How Did Warren Buffett Get Rich and What Can You Learn From Him?
The Oracle Of Omaha, Warren Buffett, continues to inspire generations of capital and currency market investors with his inimitable style, impeccable track record of returns and stress on the value for money investments. It is almost impossible to put a number on the wide range of investors who look up to his trading strategy to further their own. The most important question that comes to our mind then is what makes this man tick? What does he do so differently that even the all power market tries to follow his step, seldom trying to displease Omaha’s famous investment guru.
Warren Buffett’s Success Story
Perhaps the first pit stop in our journey towards understanding Buffett’s business acumen and investment policies is to understand how he made his own. How a 17-year old newspaper delivery boy eventually became one the century’s best known investor, business person and philanthropist?
The son of a Congressman, he gradually worked his way up the ladder. Starting with newspaper delivery and working at his father’s grocery shop to being an investment salesman, he finally managed a job offer from Benjamin Graham’s partnership. Graham was one of the biggest influences on Buffett’s trading style. Around the mid 1950s, when his personal savings amounted to $174,000 or $1.47 million in the current context, he started the Buffett Partnership and has not looked back since. His company, Berkshire Hathaway hit a record $6.4 billion profit in the last quarter.
An avid bridge player, he is known equally for his philanthropy as his investment acumen. Here is a sneak peek at Buffett’s investment strategy and lessons you could take from them to help you becomes a successful forex trader. Remember it is not just the trading technique but your very approach to life also that eventually clinches the deal for you.
Buffett stresses on the need to introduce discipline in your trading methodology. One needs to be careful about what to invest in, how much to invest and when to exit. In several talks, he has emphasized on the need to go ahead with a pre-set target and to stick to it despite many superficial distractions. This is also an important element in his overall advice of keeping costs to the minimum to maximize the return one could strive to achieve from an investment.
Being an Expert Is Not a Pre-requisite
According to Buffett,
“The stock market just offers you so many opportunities, thousands and thousands of different businesses. You don’t have to be an expert on every one of them. You don’t need to be an expert on 10 percent of them even. You just have to have some conviction that either a given company, or a group of companies … are likely to make more money five or 10 or 20 years from now than they’re earning now. And that is not a difficult decision to come to.”
Essentially what he means is you need to be totally convinced about the prospects of an investment before committing your money.
If you are not very comfortable with specific counters, he advises going for an index play and ensure that you do not end up paying almost 1-2% of your total returns as costs/taxes and other related expenses.
Avoid Letting World News Affect Your Investment
Warren Buffett is known for his calm, patience and long-term focus. Speaking to investment enthusiasts he once mentioned that even if he knew that a big war is inevitable, he would still be buying in the market. He feels a major event like war has always been accompanied by devaluation of money.
Therefore, holding money can’t be a great strategy, especially if a war is in the making. Buffett suggests it is wiser to deploy the money in the asset that is sure to see an increase in its valuation in years to come. Whether it is real estate or farm land or securities or any other asset class, if the valuation has a scope of advancing, then it is worth investing in.
Need to Be Stoic In a Falling Market
Well, we all feel elated when our investments gain, see an unprecedented rise and our profit margins expand. But every coin has two sides. What happens when your investments nosedive, the stocks or the currency pair that you invested in plummets? The Oracle says,
“When I got up this morning I actually looked at a stock on the computer, on the trades in London, that we’re buying and it’s down and I felt good. … We were buying it on Friday and it’s cheaper this morning and that’s good news.”
Will he buy more?
Of course this also goes on to highlight another key aspect in your entire investment procedure and that is how convinced you are about a particular investment you commit in and that takes us to the next point.
Don’t Buy a Business that You Do Not Understand
Time and again Warren Buffett mentions that you should never buy a business that you do not understand and are unable to assess the future prospects. He feels it is very important to understand the business that you choose to put your money into. Because he feels unless you are confident about your current investments, you cannot be confident to take a call on the future prospects and how you should deal with a specific investment going forward.
One of the best examples of this is Buffett’s stance on the entire dotcom business. During the great dotcom boom, when every investor worth his salt was making a beeline to grab a pie of this very lucrative investment proposition, the Oracle of Omaha refused to enter or take any position in it at all because he did not understand the dynamics of the technology sector. As his expertise was more in the financial services industry, he has chosen to limit his investments in this sector predominantly.
This also goes on to highlight another primary aspect that he always emphasizes, and we discussed right on top, i.e. trading discipline. It is very important to set your target and then make well rounded effort to stick by it.
