When Charlie Munger discussed the factors that made Warren Buffett so successful over the past fifty years, he mentioned John Wooden’s particular method that helped him achieve so much success at UCLA back in the day—“he assigned virtually all of his playing time to his seven best players.” This was a counter-conventional move at the time because basketball wisdom held that you should regularly give your star players rest so that everyone on the court is fresh and it would be an intelligent way to gradually give a team’s younger players experience to make the transition easier in future years when the sophomores find themselves becoming upperclassmen (though this sounds wild to us now in the era of one-and-done college basketball superstars, freshmen were actually ineligible to play on the “varsity team” for UCLA at the time).
Wooden rejected that approach and chose to do something innovative: He played his seven best players exclusively, only subbing out two men at a time over the course of a game. This brought two pleasant side effects that actually worked in practice, not just theory: (1) The teams that faced UCLA always had to face UCLA’s best, so there were no weak links in the chain to exploit. Sticking with the state of California but switching sports, think of something like the effects of the Los Angeles Dodgers bullpen on the team’s overall win-loss record. LA’s starting pitching is one of the best in the league, and the offensive attack is nearly equally as good. If you want to beat the Dodgers, your best bet is to score in the sixth, seventh, or eighth inning because the bullpen represents the weakness in the chain.
By sticking with the seven best, Wooden removed this vulnerability from the UCLA lineup on the theory that a fatigued top-of-the-lineup-athlete is still better than the person who would be the tenth best on the team. This led to what Munger would call an unexpected lollapalooza effect—by seeing more playing time and being forced to learn endurance, UCLA’s top athletes would get even better as the additional playing time converted into the refinement of their athletic abilities.
Munger described Buffett’s application of this Wooden principle as follows: “Buffett much out-Woodened Wooden, because in his case the exercise of skill was concentrated in one person, not seven, and his skill improved and improved as he got older and older during 50 years, instead of deteriorating like the skill of a basketball player does. Moreover, by concentrating so much power and authority in the often-long-serving CEOs of important subsidiaries, Buffett was also creating strong Wooden-type effects there. And such effects enhanced the skills of the CEOs and the achievements of the subsidiaries. Then, as the Berkshire system bestowed much-desired autonomy on many subsidiaries and their CEOs, and Berkshire became successful and well known, these outcomes attracted both more and better subsidiaries into Berkshire, and better CEOs as well. And the better subsidiaries and CEOs then required less attention from headquarters, creating what is often called a ‘virtuous cycle.’”
I suspect that this spirit could be applied to individual investors as well. Imagine if somehow the following constraint got imposed on your life: “Every dollar of surplus that you generate in your life can only go towards five companies. You get three years to think about which companies to pick, and from there, you must select five businesses that your income will be attached to for the rest of your life. Most likely, you would use those three years to study hard and vet your ideas thoroughly—you’d want to buy something that sells a timeless product, diverse revenue sources, an entrenched moat, wide scale, moderate or less debt, geographical diversification in where profits came from, a rich history of growing profits and rewarding shareholders with big dividend payments, an easy-to-understand business, and a significant gap between the costs of creating the items and the retail costs.
If I had to apply that test myself, I would probably settle on Coca-Cola, Johnson & Johnson, ExxonMobil, Procter & Gamble, and Nestle. It is probably true that the relentless acquisition of common stock in those five companies will lead to superior results than any other strategy I suggest on this site. It’s the nature of things when you carefully vet the best and then relentless focus your energies there.
Munger did not specifically address this, but it is important to structure your life so that you get time to enhance your strengths. I know quite a few people who spend their days putting fires out—constantly responding to e-mails, text messages, and spending more time making to-do lists than actually doing the work. That kind of behavior makes you busy, but it does not make you productive. It’s easy to lose sight of that difference if you are not able.
When Buffett was first starting out, he had his feet in the trenches. He was actually installing pinball machines at eateries so that he would have money flowing in from teenagers that enjoyed arcade games. He would buy a few acres of farmland with his surplus so that he could have a tenant farmer grow crops and he would collect a cut of the production. He would run a newspaper ring, often delivering papers himself, growing the operation so big it was almost like was running a Washington Post distributorship with a compensation rate at $175 per month (the equivalent of $2,300 per month today).
Even though Buffett was the son of a Congressman, he did not start his life as a capital allocator. He had to get his hands dirty, and put in the labor himself to generate the money to invest. Then, once the passive income streams grew large, he was able to sit around and consider potential investments. The sheer industriousness of Warren Buffett in the early days is often discounted.
His psychological motivations for wanting to get rich have never been discussed in depth. Ben Graham, meanwhile, was perfectly candid: He was born rich, saw his dad die and the family finances crumble, and got mocked at the local grocery store by a cashier that refused to honor a Grossbaum check (Grossbaum was Graham’s original last name which he changed in an attempt to sidestep anti-Semitism). It was a deep desire to get past that humiliation and never have to worry about groceries again that lit the fire for Graham. If I had to speculate on Buffett’s motivations, I think it was a combination of getting humiliated at a job that involved collecting golf balls and seeing donors threaten his father that motivated him to avoid letting others have the ability to turn off the switch on his ability to survive, and it was a way for him to assert control over his life—or at least, prevent others from having control. Once he had his money made, I think his motivations merged into something else: Money was the score-card through which he could prove to others a sense of superiority about his intellect and process.