. He believes that stock options mask a true reading of a company's earnings, so he refuses to grant any to Berkshire Hathaway's executives--and freely admits that this means he must find other ways to keep them motivated. He believes that annual reports should be both readable and honest. And on and on.

Buffett's own annual report is nothing if not readable--quite famously so. Recently, a law professor named Lawrence Cunningham compiled some excerpts into a book, The Essays of Warren Buffett: Lessons for Corporate America. The professor showed up in Omaha to hawk his book, and at his booth outside the Borsheim's party, it sold briskly.

And why not? It is an extraordinary document, full of wisdom, humor and common sense. For the millions of investors who don't come to Omaha, it is by far the best window into the way Buffett's mind works.

Here's a typical nugget: "After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers."

And here is one that strikes me as about as good a one-paragraph summary of Buffett's investment philosophy as you'll ever read: "Whenever Charlie and I buy common stocks...we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts--not as market analysts, not as macroeconomic analysts and not even as security analysts."

This is the essence of what I think of as the Buffett illusion. On the one hand, this paragraph is so steeped in old-fashioned values--largely vanished from trading-obsessed Wall Street--that one can immediately understand why Buffett has followers. How can you not fall for a guy who thinks like that?

On the other hand, the straightforwardness and simplicity of the language suggests that, really, Buffett's investing style just isn't that difficult. It amounts to a four-legged stool: Buffett cares about the future prospects of the business. He wants to know that management has both integrity and drive. He doesn't want to overpay for the stock. And whether the shares go up or down, he won't sell so long as the fundamentals remain the same. Isn't that the way we should all invest? Of course it is.

So why don't we? I think the answer is twofold. First, truly great investing requires a temperament that very few people have. For most of us, it is difficult not to panic when the market tanks, for instance. It is hard not to want to jump on the hot stock, even if we know nothing about the business. The ups and downs of the market are stomach-churning events. The fundamental equanimity required to be a great investor is an extremely rare thing.

Buffett, however, has that trait in spades. He is happy when markets tank because it means he can buy stocks he wants at a cheaper price. Indeed, one of the themes of the annual meeting this year was that this current upmarket, which has most of us rejoicing, is not the kind he prefers--because it makes it hard to find affordable stocks. "These are tough times for us," he kept saying all weekend. And he is never, ever ruffled--which I think is a key to great investing: His judgment seems never to be affected by emotion. At one point during the annual meeting, one of the shareholders asked him what kept him up at night. Buffett thought about that question for a minute, and then he replied: "Nothing."

The second reason we don't invest like Buffett is because his methods are a lot more complicated than they sound. Think about it: When Buffett talks about the "economic prospects" of a potential investment, what he means is that he wants to be able to see where its business will be 10 years from now. If he can see the business remaining dominant for the next decade, he'll consider buying the stock.

The next decade! Can you predict, with any certainty, how many of the companies you own will be dominant players in 10 years? Of course not. But Buffett can--and with a surprising amount of certainty. At a short press conference he gave on Sunday, a reporter asked him and Munger to name their biggest mistakes. "Our biggest mistakes," said Munger, "were things we didn't do, companies we didn't buy." Added Buffett: "The real mistakes were that we didn't do things we knew would work. We could have made billions and billions of dollars." You and I--we may do the best we can in looking into a company, but we don't know. Not like Buffett.

One of the most important reasons for this difference goes almost entirely unacknowledged among those who hope to find in Buffett an easily reproducible investing style. He is a genius when it comes to numbers. "Accounting," he likes to say, "is the language of business." It is a language in which his own fluency is unsurpassed, and which gives him an enormous competitive advantage. Usually, all he needs is a quick glance at a balance sheet to know whether he's interested in buying a company or not--because he finds meaning in numbers that the rest of us don't.

Again and again during the weekend, you could see his own shareholders struggling to get their arms around accounting ideas that are second nature to him. A classic example is "intrinsic value," which is Buffett and Munger's primary way of evaluating the true worth of a company--and which Buffett describes as "the only logical approach to evaluating the relative attractiveness of investments and businesses." He adds, "Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life."

Simply? Well, maybe for Buffett and Munger. But it sure isn't simple for the rest of us. Indeed, more than once shareholders asked Buf-fett to define intrinsic value during the annual meeting; his answer was invariably unsatisfying. It is just not something that can be explained easily, in front of 11,000 people. And besides, Buffett seems to feel that people should be able to figure it out for themselves: When a shareholder asked him what the intrinsic value of Berkshire Hathaway is, he responded by saying that he had provided all the pertinent information in the annual report and that the shareholders should be able to come up with it themselves. As if they could.

Here's the thing, though: Over the course of the six hours that Buffett and Munger took questions from their audience during the annual meeting, such moments were largely lost, overshadowed as they were amid the general revelry--amid the jokes and the commonsense explanations and the string of self-deprecating remarks and pearls of wisdom. (My personal favorite: "Time is the enemy of the poor business and the friend of the good business.") Time and again, the Buffett persona overshadowed the Buffett genius.

Then again, it always does.