WARREN BUFFETT AND AARON RODGERS – INDIVIDUAL TALENT OR PRODUCTS OF A SYSTEM? BOTH.
Whenever the NFL draft rolls around each year, you start hearing the phrase, “He’s a product of the system.” This phrase drives us nuts. It’s often applied to quarterbacks. We understand what scouts mean – they’re saying a college QB will not succeed in the NFL and that a player’s success in college had more to do with external factors, such as the type of offense his coach ran (Tim Tebow at Florida), the strategies/strengths of the defenses he typically faced in his conference, the plethora of weapons surrounding him (Matt Leinart at USC), etc. – anything other than individual talent, skill, disposition or work ethic. Thus, such success will most likely not be replicated in the NFL.
Aaron Rodgers was also deemed by many scouts as not likely to succeed because he was considered a product of a system that had not produced good quarterbacks. Look at what was said about him before he was drafted by the Green Bay Packers:
Marc Ross, Buffalo: "He's a little short. The thing you worry about is those (Jeff) Tedford guys. They don't do anything for a couple years and then they have a good year or two. Who of his quarterbacks has done what they're supposed to do? None of them. Is he just working magic with great college quarterbacks or just manufacturing guys?"
AFC scout: "I like him. He's a very talented guy. A lot of quarterbacks that were system people have not done very well. That puts up a red flag. Not that he is one of them. He could be an exception. But I can't get it out of my craw."
Rich Snead, Tennessee: "I like him. I just don't know if he's maxed out. He's more accurate than (Kyle) Boller but probably not as athletic. He's a better player than Akili Smith. He's more athletic than (Trent) Dilfer was. He's a little more mobile than Joey Harrington. He had to go to a JC because no one would recruit him because they said he was too small. He's been busting his (expletive) his whole life to get to this point. I just don't know how much more he has to give."
NFC scout: "(Alex) Smith is the better athlete."
AFC scout: "I think he has some upside although there are some things that are just ordinary about him."
Jerry Angelo, Chicago: "I'd give Rodgers the edge (over Smith) just because he was easier to evaluate. And there's a little more arm. But the edge is negligible."
NFC scout: "I think he has a good chance of being a bust. Just like every other Tedford-coached quarterback. Thing I struggle with him is he gets sacked a lot. He doesn't have great ability to change the release of the football. He's mechanically very rigid. Brett Favre can change his release point and find different windows. There will be more growing pains with Alex Smith but in the end he has a much better chance to be much better."
NFC scout: "The guys that Tedford has had, what have they developed into? They're too well-schooled. So mechanical. So robotic. I don't know if they become good pro players. I think Rodgers is in that same mold."
AFC scout: "I don't like him. He's a clone of Harrington and Boller. They all throw the same way. What have those guys done? Nothing. If you take him in the second round, fine. Heady guy. They do a marvelous job of coaching quarterbacks there. I don't think he's as good as the top quarterbacks coming out last year."
AFC scout: "I don't think he's in the class of the quarterbacks that came out last year. Strong arm. Pretty good athlete. Still has some holes in his game."
Bill Polian, Indianapolis: "I see a guy who has good arm strength. I see some athletic ability. I see a guy who was pretty good with a good team. I see a guy who's in a pretty efficient offense. Am I certain that he's going to come in and lead my team to the Promised Land? I can't say that. I'm not even sure I can say that about Alex Smith."
AFC scout: "He's a system quarterback. 3-, 5-, 7-step guy. Can't create on his own. Panics under pressure. Gets flustered easy. I don't think there's a quarterback in the draft worthy of a first-round pick. I'm dead serious. None of them are worth it."
NFC scout: "He fit right into the Cal system. He probably executed that as well as anybody. He doesn't have as strong an arm as Boller but can make the same reads and play the scheme as well as Boller did.
20-20 hindsight makes it easy for us to cherry-pick Aaron Rodgers as an exception to the norm. Perhaps he was an outlier. Perhaps most of the time, these scouts are right.
But that’s not what bothers us most.
Aaron Rodgers was the product of a system, but so are all college and NFL QBs. They are also products of their own individual talent, as well. It’s always a combination. And it’s never easy to find out where the line is. Is it 40% system, 60% individual skill? It’s always hard to say. But to say with such black and white confidence as scouts often do, leaving little room for doubt, that a player is mostly a product of a system or individual talent doesn’t reflect reality.
As long as a QB has baseline football IQ and athletic ability (which the scouts above seem to say about Rodgers), the real question is, can he adapt and get better in another system? Rodgers had the ability to physically and mentally adapt and get better as a professional, while playing in the Green Bay Packers, NFL system. How does one predict a player’s ability to do this? We have no idea.
Now, how is this related to Warren Buffett? Well, with regards to his investment success, we think too much credit is given to his own individual attributes and not enough to the system in which he has operated for most of his investing career. In other words, his success is the product of both the system and his own individual skill.
The common perception of Buffett’s investment success being primarily attributable to his disciplined adherence to the Graham-Dodd value investing philosophy, intelligence and temperament, is not reflective of reality.
For most of his investment career, he has made investments through the conduit of insurance companies. Why does this matter?
Well, investing with insurance premiums forces you to invest differently. If you invest in the stock of companies with volatile earnings and cash flows, the leverage with which you are investing via an insurance company makes it extra dangerous. The stocks of such companies may mark to market in an even more volatile fashion, and insurance regulators will start getting nervous as significant declines in asset values will eat into the book value/shareholders’ equity that provides the extra cushion to pay for insurance policyholder claims. This cushion gets too low, and the regulators take over the company.
Furthermore, some states actually limit insurance company stock investments to dividend-paying companies. If the law requires you to invest in dividend-paying companies, are you investing in them because you are a conservative investor looking for safe, long-term investments that compound or are you just following the law?
Some states limit the amount of insurance company assets that can be invested in stocks and preclude investments in junk bonds. Does this mean you are investing a certain way because of your personal investment philosophy or are you following the law?
The genius of all this on Buffett’s part was that he placed himself in a system (i.e. the insurance vehicle) that reinforced his investment philosophy. It was almost like a self-imposed check on potential mission creep.
When the internet bubble was peaking in the early 2000s, sure, Buffett avoided investing in such stocks because of his own investment principles about avoiding tech, investing in companies with sustainable positive cash flows, etc. – but would anyone in their right mind invest in such stocks with insurance premiums? Most would think twice, out of respect for insurance leverage, insurance regulators and the law.