Risk comes from not knowing what you’re doing.
Warren Buffett
The one liners from Mr. Warren Buffett like the above are very compelling. When you read/listen to them you feel, “Right! How did I not consider that before?”. You will feel you have learnt something new. But as time passes by our wishful thinking while engaging with the stock market gets the best of us and we forget the basic principles. Sticking to the basics and the core principles isolates the successful from the unsuccessful crowd. You should always be aware and conscious about every single step you’ve made while investing. This way, when you make a successful investment you will get a positive feedback which will compound your confidence. And when you make a mistake you’re aware of the misstep you’ve made and you would never ever make it. Let’s talk about inspiration from the likes of Mr. Warren Buffett.
Lessons from Mr. Warren Buffett
If you haven’t gone through my previous blog posts, Becoming a Value Investor and Resources to Help Become a Value Investor please check them out.
Preface
Before we dive into the interesting lessons, let’s talk about something boring. When you jump into the world of investment you will be eager to know what stocks will double in an year or what stocks to bet on. Honestly we need to over come this. At every step of your investment journey remind yourself that “Speculation is your enemy”. It’s difficult to predict the future. So, let’s forget about the stock performance in the current period or future. Stock performance only suggests the market’s sentiment based on the current economic conditions but not the actual “Intrinsic Value” of a company/industry. In the recent past we have seen many companies which investors were “Bullish” on, for instance Peloton Interactive Inc., Carvana.
If you look at these companies finances over the past 5 years (download google finance on your mobile device for quick overview of companies), you will observe that the companies have not made any significant net incomes. The companies have negative net income and the liabilities outnumber the assets. Yet the stock prices for both the companies soared during the pandemic. Why? Because in the short term when people are locked up during the pandemic these online fitness and online car vending companies look lucrative and might seem like a tremendous idea. So, investors want to bet on them for gains in the short term. But eventually, the reality always unveils itself. These companies have been underperforming for years and there hasn’t been a significant growth in the nets.
Never let the news or stock performance or your midnight conversations with your drunken friend push you towards unnecessary stock purchases. Disconnect yourself from the stock market. Connect yourself with businesses, their values and purposes, and the motto they’re striving on.
Lesson 1 – Circle Of Competence
According to Mr. Warren Buffett, you should always assess businesses which are in your “Circle of Competence”. For instance, I’m a Software Engineer in a FinTech firm. I understand Fintech and tech quite well. So any company which falls under the category of Fintech or tech falls under my circle of competence. Understanding the business means understanding what drives the income, costs associated with it and risk. Always start with companies which fall under the business model which you are familiar with.
Let’s modify this a bit. If you’re someone like me who’s eager to learn anything, pick up an industry and try to see if you’re able to understand it. For instance the Oil industry, I have no clue how the industry works but I’m interested to learn and I’m trying to understand the core concepts to get familiar. Research the companies Investment Giants like Warren Buffett invested in(That’s why I started researching Chevron). If you can understand the economics of that particular industry, the costs associated with it’s operations, and the risks associated with the industry you should feel confident in investing.
This a very important principle to be successful in your investment. You don’t want to stay up in the nights worrying about your investments. The idea is to be confident and to be at peace.
Any Fool can know. The point is to understand.
Albert Einstein
Lesson 2 – Moats
In the above image, the ditch filled with water around the castle is a moat. It’s the first line of defense. Similar concept can be applied to companies as well. How strong is a companies moat so that it not only survives the brutal competition but thrives in it. This is also called “Competitive Advantage”. According to Mr. Warren Buffett, you should be able to think 10 to 20 years from now and ask yourself if the company would still exist. And it would only exist that long if it has a durable competitive advantage. Hear the legend talk about moat himself at 1995 Shareholders meeting, 2000 Shareholders meeting.
There are different kinds of moats. For instance, The Coca-Cola Company was founded in 1892. It survived and thrived for 131 years. Through the wars, through the great depression and market crashes. It’s the secret recipe which Coca Cola has been guarding for a century which gives a sense of mystery and interest for customers. Add skillful branding, marketing and global reach to that recipe. Now, Coca-Cola is a brand which I believe almost anyone can recognize even if you take out the label from it’s signature glass bottle. This is what is a Brand Moat. Another example for brand moat would be Apple. Here is the great article which describes different types of moats.
