Warren Buffet, Idiocy, and Alternatives

As fallout from the current economic crisis continues to mount, thoughtful people are beginning to ask what we can learn from this experience. In a post at Harvard Business Online, Bill Taylor highlights a Warren Buffett interview on Charlie Rose in which the billionaire investor responds to the question "Should wise people have known better?" in the affirmative, with the note that there's a natural progression when things go wrong:

* Innovation
* Imitation
* Idiocy

An innovator spots an untapped opportunity; the imitator attempts to capitalize on its merit; finally, explains Taylor, the idiot goes and apes the imitator, and with avarice "undoes the very innovations [he is] trying to use to get rich."

According to Taylor, avoiding this cycle means developing the ability to distinguish between "genuine innovation" and "mindless imitation." In other words, he asks, "Are you prepared to walk away from ideas that promise to make money [when] they make no sense?" Taylor, like Buffett, concedes this is easier said than done when you see competition heading in a particular direction and fear you'll never catch up if you don't join the charge. It takes discipline, notes Taylor, to remain conscious of the difference—taking advantage of innovation without getting caught up in the idiocy.

The interesting note here is that the world's greatest investor, Warren Buffet, reveals this cycle that will never end (hence, cycle...). Why would an investor choose to keep the majority of his life savings in the equity markets when there are private investments available that would allow him to break the cycle and provide returns that overall beat the equity markets without the volatility? The only reason that is logical is ignorance. It is hard for the investor to make the proper decisions if they don't know all of the options.

Do your research on private investments... you will thank me later. If you want more information, please contact the author.