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“It was a mass hallucination, by far the biggest in my lifetime.”

This was the comment of Warren Buffett after he was vindicated for not entering into the dotcom frenzy everyone else was so willing to participate in.

During the period of time before that, when imaginary success was being touted everywhere in the media, questions started being asked on the relevancy of Warren Buffett and his investment strategy, and by extension his business leadership ability. Some even believed his time was over ... many mocked him. As I've mentioned before here, they're not mocking him now.

The reason I'm bringing it up to talk about again, is the reference he makes to "mass hallucination." That's also what happened in the subprime mortgage fiasco, where companies that should have know better entered into the same hysteria. They followed the hallucinatory herd, and fell off the financial cliff with them.

This is talking about more than investing, as it applies to any business leadership in any field.

Here's the deciding factor, or the way we measure whether something is real or imaginary: Does it line up with historical precedence?

Some will immediately pounce on that and say we can't look to the past if we're to succeed, but that's not only not true, but it's really not what I'm even talking about.

It's the past, but not in a nostalgic or the "good old days" mentality I'm referring to. Rather, especially in America, there's been a long enough period of entrepreneurial history to be able to look at how new industry and innovation ended up growing over a period of time.

This doesn't mean things will remain at the same pace, but as far as strategies being implemented, and from an operational standpoint, things aren't going to change as far as the time factor goes when applying it to people. People simply don't respond much differently than they have in the past.

One example is a lot of the technological innovation currently in the marketplace. Even though the possibilities are almost endless, when a product goes from early adopters to the general population, everything must be slowed down and simplified. It's the nature of people in general.

Steve Jobs and Bill Gates have mentioned the same thing in the past, as they say ordinary people don't like all the bells and whistles associated with early adopters, no matter what the particular field the product or service is offered in.

This is one aspect of what Warren Buffett is saying when talking about mass hallucination, where everyone starts to say "this time it's different." That's the hallucination or illusion. It never is.

It may be a different product or service; it may be a different technology or innovation; but it's the same people. That's the true deciding factor the majority of the time. 

This isn't to say there aren't seasons of great opportunity, but that's connected to people again, and usually happens between the time of marketing to early adopters, to the time products go mainstream. There's where the potential for significant growth lies.

But that's been historically documented. That's nothing new. When you hear something is now here that transcends the pace of business historically, very seldom does that pan out. Even Buffett as a great investor, siphoning through the best companies in the world, is able to grow at about a 22 percent rate over the years.

Even taking into consideration it doesn't pay to buy into temporarily smaller, faster growing companies because of the size of Berkshire Hathaway (BRK-A), the limits are still there, and any business eventually comes down from a period of fast growth to enter into the historical pattern.

To understand this is the check and balance we need to ensure we don't follow the inevitable herd mentality that seems to arise every few years across different industries, and which people seem to always forget their eventual ending. Beware of the mass hallucination inherent in the market. Eventually the market deals with it, but usually in a very painful way. Ask the gigantic financial institutions about that. They're learning it all over again.

Other Buffett Resources:

Company growth

“Everybody Else is Doing it”

MSU students have special visit with billionaire Warren Buffett

WARREN BUFFETT PHILOSOPHY II

Sticking to what you know  Core businesses

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