Warren Buffett is known as the best investor of the 20th century. He has been in the stock market for more than 70 years now and have seen a lot of different situations and scenarios play around. He is the 3rd richest person in the world with a net worth of over $80bln.
His company- Berkshire Hathaway (7th biggest company in the world) has grown on average at 20.9% annually since 1965. In other words a $10,000 investment in the company in 1965 would be worth the shattering $240 million today.
Now let’s get to some of the principles he has followed in order to achieve such amazing results. Before we start here are all the Metrics in case there is terminology that you don’t know.
1. Patience is Key
Warren Buffet is known as having a very patient approach and not investing in anything until it hits his buying point. A good example of that is his famous investment in Coca-Cola, which have provided him with handsome returns. The interesting part is that the company has been on the radar long before he ”pulled the trigger” in 1988. In fact Warren has been a big fan of the company ever since he was 7 years old, but he dosn’t buy shares until 50 years later.
That is for a mix of reasons. As a young investor Buffett has liked to buy bussineses which are selling below their book value, so he can buy them and sell their assets shortly after. Only later on when he met Charlie Munger (his partner in Berkshire Hathaway for a long time now) he changed his approach and started buying companies for the long run.
But still he always had this great patience and waited for stocks to come into his buying range. He has never bought companies with high PE ratios and this was no exception.
The problem was that Coca Cola always traded at a big multiple. But despite that Buffett never rushed to buy the company at the higher multiple and he waited for his chance.
And his waiting was greatly rewarded- his investment in the company has been one of his best moves ever and he is still a shareholder in the company over 30 years later.
The stock market is designed to transfer money from the active to the patient.
2. Ignore The Noise
As some of you may know Warren Buffet is born and raised in Omaha, Nebraska. The interesting part is that 88 years later he still lives in his home town of Omaha. His Berkshire Hathaway is also there and he has worked in this town his whole life.
He has been asked a lot of times why is he not in New York where Wall Street is and where all the rest of the big financial companies are. After all it is kind of strange for one of the biggest companies in the world to be in this small town right?
Well not really. That decision has been of great benefit for him as this allows him to stay away from all the noise and all the different sentiments, the greed and fear in Wall Street (For anyone that doesn’t know greed makes you buy high and fear makes you sell low).
As we know greed and fear are not good characteristics for the stock market investors and mr. Buffet is the living proof. Living in Omaha allowed him to make his own decisions unbiased from everyone else.
3. Go Against The Tide
This is maybe the thing he preaches the most- that you need to go against the sentiment of the people in the stock market. These are personally my two favourite quotes from him:
Be fearful when others are greedy and greedy when others are fearful.
Just because a 1000 people think you are right doesn’t mean you are and just because a 1000 people think you are wrong doesn’t mean you are.
You can see this quality from him over and over in his career. Sometimes he has been critiqued for lagging the market during prolonged bull- runs and periods of over- valuation. For example in the years 1998-2000 the market has went parabolically up while his performance has been lacking. But when the market started going down shortly after his portfolio started going the other way.
That can show us clearly how going against the sentiment made Warren Buffett very nice returns and protected him from the big drop in the stock market.
4. Invest For The Long-Term
When Warren Buffett buys a company he buys it with the idea to hold for the rest of his life. That way he can trully use the power of compounding on his side and see returns on the returns of his returns.
He also generally invests in bussineses with big moats that he believes are going to be around forever. Here are some examples of companies he’s been holding for a while now :
- Well’s Fargo (WFC)- He bought shares of the bank in 1989-1990, of course in times when bank stocks have been under pressure (when others are fearful) after the correction of 1987. He has been holding ever since and even adding to his position a couple of times since then.
- American Express (AXP)- He has been a shareholder in this company for more than half a decade now- since 1964. Once again he bought in when there has been a big scandal around the credit card provider and he picked up the shares on the cheap. Since then he has seen fantastic returns on his investment and I highly doubt that he will ever sell out of his position.
- Geico- the insurance giant is one of his longest held investments- he bought his first shares in 1951 and continued to add to his position until he bought the whole company in January 1996. This is the stock that brought him the biggest returns as when he started investing in it Geico has been just a small insurance company, vastly underestimated by the big players. Buffett on the other hand loved their bussines model and started picking up shares at different periods and of course never selling.
- Coca-Cola (KO)- Buffett initiated his position in the soft drinks company in 1988 and held it ever since. He is a big fan of the drink ever since he was a kid and he has been with the company in ups and downs. Of course the long- term approach has played a big favor for him as he has seen fantastic returns of his investment.
Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.
5. Ignore The Stock Price
This one is very well absorbed from his mentor- Benjamin Graham. And what ignoring the share price means is that you should not be making decisions based on a company’s share price ever. You should not buy a company because you see it has been going up in value and you should not sell a company because it has been going down.
Benjamin Graham has created this allegory of the stock market called Mr. Market. Here is a quote from Warren Buffett about Mr. Market from 1987 that is still very relevant today :
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
– Warren Buffet in his 1987 letter to Berkshire Hathaway shareholders.
6. Don’t underestimate the power of compounding
Buffett doesn’t come from a rich family and he didn’t have a headstart in life and is still the 3rd richest person in the world today because of the power of compounding. For anyone that doesn’t know compounding is when you get interest on your interest or returns on your returns. That way you multiply your returns and everything starts snowballing.
As you can see this is what strong compounding returns can give you. The secret is that the younger you start the more time you have to use it on your side and Buffett learned that very young. He started at the age of 14 and that gave him the chance to be a millionaire by the age of 30.
7. Don’t live to impress other people
Let me explain this- Warren Buffett is the 3rd richest man in the world. He can practically live anywhere and do anything there is in the world. Despite that he is still living in a moderate house in the town he grew in and is having a breakfast from Mcdonald’s every morning before he goes in the office he’s been working since the 60’s.
That is because this is the life he genuinely wants to live and that is what makes him happy. He has given a huge part of his money to charities and continues to do so. I really hope more people take example from him in that perspective.
In that regards I really recommend watching HBO’s documentary about him if you haven’t already. It is really humbling to see how small of an impact money have on him.
Closing thoughts
The most interesting thing is that Buffett’s approach is really simple and straightforward, but so hard to replicate. It requires a lot of strong mentality and discipline to go through all those ups and downs without changing your strategy. After all no one else has acomplished over 20% annual returns for such a long time. Only time will tell if someone else will ever be at the same level as him.
Hope you had an interesting read and I wish all of you the same level of success as Warren Buffett!