The Greatest Lesson From Warren Buffett

I really like this point from Mark Hulbert in his latest at MarketWatch where he’s framing the discussion on Warren Buffett’s wealth:

“And that, in turn, should refocus our energies on what truly produces great wealth.

It is not the stock market.

In fact, the most common way to get on the Forbes list is to start a company. Coming in a distant second is inheritance.”

This is a point I’ve been making for years, but I work from a more operational understanding.  I hate the way we financial people use the word “investment” in most cases because it’s misleading.  But I still use it because people interpret the term in a very particular way.  But that’s not important.

When we look at markets I like to break markets down into their different components.  You have primary markets and you have secondary markets.  Primary markets are where real “investment” is done.  That is, funding for future production is provided primarily on primary markets.   Someone who starts a company and seeds the capital upfront and then spends that capital in the pursuit of future production, is an “investor” in the truest sense of the word.   The primary markets are where capital is primarily provided so that investment spending can take place.

The secondary markets are different.  And I think they serve a different purpose in our financial lives.  The secondary markets are where already issued securities trade for exchange.  Therefore, you can access the secondary markets to allocate your already obtained savings.  But you’re not funding any real investment when you allocate your savings on a secondary market.  In fact, the company probably doesn’t even know if you own the financial asset and doesn’t really care if you own it.

In the aggregate, the secondary markets (which include the entirety of the stock and bond markets) will likely grow a little above the rate of inflation over the long-term.  But they won’t make us “rich” in the aggregate.  What will make us “rich” in the aggregate is what’s done on the primary markets.  In other words, it’s the things we actually invest in (like factories, people, education, innovations, etc) that will actually make us “rich”.   And the Forbes 400 list is simply a reflection of people who understand this point.

A lot of people think I am critical of Buffett and his views.  But that’s never been my intent.  I admire Warren Buffett.  But I hate the way the media portrays him as though he’s some sort of “value” stock picker generating all of his wealth on the secondary markets.  No, Buffett is an “investor” in the true sense of the word and has established a company that, in a lot of ways, is more like a private equity firm than a hedge fund that’s just managing assets.