Warren Buffett is an Investor and Philanthropist, who sits as the Chairperson of Berkshire Hathaway, and American conglomerate. He is regarded as the Oracle of Omaha, currently has a net worth of about $142 billion according to Forbes, and can be said to be the greatest investor in the past several centuries. He has a cultlike following of value investors, and never ceases to teach on investing and life lessons through various mediums, including his Berkshire Annual Shareholders meeting which he has chaired for many years. He has been described as a voracious reader and avid learner, and is therefore a great source of inspiration and learning for investors any day any time. His investing lessons are applicable not only in America, but all over the world, with veritable results from some investors who have copied his style over the years across the world.
In this article we explore some of his invaluable and evergreen Investment lessons and aphorisms which he has shared in the past, to serve as a reminder, keep us grounded and whip us back on track where necessary.
>> Rule No. 1: Never lose Money. Rule No. 2: Never forget Rule No. 1. This is by far the most important investment lesson every investor must keep in mind. Capital preservation is more important than any risk you can take or gain you can make. Compounding works best when you minimize loss of your capital. Following this rule will definitely prevent one from falling for Ponzi schemes and similar so called investment. Do not be too greedy to lose your money. No matter how glamorous investment prospects might seem, Preservation of your capital must take precedence.
>> Be greedy when others are fearful; be fearful when others are greedy. In investing, especially when buying stocks, you have to pay attention to your margin of safety. Even when you have determined the intrinsic value of a stock or you have come up with your investment thesis, you have to do what you can to not buy such stock at a premium. The less you pay the higher the upside potential, and the more you pay the less the upside potential. The Stock market is a market literally, driven by demand and supply. The higher the demand for a stock vis a vis supply, the higher the price and vice versa. When others are greedy demand rises and prices go up, which narrows your margin of safety, therefore the need to be fearful; and when others are fearful, demand drops with higher supply, and prices go down, which increases your margin of safety, therefore the need to be greedy at such times. It's a contrarian view, but it works for Buffett and can work for you. And this is where temperament comes into play. Being a sound investor requires a certain control of your temperament and the ability to know what you know and what you don't know and occasionally act.
>> "The principles of buying value, and the margin of safety and the detachment from the market I learned from Ben Graham. When you own stocks you own parts of businesses, and the stock exchange being open or closed has nothing to do with whether the good businesses you own are getting more valuable over time or not. The work is to be right on the businesses. If you are right on the business, the market will take care of itself".
>> "If you are in a poker game for 30 minutes and you do not know who the patsy is, you are the patsy. In the market, if your stock goes down 10% and that upsets you it means that you believe that the market knows more about the company than you do. In that case you are the patsy. If it goes down 10% and you want to buy more because you know the business is worth just as much as when you bought it before or more because of the passage of time, then they (the market) are the patsy".
>> A bird in the hand is worth two in the bush (adapted from Aesop): "By this Aesop posited an Investment equation that nearly defined Investment for the next 2,600 years, only that he forgot to add exactly when you are going to get the two from the bush, and what interest rates were that you had to measure these against. As in Investing, a bird in the hand, which is you lay out cash today (trade a bird in the hand), and then the question is as an investment decision you have to evaluate how many birds are in the bush (two, three, etc), and you have to determine when they are going to come out and when you are going to acquire them". One of the the ways Buffett won in investing was that for every company/stock he was investing in, he would determine its intrinsic value by forecasting its future cash generation and discounting it to present value taking into consideration the interest rate environment, to determine how much he should pay for it.
"I look for a business where I think I know what in a general way is going to happen. If you buy a bond you know exactly what is going to happen. Assuming it is a good bond like a US Government bond if it says 9% coupons you know what the 9% coupons are going to be for maybe 30 years if it is a 30 year bond. When you buy a business you are buying something with coupons on it to accept, the only problem is that they don't print in the amount of the coupon. It's your job as a value investor to print in the amount on the coupon. Some companies I feel are capable of doing that with, and others not the faintest idea".
>> The Stock market is a device for transferring money from the impatient to the patient. Investing requires patience, which a lot of people do not have. People would rather be promised that they are going to win a lottery ticket next week than that they are going to get rich slowly. You have to be long term greedy, not short term greedy. If you are short term greedy, you probably would not get a very good long term result". Compounding takes time. In the short run, the stock market is a voting machine, while in the long run it is a weighing machine. If you are right on the business valuation, the market will reward you in the long run, even if short term might seem unrewarded.
Hope these words serve as a timely refresher in your investment journey. Feel free to come back to this article periodically to refresh your memory.
If you want to know how to invest in the stock market check out this article: How to start investing in the Stock Market- a Guide for Beginners. You can also refer to this article for What every retail investor should understand before you buy a Stock.
Happy investing.
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