The Long Game of Trust

"I just like the feeling of being trusted," said Warren Buffett. "You know, that’s a good way to feel in life."

In a classic episode of The Simpsons, Lisa convinces Marge that she’s too sick to go to school that day — offering no proof, just her word.

Bart, incredulous, asks his mother why she accepted Lisa’s story without even feeling her forehead or checking on any symptoms. “How do I get that kind of credibility?” he asked. “With eight years of scrupulous honesty,” replied Marge.

“Ehh, it’s not worth it,” he said.

Like Bart, many people dismiss the slow grind of building trust.

Near the end of last year’s annual shareholders meeting — already an especially reflective occasion as it marked the first one since Charlie Munger’s passing — Warren Buffett summed up his success in an unusual way.

“I really enjoy managing money for people who trust me,” he said. “I don’t have any reason to do it for financial reasons. I’m not running a hedge fund or getting an override or anything. I just like the feeling of being trusted. You know, that’s a good way to feel in life — and it continues to be a good feeling.”

That trust — hard-won and meticulously nurtured over decades — is a measure of wealth that rivals the $150+ billion that Buffett is now worth. It’s a currency not traded on any exchange, yet nevertheless underpins his entire financial empire.

Trust, though, is a fragile ledger. Deposits accrue slowly — and withdrawals can “bankrupt” you overnight.

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Building trust is a lot like compounding. Gradual, almost imperceptible at first, but eventually growing into a priceless asset. Buffett once quipped, “You can’t produce a baby in one month by getting nine women pregnant.” Some things cannot be rushed.

The immense trust between Buffett and his shareholders did not spring forth fully formed. Instead, for more than seventy years, it has grown slowly through deliberate, consistent acts. His early letters to partners read like dispatches from a trusted uncle — offering the very information that Buffett himself would want to know if their roles were reversed.

• This candor seems to be the first pillar of Buffett’s trust. He does not sugarcoat bad news and, when he does occasionally err, he owns it completely. Like with the recent wayward investment in Paramount Global. Buffett offered no excuses and said only, “It was 100% my decision and we’ve sold it all and we lost quite a bit of money. I did it all by myself, folks.” Buffett’s annual letters are full of similar admissions — and blessedly devoid of spin or corporate gloss. Skeletons are not hidden, but paraded in front of shareholders as teachable moments.

• Consistency is the second pillar. Buffett’s investment philosophy — buying wonderful businesses at fair prices and then holding them for the long haul — has not wavered much since Charlie Munger nudged him away from cigar butts. Coca-Cola and American Express have been cornerstones of the Berkshire Hathaway portfolio for decades, as was GEICO before Buffett took the plunge and acquired the whole thing in 1995. Shareholders know what they’re going to get when they invest in Berkshire — without any fear that their money will be spent chasing fads or in some other unexpected manner.

• Competence completes this little triad of trust. Buffett’s track record — dating all the way back to his pre-partnership days — speaks for itself. Sixty years of 19.9% annualized total returns will do that. Cumulatively, it all works out to a five-and-a-half-million percent gain for Berkshire shareholders during his tenure. No doubt, it’s much easier to trust a man who bestows life-changing wealth on all those who come along for the ride. Yet Buffett has also always been quick to share credit, honoring Charlie as the “architect” of Berkshire’s success — and shifting most other praise on to Ajit Jain, Greg Abel, and the conglomerate’s many managers.

As mentioned above, trust is an asymmetric ledger of deposits and withdrawals. “It takes twenty years to build a reputation,” said Buffett, “and five minutes to ruin it.” Deposits are small and incremental — each honest letter, prudent investment, or candid admission of error adds a bit more. Withdrawals, though, can be catastrophic. A single scandal, a whiff of deceit, or a reckless investment gone wrong can drain the entire account overnight.

And, on those very rare occasions when Buffett’s trust seemed at risk of taking a hit, he leapt into action immediately and set things right. During the Salomon Brothers bond-trading scandal, Buffett reluctantly stepped in as CEO to rescue the firm and testified before Congress with a solemn vow to clean house there. His credibility — not just his capital — saved Salomon.

Attaching his name to the scandal-ridden bank — even temporarily — was not easy for Buffett. “In the end,” said biographer Alice Schroeder, “he actually had to reach in and pull [his] reputation out and use it. Something that was very painful for him and I don’t think he ever thought he would have to do it.”

This “seamless web of deserved trust” — as Charlie Munger called it — has manifested itself in many ways to Berkshire’s benefit. During acquisition talks, founders and business owners trust Buffett to safeguard the long-term interests of their companies — and Buffett, in turn, trusts them to run the business their way. This creates an incredible sense of mutual loyalty, with many managers admitting that the fear of letting the old man down continually motivates them.

Berkshire’s reputation as a forever home for its wholly-owned businesses sometimes opens doors with sellers who aren’t seeking the very last dollar. Where else are deals sealed with handshakes and one-page contracts? Where the other side’s word renders audits and inventory checks unnecessary?

Buffett’s trust also serves as a bulwark against shareholder agitation. Other companies might face complaints about sitting on $328 billion of cash or running such a top-heavy investment portfolio, but Berkshire shareholders barely even flinch at these peculiarities. They know that Buffett is acting in their best interests.

Buffett’s remarks about trust at the 2024 AGM weren’t necessarily new, but they resonated in a world of fleeting loyalties and corporate spin. Money can be earned, lost, and regained. Trust, once broken, is rarely restored. And building that trust is a marathon — each step deliberate and each misstep costly.

In the end, Buffett’s greatest legacy may not be Berkshire’s trillion-dollar valuation or the billions that he will leave to charity — but the trust that he carefully cultivated over a lifetime. And, much like capital appreciation, that simply cannot be rushed.