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WARRENBUFFETT
THEULTIMATEGUIDETOINVESTINGLIKEWARRENBUFFETT.LEARNTHEWARREN
BUFFETTWAY,THEWARRENBUFFETT
PORTFOLIO,THEWARRENBUFFETTSTOCKS
TableOfContentIntroductionChapter1-WarrenBuffett’sRoadtoSuccessChapter2-TheWarrenBuffettWayChapter3-TheWarrenBuffettPortfolioChapter4-TheWarrenBuffettStocksChapter5-MotivationalWarrenBuffettSayingsChapter6-FinalWarrenBuffettInvestingTipsConclusion
Introduction
Everyonewantstoberich.It’soneofthemostcommon,universalgoals,andyet,only1percentoftheUnitedStatesofAmericaisextremelywealthy,whiletheother99percentarenot.Sowhatdoesittaketogetwealthy?Certainlynotonlyworkinghardatasteadyjob,assomanypeopledo.Ifyoutrulywanttobesuccessful,youmustenterintotheworldofstocksandinvestinginbusinesses,asWarrenBuffett,oncetherichestmanintheworld(nownolongernumberoneonlyduetothefactthathehasgivenawaybillionstocharity)does.
Thus,inthisbook,IwillbetalkingallaboutWarrenBuffett,fromhislife
storytohisbusinessmethodstohisportfolioandmore.WarrenBuffettwasabletomakehiswaytothetopwithhardwork,persistence,andaboveallelse,smartinvesting.Withafewtipsinyourmind,youshouldbeabletoachievesomedegreeofsuccessininvestingandbuildingyourwealthaswell,thoughnotperhapsatthelevelasWarrenBuffett,ofcourse.
Youmightbeafraidtogetinvolvedinthestockmarket.Afterall,it
soundsfrighteningandfaraway,likeaconceptfromWallStreetfilledwithcorruptionandlossofmoneyandfrustration.Buttherealityisthatinvestingiseasierthanitseems,andthefactofthematteris,ifyoufollowWarrenBuffett’smethods,youwillrealizethatinvestingisnotamatterofwatchingdaytodayfluctuationsinthemarketandgettingdizzyathowinconsistenteverythingis,butrather,amatteroflongtermreturns.Thinkinthelongterm,minimizerisks,andgetknowledgeableinwhatyouinvestinratherthaninvestingineverythingthatsounds“legit,”andyouwillfindyourselfsucceedingandachievingmorethanyoueverdreamedyoucould.
Forexample,IneverknewmuchaboutthestockmarketuntilIstumbled
acrossabooktitledTheWarrenBuffettWaywrittenbyRobertHagstromthatgoesoverWarrenBuffett’sinvestingprinciples.Itisamethodfollowedbymany,manysuccessfulinvestors,andIhopethatafterreadingthischapter,yourunderstandingoftheWarrenBuffettWaywillbegreatlyincreasedandyouwillfindyourselfabletofollowitandsucceedwithitaswell,asIhave.From
readingthisbook,mymindhasbeengreatlyopenedintermsofthestockmarket,businesses,andtherealmofentrepreneurshipingeneral.Ihadhadsomanymisconceptionsandthoughtswhenitcametoinvesting,allofwhichwerechangedwiththisbook.Thisbookistrulyeyeopening,andIrecommendthatyougiveitaread,butifyoufindyourselfwithouttime,thenthekeypointsIcoverfromTheWarrenBuffettWayinchapter2shoulddo.
Truly,investingisnothardtodoifyougetyourfactsstraightandfollow
WarrenBuffett’smethods.IadmitthatIhavelostmoneyinvesting,butoverall,Ihaveearnedalotmore.EvenWarrenBuffetthimselfhasmademistakes,butlookathiscurrentempireofbillions.Donotbediscouragedbymistakesyoumakeormoneyyoulose.Wewillallmakemistakes,buttheimportantpartistopushpastthemandlearnfromthem.IhopethatwiththisbookyouwillbeabletominimizeyourmistakesandrisksandlearnhowtobeasmartinvestorlikeWarrenBuffett,andinturnearnyourownfortune.
EvenifyoudonotendupmuchwealthierornearlyaswealthyasWarren
Buffett,youwillattheveryleastgaininsightintohowtheAmericaneconomyworksandhowinvestingworks,ratherthanbeingkeptinthedarkandhavingmisconceptionsabouthowWallStreetruns.Itneverhurtstohavemoreknowledge,andpersonally,Ihavefoundmyselfmoreconfidentandlesslikelytobeconnedorpushedintothingsfrommynewfoundabilities.Ihavealsogainedalotmorefinancialindependenceandamabletomanagemyowneconomicsituationfarbetter.Nomatterwhatyougain,Iknowyouwillgainsomething,sogoaheadandgivethisbookaread!Goodluck,andhavefun!