Don’t Aim For Quick Profits
This is another red flag from Buffett. He says,
“Our whole attitude in our own business and what we like to see with the businesses we own stock in is we want to run them for the people who are going to stay in rather than the people who are going to get out. At any given time, you can make more money, usually, selling the company. … The answer is not to sell the company. The answer is to keep running the company well. … I could do certain things to jiggle up the price of Berkshire in the short run. It would not be good for the company over five or 10 years.”
While discussing the issue, he says while there is no law against anyone wanting to book quick profit, that is not the way he likes conducting business or would want to execute his trades. His methodology has been a lot more passive and relatively calm despite all the mayhem and chaos around.
Need to Understand the Bigger Picture
This is a very interesting perspective that is brought to light by his friend and bridge partner, Bill Gates. Gates says at the very behest it might appear the Buffett business is picking and investing in stocks. But when you delve deeper, you realize that he has the ‘whole frame of the business.’ Quoting the investment guru, Gates says Buffett insists on some basic parameters.
“He talks about looking for a company’s moat – its competitive advantage – and whether the moat is shrinking or growing. He says a shareholder has to act as if he owns the entire business, looking at the future profit stream and deciding what it’s worth.”
Buffett spends a lot more time analyzing the future growth avenues of a particular business compared to day to day analysis of the stock movement. According to him gains and loss on any specific day do not make a huge difference to him. What matters is how much investment yields after 10 or 20 years. If he is convinced of a significant run-up he puts his money in it.
Never Compromise Your Reputation
This is one factor that Warren Buffett stresses over and over again. He says,
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
In this age of complete digital outburst, it becomes particularly important to guard your reputation like a hawk. Even the slightest slip from your side could cause unfathomable damage to your reputation and however much you might want to wish it away, technology makes it possible now to remain etched forever along with conclusive evidence that is hard to ignore or for that matter even disappear.
Keeping a Frugal Approach
This perhaps is one of the toughest lessons that Buffett teaches his followers. Earning money is one aspect of it but knowing where to draw the line and how much to allocate for your expenses is a big challenge. To earn and yet not flaunt what you have made is a tall ask. He has been staying in the same non-descriptive Omaha house that he had bought in 1958 and was then worth around $31,000. He does not sport luxury cars, fancy phones and his base salary has remained the same in Berkshire Hathaway in the past 25 years.
Know When to End or Quit
In several talks and interaction with his admirers, Buffett has stressed on the need to know where to draw the stop line. It is very significant that as investors and traders, one recognizes ones limitations. He says,
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Essentially what he is trying to convey is if you understand that you have invested in some loss making counter, it would be wiser to exit that investment as fast as you can and limit the extent of your losses.
Learn from Your Mistakes
Time and again Buffett has stressed on the need to convert your mistakes into change platforms, the foundation stone of your success. It is possible that during your trading career you might make many decisions which might be really stupid but learn how you can capitalize on them to ensure future gains and decidedly firm approach.
The scope of mistakes of widespread but what makes the difference is how we deal with it. Instead of reminiscing an opportunity who passed away, it would be always be logical to focus better and look at future opportunities that have the potential to yield even higher returns.
Surround Yourself with Smart People
It might be a difficult fact to get used to initially but accomplishment begets accomplishment. Buffett says,
“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours, and you’ll drift in that direction.”
The logic is simple yet sound. When you constant see people around you perform in a committed manner, they would inspire you to make yourself better and in many ways improve your approach and become a lot better person.
While you might not yet be accomplished enough to be a mentor to someone but it surely could be your best shot at self-improvement. Remember the old saying, birds of feather flock together. Interacting with like-minded individuals open up many hitherto unknown vistas of knowledge and give you an interesting opportunity to scale up your business and personal achievement levels.
Last but not the least important would be the primary passion quotient. Buffett says,
“Without passion you don’t have energy and without energy you have nothing.”
This energy is often the deciding factor, that fine line which demarcates success from failure. Passion drives performance, knowledge enhancement and creates the kind of base that will enable you to take risk and see them bear fruit in your day to day life.
The oracle of Omaha has always emphasized the need to excel and exceed your own expectation. Most importantly he has valued the need to recognize the true worth of time because you might figure out alternative ways of compensating for most types of loss, it is simply impossible to make up for lost time. It is precious and he firmly believes in utilising it to its maximum potential. In his own words,
“No matter how much money you have, you can’t buy more time.”