Buffett's link to commonsense run historically deep. His first years at a hedge fund were under the tutelage of analyst extraordinaire Alexander Graham.
Graham traced his success to the influence of founding father Benjamin Franklin.
Franklin, in turn, championed Thomas Paine, author of Commonsense.
Commonsense is your ability to match the newness of your plan to the newness of your environment.
Meaning, if old protocols will work, use them.
But if your environment is volatile or changed, breaking protocol and providing something appropriately new gives you a better shot at success.
The protocol Buffett inherited from Graham was this: Rather than trying
to predict what a stock will be worth tomorrow, focus on getting the cheapest price you can today.
Buffet took the protocol one step further, applying what he understood about human psychology to give him an edge.
What Buffett understood was this: most people have too much fear about the future and anxiety about the past to use commonsense.
Markets are volatile. That is their nature.
Meaning market volatility isn't a change in the environment. But most investors behave as though it is, rushing to sell when things go south.
Buffett turns their panic into opportunity: amplifying Graham's protocol by buying more at the cheapest price.
Buffett's protocol? Be fearful when others are greedy, and be greedy when others are fearful,
That's how Buffett turned the 2008 financial crisis into a personal payday; injecting cash into blue chip companies whose values were tumbling.
For example, Buffett bought $5 billion in preferred shares of Goldman Sachs at its low point, immediately after Lehman Brothers failed.
Three years later, Goldman bought the stock back for $5.64 billion, giving Berkshire Hathaway more than $500 million in gains.
Buffett's “secret” is that he takes understands that market fluctuations are the norm. He therefore sticks to his protocol, consistently turning commonsense into cash.
