Who doesn’t want to be wealthy like Warren Buffett. He is worth more than $50 billion and is considered the modern investment guru of value investing. He did not make this wealth overnight . It took him nearly 60 years to accumulate this wealth.
Few of us understand the discipline, courage and hard work that was reason behind the wealth he made. His life is full of Investing lessons/mandates if you pay attention. The method he used is rational and the general public can emulate this approach.
Investing lessons from Warren Buffett
1) He bought his first share at age 11
On Christmas Eve, Warren Buffett sold candies to the neighborhood at age 6. When you have an entrepreneurial spirit it is visible at an early age. You are always on the look out to make money. He started going to the library at 8 and gathering knowledge.
At age 10, he was delivering newspapers and paying his own expenses. With more money left after expenses he wanted to invest somewhere. In 1941 with the help of his dad, he bought his first stock at the age of 11 in his aunt’s account. He bought 6 shares of Cities Service at #38 each which rose to $ 200 in less than 2 years. He admits it was luck and advice of his father.
Lesson Learned: Start investing early. The compounding effect can produced wonders for wealth creation. The sooner you start the more you can make with the same investment. Time your best friend in investing.
The second richest man still lives in a house less than $1,00,000 worth. He married in this same house and lives here still. It does not have security guards, high fences or walls. He says “A house is there to give you protection. It must keep you warm in winter and cool in summer. It is a resting place after a hard day’s work. Even if I own a house with 20 bedrooms I can still sleep on only one bed. Also, the house holds a lot of memories”. Warren still drives an old Ford. He has changed his car only 4 times in last 50 years. He never bought a luxury car
Lesson Learned: Live frugal. Learn to control expenses lesser than what you earn. One should never spend on things he does not need. Also, buying or showing off just for the society is a fool’s errand. Take a logical and analytical approach to where you spend your money will make sure it is spent wisely.
Related read: How to choose good quality stocks for investment
3) Buffet owns 63 companies but writes only one letter every year to CEO’s
Warren’s Berkshire Hathaway owns nearly 63 companies. He owns some companies 100% and some partly. But he writes only one letter to his CEO’s each year. Each of the CEO is given a book called “Owner’s Manual” . It does not contain how to run the business but the principles to do business. Some principle in the manual are
- Rule #1 – Never lose investor’s money. Rule #2 – Never forget Rule #1
- Make losses and I will be understanding. Lose reputation/ethics and I will be ruthless. Lost money can be made again but once reputation is lost it is lost forever.
- Don’t accumulate debt. Try to grow with profits and not debt.
Lesson Learned: Do what you are good at. Warren says “I can’t run an insurance company. I know to invest in good businesses. We should not do what we are don’t know. Most managers are not good capital allocators and most capital allocators are not good managers”. Also, adopt ethics as a way of doing business.
4) Have friends better than yourself
Warren would always surround himself with successful and rational people. He would take
their advice , analyze them and implement if they are worthy. When you hang around with successful people their attitude, positive energy and brilliance rubs off on you.
Lesson Learned: Warren says “It is better to hand out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction”. You are who you associate with. If people don’t share your ideals, they will likely distract you.
5) He lost big money ($5 billion) on Dexter Shoes
Buffet is known for being candid about his investments and mistakes. His letter to shareholder’s are wonderful pearls of wisdom and he has been writing these letters for last 20 years. You can find great advice in between the lines when you read these letters. Buffett acquired Dexter Shoes in 1993 for $443 million with Berkshire Hathway stock. In 2001 Dexter Shoes was closed due to foreign competition. Buffet admits in 2007 shareholder letter that the Class A shares Buffett exchanged for Dexter Shoes is now worth $4.8 billion.
Lesson Learned: Acknowledge the mistakes and move on. Take care not to repeat them. Buffet never uses his company stocks to buy businesses. He pays cash nowadays. If you are afraid to make mistakes, you never know what lies ahead.
6) Buffet bought a company in a 30 minute meeting for $60million
Buffet met Nebraska’s furniture owner on her request in 1983. He asked her to send her valuation. She sent in at $40million. He went to meet her and met with her for 30 mins. The lady had a lot in common with Buffet. At the end of meeting, he bought the company at $60 million paying $20 million more. It is significantly worth more than a billion dollars now.
