Warren Buffett has always been someone I’ve admired in the financial world. With a net worth of 77 billion US dollars, he has investing strategies that all can learn from.
in the beginning…
It seems to be that Warren had an interest in investing from a young age. Although slightly unusual, this is something I can relate too – I’m one of those people who are happy reading the ‘Business’ supplements in newspapers! It also has the benefit of that resource we cannot get back: Time.
Warren was lucky enough to have Benjamin Graham as one of his mentors. Author of The Intelligent Investor, Benjamin’s primary philosophy was that any worthwhile investment should be of a much higher value than what the investor paid for it. These investments would come from companies with strong balance sheets, not a lot of debt, good cash flow and high profit margins. From this, Benjamin coined the phrase “margin of safety” which is where investments are purchased significantly below value to allow for any extraneous circumstance, such as human error, the unpredictability of the stock market, and bad luck.
“Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.” – Benjamin Graham
Warren created his investment ideas around this which led to value investing. This is a strategy where investors actively seek out stocks they believe the market has undervalued based on the idea that the market overreacts to good and bad news (as seen with UK stocks after Brexit or shares in a company dipping after less than expected profits). The concept of long-term investing is emphasised.
A great quote from Warren explains this:
“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table.” – Reported by Bloomberg Businessweek’s Anthony Bianco while trailing Buffett for a cover story in 1999 (Investopedia).
Thoughts on the stock market
From this value-investing school of thought, Warren claims that beating the S&P 500 is pure chance. He has become an increasing critic of actively managed funds, such as mutual funds. I personally invest in passive funds, i.e. index trackers, which has been endorsed by Warren. Because of his scepticism in active management, he has advised investors (including individual investors) to move their money to index funds that track broad stock market indices.
While working in the industry for some years and developing lots of different skills, Warren created partnerships (at first with friends and family) where he would invest in the stock market on behalf of customers. Combining these partnerships helped him reach millionaire status and he then acquired Berkshire Hathaway . Originally a textile manufacturing firm, Warren pivoted the company into the insurance sector as it appeared to be a better industry to be in. He also purchased stakes in other companies, including 7% of Coca Cola (which he still has), ABC, and Salomen Inc of which he became a director.
The 2007 – 08 financial crisis hit the world hard, including Berkshire Hathaway which suffered a 77% drop in earnings. However, this did not seem to stop him as Warren became the richest person in the world in 2008!
what a guy!
Warren is renowned for his charitable actions. In 2006 he announced a new plan to give 83% of his fortune to the Bill & Melinda Gates Foundation. He is also been on record saying that his children will not inherit much of his wealth in order to let them forge their own paths:
“I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing”. – Warren Buffett and Charlie Rose
The fact that someone can be so incredibly rich while still being grounded and a genuinely nice person is really lovely to hear. Indeed, he seems to follow an old rule of wealth: living below your means. It was from living modestly and under the radar that Forbes only added Warren to the list of richest Americans in 1985 when he was already a billionaire from Berkshire Hathaway.
In 2014, a Fast Company article featured Warren’s goal setting practise. Warren advises people to first create a list of the top 25 accomplishments that they would like to complete over the next few years. Then reduce this down to the top five and just focus on them while avoiding the longer list as this would distract attention towards meeting the top five.
This is a strategy I feel would benefit my life immensely as I can become overwhelmed with the amount of goals and dreams I have! Avoid being an octopus on roller-skates trying to do everything at once, instead stay true to your priorities.
I will end with arguably one of Warren’s most famous quotes about the power of long-term thinking:
“Someone is sitting in the shade today because someone planted a tree a long time ago.”