Warren Buffett is arguably the most renowned investor and billionaire in the world – even if Bill Gates has about 20 times more followers on Twitter than the Oracle of Omaha.
What makes Warren Buffett’s rise into the elite category of “billionaire” so intriguing is that he did it entirely through investments. Quite a few of today’s billionaires, by comparison, had quite the head start via inheritance or family fortune.
Warren Buffett had less than $10,000 to his name in the early 1950s, and now, a little more than six decades later, his net worth sits at more than $85.3 billion, with his conglomerate Berkshire Hathaway sporting a $410 billion market valuation — good enough for the fifth-largest market cap among all companies listed on major U.S. exchanges.
Warren Buffett’s 8 Important Lessons About Investing:
1. “Rule No. 1 : Never Lose Money
Rule No. 2 : Never forget rule No. 1.”
The great secret to getting rich is getting your money to compound for you and the larger sum you start with, all the better.
As an example: $100,000 compounding at 15% for twenty years will grow to $1,636,653 in year twenty, which gives you a profit of $1,536,653.
But let’s say you lost $90,000 of your initial investment and could only invest $10,000.
Then your investment would only grow to $163,000 in year twenty, for a profit of $153,665.
This is much smaller number. The larger the amount of money you lose, the greater the impact on your ability to earn money in the future.
That is something that Warren Buffett has never forgotten. It is also a reason why he drove an old VW Beetle long after he was multimillionaire.
2. “I made my first investment at age eleven.
I was wasting my life up until then.”
It is good to find one’s calling early in life and in the field of investing it allows for unparalleled opportunities for the magic of compounding sums of money to work.
The stock that Warren bought when he was eleven was in an oil company called City Services.
He bought three shares at $38 only to watch it sink to $27.He sweated it out and after it recovered, sold it at $40 a share.
Shortly thereafter, it soared to $200 a share and he learned his first lesson in investment – patience. Good things do come to those who wait – provided you pick the right stock.
3. “Never be afraid to ask for too much when selling our offer too little when buying.”
Warren understands that people fear embarrassment if they ask too high a price when selling or offer too low a price when buying. No one wants to be seen as greedy or cheap.
Simply stated, in the world of business, how much money you get from a sale or how much you have to pay when making a purchase determines whether you make or lose money and how rich you ultimately become.
Warren has walked from many a deal because it failed to meet his price criteria.
Perhaps the most famous example was his Capital Cities purchase of ABC. Warren wanted a larger share of the company for his money than Capital Cities was willing to part with – so he walked from the deal.
The next day Capital Cities caved in and gave him the deal he wanted.
Ask and you might just receive, but if you don’t ask…..
4. “The great personal fortunes in this country weren’t built on a portfolio of fifty companies. They were built by someone who identified one wonderful business.”
If you do a survey of super rich families in America, you will find that almost without exception their fortunes were built on one exceptional business.
The Hearst family made their money in publishing, the Walton family in retailing, the Wrigley family in chewing gum, the Mars family in candy, the gates family in software. The lists goes on and on.
The key to Warren’s success is that he has been able to identify exactly what the economic characteristics of a wonderful business are– a business that has a durable competitive advantage that owns a piece of the consumer’s mind.
When you think of gum you think of Wrigley, when you think of a discount store you think of Wal-Mart and when you think of cold beer you think of Budweiser.
Warren has learned that sometimes the shortsighted nature of the stock market grossly undervalues these wonderful businesses and when it does he steps up to the plate and buys as many shares as he can.
Warren’s company, Berkshire Hathaway, is a collection of some of the finest businesses in America, all of which are super profitable and were bought when Wall Street was ignoring them.
5. “You should invest like a Catholic marries- for life.”
Warren knows that if you view an investment decision from the perspective that you will never be able to undo it, you’ll be certain to do your homework before taking the plunge.
You wouldn’t jump into a marriage without doing your research (dating) and discussing it with your advisers (your pals at the pub) and thinking long and hard about it….. would you?
Nor should you jump into an investment without knowing a lot about the company and making sure you understand it. But it is the life part that really makes the money.
Consider this: In 1973 Warren invested $11 million in the Washington Post Company, and he remains married to this investment even to this day and over the 33 years he has held on to it, it has grown to be worth $1.5 billion.
6. “Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.”
Warren has always thought it strange that highly successful and intelligent businesspeople, who have spent lifetimes making huge sums of money, will take investment advice from stockbrokers too poor to take their own advice.
And if their advice is so great, why aren’t they all rich? Maybe it’s because they don’t get rich off their advice but off charging you commissions?
One should beware of people who need to use your money to make you rich, especially when the more things they sell you means the more money they will make.
More often than not, their agenda is to use your money to make themselves rich. And if they lose your money? Well, they just go out and find someone else to sell their advice to.
7. “Happiness does not buy you money.”
Warren never confused being rich with happiness.
We are talking about a guy who still hangs out with the same people he did in high school and still lives in the same neighborhood in which he grew up.
Money hasn’t changed who he is on a fundamental level. When asked by college students to define success, he has said it is being loved by the people you hope love you.
You can be the richest man in the world, but without the love of family and friends, you would also be the poorest.
8. “You should invest in a business that even a fool can run, because someday a fool will.”
There are businesses with great underlying economics and businesses with poor underlying economics. You want to invest in companies with great underlying economics because it is hard to damage these kinds of businesses.
Companies in which Warren has invested, such as Coca-Cola, Budweiser, Wal-Mart , Wrigley’s, Hershey are almost dumbproof.
You know you are going to make money with these businesses, even if a fool becomes CEO.
But if you have to worry about a fool running the business, then maybe it isn’t such a great business, and maybe you shouldn’t be in it.