Lesson Learned: Never suck your thumb. Buffet collects information before hand. He valued Nebraska Furniture at $50million. When he liked the owner(as she will be running business in future as well) he finished the deal in 30 min. Be informed and take decisions quick.
7) He lost $1520 in race betting at age 18
On his friend’s birthday, Warren went to a nearby horse racetrack. Due to a dare from his friend, He bet $300 on a horse. He lost and with a bruised ego he bet again. He lost again and bet 6 times until he lost all the $1500 he had with himself. He felt bad that he lost his two week’s earning. He never bet again on horse race in his life
Lesson Learned: Know when to walk away from a loss. Don’t let your ego bruise you and fool you into trying again. This is precisely one of most important lessons. Most investors lose money in a stock and in an effort to recoup losses, they average by buying more of it. A bad investment multiplies itself. Learn to let go of bad investments. Use your brain and not ego.
Check out Warren Buffet’s networth here
8) His parents wanted him to be a doctor. He chose investing
Howard Buffets (parents of Warren) wanted Warren Buffet to be a doctor. He was already making good money in his business. He knew where he can excel at and chose it. He pursued and ultimately succeeded. Imagine what he could have been if he became a doctor. Once when Buffet was invited to Harvard. A young graduate picked him from airport. They struck a conversation and Warren asked “What do you plan to do after graduation?”. The guy replied “I want to join a Consulting Company.Work for 5 years and then start my Fashion business”
Warren replied “If you’re going to run a fashion business and it is your passion, what’re you going to do in IT consulting. ‘Knowing what you want to do and not doing it now is like saving sex for old age. You won’t get much out of it”. A perfect example/way to say ‘ Start NOW what you want to do ‘
Lesson Learned: Only you know what you’re good at. Not others. Knowing what to do and not doing it is an injustice to yourself. Identify your strengths and try to improve yourself on that. The best way to excel in life is following your passion.
9) He buys stocks when nobody else does – In a crash
Buffet bought $ 1billion worth of Coca Cola in 1988. This was immediately after 1987 crash when the US stock market saw one of the biggest losses in history. Berkshire Hathway stocks had lost 25% just 6 months. But he ended up buying 7% of Coca Cola which nearly took up 40% of his networth. But he bought with conviction. It returned 10X return by year 2001 itself.
Lesson Learned: You need to believe in your judgement. Have the courage to act on what you believe. As Graham said “Be fearful when others are greedy, and be greedy when others are fearful.” . If you buy when all are buying, whom will you sell to? The prices would have gone up already.It takes immense courage to go against the herd. But it’s where the profit is.
10) He wants to hold stocks forever (at least hypothetically)
As said in point #9, the stock returned 10 times return in 10 years. But he din’t sell Coca Cola at $ 10 billion. He still holds the stocks. Why? Because he knew Coca Cola is a wonderful business and will do well in future. So he holds the stock and did not sell it. You should exit a business/stock only if it stops generating growth and profits.
Lesson Learned: Don’t kill your goose that lays golden eggs. If you know the business is still awesome, there is no need for you to exit the stock. If you own terrific business you can hold it forever if the fundamentals do not change. The key lesson is to have patience. This is the most important among lessons listed here.You need high emotion control to hold a stock for 25 years or more.
Phew! We have given the lessons which we refer from him indirectly.Below is Warren’s direct advice to young people at Nebraska University during a seminar
- Live your life as simply as possible
- Money doesn’t create man. But it is man who created money. So money isn’t everything
- Don’t spend on brands for brand sake. Buy quality and wear what you’re comfortable
- Don’t waste money on unnecessary things. Buy what you need and not because others are buying or doing something.
- Save and invest as much as you can. But Live your live to the fullest now.
It is important for you to adopt the principles and apply them. As we said in the start, point #8 and #10 are most difficult to follow. Why? Because they are emotional decisions.
It depends not how clever you’re but how well you can control your emotions. As Buffet said “You don’t need an IQ(Intelligent Quotient) of 140 to succeed in stock market. You can do remarkably well in stocks if you have an IQ of just 80. But you need an EQ (Emotional Quotient) of 140”.
If you don’t mind reading really long letters check Buffet’s letters here Warren Buffett letters to investors .
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