Main Lesson of the book: How and why Warren Buffer did what he did.
It’s no secret that Warren Buffet was a huge fan of Benjamin Graham who wrote the book The Intelligent Investor. Warren took the lessons that Benjamin taught him to heart and used it as the foundation for his own philosophy on investing. Buffet at one point was close to retiring in his 20’s but his family asked him to help them invest his money. And instead of just taking their money he decided to create a partnership with them. The partnership had certain ground rules that showed how much Buffet respected them. One of the key rules was that Buffet would invest their money the exact same way he invested his own money. He would not only do that, but he promised that outside of the investments he made with the partnership he would make no other deals. A beautiful rule he instated was that his performance should only be taken under review after 3 years at a minimum. Because he felt that this was the earliest one could speak of measuring results. He also made sure that the results wouldn’t just stand by themselves but instead they would be compared to the Dow Jones industrial average. Which means that he had a measuring stick that he didn’t simply use to see how well he was doing in the market as a whole, but instead it was a point he competed with. He tried to beat the Dow every year with at least a 10% advantage over the Dow. And based on what the book states, he never had a down year in all of his investment years with the partnership. Which is downright amazing.
Buffet follows the rules of Graham which are: always have a margin of safety in your investments. Which means that if you think the stock is worth 20 then try to buy it at 10. The next rule is keeping an eye on the market prices. Keep the value you have given the company in mind, and when the market price drops below that point to a very depressing degree, buy it. And if it gets high to an almost euphoric price, sell it. Other than that, the price changes shouldn’t bother you at all. Another key rule Graham taught is that owning a stock is the same as owning a part of a business. It’s not just some piece of paper or some digital symbol on your screen, you actually own a part of the business. And last but not least, forecasting is a past time for fools. No one knows what will happen in the market, so don’t waste your time on trying.
Like I said before, Buffet was able to beat the Dow every single year, but what I failed to mention is that he was able to beat it by 20% at times for several years in a row. The significance of this number becomes so much greater when its compounded. Buffet was understandably so a huge fan of compounding. He understood that the underlying math was the key element in creating wealth. By compounding 20% every year, the math alone allowed his wealth to grow exponentially. Which is a lesson we all have to abide by. Every book I’ve read so far, mentions compounding as the key element in grown wealth. Patience and persistence are key in letting your money grow.
Buffet had a very interesting perspective on investing as he divided his investing method into three categories. Which are:
- The Generals
The generals were companies that Buffet found through extensive research. These were the companies that were undervalued according to his research. They could be franchises or business that just got started or were ignored by the general stock market, because of whatever reason. Workouts are companies that are about to be purchased or are to merger with other companies. The moment that is announced, the value of the stock usually goes up to match the company that is buying the company or the bigger company of the two if they were to merger. The strength of workouts is that even if the market is down or flat, you can still make a good amount of profit from this category.
The next category is Controls and this category is one that a lot of us will probably most likely never be able to make use of. Control means literally that you buy enough stock of the company to get a controlling percentage so that you can influence management. This means that you literally bought your seat at the table and now that you are at the table you will have your say in what the company will do and won’t do.
The key rules you need to remember when investing according to Buffet are the following:
- Invest in generally undervalued stocks.
- Invest in merger arbitrages. (Invest in both companies that are about to merge.)
- Invest in the business not in its stock. (If the business grows, so will its stock)
- Be willing to go against the crowd. (Just because everyone is scared doesn’t meant its justified. Be brave and do your own research.)
- Tax is important, but don’t let it deter you from buying a stock. (The goal with investing is to make the most amount of money possible and not to pay the least amount of taxes.)
- Don’t follow trends, follow your research.
Another point you should consider is that its nice to diversify but if you did your research you should instead buy more of the company you believe in. Diversifying for the sake of diversification doesn’t have a lot of value. Instead buy what you know, buy more of what you have researched, because a great idea will be more profitable than a bunch of nice small ideas. Buffet also states himself, albeit in his later years, that buying Index Funds is the smartest thing one can do. Which for a lot of us is the right thing to do. Because I doubt that a lot of us are willing to do the work it requires to actually research a company and management team. So, for those who want to make sure they get the benefit of compounding, without having to spend all their days researching, an Index fund is the way to go. This will also make sure that you don’t lose 40% to 50% of your possible profits to money managers and investment brokers who will never beat the market for you buy get paid either way.
All in all a nice book, but at times it felt more like a book to praise Buffet than teaching me about investing.