Thinking Like Warren Buffett: Going Beyond Stocks (#9)

Buffett's thinking on generational wealth is another insight into the power of his reasoning process

Warren Buffett is famous for taking difficult concepts and making them seem simple. He is of course master of the arena in stocks, but his thinking goes beyond the stock market.

I was recently watching an interview Buffett gave Nightline in 1999. It’s well worth watching in its entirety. But what got me thinking was a comment he’s made before on generational wealth.

“You have people talk about the debilitating effect of food stamps and welfare recipients, the cycle of dependency, and all of that sort of thing. But if you come out of the right womb, you were on welfare the day you were born. Instead of calling it a welfare officer you call it a trust officer, and instead of calling it food stamps you call it dividends and interest.”

Here’s the specific video clip containing all of Buffett’s thoughts.

In my recently-released history of Berkshire Hathaway, I repeatedly use the term “economics vs. accounting”. While we’re not talking about businesses here, the logic is the same. As Buffett puts it, “Wealth is a claim check on the future output of other people.” The underlying economics of the situation is having claim checks transferred to someone who didn’t directly earn them by contributing something to society. Changing the terms doesn’t change the underlying situation.

Interestingly, Charlie Munger has a different take on the risks of dynastic wealth. Charlie reasons that it’s rare for generational wealth to last since the heirs inevitably squander it within a few generations.

My personal take is that they’re both correct just looking at different time horizons. The dynastic wealth Buffett despises is a real risk to the immediate term as it sets up the potential for a family to do harm to society. Munger, by contrast, clearly places faith in the tendencies of heirs to squander their inheritances and the simple math that creates exponentially more beneficiaries as the generations go along.

The main takeaway from this post is the thought process, however. We can all learn from Buffett (and Munger) the power of logical reasoning that crosses domains and nomenclature to get at the heart of the matter at hand.

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