Analogy makes concepts tangible
“No ideas but in things.”
— William Carlos Williams, 20th-century American poet
Metaphors, similes and other comparisons turn ideas into things. That makes them shortcuts to understanding.
Warren Buffett, chairman of Berkshire Hathaway, used that attribute of analogy to make his concepts tangible — and therefore more accessible — in a letter to shareholders. This concept — the price of America’s burgeoning trade deficit — becomes clearer when Buffett compares it to a wealthy family’s overspending:
“As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. I fervently believe in real trade — the more the better for both us and the world. We had about $1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last year — imports for which we exchanged no goods or services.
“(Ponder, for a moment, how commentators would describe the situation if our imports were $.76 trillion — a full 6% of GDP — and we had no exports. Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world.)
“Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.”
Buffett makes his perspective on executive incentives clearer by comparing it to lottery tickets and batting averages:
“When we use incentives — and these can be large — they are always tied to the operating results for which a given CEO has authority.
“We issue no lottery tickets that carry payoffs unrelated to business performance. If a CEO bats .300, he gets paid for being a .300 hitter, even if circumstances outside of his control cause Berkshire to perform poorly. And if he bats .150, he doesn’t get a payoff just because the successes of others have enabled Berkshire to prosper mightily.”
In this passage, Buffett makes a particularly complex financial transaction clearer through comparison. Berkshire reinsured Equitas so its “names,” or underwriters, don’t have to worry about huge claims bankrupting the firm — and themselves:
“Scott Moser, the CEO of Equitas, summarized the transaction neatly:
“Names wanted to sleep easy at night, and we think we’ve just bought them the world’s best mattress.”
Learn more about turning ideas into things.