Going from Knowledge to Data with Warren Buffett (the Value of Promises)

For 50 years Warren Buffett has issued his annual letter to shareholders#. Their clarity is one of the two reasons why so many of us read them.

We expend so much energy reading and writing about data — big and small — and yet so little understanding how to use knowledge to extrapolate information that gives us actionable data these days. Buffett is a master at that process.

Take for example what he says about investing in insurance, one of the industries in which I spent some of the best years because of the type of business it is that makes it a long game:

Simply put, insurance is the sale of promises. The “customer” pays money now; the insurer promises to pay money in the future should certain unwanted events occur.

Sometimes, the promise will not be tested for decades. (Think of life insurance bought by people in their 20s.) Therefore, both the ability and willingness of the insurer to pay, even if economic chaos prevails when payment time arrives, is all-important.

This is the one type of promise that positively needs to come through when it counts. As anyone who has had to resort to using the coverage knows, it's a long shot you don't want to take. Choose your provider carefully.

Berkshire’s promises have no equal, a fact affirmed in recent years by certain of the world’s largest and most sophisticated P/C insurers, who wished to shed themselves of huge and exceptionally long-lived liabilities. That is, these insurers wished to “cede” these liabilities – most of them potential losses from asbestos claims – to a reinsurer. They needed the right one, though: If a reinsurer fails to pay a loss, the original insurer is still on the hook for it. Choosing a reinsurer, therefore, that down the road proves to be financially strapped or a bad actor threatens the original insurer with getting huge liabilities right back in its lap.

What would happen if we started thinking about all kinds of services and products using this lens? Balancing the present moment action with its long term consequences. For organizations we flip the question. Which assemblage of strengths will deliver endurance and resilience to your business sustainably?

If you are looking for additional thoughts on investments, check out Tren Griffin's a dozen things taught by Warren Buffett post#.

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