BUILDING WEALTH THROUGH WARREN BUFFETT WAY

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Today, when people think of the greatest investor of our age, Warren Buffett is perhaps the undisputed champion with his time-tested principles, their decisive execution and an exceptional ability to understand the situation and business. In 2008, he was the richest man on the earth with his fortune of almost 70 Billion dollars, He consistently beat the S & P index by a handsome margin. From 1965 to 2019, Berkshire Hathaway averaged the growth of 19.0% as against the growth posted by the S&P index of 9.07%. Though, many books have been written on principles adapted by Buffett, here, let’s have a look at some less-highlighted ones: -

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DON’T BE SIDE-TRACKED AND DON’T SETTLE FOR SMALL PROFITS

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By the time, Buffett was eleven, he had saved $120 by selling popcorns and peanuts in football matches, selling bottles of coke on small margin,and delivering newspapers and magazines. He, along with his sister Doris purchased three shares each of CITY SERVICE PREFERRED for $114. Initially, the stock went down by 30% and as soon as it recovered, Buffett chose to sell his holding for $120 thus making a profit of around six dollars in the bargain. Thereafter, the stock price increased to $202 and poor Buffett and his sister had TO for-gone a loss of a whopping 492 dollars! This incident taught him the most fundamental of his investing principles; “don’t be side-tracked and don’t settle for small profits!”??? ??????????

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INVEST, DON’T SPECULATE

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if we have a close look at the investment strategies of Buffett, one can easily notice a pattern of belongingness and consistency. He always emphasizes that while purchasing shares of a company, think as if you are starting that particular business and if you don’t understand the business, don’t invest in shares. Although he had started the BUFFETT partnership way-back in 1956 and saw technology companies making plenty of billionaires, he made his first investment in IBM, a technology company as late as in 2011 I.E. 55 years after entering into the investment business. Things like PE Ratio, dividend yields, book value, 52-week low-high, and other technical charts are of no significance for the investment philosophy of Buffett. He invested almost 30% of Buffett partnership’s assets into American Express after infamous salad oil scandal of the early sixties as a result of which stocks of American Express had lost more than fifty percent of their value. The result, stocks of American Express tripled in just two years! ?Often he has said (greedy when others are fearful and fearful when others are greedy). However, it can be argued that sometimes, Buffett did not follow his own rules. For instance, in 1988-89, he made an investment of over one Billion dollars in coca-kola. By that time price of the stock had risen five-fold in the last six years, but the genius of Buffett had other compelling tenets to satisfy his decision!??? ????????

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HIRE WELL AND MANAGE LITTLE

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Berkshire Hathaway employs as many as four lakh employees but its headquarter in Omaha, Nebraska has only 25 of them! When Buffett hired AJIT JAIN, an alumnus of IIT KHARAGPUR, according to Jain’s own admission, he had little knowledge of insurance business, but Buffett realized his brilliance and it worked miraculously well. In Berkshire Hathaway’s 2009 annual report, Buffett wrote “A hugely important event in Berkshire’s history occurred on a Saturday in 1985. AJIT JAIN came into our office in Omaha – and I immediately knew we had found a superstar. (He had been discovered by Mike Goldberg, now elevated to St. Mike.) … If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.”

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QUALITATIVE UNDERSTANDING OF MANAGEMENT

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Time and again, people asked Buffett about his holding period and every time he replies, “my favorite holding period is forever.” The question arises what precisely he means by forever? repeatedly, Buffett has said that you cannot make a good deal with a bad person. While looking at a company, do look at its managers and notice that during turbulence how they behaved. What information did they hide from the shareholders? Were they honest in their approaches? How did they handle failures? Does management have the courage to resist the institutional imperative? “The CEO who misleads others in public may eventually mislead himself in private.” Says Buffett. From 1989, Berkshire Hathaway has been formally reporting its mistakes or lost opportunities in its annual reports. He has always been a great proponent of long-term investing and doesn’t believe in selling the portfolio on a regular interval. He always prefers a bumpy long term over a taxing short term. For instance, if somebody invests in security and earns 15% annually, imagine two scenarios for say ten years. In scenario I, the stock is sold every year, income is taxed, and the net amount is reinvested. In scenario II, the holder does not sell it for ten years and at the end of the tenth year, has a compounded return of fifteen percent! Simple mathematics will show the difference!

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MARGIN OF SAFETY????? ??

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An investor should always look closely at how much margin of safety is available to him while investing in a particular stock. The margin of safety, Buffett describes is the difference between the price of the stock and its intrinsic value. When the intrinsic value of the stock is more than the price of the stock, an investor has THE POSITIVE margin of safety and the bigger is the difference between intrinsic value and price of the stock, the more margin of safety is available to the investor. If the intrinsic value of a share is less than the price, the investor has a negative margin of safety. While having formal education, Buffett once happened to see “the intelligent investor” by Benjamin Graham and it was like seeing the light. Perhaps, Buffett is the most popular disciple of Graham. He went to Columbia business school to study under the mentorship of Graham. While awarding an A+ grade, Graham commented that in the last 22 years of teaching, Buffett was the first to receive an A+.

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Look for the inflection point

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Every business, every company, almost everything has an inflection point. This is the point where the fall of a business or company begins after a significant rise. Alternatively, this can be the point where the rise of the company begins after a considerable fall. To summarize an inflection point is the point where things will no longer fall or rise anymore and will take the opposite path. An investor should therefore always try to identify the inflection point of a company. For instance, in 2008, when Nokia had 41% of the world’s cell phone market, it reached its inflection point. There can be many examples that indicate exactly the opposite.? ?

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Conclusion

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After looking closely at the investment career of Buffett, it can be concluded that he is a combined embodiment of quantitative theories of Graham and the qualitative principles of Filip Fisher.? In the investment philosophy of Buffett, the quantitative facets like margin of safety have come from Graham and qualitative aspects have been adapted from Filip Fisher. In 1969, Buffett had claimed that he is 15% Fisher and 85% Graham. But since then, his investment philosophy has inclined more towards Fisher and he has put in enormous effort in looking towards the quality of management and its ability to resist the institutional imperative. The investment of one billion dollars in Coca-Cola clearly indicates this shift. Last but not least, partnership with Charlie Munger and the advent of Ajit Jain has been an added bonus in the illustrious career of the Buffett. ????????b