Lesson 3 – CEOs and Foundations
The success of a company depends on how well and efficiently it is being run. How happy are the customers it’s serving and how happy are the employees working there. These play a very crucial role in the overall health of a business. It’s the duty of the CEO to maintain the culture of the company and also to take decisive actions in allocating capital for future growth. A great flight captain will always navigate through the storm and turbulence without the passengers panicking. A smooth landing is a cherry on the top.
Learning about a great captain for a company has 2 advantages(at least for me). One, chances of the company prospering under his reign are quadrupled. Second, you will definitely learn great life lessons from them which are helpful for personal development. Warren Buffett, the captain for Berkshire Hathaway Inc., one of most successful companies to every exist has inspired me and taught me invaluable lessons in investing and life. And this blog is about those lessons.
The other most important aspect that you should look into is the “Foundations”. Every or any company is built on an idea or to solve a problem. If these foundational ideas and solutions are still relevant after years, keep that company on your radar. Over the years, it’s natural to stride away from the fundamentals of why the company was brought into existence. But, if the company keeps striving on it’s foundations then it will always stay relevant. For instance, when Apple was founded “great tech packaged beautifully pleases and attracts customers” was one of the foundations. We can still see the same motto behind all of their products even after 40 years of companies inception.
Lesson 4 – Diversification is not necessary for stocks
Diversification of capital is a very reasonable approach in keeping your risk to minimum. But, if you adhere to the above 3 principles I believe you’ve already minimized your risk. Diversification in investments requires extensive knowledge on various industries. The idea is to invest in business from different industries/sectors so that you’re not exposed to market meltdowns and losses from 1 single sector. In the end your losses will be averaged by gains in other sectors of your diversified portfolio. If this is something which is a sound idea for you, then you can absolutely go ahead with it. But I believe in picking handful of the best businesses with a great competitive advantage and run by an amazing CEO. No matter what the market/sector meltdowns are, such companies will always thrive.
Lesson 5 – Being Humble and Stress free
This is more of life lesson. Even though Mr. Warren Buffett is the 5th richest man in the world, you would not find any difference in his attitude since his early ages. He has always remained humble over the years. He openly accepted any investment blunders which he has made and has always been transparent to his shareholders. This creates trust and unfadable faith towards the future. These qualities should be inculcated to create a never ending virtue cycle where every person can have more faith and trust on every other person. Being humble keeps you from making erratic and egoistic decisions. This ends up hurting the people around you and losses in investments from bad bets.
Conclusion
Try to find your inspirational value investors. Listen and read extensively on them. This way you not only learn their investment principles for success but also principles for life. You can always fetch ideas from these legends and adapt accordingly. Value Investment is not just a way to invest but it’s a way of life. You have to embody the principles not just in investment but also in personal life. Try to gain as much inspiration from around you as you can. You will be unstoppable.
Berkshire Hathaway Shareholder letters by Mr. Buffett- https://www.berkshirehathaway.com/letters/letters.html
The above link has shareholder letters written by Mr. Buffett for the past 45 years. These are treasure trove of knowledge and every one MUST read them.
Disclaimer
The following blog posts are provided for informational purposes only and should not be considered as financial or investment advice. The content presented in these blog posts is based on the author’s personal opinions, research, and analysis of the financial markets.
Investing in stocks, bonds, cryptocurrencies, or any other financial instruments involves risks, and past performance is not indicative of future results. The value of investments can fluctuate, and it is possible to lose some or all of your investment. It is essential to conduct thorough research and consult with a qualified financial advisor or professional before making any investment decisions.
The information provided in these blog posts may not be suitable for all investors and should not be relied upon as the sole basis for investment decisions. Each individual’s financial situation, risk tolerance, and investment goals are unique, and it is crucial to consider these factors before making any investment choices.
The author of these blog posts does not guarantee the accuracy, completeness, or timeliness of the information provided. While every effort has been made to ensure the information’s reliability, the author and the blog cannot be held responsible for any errors or omissions. The author may hold positions in the stocks or companies mentioned in the blog posts, which may influence their views and opinions.
By accessing and reading these blog posts, you acknowledge and agree that the author, the blog, and any associated individuals or entities are not liable for any losses, damages, or actions taken based on the information presented. You are solely responsible for your own investment decisions and should seek professional advice if needed.
Remember, the financial markets are inherently unpredictable, and there are no guarantees of investment success. Proceed with caution, do your due diligence, and consider the risks involved before making any investment decisions.