Chapter1-WarrenBuffett’sRoadtoSuccessWarrenBuffettisknowntodayasamassivelysuccessfulentrepreneurandinvestor.However,allsuccessfulpeoplehadtomaketheirwayfromthebeginning,WarrenBuffettincluded.Itisoftenbothinspiringandakeytounderstandingtolookatasuccessfulperson’sjourneytosuccess,andsointhischapterIwillgooverhowWarrenBuffettgottotheplaceheisattoday,withover72billiondollarsofnetworth.WhileweallhaveourownstoriesandnonewillbethesameasWarrenBuffett’s,itisstillinterestingandhelpfultoseehisstory,asitgivesmuchnecessarybackgroundthatwillhelpyouunderstandwhoheisasbothapersonandbusinessman,givingyouinsightforlaterchaptersinwhichItalkabouttheWarrenBuffettWay,hisportfolio,andmore.WarrenBuffettwasbornin1930inOmaha,Nebraska.HisfatherwasastockbrokerlaterelectedasaU.S.Congressman,causinghisfamilytomovetoWashington,D.C.,whichiswhereWarrenBuffettbecameinterestedininvestingandmath.Underhishighschoolseniorpicturewaswritten:“futurestockbroker.”WarrenBuffettactuallybeganbeinginvolvedinbusinessatquiteayoungage;asachild,hewassellinggumandmagazinesaroundtheneighborhood,andattheageof11,heboughtstocksforheandhissister.Hebought3sharesat38dollarseach,andwhiletheirvaluedroppedatfirst,herefusedtosellthem,waitinguntiltheyroseto40dollarstodoso.However,eventuallythestockvalueofthestocksheboughtrosetoover200dollars,andheregrettedsellingthemearly.WarrenBuffettnowsaysthatthiswasavaluablelearningexperienceforhim.WarrenBuffettwasalsoamathprodigyfromayoungage,beingabletodolargeamountsofcalculationsinhismind.Attheageof13,WarrenBuffettfiledhisveryfirsttaxreturn,andclaimedhisbike,whichheusedinhisjobasapaperboy,astaxdeduction.Hecontinuedtobeextremelyeconomicalevenasayouth,lateronbuyinganoldpinballmachine,puttingitinabarbershop,andusingtheprofitstobuymore,eventually
sellinghis“business”foroverathousanddollars,whileheonlyspent25dollars(tobuythefirstmachine).Whenhewas14,heboughtfortyacresoffarmlandonwhichatenantfarmerworkedfor1200dollars.BythetimeWarrenBuffettfinishedcollege,hissavingswere90,000dollars.Speakingofcollege,WarrenBuffettattendedtheUniversityofPennsylvania'sfamedWhartonSchoolofBusinessduetopressurefromhisfather,asWarrenBuffetthimselfwouldhavepreferredtocontinuebeingactuallyinvolvedinbusinessratherthanattendingcollege.HelatertransferredtotheUniversityofNebraska-Lincoln,andaftergraduating,appliedforHarvardBusinessSchoolandwasrejected.Instead,heattendedColumbiaUniversity’sbusinessschool,sincehefoundoutthathishero,BenjaminGraham,taughtthere.AftergraduatingfromColumbia,hefoundoutthatGrahamwaspartofGEICOinsurance,andsoheaimedtogetajobthere.AfterspeakingtothevicepresidentofGEICOforhours,thevicepresidentfoundhimextraordinary,andalongwithWarrenBuffett’sfather,encouragedhimnottoworkonWallStreet.WarrenBuffettevenofferedtoworkBenjaminGrahamwithoutpay,butBenjaminGrahamwouldnotallowhimto,soWarrenBuffettreturnedtohishometownandstartedafirmtherenamedBuffettPartnership,wherehemademanyextremelysuccessfulinvestmentsbybuyingundervaluedcompanieswithstocksthatquicklyrose.Hewasdubbedthe“OracleofOmaha”andbecameverywealthy.In1952,BuffettmarriedSusanThompsonandtheyhadthreechildrentogether.Warrenmademoreandmorepartnershipsinthemeantime,eventuallyexpandingtosix,andaftermeetingCharlieMunger(whowouldlaterbecomehispartner),hispartnershipsexpandedevenmore.Hefoundmanypartnerswillingtopool10,000dollarseach,whilehehimselfinvestedmerely100dollars.Hewaswildlysuccessfulandbecameamillionairein1962,mergingallofhispartnershipsintoonelargeone.WarrenBuffetteventuallyboughtBerkshireHathaway,which,whenitbecamesellinghighclasssharesin1990,madeBuffettabillionaire.DuringtheGreatRecession,WarrenBuffettfacedmanydifficultiesandcriticism,butwasabletoraisehiscompanytothestandarditwasatbeforetherecession.In2008,WarrenBuffettwasnamedbyForbesasthewealthiestpersonintheworld.Afterhe
donatedbillionsofdollarstocharity,hefelltothesecondwealthiestpersonintheworldbehindBillGates.Hehaspledgedtodonate99percentofhiswealthtocharity,notoutofguiltbuttoenabletheeconomytoflow.AsyoucanseefromWarrenBuffett’ssuccessstory,hebeganventuringintobusinessandinvestingatayoungage,andfromsmartinvestmentsandanattitudeinwhichhewentoutofhiswayandwaspersistentingettingwhathewanted,wasabletoachievegreatwealthearlyoninhislife.Andthroughoutitall,hehasremainedunarrogant,donatingmuchofhiswealthandtakingonarelativelylowsalary.
Chapter2-TheWarrenBuffettWay
TheWarrenBuffettWayisabookwrittenbyRobertHagstromthatgoes
overWarrenBuffett’sinvestingprinciples.Itisamethodfollowedbymany,manysuccessfulinvestors,andIhopethatafterreadingthischapter,yourunderstandingoftheWarrenBuffettWaywillbegreatlyincreasedandyouwillfindyourselfabletofollowitandsucceedwithitaswell.
Forstarters,WarrenBuffetthasfourprinciples.First,buybusinessesthat
havegoodprospectsinthelongterm;theyshouldbeonesthatwilllastandgrowfarintothefuture,notfadsordyingcompanies.Secondly,buycompaniesforfarlessthantheyareworth;thismeansthatyoushouldbuybusinessesthatareundervalued.Thirdly,buybusinessesthatgiveahighreturnwhenitcomestoinvestmentcapital.Finally,lookforhonestyandintegritywhenpurchasingbusinesses;findoneswithhonorablemanagers.
Now,WarrenBuffett’sapproachiscenteredaroundbusinesses’values
andmarketprices.Thismeansthatwhenhediscoversacompanyheisinterestedinandinvestedin,hebehavesnotasameresidestockmarketmember,butasacompanyowner.Hewillstudyeverythingaboutthebusinessheinvestedinandprovidetime,energy,anddedication.Hebecomesanexpertthatworkswiththepeopleinthebusiness,notagainstthem,andthissetshimapartinthebattlefield.
