“When I was 21 years old, I could have been saying the most brilliant things on earth and nobody would have listened to me. Now, I could say that the moon was made of pink tissue paper and everyone would go, ‘Wow, look! It really is.’ And they would believe me, because I am Warren Buffett.”
– Warren E Buffett, CEO Berkshire Hathaway, oft quoted and unofficial holder of ‘cracking one-liners’ title.
Somewhat amused at all the attention he gets, his record speaks for itself. So let’s have a look at a few investment nuggets.
1. “A ham sandwich could run Coca Cola”
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No seriously, Buffett is paying coke a compliment here, and it speaks loudly for the type of company you should be investing in – at the right price of course.
As famous US fund manager Peter Lynch would put it, “Try to find a company any fool can run, because someday one will be”.
2. Margin of safety
Buffett got this one from his college lecturer, mentor and friend Benjamin Graham. Margin of safety simply means to buy a company or investment well below your best estimate of its intrinsic value.
That means you don’t just go out and buy great companies like BHP (ASX: BHP) or Woolworths Ltd (ASX: WOL) at any price. Buy these great companies when they are selling at a good or great price.
This is key to Buffett’s 50+ years of out-performance.
3. The inner scorecard concept
“If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?”
Those who answer the latter have an inner scorecard. They have the ability to be a true contrarian by ignoring the world’s judgment and focusing on long-term results.
4. Please dumb it down
“We like things that you don’t have to carry out to three decimal places. If you have to carry them out to three decimal places, they’re not good ideas.”
Some of Buffets biggest calls required no more due diligence than thumbing through a few essentials in an annual report. Complex financial calculators that work out a company’s ‘value’ using a discounted cashflow and vast spreadsheets are useless if you don’t understand the business and its management.
5. Focus, focus, focus!
When asked what his most important key to success was he replied: focus! Microsoft founder and good mate Bill Gates answered the same way.
His gift for “capital allocation” helps but it was his persistency at searching through and analysing reports and information for hours on end that helped him get to where he is today.
6. “Be fearful when others are greedy and greedy when others are fearful.”
Or as the great investor and mutual fund pioneer Sir John Templeton said, “The time of maximum pessimism is the best time to buy.”
7. “Leverage is the only way a smart guy can go broke”.
Debt is a two-edged sword and as we have seen all too well companies with MBA scholars loaded up on complex financial instruments that are only a few days away from financial ruin where an all too familiar illustration of the last couple of years.
8. The concept of ‘economic moat’
Refer to the ham sandwich running coke earlier. Look for companies with sustainable competitive advantages that are likely to run well for decades not just years.
9. You’re a part owner, never forget this
All too frequently we discuss ‘stocks’ or ‘shares’ like they are gambling chips on a table and divorce them from the underlying company. Don’t buy something that’s considered ‘hot’ or as Peter Lynch put it “the chronic losers with a history of playing hunches”.
Remember a stock is only as good as the company behind it. It’s kind of like the promise someone gives is only as good as the person who gave it.
10. The snowball
Based on the title of the latest book written about him, it sums up his life in two words. Buffett believes in the power of compounding, starting early, being patient (waiting to buy the right stock or business at the right time and price).
Follow these rules and Buffett’s snowball can turn into a snow castle.
Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.
The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.
The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.