Invest Like the Master
One of my personal favorites!
I recently read The Warren Buffett Philosophy of Investment,by Elena Chirkova (2015), to find out how the world's greatest investor plies his trade (and maybe to pick up some hints along the way!). You'd imagine that such a profitable investor would have some juicy, complicated secrets, right?
Well, according
to my reading of this insightful book, Buffett’s strategy can be boiled down to a couple words:
‘extraordinary patience.’ Another couple: ‘tremendous
discipline,’ which amounts to the same thing.
Two
other important
words
to remember include
‘integrity’ and
‘reputation.’ ‘Detailed
knowledge of a company’s fundamentals’ is an additional major
factor.
It
is, of course, far easier to discuss these at a distance than to
practice them consistently. This
is certainly why successes of Buffett’s scale are so rare.
Furthermore,
Chirkova notes that the structure of Berkshire Hathaway, as a
Buffett-controlled conglomerate of strong companies that share access
to funding but little else (and, except in rare cases, no
interference in day-to-day operations), reduces short-term pressures.
Unlike a publicly traded company, Berkshire Hathaway’s structure
reduces the demand for immediate returns. Unlike a mutual fund, there
is no possibility of capital shortfalls from skittish investors who
withdraw their money. This structure allows Buffett to operate
without compromising his long-term view.
He’s
wary of debt, though he has demonstrated a willingness to use it
judiciously. Leveraged buyouts are anathema. Operational synergy
should not be sought, though financial and marketing synergy can be
advantageous. Management
should be sufficiently motivated with a carrot-and-stick model—not
only rewards, not only
punishments, but a combination of both.
Basically:
find a good company at a reasonable price, pay for it with cash, and
then don’t interfere—don’t replace management, don’t demand
changes for change’s sake. Simply allow it to continue to be a good
company. And always keep your word.
None
of these principles are earth-shattering revelations; indeed, they’ve
been known since time immemorial. But they are so rarely practiced
that it almost seems like a revelation. Do you want to be like Warren
Buffett?
Then here’s your answer: fundamentals, fundamentals,
fundamentals. Master the basics of business. And then, when you think
you’ve mastered them, remind yourself of them every day, so you
don’t abandon them for the trends of the moment.
Here are the best Buffett quotes. Page numbers indicate the page in Chirkova's book:
“We
can afford to lose money—even a lot of money. We cannot afford to
lose reputation—even a shred of it” (p. 287)
“The
business schools reward complex behavior more than simple behavior,
but simple behavior is more effective” (p. 18)
“When
we invest in stocks, we invest in businesses” (p. 23)
“It’s
far better to buy a wonderful company at a fair price than a fair
company at a wonderful price” (p. 33)
“There
aren’t that many wonderful businesses in the world” (p. 46)
“The
real test of a business is how much damage a competitor can do, even
if he is stupid about returns” (p. 59)
“Investment
must be rational; if you can’t understand it, don’t do it” (p.
79)
“There
is a lot of difference between making money and spotting a wonderful
industry” (p. 82)
“...try
more to profit from always remembering the obvious than from grasping
the esoteric” (p. 83)
“Compound
interest is a little bit like rolling a snowball down a hill. You can
start with a small snowball and if it rolls down a hill long
enough...and the snow is mildly sticky, you’ll have a real snowball
at the end” (p. 83)
“Areas
do not make opportunities. Brains make opportunities” (p. 85)
“The
most important thing in terms of your circle of competence is not how
large the area of it is, but how well you’ve defined the perimeter”
(p. 89)
“If
you aren’t willing to own a stock for ten years, don’t even think
about owning it for ten minutes” (p. 98)
“You
could have bought a share of Coca-Cola in 1919 for $40 a share. A
year later it was $19.50...Today that $40, if you had reinvested all
dividends, is worth $1.8 million and that’s with depressions and
wars. How much more fruitful it is to invest in a wonderful business”
(p. 99)
“It
always amazes me how high-IQ people mindlessly imitate.” (p. 102)
“A
pin lies in wait for every bubble. And when the two eventually meet,
a new wave of investors learns some very old lessons: First, many in
Wall Street...will sell investors anything they will buy. Second,
speculation is most dangerous when it looks easiest” (p. 103)
“I
will tell you how to become rich...Be fearful when others are greedy.