Whenitcomestoinvestingitself,WarrenBuffett’sapproachinvolvesnot
followingdailystockmarketfluctuations,butrather,hekeepsalongtermperspective.Thestockmarketisonlytheretomakesellingandbuyingeasier,nottoplacevaluesonthings,andsoonlyusethestockmarketintheshorttermtofindgooddealsthatsometimespopup.Hisreasoningbehindthisisthatpeoplearewhatmakeorbreakthemarket,andintheshortterm,investor’ssentimentsgetintheway,whileinthelongterm,stockvalueissetbycompanyeconomicprogress.
Donotanalyzetheoverall,bigpictureeconomy,sincethiswillgetyou
nowhere.Buybusinesses,notstocks;thisdoesnotnecessarilymeanyouliterally
mustbuyouttheentirebusiness.Thismeansthatifyouareastockholder,makeanefforttoknowthebusiness.Besureyoucanunderstandwhatthecompanyisabout.Payattentiontoequityreturnandnothowmuchyoumakeoneachshare,andalwaysmakesureyouhaveaportfolioofallyourbusinessessinceyoumustplacepriorityonthebusinessesnotstocks.
SomebackgroundonWarrenBuffett’sinvestmenttechniquethatwillbe
helpfultoknowisthatitisbasedupontwomentors’strategies:BenjaminGrahamandPhilipFisher.WarrenBuffetttookfromBenjaminGrahamtheideathatyouneedamarginofsafety;youmusthavehardnumber,strictguidelineswhenyoubuystocks.HealsotookfromBenjaminGrahamtheideathatstocksarelongtermratherthanshortterm,sothereisnopointinfollowingthemonadailybasis.
WarrenBuffetttookfromPhilipFishertheideathatbusinesses’
managementsarecrucialtobusinessvalues.Integritymatterswhenitcomestopurchasingbusinesses,andonemustlookatindividualcompanymanagersratherthanjusttheoutsidecompanyvalues.HealsolearnedfromPhilipFisherthatnotputtingyoureggsinthesamebasketactuallyupsriskratherthandecreasingitsinceitwillbehardertopayattentiontoallofthedifferentthingsgoingoninyourhands.Whenlookingforbusinesses,lookforonesthatareconsistent,sincethesewillbelessriskythanonethathasperformedwell,butonlyduringacertaintime.
TheWarrenBuffettWayalsoencompassestheideathatyoushouldnotbe
discouragedifyoudonothaveenoughcapitaltoinvestlargeamounts.WarrenBuffetthimselfhasearnedmuchofhisfortuneingettingpartnershipsandinvestingotherpeople’smoney;thisissmarterasyougetmorecapitaltoinvestwithlesspersonalrisk.Also,calculate“ownerearnings”onyourownwhenyouinvestinordertomakesurethatyouareriskingless.AccordingtoWarrenBuffett,thereisnosuchthingasriskifyouareknowledgeableenough,andthisisverymuchtrue.Donotdoanythingthatyouknowisinherentlyriskyandifyoudotake“risks,”theyshouldbebaseduponpastexperienceandknowledge,makingthemactuallynottrulyrisky.
Chapter3-TheWarrenBuffettPortfolioAportfolio,asdefinedintermsoffinance,isagroupofinvestmentsheldbyasingleentitysuchasaninvestmentcompany,hedgefund,orevenanindividualthemself.Theseinvestmentsincludestocks,bonds,etcetera.Tohelptheaverageenthusiastunderstandtheterms,Iwillfirstdefinethetwotypesoffundspeoplewillmostcommonlyinvestin:mutualfundsandhedgefunds.Mutualfundsarethesafestoptionforabeginnerinvestortochoosetoinvesttheirmoneyin,astheyarecollectionsofalargegroupofinvestorsforavarietyofstocks.Thismeansthatifastockfails,thenegativefalloutiswidelydispersedamongstallthoseinvestors.Itwillaffectyoumuchlessthantheothertypeofinvestment,ahedgefund,would.Incontrast,ahedgefundiscommonlyusedamongstwealthyinvestors.Theyarecomprisedofasmallergroupareinvestorsandmanagedbyafewwealthyindividuals.Thishasthepotentialofabigriskbigpayoffsystem.Ifastocksucceeds,there’slesspeopletosplitaportionofapiewith,meaningmorerewardforeveryone.Ifastockfails,itmeanspeoplelosemoremoneysincetheyhaveinvestedalargerportionoftheirmoneyintothehedgefund.
Knowingallthis,WarrenBuffett’sportfolioismanagedbyhisholdingcompany,BerkshireHathaway,ofwhichheisthelargestshareholderandCEO.Thecompanyhascompletecontrolofmanysubsidiarycompanies,oneofthemostimportantbeingGEICO(alsoknownastheGovernmentEmployeesInsuranceCompany),awellknowntopautomobileinsurancecompany.BerkshireHathawayisvaluedatapproximatelytwohundredbillionUSdollars,whilethenetworthofWarrenBuffettisapproximatelyseventytwobillionUSdollars.AfunfactyoumightnothaveknownaboutBuffettwasthathisbecomingCEOofBerkshireHathaway,anextremelylucrativeinvestmentcompany,wasoriginallyamistakeasaresultofapersonalinsultatthepreviousownerofBerkshire.Originallyheplannedtoselltheshareshehadboughtattheagreeduponpriceofelevendollarsandahalfperstock.
