Wednesday, July 23, 2008
Warren Buffett needs no introduction and is an idol for everyone— investor or not.
Folks only look at his successes but forgo his mistakes. Buffett himself is the first one to admit his mistakes and makes it a point to call them out in his letters to shareholders of Berkshire Hathaway. This post is dedicated to the mistakes as acknowledged by the great man himself. There’s a lot of learning to take away for all aspiring investors, like you and me. Call them his mistakes or his mantra for successful investing, I see them as the cardinal rules of investing and trading—value, swing, trend or day.
Cheap’s not good: Buffett realized through his experience that given a choice, a good company whose shares moderately higher prices are much better than a mediocre company whose shares are at a discounted price. Time supports good business and destroys bad business. Do note the emphasis is on ‘moderately higher’ and not ‘excessively higher’.
Bet on the captain or the ship: The classical investor’s dilemma is—should the bet be on the company or its management? According to Buffett, "Good jockeys will do well on good horses, but not on broken-down nags." Good business with good management grows and profits. Bad business with any management eventually fails. Bad management for good business gets ultimately replaced.
Stick to the basics: Buffett’s portfolio lacks the luster and consists of seemingly the dullest businesses around. Instead of hi-tech, Buffett goes low-tech and invests in candies, soft drinks mattresses, shoes, paints, jewelry, possibly insurance etc. His glimpse of the future is around these companies rather than complicated, tech companies, reason being the simpler the company’s products are, the better is an investor’s ability to evaluate the business.
Buffett says, "To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.". It’s all about the investor’s circle of competence and comprehension. Focus on your strengths
Avoid Greed: Unlike businesses where excess profits lead to futile acquisitions or where egos and rivalries create unnecessary acquisitions and purchases, Berkshire Hathaway (BRK.A) completely eliminates emotion-led meltdowns that impact its investments and business. The focus is only on long-term shareholder returns. Buffett says, "I thought that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn’t so. Instead, rationality frequently wilts when the institutional imperative comes into play."
Investor Trust: Buffett has learned from his mistakes to invest in only those businesses with management that has a high degree of integrity. This is critical for investor trust. He says, “After some other mistakes, I learned to go into business only with people whom I like, trust, and admire. We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We’ve never succeeded in making a good deal with a bad person."