The Wisdom of Warren Buffett
In anticipation of the Berkshire Hathaway meeting in Omaha on May 6, I re-read Warren Buffett’s most recent letter to shareholders. Even if finance isn’t your favorite topic, Buffett’s writings are full of great advice, wisdom, and personal finance tips.
Some of my favorite learning points follow.
If you are going to teach someone, be able to coherently explain your perspective in a concise manner using sixth grade verbiage. Buffett is the master of taking very complex topics and explaining them as if discussing it with his sisters. Learn to master the one-page executive summary.
Have humility. You will make mistakes. Buffett has made lots of mistakes, and yet he is worth $100 billion. And that is after giving more than $40 billion to charity. Put yourself in a position such that mistakes will not wipe you out.
Have good habits for life. Logical financial habits keep you out of trouble and will be more important than picking the “big win” stock. Buffett has remarked that, “The chains of habit are too light to be felt, until they are too heavy to be broken.” As such, avoid things that will blow you up. Use debt sparingly and spend less than you make.
Even if you have great insights into how investments should play out, you must still have the necessary time frame to be proven right. Often, I have thought, “If I figured this out in south Texas, then surely everyone knows it.” Even if you are right, it doesn’t mean the markets immediately agree. Be patient, painfully patient. Measure things in decades, not days.
One of the most important assets Berkshire Hathaway owns produces the lowest return. A large cash position is not there to make you rich. Cash allows you to ride out rough times and seize upon opportunities. Cash is like oxygen. While plentiful, it is easy to take it for granted. However, once in short supply, or threatened, then suddenly the best laid plans crumble. Today, cash pays nearly five percent. As such, the opportunity cost of holding cash is reasonable.
Buffett is incredibly skilled as an owner of quality businesses. Some he owns entirely, while others are via partial ownership in publicly traded shares. However, he is not a stock picker or trader. Find great, enduring and profitable businesses.
In the late 1980’s Buffett made two purchases of Coca-Cola. Adjusted for stock splits, his purchase price was a little more than one dollar per share. Today, Coke trades for about $63 per share; a 60x return, not including dividends. Compound interest is an amazing mathematical concept. It is highly deceptive and incredibly powerful. Buy great companies and let them run. Every time you trade a winner, you give more money to the government. Buffett has paid zero capital gains taxes on his 60X increase in Coke.
Although the thought of hitting a lottery winner is incredibly seductive, it is very unlikely. Ditch the lotto mentality. As you search for great businesses, understand not everyone has to be a barnburner. In nearly sixty years of running Berkshire, Buffett has only hit it big about once every five years. Knowing this, slow down, be patient and stay consistent and focused.
Markets are neither logical nor efficient. If you get swept up in the emotion, you will lose. However, if you have the independence of mind to play a different game, you can take advantage of irrational markets. Let time be your friend. The longer your investments grow, the better your odds of having highly profitable success.
Live a modest life. If you emphasize material things, eventually they will own you. Worse, if you borrow to buy material things, they may bankrupt you. Buffett still lives in the house he grew up. It’s nice, but not a mansion. For years, Buffett bought used cars simply because they offered the same utility, but at a bargain price.
Have great relationships. At age 92, Buffett’s best friend and business partner of sixty-plus years is 99-year-old Charlie Munger. Their relationship has propelled both men to be better in business and life. Strong relationships are often cited as one of the most valuable characteristics of people who are happiest.
CNBC will live stream the Berkshire Hathaway meeting on May 6 starting at 8:45am. The link is: www.cnbc.com/brklive/