Lessons on Investing from Warren Buffett
By an Australian visitor to Berkshire Hathaway’s 2016 meeting
Last week, I travelled 15,000 kilometres to hear the world’s greatest investor speak. Ever since my first share investment at age 16, I’ve held Warren Buffett in high regard. And so, 23 years later, I fulfilled a long-held ambition.
That’s right. I flew all the way from Australia across to Omaha, Nebraska to attend the annual shareholder meeting of Berkshire Hathaway in person.
So, what it’s like to attend the Berkshire Hathaway meeting?
It was everything I’d hoped it would be. Around 30,000 people from all over the world attended. The atmosphere was amazing. And the Oracle of Omaha — and his business partner Charlie Munger — certainly delivered.
There was also a massive expo hall filled with exhibits by the dozens of Berkshire-owned companies. Everything from candy to jet turbines, jewelry to trains, prebuilt homes to cowboy boots. And the crowds packed in and opened their wallets for a full day and a half.
It was also incredible to see the rock-star welcome given to this 85 year old. Legions of adoring fans gathered around him. Security calmly cleared a path. I’ve never seen so many cameras and phones held up!
The all-day meeting included nearly six hours of Q&A. As a jet-lagged Australian half their age, I found this amazing. After all, Buffett is 85 years old and Charlie Munger is 92. Yet, munching on peanut brittle and sipping Coke, they delivered their trademark wisdom and good humour all day.
My Top Lessons on Investing from Warren Buffett
To mark the occasion (and to help fill in my 48 hours of travel time there and back), I decided to write down what I’ve learned from him over the years.
So here’s my summary of lessons on investing from Warren Buffett:
1See yourself as a business owner. Investing in shares means you own a part of a business. Make your decisions based on the intrinsic value of that business, not on its fluctuating share price. Remember that “price is what you pay, value is what you get”. As a business owner, you need to think deeply about the business. How strong is its competitive advantage? What are its prospects? How much cash does it spin off? How good is its management? What return on assets does it generate? If you buy & sell shares without thinking about the business itself, you’re a speculator not an investor.
2Have a margin of safety. Money is hard to accumulate and easy to lose. “The first rule is not to lose money. The second rule is not to forget the first rule”. You can factor in a margin of safety by buying at a discount to what an asset is really worth. These discount opportunities don’t come up very often but they’re worth the wait. That way you’re less likely to lose money when things don’t go to plan (…and they hardly ever do!). As Charlie Munger has said: “it’s remarkable how much long-term advantage people like us have got by trying to be consistently not stupid, instead of trying to be very intelligent”.
3Be patient yet willing to act decisively. Buffett advised:”be fearful when others are greedy, and greedy when they are fearful”. Value investors like Buffett outperform because of the action they take in downturns, not booms. Great opportunities don’t come along every day. Be patient and avoid the temptation of unnecessary action. As an investor, you “don’t get paid for activity, just for being right”. Wait patiently and prepare your resources. And when the time is right, act boldly to exploit the opportunity to the utmost.
4Be wary of debt. Borrowed money magnifies your outcomes. It increases your return, but also exacerbates your losses. Buffet says: “I do not like debt and do not like to invest in companies that have too much debt”. At times of crisis, high debt may lead you to get caught up in the trouble or cause you to miss great opportunities. Financing often dries up in a crisis, so you need to have cash available to take advantage of cheap prices for valuable businesses. Better to miss some upside rather than risk it all with too much debt: “We will reject interesting opportunities rather than over-leverage our balance sheet.”
5Be humble. Your past success isn’t just due to skill and hard work. Luck always plays a role. Buffett quips that he “won the ovarian lottery”. In other words, an intelligent person born to loving, educated parents in a well-off country has a huge head start. So be grateful for those advantages. Don’t let success go to your head. Own up to your mistakes. Keep your sense of humor. And remember that just because past investments worked doesn’t mean your future ones will. Even the world’s greatest investor makes plenty of mistakes.
6Strive to be rational. Be aware of psychological biases, both your own and other people’s. Use humility to protect you from hubris and arrogance: pride goes before a fall. Write down the logic of why something is a good investment. And keep examining that evidence — when key facts change, your conclusion may too. Ideally, get someone else to challenge your thinking. The combination of Warren Buffett and Charlie Munger is part of the reason why they can be amazingly patient and make great decisions.
7Know your limits. Only invest in what you understand (a.k.a. your “circle of competence”). Avoid following the herd into the next big thing. Buffett famously avoided the late 90s tech bubble, with critics saying he was past his prime and out of touch. But ultimately he was proved right. And again with derivatives in the 2008/09 crisis. If you don’t understand the economics, it’s either (i) not a good investment at all, or (ii) not the right investment for you. As Buffett says “risk comes from not knowing what you’re doing”.
8Take a long term view. There’s nothing like an octogenarian investor to remind you to think beyond the current month or quarter! As a business owner, you should think in years (or even decades). Put your money into healthy businesses that will deliver results over a long period of time. Remember: “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes”. And the magic of compounding means that a few extra percentage points of return each year adds up to serious money.
9Learn the lessons of the past. Fundamental human needs and behaviours don’t change much. What we see today has (sort of) happened before. Before the internet, other innovations had as great (if not greater) impact. What about railroads, air travel, telegraph, electricity, mass production, and running water? But all too often “what we learn from history is that people don’t learn from history”. Avoid that danger by studying what has happened in previous booms and busts, and in other industries.
10Act with integrity. Stick to your principles. Treat people with respect. Demand the highest of ethical standards. Remember Buffett’s famous message to Salomon Brothers employees during the financial crisis? “Lose money for the firm and I will be understanding. Lose a shred of reputation and I will be ruthless”. Integrity and a good reputation can be powerful allies when it comes to long term success.
So those are my top investment lessons from Warren Buffett. The challenge for me now is to consistently apply these lessons over the long term! As the Oracle of Omaha himself says:
“Investing is simple but not easy”
If you’re interested in reading more of Warren Buffett’s investment wisdom, I strongly encourage you to go read his letters to Berkshire shareholders.