Your New Favourite Investor
When you think of the stereotypical investor, you probably don’t think of the word “Admirable”.
You probably think of a middle aged white guy in a Ferrari, busy from a long day of exploiting his clients.
That’s because you haven’t met Warren Buffett.
It’s easy to rattle off all the statistics as to why Buffett is the greatest investor of the last 50 years.
You can point to his multibillion dollar company Berkshire Hathaway, where a single share costs US$217,000.
You can look at his consistently high returns, and the companies he partially owns: Coca Cola, Wells Fargo, American Express, Kraft Heinz, Fruit of the Loom, GEICO, etc.
You can look at his popularity, and the huge number of books written about him.
Those things are impressive, but they’re not the interesting bit.
The interesting thing about Warren Buffett is his investment philosophy – it’s both highly unpopular and highly successful.
Buffett’s philosophy boils down to this:
Find companies that have a sustainable advantage, then buy them while everyone else is panicking.
When the markets fall back in love with your companies, that’s when you consider selling.
You’re probably thinking “Well duh, buy low sell high isn’t exactly new”
The difference is that buy low sell high is incredibly difficult to implement, because it requires two painful moments.
Firstly, it requires you to invest in an unpopular company – buying low, by definition, means buying when everyone else thinks you’re wrong. Maybe the market has crashed, or the company has hit a snag, or the news has scared everyone. It’s hard to be excited about buying a company that’s on a losing streak.
Secondly, it requires you to get rid of a company that the market raves about – and therefore ending your run of good luck. Selling in the middle of good news, rising prices and general optimism is really hard to pull off.
At both of these times, everyone else will tell you that you’re crazy.
That’s why Buffett is so admirable – he has the guts to back himself when the rest of the market is screaming that he’s wrong.
Buffett is able to do this because of six key skills:
1. The ability to spot a company that has a monopoly – Buffett goes for companies with a sustainable monopoly, as opposed to industries that are price wars. He likes brands like Wrigleys and Coca Cola, rather than airlines and dairy companies.
2. The diligence to research when a company is cheap (or overvalued) – Buffett has a defined “Buy Price” based on huge amounts of research, and he sticks to his guns.
3. The guts to buy good companies when they’re unpopular – Buffett is willing to play the long game, happily riding out the market downturns because he believes his companies are going to be around for the next 50 years.
4. Patience in the bad times…and the good – It’s not just the crashes that are hard to bear, Buffett also has the patience to sell when prices are high, and then sit on his hands until the market gets cheap again.
5. The ability to avoid distraction and temptation – Buffett has an incredible ability to avoid hype, both good and bad. He’s often ridiculed for making bizarre short term decisions, but in the long run he’s vindicated.
6. A complete lack of ego – Buffett doesn’t pretend to understand all industries, and avoids those that he can’t grasp. He famously doesn’t go near anything tech related, and is happy to have missed out on Uber, Facebook, Intel and AirBNB. Buffett would rather miss out on glory than make an investment in something unfamiliar.
What’s remarkable about Warren Buffett is how little the money has changed him – he lives in the same house he’s always had in Nebraska, dresses simply and doesn’t throw his cash around.
Buffett has pledged to give the majority of his money away, and better yet, has inspired many other billionaires to do the same. This makes him not only the greatest modern investor, but arguably the greatest modern philanthropist too.
He’s also transparent – writing a legendary annual report for shareholders that is now available online. The letters are fantastic, full of wisdom and delivered with humour and humility.
If nothing else, I hope that Warren’s words stick with you whenever you think about investing:
"Only when the tide goes out do you discover who's been swimming naked."
"Price is what you pay. Value is what you get."
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."
"If a business does well, the stock eventually follows."
"The investor of today does not profit from yesterday's growth."
And my favourite:
"Be fearful when others are greedy, and greedy when others are fearful"
To read Warren Buffett’s famous annual reports for free, go to http://www.berkshirehathaway.com/letters/letters.html