Warren Buffett’s Billion-Dollar Lesson

About 99% of American management thinks that if they’re wonderful doing one thing that they’ll be wonderful at doing something else. – Warren Buffett

 

As I sit here in Omaha preparing for our sold-out CEO workshop tomorrow – Leadership Lessons from Warren Buffett – I am reflecting on this quote above about overconfidence and the billions of dollars that American leaders lose because of their arrogance.

Just today in the Wall Street Journal a leader – Nick Adams, Partner at Wellington Management – is profiled because his fund lost billions due to his overconfidence (“How a Hedge-Fund Ace Chased Silicon Valley Riches – And Embarrassed Himself“).

What’s the remedy for overconfidence and arrogance?

According to Buffett, it’s the “circle of competence” concept.

The idea is that we all have a few things that we do well – those things sit inside our circle of competence. The trick is then to pay close attention to where this circle begins and ends. Buffett believes the circle can be expanded but that takes real work and not just wishful thinking.

Adams, who was good at bank stock investing, decided he must be good at fintech startups. A few of his friends and investors warned him he was moving into areas he did not understand.

Some of Mr. Adams’s investors say they told him they were concerned he was straying from his strong suit—bank stocks…

 

He seems to have ignored these warnings and just jumped right in.

Leaders make this mistake all the time – whether in investing, buying companies, building products, or moving into new markets. They ignore their circle of competence and just charge ahead. Customers, colleagues, and investors tend to suffer.

What are some other examples?

  • Netflix’ near-death experience in 2011 (CEO Reed Hastings credited “arrogance based on past success” for that crisis)
  • Uber’s recent repeated stumbles
  • Decisions made by big bank executives on the eve of the financial crisis
  • Walmart’s Project Impact (which I estimated lost them billions in potential revenue)

In our workshop tomorrow, we host a private conversation with one of the Berkshire CEOs and a leading hedge fund manager. We’ll talk about the many reasons Berkshire has become so successful including this circle of competence concept. Then Saturday morning we get up early and trek over to the ‘Woodstock of Capitalism’ to spend the day with Warren Buffett and his terrific partner Charlie Munger.

-Phil

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