Tuesday, September 21, 2010

The Philosophy of Warren Buffet


I'm confident that many of you have heard of Warren Buffet, the most successful American investor of the century which earned him the nickname: "Sage of Omaha"

I'm not going to bore you with his life story, but instead focus on some of his key philosophies that made him into such a successful man.  He is still well known for his frugality despite of his incredible wealth, and even though many of us will choose to walk paths where we end up splurging from time to time, it is still important to try and be in control of money instead of it taking control of us.

 

Warren Buffet is the chairman and CEO of Berkshire Hathaway which has stock holdings worth around 125,000$ per share currently.  This may seem like an insurmountable amount of money for a single share of a stock, but the point i'm trying to show here is that disciplined investors over time can actually grow their portfolio to a point where they can consider purchasing monstrously expensive (or potentially inexpensive) stocks.

I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die. (Lowe 1997:165–166)

From a NY Times article: "I don't believe in dynastic wealth", Warren Buffett said, calling those who grow up in wealthy circumstances "members of the lucky sperm club".  Buffett has written several times of his belief that, in a market economy, the rich earn outsized rewards for their talents:
A market economy creates some lopsided payoffs to participants. The right endowment of vocal chords, anatomical structure, physical strength, or mental powers can produce enormous piles of claim checks (stocks, bonds, and other forms of capital) on future national output. Proper selection of ancestors similarly can result in lifetime supplies of such tickets upon birth. If zero real investment returns diverted a bit greater portion of the national output from such stockholders to equally worthy and hardworking citizens lacking jackpot-producing talents, it would seem unlikely to pose such an insult to an equitable world as to risk Divine Intervention.




This was the first book I read related to investing early on in my high school years which introduced me to the underlying theory of investing.

NEVER LOSE MONEY

General rules
  • Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
  • It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
  • You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right—and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else.
  • Our favourite holding period is forever.

    • Letter to Berkshire Hathaway shareholders, 1988
  • When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.
  • Risk comes from not knowing what you're doing.
  • If you don't know jewelry, know the jeweler.
  • If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes.
  • There seems to be some perverse human characteristic that likes to make easy things difficult.
  • One's objective should be to get it right, get it quick, get it out, and get it over... your problem won't improve with age.
  • A public-opinion poll is no substitute for thought.
  • In the insurance business, there is no statute of limitation on stupidity.
  • If a business does well, the stock eventually follows.
  • The most important quality for an investor is temperament, not intellect... You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.
  • The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.
  • We will only do with your money what we would do with our own.
  • Occasionally, a man must rise above principles.
  • It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
  • Of one thing be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.
  • When asked how he became so successful in investing, Buffett answered: we read hundreds and hundreds of annual reports every year.
  • "I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that. "I'm paying $32 billion today for the Coca Cola Company because..." If you can't answer that question, you shouldn't buy it. If you can answer that question, and you do it a few times, you'll make a lot of money."
  • You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it.
  • I really like my life. I've arranged my life so that I can do what I want.
  • If you gave me the choice of being CEO of General Electric or IBM or General Motors, you name it, or delivering papers, I would deliver papers. I would. I enjoyed doing that. I can think about what I want to think. I don't have to do anything I don't want to do.


I hope this helped you get an idea of what the nature of my blog will be in the next couple of posts.

Ideally I want to talk about the different tools investors use to achieve success when starting their portfolios, and maintaining them after they have achieved some level of success.

I hate to admit that I myself have not been especially prudent with handling my money, and thus I am writing this blog for myself as well as anyone who is interested to help them keep focused and actively make their money work for them instead of working so hard for it.

Again thanks for all the positive comments and to all new followers, please feel free to post your own opinions and things you would like to see me blog about in the future.

Happy blogging

59 comments:

  1. 'Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.'

    I think I'll write that down somewhere ;D

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  2. Agreed with Structus! Nice article man, check out my blog!

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  3. I've never been very good about managing my money, either. Don't worry about it. Perhaps this blog of yours could be a mutual learning experience?

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  4. I'd be curious to know what Soros' opinions are...

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  5. Nice article, Buffet is my model. Will read again.

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  6. Great investment tips like always. I love coming to this blog and reading about money relater issues, and your tips make so much sense.

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  7. haha agreed, I think rule 1 might be the most important

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  8. always wanted to get into fincial stuff but it always boggles my mind

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  9. Pretty epic thread. I was gonna invest my scholarship $ this semester. Usually I get over 3 grand, this time those fucks only gave me $600. So maybe later.

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  10. I sure as hell could use some extra money....stocks eh?

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  11. Whoa, what an inspiring and mindblowing article... Love it!

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  12. Interesting read, even for a commie who hates capitalism.

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  13. this is the invest club. Rule number 1 is never lose money, second rule is never ever lose money... if this is your first night, you have to invest.

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  14. Honestly Warren Buffet is one of the most interesting men I know of. He still lives in the home he purchased for $30,000 in the 70s. He definitely has a good head on his shoulders.

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  15. I think I am going to like this blog, I am trying to gather as much info and tips as possible, so if and when I take the plunge into investing I will be less likely to screw myself.

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  16. Thanks, all the commented are very much appreciated.

    @Randy, keep it clean next time

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  17. I sure could use a piece of Buffet's stash... also the pic above me... :D Thanks! Look forward to more.

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  18. I wish i had warren buffets financial abilities.

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  19. Haha I like Rule #1. It's sometimes the extremely obvious that helps the most. I guess it fits in with the old "a penny saved..." quote.

    Great read!

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  20. gotta love warren buffet... Autism is not a disability!

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  21. Nice post, and a great read. I've been studying economics myself, lately. I'll be checking back on this.

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  22. followed, thanks man i need something like this will check it daily!

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  23. thats because rich people get richer by having there money work for them!

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  24. Wow warren buffet is a very smart man. very good read =)

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  25. More people should be like Warren Buffet, methinks.

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  26. i've always wanted to try out the stock market, seems intimidating o.o

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  27. very good words of advice. I will refer back to this when I have questions about money

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  28. So much good money advice, thank you for this post!

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  29. Econ student here. Always nice to meet some non keynsians lol

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  30. Perhaps the most useful blog I've found in a while. I've also taken an interest in the economy... Perhaps I should start some investments too.

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  31. thanks for everyones great comments, in the process of returning them =)

    PLEASE check out my new blog, it contains stuff i'm sure you will all find very interesting

    http://principlesofpower.blogspot.com

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  32. Not really my type of read, but interesting :)

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  33. ohhh wow.. haha this is intense

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  34. Look forward to updates as always :D I have been thinking about reading my copy of Rule #1.

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  35. Great post as always!! Nice LONg read:D

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  36. Buffet is still only number two, after Bill Gates, so I dont know if I can trust his tips...

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  37. what buffet says goes lol. looking forward to your next post

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  38. I can't even follow rule #1 :(

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  39. these are some really good rules to live by, thanks for the info

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  40. "You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right—and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else."

    I cannot agree with this more, in real life also. So many people these days seem to believe that facts and truth should be decided democratically.

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  41. "You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right—and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else." That's good advice for everything, I think

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  42. This is really helpful, very nice. :)

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