However,whentheownertriedtoundercutBuffettbysendinganagreementtobuythestocksatelevendollarsandthreeeighthperstock,Buffett
decidedtobuyouttheentirecompanysothathecouldfirethethenpastowner.AsclaimedbyBuffettin2010,buyingoutBerkshirewaswhathedeemedhisbiggestinvestmentmistakethathehadevermade.How,youmightask?Well,hesaidthatthemoneyhehadusedtobuyoutthecompanycouldhavebeeninvestedinseveralotherendeavorsthatwouldhavemultipliedhismonetaryreturnseveralhundredtimesmorethanwhathereceivedfromBerkshire.Thisgoestoshowyouthatinvestingistrulyaluckbasedgamewhenitcomesdowntoit,althoughtherearetipsthatafreshinvestorshoulddefinitelyknowtoavoidlosingalloftheirinvestmentsinriskydeals.
Overall,WarrenBuffett’sportfolioiscomprisedofseverallargeandsuccessfulconglomerateslikeWellsFargoandCocaCola,whichheboughtdecadesagobeforetheirpopularityreallyexploded.Thefinancialtermforthistimeofinvestingis“valueinvesting.”It’sanideacreatedinpartbyBenGraham,alateprofessorofColumbiaBusinessSchoolwhotaughtBuffettwhengettinghisdegreeandremainedaclosefriendduringhislifetime.Thebasicideaofvalueinvestingisbuyingsecuritieswhosemarketpriceislessthantheintrinsicvalue,ortruevalue,ofthesecurity.
Thehigherthedifference,thehighermarginofsafetythesecurityis.Thesecurityisafinancialassetthatcanbeastockoranothermechanisminfinance.Thisworksbestofcourseincasesofthingswithtangibleassetslikestocksincomparisontointangiblereturnsfromconstructslikepatents.
However,valueinvestingcanberiskysincealotofthesuccessofthe
investorisdependentonhowmuchinsideinformationtheinvestorhasinadvance.Thisrequireshavingconnectionstoinsidersofthecompanyandhavingtheabilitytogetcrucialinformationbeforeotherinvestorscan.Obviously,noteveryonehasaccesstoresourceslikethat,sotherearethingslikeindexfunds.IndexfundshavebeendirectlyrecommendedbyexpertinvestingprofessionalslikeJohnBogle,WarrenBuffett,andCharlieMunger(Buffett’sclosefriendandvicechairmanofBerkshireHathaway).Whatmakesinvestfundsidealforaninvestoristheirlowriskfactor,sincetheyareaspecifictypeofmutualfundwithanextremelyhighdiversityofstockswithlowpricesandhightaxefficiency(lowertaxesthannormal).
Ultimately,realizethatBerkshireHathawaywasobviouslynotcreatedin
adaytobecomethefinancialgiantthatitistoday.ThecompanyoriginallybeganasatextilescompanyandwasonthebrinkoffailingwhenBuffett
becametheCEOandsteereditinthedirectionofaninvestmentcompany.Formingaportfolioisdifficultandtakesalotofresearchinordertoensurethemaximumreturnwithaslittlelossaspossible.‘Outsiders’totheindustryareautomaticallyatadisadvantagewhenitcomestoknowingthebestenterprisestoinvestin,sobeconfidentbutnottooconfidentatthesametime.
Itwilltakealotoftime,andthereareneveranyguaranteesinafieldas
tumultuousasinvestments,butoddsarethatyoucanmakeasmallprofitaslongasyouinvestsmartly.Andbysmartly,Imeanknowingnottorelyonasingleinvestment,basicallyputtingallyoureggsintoonebasket.Intheend,nomatterhowsafeandstableaninvestmentseems,theyallstandatleastasmallpossibilityoffailingandcrashing.Onesuchcrashthathadwidespreadeffectsacrosstheworldwasthefinancialcrisisof2007and2008,whichIwillexplaininrelationtohowyoushouldproperlyinvestinstockslikeWarrenBuffettinthefollowingchapter.
Chapter4-TheWarrenBuffettStocks
BerkshireHathawayofferstwotypesofstocksforpotentialinvestorsto
purchase.Thefirstkindofstocks,ClassAshares,aretheoriginalstockssoldbyBerkshire.Thesearethehighlystable,notriskystocksthatarevaluedatexpensivepricesthatcangoashighasoverseveralhundredthousanddollarspershare.ThereasonthesesharesarevaluedatsuchahighpriceisduetothefactthattheCEOWarrenBuffetthasavoidedstocksplitting.
Stocksplittingisapracticethatincreasesthenumberofstocksper
shareholderbutlowersthepriceofeachstockaccordingly.Pretendforexamplethatyouhavetensharesyouboughtforonehundreddollarseach.Stocksplittingwouldmakeyoutheowneroftwentysharesthatarevaluedatonlyfiftydollarseach.ThisisimportantbecauseitmeansthatBerkshireHathawayisknowinglydecreasingtheliquidityoftheirsharesandloweringthetradingvolumeofshares.
Thestrategyismeanttokeepthesharesinthehandsofaselectfew
investorsthatthecompanyisfamiliarwith.Itisthoughtthatiftheystocksplit,thecompany’sshareswillfallintothehandsofnewerinvestorsthataremoreriskyandunknownfactorsthathavethechanceofdefaulting.ByrefusingtosplitstocksBerkshireeffectivelykeepstheirsharesathigherpricesandinthehandsoftrustedinvestors.TheClassBsharesincomparisonwerecreatedaftertheClassAshares.BuffettwashesitantaboutintroducingtheClassBsharesbecauseitmeantthattherewouldbemoreriskinvolvedincomparisontothetrustoftheClassAshares.However,theClassBsharesweremeanttobemoreaccessibletothegeneralpopulaceastheyarecheaperandhaveundergonemultiplestocksplitstolandinthehandsofmanydifferentpeople.
Howdoesthisrelatetohowyoushouldinvestinstockssuccessfully?