Be greedy when others are fearful.” (p. 103)
“It’s
optimism that is the enemy of the rational buyer.” (p. 103)
“Fear
is the foe of the faddist, but the friend of the fundamentalist”
(p. 103)
“[Berkshire
Hathaway seeks to buy companies that] we can understand, with
favorable long-term prospects, operated by honest and competent
people, and available at a very attractive price” (p. 104)
“All
intelligent investing is value investing” (p. 104)
“One
English statesman attributed his country’s greatness in the
nineteenth century to a policy of ‘masterly inactivity.’ This is
a strategy that is far easier for historians to commend than for
participants to follow” (p. 105)
“It
is better to be approximately right than precisely wrong” (p. 107)
“To
many people conventionality is undistinguishable from conservatism”
(p. 133)
“In
the short run, the market is a voting machine. In the long run, it’s
a weighing machine” (p. 137)
“We’re
risk averse, not volatility averse” (p. 139) —This is used to
make the point that “risk is a possibility of loss” [Chirkova p.
139], rather than the random ups and downs of the market.
“[Risk]
comes from not knowing what you are doing” (p. 139)
“[I’ve]
done better by avoiding dragons rather than by slaying them” (p.
140)
“I
would rather be certain of a good result than hopeful of a great one”
(p. 141)
“When
companies with outstanding businesses and comfortable financial
positions find their shares selling by far below intrinsic value in
the marketplace, no alternative action can benefit shareholders as
surely as [stock] repurchases” (p. 149)
“In
the production of rosy scenarios, Wall Street can hold its own
against Washington” (p. 151)
“The
smarter side to take in a bidding war is the losing side” (p. 152)
“[quoting
Peter Drucker] Deal-making beats working. Deal-making is exciting and
fun, and working is grubby...Deal-making is romantic, sexy. That’s
why you have deals that make no sense” (p. 153)
Regarding
EBITDA [earnings before interest, tax, depreciation, and
amortization] “Why
not report earnings before wages? Why not report earnings before
rent? Why not report earnings before all expenses? That is called
sales” (p. 171)
“Some
guys chase girls. I chase companies” (p. 205)
“We
like to do business with someone who loves his company, not just the
money that a sale will bring him (though we certainly understand why
he likes that as well)” (p. 209)
“It’s
difficult to teach a new dog old tricks” (p. 211)
“We
centralize money. Everything else is decentralized” (p. 215)
“The
best results come from letting high-grade people work unencumbered”
(p. 215)
“[Trying
to implement a lot of changes does not work] any better in
investments than it does in marriages” (p. 215)
“‘Turnarounds’
seldom turn.” (p. 253)
Bonus:
“Buffett opines that between two ‘wonderful’ businesses, one
should choose the least capital-intensive.” (p. 50)
Bonus:
“They [Benjamin Graham and David Dodd] explain that the intrinsic
value [of a stock] may be different from the ‘price,’ which, in
their view, is influenced by ‘artificial manipulations’ and
‘psychological excesses.’” (p.
25)
Bonus:
Buffett’s operating partner Charlie Munger, on how to invest
correctly: “Ask, ‘What do you own and why do you own it?’ And
if you can’t answer that, you aren’t an investor.” (p. 88)
Bonus:
“Nothing important on Wall Street can be counted on to occur
exactly in the same way as it happened before” (p. 118, quote from
Benjamin Graham)
Bonus:
“In a lousy industry, one that’s growing slowly if at all, the
weak drop out and the survivors get a bigger share of the market. A
company that can capture an ever-increasing share of a stagnant
market is a lot better off than one that has to struggle to protect a
dwindling share of an exciting market...a survivor in a lousy
industry can reverse its fortunes very quickly once the competitors
have disappeared” (p. 125, Peter Lynch and John
Rothchild)
Bonus:
“People calculate too much and think too little” (p. 139, Charlie
Munger)
Bonus:
“The economics are irrelevant if you don’t have trust” (p. 210,
Charlie Munger)
Buffett’s
annual salary amounts to $100,000 per year. He receives “other
compensation” in the amount of roughly an additional $400,000 per
year, for a grand total of about $500,000 per year (p. 165). Of this
half-million, he returns a significant sum (around half) to repay the
company for personal phone calls, postage, etc. Of course, the vast
majority of Buffett’s wealth comes from his shares in Berkshire
Hathaway, but it’s telling that he does not give himself a generous salary, even though few would object to such an arrangement.
Buffett is clearly underpaid, in light of his considerable
accomplishments—or, perhaps, the rest of the world’s executives
are vastly overpaid.
This
is another illustration of Buffett’s integrity. He doesn’t just
‘talk the talk’ about executive compensation, he walks the walk
when it comes to his own salary as well. Buffett quotes the Bible,
“For where your treasure is, there will your heart be also.”
***
Find out Buffett's secrets for yourself with Chirkova's well-researched book!
