Investing Secrets of Warren Buffett
Secrets of Warren Buffett
I've been following Warren Buffett and Berkshire Hathaway for a number of years, and I've written tens of thousands of words about him, his investing philosophy, and what makes him tick.
Buffetts' unique and successful outlook and strengths need to be learned, comprehended and embraced, as they've proven over the decades to not only be the most successful in history, but also the correct way to evaluate equities before investing in them.
What's just important to me is in learning investing from Warren Buffett, you can also learn what to look for when you're thinking of building or buying a business, as the lessons Buffett gives are as true on the investing side as it is on the management and running a business side.
Understanding the business
If anything has been lived and taught by Warren Buffet it's this: if he doesn't understand a business, he won't buy or invest in it, simple as that.
The reason Buffett lives by that rule is because he is a long term investor, which is really the only kind there ever should be.
What this means is if he doesn't understand a business, he can't fairly accurately project out for a decade or two where it'll be. If he can't do that, he passes on it. That has saved Buffett and his investors more than one time, as the flavor of fad of the day has caused huge losses for a number of funds and individual people; think the dot com bomb as the most recent, where many people were castigating and mocking Buffett for not entering the fray. It wasn't too long afterwards that Buffett was proven right once again, as billions in company valuations disappeared almost overnight, if a tech company survived at all.
Many sectors like the Internet, entertainment and tech companies are in this category, where expert marketing plans create tons of hype which give the impression of solidity and long term prospects for a company, when it fact it is a highly volatile industry which can't be accurately projected not only as to earnings, but to whether the companies within the sector will even survive.
Think of Apple and Steve Jobs. This is why so many people panic when Steve Jobs is out of the picture and uncertainty surrounds the company. Jobs is a one of a kind, and Apple is extremely vulnerable without him.
This is a strength and a weakness, and over the long term Apple is a very vulnerable company because of the ongoing health problems connected to Jobs. But even if Jobs didn't have health problems, there would be concerns, as there is just too much reliance upon him, and he isn't reproducible, which is and will be a disaster when something happens to him or he steps down from the helm.
In other words, Apple really can't be understood because of that important variable and is impossible to predict where it will be because of its product line as well as the Jobs issue.
Business and investment lessons from Warren Buffett
Having a big moat surrounding your company
Another foundation to the Warren Buffett investing strategy is how defensible a business is. The last thing Buffett or we should want to invest or build a business in is a commodity business, where branding won't be possible or of little value, and the competition is on price alone.
If that's what happens, there is little or no certainty about the profits or longevity of a company. So we want to look for companies or in reality, sectors, where it is difficult to reproduce, or there's a competitive advantage in a way that creates a formidable barrier to entry, which fends off competition long term.
That way, predictability is part of the picture, and pretty accurate projections as to the long term prospects of a company can be made.
Something everybody needs or uses
Another thing Warren Buffett looks for is a product or service that is needed to be used on a daily or consistent basis, and which needs to be replenished.
A major example of that years ago was the Gillette company when it was a standalone business.
Men everywhere in the world, as Buffett would say, get up and shave their faces on a daily basis. Nothing is ever going to change that, so he knew he could count on that for the entirety of his investing life.
Then the secret is to find the most productive, effective, well-run and defensible company in the men's shaving sector, and invest in them. Buffett's research told him it was Gillette, and he invested accordingly, making huge profits for many years.
Warren Buffett doesn't rely on luck
One of the real secrets of the most wealthy and successful investors in the world, without a doubt, is research. Warren Buffett, as someone said one time, read company reports like others read pulp fiction. Others have similar practices, and it really pays off in the long run, as the one with the most accurate information will win, as long as they know what to do with that information.
So while it at times may seem Buffett has special insight into the market (and he does), it's not because he has something special about in that's innate and because he's Warren Buffett, rather he's Warren Buffett because he devours and reads everything he can get his hands on in a particular industry or company he's interested in, looks over the macro situation, and then makes determinations about the long term prospects of not only a company, but the sector it operates in.
What seems like a magical, inherent ability, is in reality simply old hard work and willing to take the time and steps needed to succeed in his chosen field.
It's the old adage of the harder and smarter you work, the more lucky you are. That has proven true with Warren Buffett, and all those with similar practices and outlooks.
Warren Buffett always great with a quote
Buffett knows what to do with the information he gets
Now we're getting down to the guts of what makes Warren Buffett and others so successful: he knows how to properly interpret and apply the information he gets.
We must understand in the age we live in of instant communication, there are so many people with hidden agendas who have no scruples about putting out any type of information for their short term profit.
So we have to be wary of whatever it is we take in, no matter what the source or the alleged trustworthiness it has a reputation for.
Some of the most fictitious reports come from the governments of the world as well as many companies trying to hide short term negative results, who form all sorts of smokescreens, and in many cases - outright lies- hoping to buy time and make it right before they are tossed out of the company.
This is done through "creative accounting," and giving out of half truths and a lot of forward statements that in many cases aren't based in reality, but wishful thinking.
In other words, Warren Buffett understands that a whole lot of what he reads is a bunch of BS, so he has to read between the lines and include other information before being able to form an accurate picture.
Now this isn't a cynical observation, it's just the truth. On the other hand, Buffett also knows the companies with sparkling reputations and integrity, and so once when he was offered to buy a company that Wal-Mart owned, their accountant came and gave him the figures, and he didn't even bother checking them. Wal-Mart operates with utmost integrity, and he knew the numbers and information given him would be exactly as they said it was - and it was exactly that when he bought it.
Warren Buffett MBA Talk - Part 1
Warren Buffett MBA Talk - Part 2
Warren Buffett's unknown secret
I remember in an interview a smart interviewer was asking some pointed and in-depth questions which led to asking the question of Buffett where all the information led him to making a decision, and he coyly said something like "that's the thing isn't it?"
Does this mean he has a deep, hidden secret no one else can know? I don't think so. I think what he means by that is he has an objective standard he goes by which if it isn't met, he simply won't buy.
I know some people in real estate that have revealed some of their own formulas which they have set up in order to keep themselves from lying to themselves and buying property. They have point systems applied to certain factors which if they don't add up to a certain amount, they walk away from the property no matter how much they may personally like. Emotion is fickle, and your heart can lie to you. Buffett and others develop these types of formulas in order to keep that from happening to them, especially when they're using the money of other people that rely on them to build their wealth.
I'm not saying I know for sure Buffett has a formula, but there have been hints of it in conversations, and I think that's what he goes by after all the other research and data make it worth applying the formula to.
Wisdom of Warren Buffett
Those running a business or investing can learn a lot from Warren Buffett. He made his billions by focusing on boring companies with great management who served a market they could defend themselves in, with the ability to increase prices if needed to remain profitable.
In other words, they weren't a commodity business, but had a competitive advantage that afforded them flexibility in pricing, and predictable sales for years into the future.
These business are simple and easy to understand, not complex in its outworking, and served a market that the product or service would be replenished over and over again. That's the overall and general foundation and lessons to the success of Warren Buffet and his holding company Berkshire Hathaway.