Warren Buffett Wisdom

Many people say Warren Buffett has been born with business in his blood. Let us look closer at his life path.

Warren Edward Buffett was born on August 30, 1930, and was the only son of Leila née Stahl and a politician and a stock trader Howard Buffett. Warren, at the age of 6, received the first profit of 5 cents. It was a purchase of 6-packs of Coca-Cola from his grandfather’s grocery store for twenty-five cents resold for a nickel for each of the bottles.

Warren entered the investment game at the age of 11, purchasing three shares of Cities Service Preferred at $38 per share. However, shortly after buying the stock, it fell to just over $27 per share. Frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them, and it was a mistake he soon came to regret. Cities Service shot up to $200. The experience taught him one of the basic lessons of investing: patience is a virtue.

After this experience, he keeps telling everyone: “The stock market is a device for transferring money from the impatient to the patient.”

By the time Warren was 15, he had accumulated almost $2,000 and invested them in 40-acre farm in Nebraska and a farm laborer to work on the land then used the profits to help pay his way through the University of Pennsylvania and the University of Nebraska.

After graduating from Nebraska, Warren continued his education in Washington, where his family moved after the victory of Howard Buffett in congressional elections.

Warren’s next step was to enroll at Harvard Business school, however, his candidacy was rejected with the note “too young.” This failure served him well. Instead of Harvard, he enrolled at Columbia University in New York, where he met Benjamin Graham (a professional investor and renowned economist) as a lecturer, who became his future tutor and mentor.

According to Buffett, Graham helped him to build the foundations for intelligent investment (highlighted in “The Intelligent investment” book). Buffett always calls Graham his “second father” as the impact he had on Warren cannot be undervalued.

Benjamin Graham wrote The Intelligent Investor in 1949 as a guide for the common investor. The book champions an idea of buying low-risk securities in a highly diversified, mathematical way. Graham was keen on fundamental analysis, capitalizing on the difference between a stock’s purchase price and its intrinsic value.

Today, Warren Buffet has shares of the most popular companies, including Berkshire Hathaway, National Indemnity, GEICO, The Washington Post, Burlington Northern Santa Fe and many others. The truth is that with all this wealth he tries to save as much money as possible all the time and lives quite modestly. In addition, he teaches his family to follow his lifestyle, because most of his money after his death are planned to be transferred to charitable foundations and organizations.

Warren Buffett is just a genius in his business. He has a special intuition, unique financial insight, which was developed due to his devotion to his beloved work. His “sixth sense” not only suggests how to “make money”, but also allows him to make accurate economic forecasts, for which people call him “Oracle of Omaha”.

Warren Buffett’s rules of success

You don’t have to understand an advanced investment theory to be a good investor:

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses — How to Value a Business, and How to Think About Market Prices.”

-1996 shareholder letter

“…an investor needs some general understanding of business economics as well as the ability to think independently to reach a well-founded positive conclusion. But the investor does not need brilliance nor blinding insights.”

-2000 shareholder letter

Invest for the long term and don’t stray:

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards — so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

-1996 shareholder letter

Know what you know and what you don’t know:

“Defining your circle of competence is the most important aspect of investing. It’s not important how large your circle is; you don’t have to be an expert on everything. But knowing where the perimeter of that circle of what you know and what you don’t know and staying inside of it is all important.”

-Talk with to UGA-Terry College of Business students, 2001

“It’s vital, however, that we recognize the perimeter of our ‘circle of competence’ and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.”

-2013 shareholder letter

Put your money in index funds:

“If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be [Vanguard founder] Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing — or, as in our bet, less than nothing — of added value.”

-2016 shareholder letter

Resist stock market FOMO:

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities– that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

-2000 shareholder letter

How to value a business:

“The formula for value was handed down from 600 BC by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out. When interest rates are 20%, you need to get it out right now. When rates are 1%, you have 10 years. Think about what the asset will produce. Look at the asset, not the beta. I don’t really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price. I don’t care if they close the NYSE for 5 years. I care more about the business than I do about events. I care about if there’s price flexibility and whether the company can gain more market share. I care about people drinking more Coke.”

-Q&A with students from Emory University and other business schools in Omaha, 2009

The average investor can often outperform the pros:

“The goal of the non-professional should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal….The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.”

-2013 shareholder letter

Better information doesn’t mean better investing:

“There is no doubt that there are far more ‘investment professionals’ and way more IQ in the field, as it didn’t use to look that promising. Investment data are available more conveniently and faster today. But the behavior of investors will not be more intelligent than in the past, despite all this. How people react will not change — their psychological makeup stays constant. You need to divorce your mind from the crowd. The herd mentality causes all these IQ’s to become paralyzed. I don’t think investors are now acting more intelligently, despite the intelligence. Smart doesn’t always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.”

-2005 Q&A with students at University of Kansas

Have people in your life who would hide you:

“…Why am I frugal? You can’t buy health and you can’t buy love. I’m a member of every golf club that I want to be a member of. I’m the highest handicap member of Augusta National. I’d rather play golf here with people I like than at the fanciest golf course in the world. I can do anything that I want, and I do. I buy everything I want to have. I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living. Bella Eidenberg was a Polish Jew who was at Auschwitz and some of her family didn’t make it. Twenty years ago she said she was slow to make friends, and that the real question in her mind was always, ‘Would they hide me?’ If you have a lot of people that would hide you, you’ve had a very successful life. That can’t be bought. I know people that have billions of dollars and their children would say, ‘he’s in the attic.’”

-Talk with Emory business students, 2009

And how did you start your investment path, if so?

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