Famous investors (1) – Warren Buffet and his lessons in investments

Let’s be honest and face it – the big shots, the people who did a hell of a lot of money from their investments, will rarely go public about their methods. Yet Warrent Buffet, the Sage of Omaha, has constantly promoted transparency and openness in investing for more than 40 years.
How did Warren do it without damaging his investments?

First of all, he started early.
Actually Warren Buffet illustrates perfectly tha you never start investing early enough – the sooner the better. At the age of 25, Warren Buffett started with US$100. He managed to gather US$ 105,000 from 7 partners, which at that time (1962) was a huge amount of moeny for investments. Yet he promissed them a 7% return – but what he actually did was to get yields higher than the double of the Dow Jones average, which is amazing for somebody who doesn’t know the basics of investing… but pretty normal for an investor who constantly chooses the better investing options

Secondly, Warren Buffett chose only the companies whose businesses he understood.

As the home page of his company says (Berkshire Hathaway), “If you don’t know jewelry, know the jeweler.” Investing in certain companies is (for Warren Buffett) a matter of knowing the board of directors running the business, delegating them the responsability to do the same things before he bought the companies and of course trusting the businesses he buys. Of course, this knowledge – orientation approach should not be treated as exclusive. It is not the only investing approach and is very time consuming, as Buffett proved repeatedly. However, understanding that you buy more than shares who can be technically analysed and predicted with a spreadsheet model is essential for investing. An investor puts its money into a business effectively financing it for the long term, therefore he should understand the business model of his money basket!

 Investing is also about trusting your people and your business partners.

As Warren Buffett recently mentioned in an interview (June 25th, Bloomberg), with a staff of only 19 at Berkshire headquarters in Omaha, Nebraska’s Kiewit Plaza, Buffett says he won’t buy a company without management in place that he’s sure of. And he’s fully trusting the management he’s raised and put in place, such as his presidet Eithan Wertheimer or his team of dedicated analysts who effectively help him run his acquisitions.

According to Buffett, investing is not only a buying game, but also a selling one.

Of course, if you think about it it’s very logical – when you buy completely entore companies (or controlling interests), as Berkshire Hathaway does, you need to convince your own backing up investors that what you buy is the right investment at the right place. With other words, your customers are both the investors who put their money at stake and the executives of the companies from whom you are buying, with whom you need to develop a long term and effective working relationship. Buffett said that

“You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever, or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.”

One of the Buffet’s investing lessons points also to the bear markets.

It is good to buy shares cheap and sell them with a margin, and in fact most of the businesses do so. For example, Berkshire Hathaway announced on Wednesday June 25 that they  invested in the subprime market through its house manufacturing unit, Clayton Homes. In an environment where the oil price has reached US$ 143/barrel (as of today) and where there are serious worries about a rising inflation, Buffett is clearly anticipating a long term end of the recession and a come back to growth, where he will be very well positioned to grow. Which of course is the essence of most of the investing strategies, you should invest where there is long term potential for growth (an American obsession).

These are just a few lessons that Buffett has exhibited in his investing life. Of course, one might say that at 87, Warren Buffett can afford to teach lessons and to learn from his own mistakes, since he built a scale where these cannot be covered. I guess what I am trying to say is that if you do not make those mistakes, you will fail to see the peaks of investing, so

Do It! Invest now!

A few more comments

The Sage of Omaha, by his own count, now owns 76 companies outright, a number that rises to about 200 if Marmon’s 125 subsidiaries, which make everything from water treatment gear to brake drums, are taken into account. Among the Buffett companies are names familiar to most Americans: Geico car insurance, best known for the Cockney-accented gecko in its television commercials; Dairy Queen restaurants; Benjamin Moore paints; and Fruit of the Loom underwear.

Berkshire also owns 8.6 percent of Coca-Cola Co., 13.1 percent of American Express Co. and 8.8 percent of Wells Fargo & Co. Those three investments alone amounted nearly $25 billion on June 24.

Some additional resources on Buffet’s investing strategy

A recent and pretty complete wrap up of Warren Buffet;’s investing principles can be found on Bloomberg here.

The home page of Buffett’s investing company, a very simple yet interesting site with several investing links, can be found here.

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