Well,forastart,theconflictbetweenClassAandClassBsharesinBerkshireisreminiscentofsomethingthatleadtothesubprimecrisisof2007to2008.Itishighlylikelyyourememberthecrashofthehousingbubbleanditsaftereffectsworldwide,butdoyouknowhowthatbubblewascreated?Itallrelatesbackto
stockinvestors.WiththerepealoftheGlass-SteagallAct,thelimitsitplacedon
commercialsecuritytradingwaslifted.Thismeantbanksandotherentitiescouldmakeriskierdealswhenchoosingtolendtobuyersandsoon.Tounderstandthebasicsbehindthesubprimecrisis,Iwillexplainafewvitaltermsinvolvedthatyoumighthaveheardbefore.Theword“subprime”itselfequatestorisk.Theloansareriskierbecausethepeoplewhotakeonthemortgages,etceteraarenotassafetorelyonforpayingthemoff.Thereisagreaterriskofthesubprimeborrowertodefaultwhentheybuythingslikehousesoncredit,andthehousingmarketcrashwasthecollectionofanentiresocietyofsubprimeloansdefaultingwhentheborrowerscouldnotpayofftheirloans.
Theloansthemselveswerebundledtogetherinafinancialdeviceknown
asaCDO(collateralizeddebtobligation)thatisthensoldtoaninvestorsuchasyourself.InadditiontotheseCDOsbecomeriskierandriskiertobuyasbankslentmoneyoncredittosubprimebuyers,bankswerealsousinghugeamountsofleverage.Leverageisbasicallyborrowingmoney,investingit,andthenreturningtheborrowedmoneyandkeepingtheleftoverreturn.Obviously,thehighertheleverage,themoreyouprofit.Forexample,ifyouborrowtendollarsandinvestitintoareturnthatyougetonehundredfiftypercentreturnfrom,thenyoumakefifteendollarswithafivedollarprofit.Now,ifyouborrowonehundreddollarsandinvestforthesamereturnofonehundredfiftypercent,youmakeonehundredfiftydollarswithafiftydollarprofit.Ofcourse,thesecalculatedrisksarenotfoolproof.Themoremoneyyouborrow,thehighertheriskbecomesifthoseinvestmentsmadefailed.Thecollectiveeffectstemmingfromthesubprimelending,CDOs,andleveragecreatedthehousingbubblethatmadethemarketseemstableandontherise,andledtothedrasticdropandrecessionthatwearestillfeelingtheeffectsof.
Knowingthatthisallresultedfrominvestmentspeopleconsciouslychose
tomade,realizethatthemarketisnotpurelybasedonluckgame.Thoughalotofitischance,thereisalsoalotofcommonsensethattheaverageinvestorshouldusetomakesmartchoicesthathaveahigherchanceofsucceeding.ItmightbetemptingtotryandrecreatethestereotypicalragstorichesstorybyinvestinginveryriskystocksontheslimchanceofitsucceedingandbecomingahugeconglomerationlikeMicrosoft,butrealizethatthechancethatwill
happenisindeedpracticallyoneinamillion.Everyday,investorswhoareexperiencedandIvyLeague-taughtlose
millionsontheunexpectedfluctuationsofthemarket.Ifyouarereadingthisbook,youareprobablyhopingthatthereissomecomplicatedbutnotuncrackableformulatogettingrichquickandeasilyonthestockmarket,butthetruthisthereisn’t.Allthatexistsareeducatedguessesinwhichstockstoinvestinbywatchingtrendsandhavingtheadvantageofinsiderknowledgeofacertaincompanytoknowwhereyoushouldtrustyourmoney.
Chapter5-MotivationalWarrenBuffettSayings
Everysuccessfulpersonhasmottostheylivebyandadvicetheykeep
closetotheirheart.Theyworkhardandareextremelymotivational,andWarrenBuffettisnoexception.Infact,hehasmanyamazingquotes,allofwhichencompassbothwhoheisasapersonandasabusinessmagnet.
Nowthatyouareonyourwaytobecomingasmartinvestor,takealookat
afewofWarrenBuffett’swords.Theyareinsightful,wise,andmayjustgiveyouanextraboostofinspiration,confidence,orunderstanding.Beloweachquote,ItalkaboutwhatexactlyWarrenBuffettistryingtosayandwhatyoucantakefromwhathesays.
Now,youmaynotthinkthatquotesarereallynecessarytolearningthe
WarrenBuffettWay,butdonotdiscountthem.Theymayseemminute,butwordscanbepowerful,especiallyconsideringthepowerbehindthemanwhospokethem.Eventhesmallestofdetailscanmakeadifferenceinthelongrun,andgettingfamiliarwithWarrenBuffett’squotescandonoharm.Attheveryleast,youwillgainmoreinsightintowhoWarrenBuffettisandfeelmotivatedtogetgoingintoyourjourneytowealth.Attheverymost,youwilltrulyfigureoutwhatpreciselyWarrenBuffett’ssecretsareandbeabletoaddtoyourownstrategiesandunderstandingofbusinessandinvesting.Nomatterwhatyougainfromthesefollowingquotes,IhopethatyouwillfindthemasworthwhileasIdid.
1. “Someoneissittingintheshadetodaybecausesomeoneplantedatreealongtimeago.”Nevertakeanythingforgranted.Nothingcomesfromnothing;youneedtoconsiderwhereyourgainsarecomingfromratherthanfocusingonthegainsthemselves.Everythingcomeswithaprice,sokeepyoureyeoutonthesmallestofdetailsaswellasthepast.Appreciatefoundationslaidandlaystrongfoundationsofyourownsothatyoucanbenefitinthefuture.
2. “Ittakes20yearstobuildareputationandfiveminutestoruinit.Ifyouthinkaboutthat,you'lldothingsdifferently.”Reputationsaredifficulttobuild.Theytakealongtimearearesoeasytodestroy,sobecarefulwhatyousayanddoinboththepubliceyeandinprivate.Donotscrewuprelationshipswithcompaniesandwithindividuals.Oncetrustisbroken,itisnearlyimpossibletogainback,andisitworthit?No,becausemessinguphappensinaninstant.Inaninstant,allofyourhardworkcouldbefornothing,sokeepthisinmindinordertoavoidmishaps.
