The 2008 world’s richest person, Warren Buffett, the oracle of Omaha achieved this feet not by luck but by adhering to simple but critical tenets. He would be the first to say his homespun and positive philosophy played a big role in his becoming the richest person in the world until recently.
Despite the downward trend in the stock market coupled with the global financial crisis, Buffett’s investment wisdom remains an insight for successful investing. Some of his simple and psychological lessons are applicable in life outside investing:
1. Be Frugal – If the economic downturn is forcing you live simply, look on the bright side. It is making you more life Buffett. He lives in the same modest house in Omaha, that he bought more than five decades ago. He drives his own car. How does this make him a better investor? First, it gives him more to invest. Second, a frugal investor will demand this quality from managers. Buffett is leery of corporate waste. Excessive executive pay or silly perks are red flags. Third, frugal people do not need fast returns to support extravagant lifestyles. This leaves them free to think more clearly about when to buy and sell stocks, making them much better investors.
2. Wait for the `fat pitch’: Resist the itch to constantly buy or sell stocks. “Lethargy bordering on sloth remains the cornerstone of our investment style”, quipped Buffett in his 1990 annual report to Berkshire Hathaway shareholders. Have the patience to wait a long time until some market turbulence brings the “fat pitch”, as Buffett calls it, or stocks of great companies trading at really cheap valuations.
3. Be a Contrarian: A great way to make money is to go against the crowd. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. Buffett explained in a 1986 letter to shareholders. So be sceptical of the conventional wisdom. Not because the crowd is always wrong but because the crowd’s wisdom is probably already reflected in market prices.
4. Stick With What You Know: One of Buffett’s basic rules: If you do not understand a company’s product or how it makes money, avoid it. He calls this “staying within your circle of confidence”
5. Do Not Depend on Others to Say You Are Right: If you are in need of constant affirmation about your investment decisions, particularly from the stock market, you will not be able to invest like Buffett. Buffett makes outsized returns by purchasing disliked value stocks that are so beaten down they are often virtually ignored by the talking heads.
6. Buy Companies Cheap: This is the essence of being a value investor. The first step involves calculating what Buffett calls an “intrinsic value” for a business either by examining what similar companies sell for or calculating the present value of all the cash that will be generated by a company in the future. Build in a “margin of safety” by purchasing a stock well below its intrinsic value. Buffett does not pay much attention to earnings per share, a common measure of value. Instead, he likes to see companies with good return on equity, solid operating margins and reasonable or no debt. He also likes to see that companies generate a lot of cash and that they invest it well or return it to shareholders in the form of dividends or buybacks. He looks back over five years or more. He considers a consistent operating history; he is not into start-up companies. He also prefers to gauge how well a company does in different kinds of markets, not just the good times or the latest quarter.
7. Look For Companies with Economic Moats: A key characteristic supporting consistent operating history is a sustainable competitive advantage. In other words, a company should have a barrier to entry or a kind of moat that keeps potential competitors at bay. This could be a patent protection on drugs, high costs to get into business or simple brand power.
8. Buy Big, Concentrated Positions; Buffett goes against the crowd here, too. When he finds a company he likes, he piles into it big time.
Food For Thought – The Power of Belief and Commitment
The biggest obstacle between you and anything you want, is your lack of belief that you can have it. Once you truly believe it is possible, once you can see yourself doing it or being it or having it, the rest is just details. With belief, plus the commitment to follow through and do whatever it takes, anything can be yours. Everything you need to get there is available to you, when you believe and when you commit to getting there. Know that you can do it. Nothing can hold you back once you have belief and commitment.