Warren Buffett once gave a group of college students an exercise that I think is more useful than it initially sounds.
Imagine you could buy 10% of one classmate’s earnings for the rest of that person’s life. Who would you choose?
There are a couple of conditions. You can’t simply choose someone because they have wealthy parents or some other inherited advantage. You have to base the decision on qualities that person has developed.
When people think about it long enough, something interesting tends to happen.
They don’t necessarily choose the smartest person in the room.
They start choosing for character.
Dependability. Work ethic. Integrity. Humility. The ability to work with other people. Someone who can admit when they’re wrong and generally demonstrates good judgment.
Buffett also flipped the question around: Who would you least want to own?
Again, the answers are revealing. Dishonesty, selfishness, poor judgment and an inability to work well with others tend to rise pretty quickly to the top.
I like the exercise because, after more than two decades working with people and their money, I think there’s a financial lesson buried in it.
We spend a lot of time measuring financial success with numbers. Investment returns, account balances, income, tax rates and so on. Obviously those things matter.
But what we tend to see over long periods of time is that judgment matters too.
I’ve watched people have very good investment results only to make poor decisions elsewhere that offset years of progress. I’ve also seen people who never had spectacular investment results build remarkable financial lives because they made reasonably good decisions over and over again.
Good judgment has its own kind of compounding effect.
That brings me to investment managers.
When we evaluate a manager, there’s plenty of quantitative work to do. But eventually you get beyond the spreadsheet and you’re evaluating people.
How do they think? What happens when something they believed turns out to be wrong? Do they change their process because markets become uncomfortable, or can they remain disciplined? Can they admit mistakes? Do they demonstrate integrity over long periods of time?
None of those things fit particularly well into a performance table. But if you’re entrusting someone with decisions that may play out over decades, I think they matter quite a bit. And it extends well beyond investing.
Choosing a spouse, a business partner, an employee, an advisor or someone to help manage family wealth can have enormous financial consequences. Those decisions may involve money, but fundamentally they’re decisions about people.
One of the ideas I mention in the episode is trying Buffett’s question with your children or grandchildren without telling them what you think the answer should be.
Just ask them who they’d choose and why.
Their answer might lead to a much more interesting conversation about money than talking about money itself.
In this week’s episode of Wisdom for Your Wisdom Years, I spend some time on Buffett’s exercise, what I’ve observed over the years and why character and judgment deserve a place alongside the things we can actually measure.