3 .“Themostimportantthingtodoifyoufindyourselfinaholeistostopdigging.”Chancesare,ifyouareinfinancialtroubleorfindyoursituationgettingworseandworse,youyourselfaretheperpetrator.Sometimes,itisgoodtotakeastepbackandevaluatewhereyouare.Ifyoukeeplosingmoneyinvesting,stopinvesting.Donotmakeyourlossanylarger.Alwaysnoteyourownsituationandbeabletorecognizewhenyouhavegonetoofar.
4. “Priceiswhatyoupay.Valueiswhatyouget.”There’sadifferencebetweenwhatyoupayandwhatyouget.Priceisnotnecessarilyareflectionofquality.Lookcarefullyatvalue,orquality,andtrytopaylessforbettervalue.
5. “Honestyisaveryexpensivegift,Don'texpectitfromcheappeople.”Beingcheapisnotnecessarilygood.Becautiouswhendealingwiththosewhoarestingy,asyoumaygetcheatedon.Lookforthosewhoaregeneroustoensureintegrity,becausepeoplewhodonotgiveareselfishandthereforemorelikelytolie.
6. “Therecomesatimewhenyououghttostartdoingwhatyouwant.
Takeajobthatyoulove.Youwilljumpoutofbedinthemorning.Ithinkyouareoutofyourmindifyoukeeptakingjobsthatyoudon'tlikebecauseyouthinkitwilllookgoodonyourresume.Isn'tthatalittlelikesavingupsexforyouroldage?”
Dowhatyoulove.Thismayseemobvious,yetsomanyofusdoexactlywhatWarrenBuffettsaysnotto.Donotthinkofthingsintermsofyourresume.Bythetimeyoudomanagetobuildyourresumebydoingthingsyoudisliked,itwillbetoolatetostartdoingwhatyoulove.Dowhatyoulovefirst,becausetheoppositeordermakesnosense.
1 .“Nomatterhowgreatthetalentorefforts,somethingsjusttaketime.Youcan'tproduceababyinonemonthbygettingninewomenpregnant.”Donotexpecteverythingtocomequicklyandeasily.Certainthingsneedtime,sobepatientanddonotrush.2. “RuleNo.1:Neverlosemoney.RuleNo.2:NeverforgetRuleNo.1.”Thesemayseemlikeimpossiblerules,butdonotworry.Nobodyisperfect;youwillalwaysmakemistakes,butifyoukeeptheserulesinmind,youwillfindyourselfmakingless.3. “It’sbettertohangoutwithpeoplebetterthanyou.Pickoutassociateswhosebehaviorisbetterthanyoursandyou’lldriftinthatdirection.”Beingwithbetterpeoplewillforceyoutobetteryourself.Beingwithpeoplewithqualitiesyoudonotwantorwhoareworsethanyouwillbringyoutotheirlevel.Whoyouassociateyourselfwithbecomeswhoyouare.
4. “Riskcomesfromnotknowingwhatyou'redoing”Thereshouldneverbesuchthingasriskifyouareknowledgable.If
youknowthings,thentherisksyoutakearenotreallyriskssinceyouwillknowwhatthepayoutshouldbe.Learnfromexperienceandfromfactsandnevermakeguessesthathavenofoundation.
5 .“Shouldyoufindyourselfinachronicallyleakingboat,energydevotedtochangingvesselsislikelytobemoreproductivethanenergydevotedtopatchingleaks.”Ifthingsaregettingworseorhavebeenbadforawhile,donotbesostubbornastocontinuetotrytofixyoursituation,especiallyifyouhavetriedmanytimesbeforeandfailed.Sometimes,itiswisesttomoveawayfromsomethinganddosomethingneworstartoveraltogether.Itisnevercowardlytowalkaway,evenfromsomethingyouhavespentalotoftimeon.Donotletsentimentoryourselfgetinyourownway.Lookatthingsclearlyandnotalwaysfromyourownperspective,whichcanbebiased.
6 .“Thereseemstobesomeperversehumancharacteristicthatlikestomakeeasythingsdifficult.”We,ashumans,liketomakeeverythingharderthantheyneedtobe.Simplify,simplify,simplify.Noteverythingisashardasyoumakeitouttobe.Takeastepbackifyoufindyourselfovercomplicatingthings.Sometimesthebasicsareallweneedtosucceed.
7. “Inthebusinessworld,therearviewmirrorisalwaysclearerthanthewindshield.”Thepastisalwayssomethingwecanlearnfromwhenitcomestobusiness.Donotalwayslookstraightahead,asthismayseemliketheobviouswaytogetahead,itisnot.Youdonotknowwhatwillhappeninthefuture,andplungingstraightaheadintotheunknownisneverawisestep.Becarefulandlearnfrompastexperiencesofthosearoundyouandyourownmistakes.
8 .“Thedifferencebetweensuccessfulpeopleandreallysuccessfulpeopleisthatreallysuccessfulpeoplesaynotoalmosteverything.”
Sayingyestoeverysinglethingpresentedtoyoumayseemlikethequickwaytoachievingsuccess,butoften,doinglessismore.Ifyouwanttobetrulysuccessful,youhavetoknowwhentobackofforrejectthings,andyouwillfindthatthiscomesmoreoftenthannot.Mostthingsarenotoptimallybeneficialinthelongrun.Donotwasteyourtimeonminorthings,butratherlookforbigprojectsthatwillmaximizebenefits.9.“Iboughtacompanyinthemid-'90scalledDexterShoeandpaid$400millionforit.Anditwenttozero.AndIgaveabout$400millionworthofBerkshirestock,whichisprobablynowworth$400billion.ButI'vemadelotsofdumbdecisions.That'spartofthegame.”Donotworryifyoumakebigmistakes.Everyonemakesthem,includingWarrenBuffett.Hehasthrownawaymillionsofdollarsduetopoorchoices,butlookathimnow.Heisoneoftherichestmenintheworld,andthisgoestoshowthatyoushouldnotletmistakesyoumake,nomatterhowbig,holdyoubackorbringyoudown.Moveonfromthem.Learnfromthem.Butneverletthemdiscourageyouormakeyouthinkthatyouaredestinedtobeafailure,becauseyouwillmovepastthem.
