Buffett on Evaluating People: Reference Checks vs. Behavior

Warren Buffett may be the most well-connected businessman around.  In the past, some have argued that it's this quality that enables his great success, even more than his own intelligence and judgement.  His investment results are better, this rather sinister argument goes, because his information is better.

From the same Fortune interview, here's Buffett on how he evaluates John Stumpf, CEO of Wells Fargo:

Well, John [Stumpf] is in charge. Dick is a terrific help to John. I play bridge with John on the Internet. He plays under the name of HTUR. His wife's name is Ruth. My bridge partner, who I probably play bridge with four times a week, developed online banking for Wells. A woman named Sharon Osberg. And she's worked with those people. And she told me about John Stumpf ten years ago. I've had some insight through her on these people. But the real insight you get about a banker is how they bank. You've got to see what they do and what they don't do. Their speeches don't make any difference. It's what they do and what they don't do. And what Wells didn't do is what defines their greatness [my emphasis].

I apply this logic to the world of money manager selection.  Manager selectors spend a lot of time on reference checks, talking to people they know who also know the manager they're trying to evaluate, just as Buffett talked to Sharon Osberg about John Stumpf.  Manager selectors, myself especially, also spend a lot of time evaluating investors communications: their investor letters, speeches, interviews, etc.

All of these things are important, especially in a world like mine in which the lack of information about people is the singular feature.  But it's important to realize that in the final analysis, reference checks and manager communications matter less than direct observation and interpretation of a money manager's behavior.  The real insight you get about an investor is how they invest.

Disclosure: Long Berkshire Hathaway