Chapter6-FinalWarrenBuffettInvestingTips
HavingreadthesuccessthatWarrenBuffetthasachievedinmakingafewsmartinvestmentsthatpaidofwell,whatcanyoudotoachieveevenafractionofthatsuccess?WhileitistruethatnotmanyofuswilleverachievethesamedegreeoffinancialsuccessthatBuffetthas,itisdefinitelypossibletomakeasmallandtidyprofitifyouknowtheseinvestingtipsandkeeptheminmindwhenventuringoutintoyourfirstinvestingendeavor.
TIP#1-TheTimeisNow
KnowingthattheUShasjustgottenoutof(orisstillinthemidstof?)thehugerecessionof2008,itmightmakeyoushyawayfrominvestingintheweakmarket.Intheearlydaysofthehousingcrisis,stockholderswerepanickingandquicklytryingtosellalltheirstocksassoonaspossiblebeforethevaluedroppedanyfarther.Ofcourse,thiseffectonamacroeconomicKeynesianperspectiveiscompletelydestructive,asitonlyweakenstheeconomyfurtherandhastensthefall.Butratherthanlosinghopeandsellingstockswiththerestofthegeneralpublic,BuffettandhisvicechairmanCharlieMungertookadvantageofthecurrentloweredstockpricestopickupbargaindealsthatwillnodoubtpayoffwhentheeconomyrevivesitself.Notwithstandingtheinevitablepessimiststhatwillcropup,theeconomyisonthewaytoitsupswingoncemore,andthecyclesofboomandbustitgoesthroughareperfectlynormal.Thelongertheboom,theharsherthebust,andalreadytheeconomyhasbeenseentobeimprovingdaily.Ifyouwanttotryinvestingstocksthenyoucanjustcatchthetailendofthebargainperiodwithloweredpricesbeforethevaluebeginsincreasingoncemorealongsidetheeconomy.
TIP#2-ThinkoftheLongTermwhenChoosingwhichStockstoInvestInBuffettclaimsthatthereisageneralmisnomerthatstocksareariskybusiness,andwhilethisistrue,aslongasyouthinkofthelongtermitisn’treally.Thekeyiscreatingadiverseportfolio,sowhenvaluedeclinesinstockswillinevitablyoccur,theywon’tbeasmuchofanissue.Ifyouthinkinthelongterm,ashorttermfluctuationinpricesisn’tthatmuchofanissueaslongastheoveralltrendofthestockisavalueincrease.However,Buffettdoeslistthemistakesthatcanchangealongtermstock’spotentialvalue.Iftheownerofthestockkeepsanundiverseportfoliothenthereisahigherriskofacrucialstockintheportfoliofailing.Payingexorbitantpricestohirefinancialadvisersandmanagersdonotalwayspayoffintheend.Theriskofborrowinghighamountsofleverageoncredittoinvestinstocksthatfailandmustbepaidback,asdiscussedearlierinthechapteronWarrenBuffettStocks.
TIP#3-DoNotPlaceYourTrustinClaimedStockMarketExpertsIfyouhavethemoney(orevenifyoudon’t),itcanbeextremelytemptingtohireaproclaimedprofessionalandexpertat‘playing’thestockmarket.Theymightshowyoutheirsuccessfulrecord,highlyqualifiedIvyLeagueeducation,andimpressyouwiththeirsophistication,butBuffettpointsthatthemarketishighlyunpredictable.Nomatterhowmuchorhowhardsomeonemayclaimtheyhavetheformulaortrendsofthemarketfiguredout,Buffettnotesthatinrealityevenhecannotpredictthefutureonwhathappenswithstockprices.Asaresult,donotwasteyourmoneyhiringcountlessoverpricedfinancialadvisersforyourstocks.Theymighthaveaneducatedprediction,butaclearcounterexamplewouldbethehousingbubblecrashthatIhavereferencedthroughoutthisbook.Althoughsomebusinessmogulspredictedthebubblecrashcoming,manyotherpeoplejustasprominent,suchasthethenchairmanoftheUSFederalReserveAlanGreenspan,singlemindedlyclaimedthattheeconomywasnotonthecuspofadownswing.AsquotedfromBuffett,“anythingcanhappenanytimeinthemarkets,”solearnnottogrowcomfortableandassumeatrendwillcontinue.Countontheunpredictabilityandmakecontingencyplans.Aboveall,thestockmarketisanextremelymercurialanddynamicenvironment.
TIP#4-BeDecisiveandConfidentinyourDecisions
Ifyouknowtherightthingtodo,donottrytodragontheprocessduetosentimentalityorothersuchreasons.Althoughthereareclaimsofthemythical‘instinct’whenitcomestothestockmarket,mostofthetimeslogicwillprevail.OneoftheanecdotesBuffettcommonlyresortstoistheexamplehemakesofTesco,aBritishchainofsupermarketsthatbeganfailing.Althoughhehadsoldmillionsofportionsbeforethecrash,hewasreluctanttocompletelysellallofthestocksandcontinuedataleisurelypace,somethingreferredtobyhispartnervicechairmanas“thumbsucking.”Thisultimatelyresultedinthelossofmorethanfourhundredmilliondollarsintermsofstockvalues.Asmuchasthestockmarketcannotbepredicted,thatdoesnotmeanthatyoushoulddragthingspasttheirexpirationdateinthehopesofsomethingunpredictablemagicallysavingthestock.Alwayspreparefortheworstcasescenariosandfollowthroughonwhatyourmindistellingyouwithconfidence.
Conclusion
HavingnowfinishedreadingthisentirebookbaseduponWarren
Buffett’slife,investingstrategy,thoughtprocess,andtips,Ihopethatyouhavehadyourmisconceptionsofthestockmarketcorrectedandleavewiththebasicknowledgerequiredtobecomeasmartinvestor.Thestockmarkethasdevelopedareputationamongthepeopleoftheworldasamysticalentity.IthasbecomearealmwiththetopclosedinonWallStreetwithacircleofseeminglyimpenetrablesuitseventhoughtherealityisthatanyonecanbecomeaninvestor.
AlthoughtheaverageJoemightbeatanimmediatedisadvantageinterms
ofsafetyfundsandinsiderknowledgeonthebestdealsandshorttermfluctuationsofastock,therearemostdefinitelyoptionssuchasmutualfundslikeindexfundsthatareeasytouseandrelativelysafeincomparisontofillingaportfoliowithanarrowrangeofriskysecurities.OfcourseachievingsuccesslikeWarrenBuffettisdifficultforeventhemostwelloffpeople.Truly,thedegreeofwealthandinvestmentreturnBuffetthasachievedcannotbereplicatedevenwithsheerdumbluckonthemostprofitableinvestments.Andwhowouldexpectittohappen?Themostimportantthingaboutthestockmarketismakingsureyoucanholdontothestocksinyourportfolioandkeepingthatstableportfoliowithouthugelosses.BuyingDisneystockforyourchildrenisafunthingtodo,butthereisn’tmuchfluctuationinastockasoldandestablishedasDisney.Onceyoufamiliarizeyourselfwiththetermsofthefinanceworld,it’salifelonglearningprocess.Althoughthemarketisunpredictableintheshortterm,thelargercyclescanbepredictedingeneralterms.
Hopefullyyouaren’tagainstreadinglongandpotentiallydensetexts,asit
canbeincrediblyusefulreadingtheideasofpasteconomistsandbusinessmogulsfromKeynestoMiltonFriedman.Thestockmarketdipscloselyintosurroundingareasofstudysuchaseconomics,thestudyoftheuseofgoodsinasociety.Economicconceptscanbecloselyrelatedtothestockmarket,especiallyinsubjectslikegametheory,etcetera.Investingisatthesametimemoresimplisticandcomplexthanyoupreviouslyimagined.Whileitcanbeinterestinganduseful,itisn’tnecessaryatalltoinvesting.
However,itcanmakethedifferencebetweenadecentinvestorandagreat
one.Findwaystomakethereadingmoreinteresting.Alotoftheissuesarguedaboutarestillhugelyrelevanttodayintermsofeconomicpoliciesandthepositionsofdifferentcandidatepositionsinpoliticsandpresidentialcampaigns.Itcanhelpincreaseyourknowledgeofthedifferencesbetweeneachpersonrunningforofficeandbecomemoreawareoverallofthestateoftheeconomyratherthanlivinginignorancetowhatiscausingoureconomytochange.Intoday’sglobaleconomy,theeffectsofamarketcrashinanothercountry,suchasthehighriskcreatedbyGreece’scurrentdebtcrisis,canhavearesoundingeffectonyourdailylifeaswell.Thehousingbubblecrashaffectedeverycountryintheworldexceptforthosethatweren’theavilyinvolvedintrade,suchasNorthKorea.Byknowingandunderstandingworldevents,yougainalargerideaofyourindividualsecurityintheworldandthebestcourseofactionyoushouldtake.Itforcesyoutostepbackandtakealargerperspectiveoftheworldinmind,whichundoubtedlyhasamultiplenumberofbenefitsbeyondjustthefinancial.
Learninghowtoinvestautomaticallymakesyouamoreconsciousperson
oftheeventshappeningaroundyou,sothatyoudon’tsimplygointhedirectionofthecrowd.Afterall,thevastmajorityofpeopleinlifearethosefollowingthese‘greenlights,’signalsthatarethrownoffbythepossibilityofmakingaprofit.Didyouknowthatabubblecanbepreventedaslongasalargeenoughnumberofpeoplerealizethatabubbleisforming?Peoplewhodon’tknowanybetterinstinctivelyfollowthe‘greenlights’theyhearaboutthattheyactuallyknowlittleaboutmostofthetime,whetheritbebuyingahousethatyoureallycan’taffordoncreditbecausethemarketisgoinguportakingoutaloanwhenyouhavenosavingstopayofftheinstallmentplan.
Evenifyoudon’tactuallyendupinvestinginanything,theknowledgeis
stillgoodtohaveintermsofbecomingamoreawareperson.Theeffectthatbeginningtounderstandhowtheeconomyworkswillchangeyourlifeforever;itcertainlydidmine!Peopleconstantlymakefunofpoliticiansfortheirpolicies,economicespecially.Afterall,themoneyandresourcesiswhatcontrolsourhealthcare,socialsecurity,welfareprograms,andmanymoreareasthatyouwouldn’toriginallythinkwouldberelated.Butwhenyoupeelawayallthedifferentlayersandgetdowntothenittygrittyofitall,everythinginlifeis
ultimatelyruledbythemoney.Andultimately,thisknowledgeiswhatgivesapersonpowerovertheirownlifeandthelivesofthepeoplethatyourmoneytouches(thusbeingtheentireworld).Asyoulearnmoreaboutinvestingandtherelationshipofmoneyonyourjourneytodiscoveringyourselfandhowtheworldworks,Ihopeyouwillnotonlylearnhowtomakesmartfinancialdecisions,butalsogainabetterunderstandingofsocietyandthewaytheeconomyisrun.
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