Every individual who is a keen investor swears by the investment mantras of Warren Buffett. The success of Warren Buffett, a self-made multi-billionaire, can be attributed entirely to his smart and unorthodox investment strategies.
Buffett, largely influenced by the philosophy of famous professor, economist, and investor Benjamin Graham patronized the concept of value investing. It is this belief of value investing that gave importance to choosing the company’s stocks that were undervalued but have tremendous potential in the future. This led to some of his earliest deals in companies like Berkshire and Coca Cola laid the foundation for his multi-billion empire.
Value Investing, along with the philosophy of emphasizing company performance, debt, and profit margins, has led Buffett to close some other business deals, which added to his fortune.
From starting partnerships with family members to becoming the largest shareholder of Bank of America, Buffett’s acumen in investing leaves the followers and critics in awe of the person. Buffett has always been open to discussing the ideology of investment.
He has followed the much-loved method of writing letters to shareholders, laying down the famous investment mantras in front of the world. Read on to know what wisdom can be gathered from some of the most famous essays of this most successful investor of all times:
Boards & Managers
Buffett, in one of his essays, talks about the three critical aspects that are necessary for the success of any organization. The first point he talks about is ambiguities that are associated with the role of a CEO in an organization. The key point that is highlighted is that there are no fixed parameters to evaluate a CEO’s performance. Absence of any criteria or a questionable authority to measure performance often leads to an incompetent CEO carrying on for a long time. This is also because the board of any organization does not directly question a CEO’s performance. If at all is a question raised, then a CEO in most of the cases can attribute a subpar performance on others, which includes people in various managerial positions reporting to him.
Another point that Buffett touches upon is the importance of corporate governance. It highlights the importance of having a strong and ethical Board of Directors, which would fulfill its prime responsibility of protecting the interests of the shareholders. He elaborates on this by presenting three different scenarios. First, the owners being completely absent with larger power vested in the board of directors. The second case where the owner is an active participant in management. A third situation where the owner acts as a silent watch guard ready to intervene to resolve any conflict of interest that might arise and to protect the rights of shareholders. Buffett advocates the third case as an ideal one, which leads to a balanced and smooth functioning of the company. Explore more about personal loan here.
Buffett touches upon the last point by talking about the importance of having able and competent managers. A manager who knows his job and is committed is an asset to any organization. Having a good manager lays a foundation for a successful organization and this is demonstrated by the exemplary managers that Buffett has at the many different entities working for him.
Buffett begins this essay by talking about the approach that both Buffett and his business partner Charlie follow while purchasing a stock. The various aspects like the future of the business, the current price, etc. are thoroughly evaluated by Buffett and Charlie before any investment is made. Another point that is elaborated is that a transaction is not undertaken with any specific time horizon. The stock is not sold until the time both business partners see a gradual increase in its intrinsic value.
Buffet then goes on to discuss the method that his teacher Ben Graham followed for making any decision about the stock. It was Graham who introduced Buffett to the idea of Mr. Market. The concept aims to provide an understanding of handling the volatile conditions of the stock market. It emphasizes the need for having a strong mental attitude to make a balanced decision and refrain from conducting a buy-sell transaction guided by market sentiment.
Mr. Market is presented as an imaginary character that comes up with the daily propositions luring an investor to make a hasty decision for a stock that a person holds. Buffett talks about being cautious of the various opportunities that Mr. Market comes up with and recommends to adopt a well-thought approach before making any decision to either buy or sell as it could have lasting impacts. By drawing an allegory of Mr. Market Buffet presents the uncertainty that is associated with investing in stock markets and how to handle these situations without giving in to temptations.
“Value” Investing – A Redundancy
Buffett begins this essay by pointing out the basic and the most important reason why someone invests in a business or a stock of any company. The underlying goal is to earn profits out of such a purchase. The attention is paid to invest in the businesses that will have great potential to generate higher returns in the future. The importance of having knowledgeable, skilled, and able people to be at the helm of handling the business like the ones who are managing various entities held by Buffett is highlighted.
Talking about the advantages that a controlled company offers, he points out that it allows allocating capital to the resources according to the need. This cannot happen while trading in marketable securities. An important fact that is mentioned is the inability of many CEO’s to allocate capital and their denial in accepting the same. This inability to allocate capital often leads to the intervention of investment banks and consultants, which, according to Buffett, does not provide much help. Another advantage that holding a company offers is benefitting from the tax-related norms.
Buffett, a staunch proponent of value investing, surprises the reader by terming the “value” investing as redundant. Talking further on the redundancy of value investing, Buffett says that value is an inherent factor that an investor seeks while investing. The belief of investing in low price stocks to get higher value cannot always be true. And vice versa will not hold any value where high price stock would offer low value in terms of dividend and other returns. A parallel between growth and value is drawn where both are said to coexist together. Growth in the organization’s business and other prospects would lead to increased value. Thus, Buffett talks about how the once considered a benchmark of investing “Value Investing” is no longer as an attractive proposition as it used to be.
Before we discuss the aspects that Buffett covers in his essay Intelligent Investing, let’s understand that it has nothing to do with Value Investing. While discussing the mantras of intelligent investing, Buffet begins by explaining how a great vision combined with product innovation and first-entry benefit has managed to create the giants like Coca Cola & Gillette. And how have they been benefitting from the reputation that they have built for themselves, and they would continue to reap in the benefits in the years to come.
Buffett warns investors to be wary of making impulsive purchases and also understand that there is a difference between the value paid for acquiring a share and its actual valuation. It could take time for the stock to reach the price paid in acquiring and give higher returns.
According to Buffet, an investor could earn higher profits without even knowing the modern finance trends like beta, option pricing, emerging markets, etc. An investor should make any investment decision, keeping in mind the two factors, i.e., buying at a rational price and to invest in the companies whose profits would continue to increase in the coming years giving higher returns.
To select a company, emphasis should be on studying and evaluating the company’s prospects with regards to the business plans and the scope of growth and increase in value. A little effort spent before choosing a stock would likely give the desired outcome. The same can be vouched for looking at the success that Buffett has achieved following the rules that he has shared.
The investment ideologies and strategies that Warren Buffet follows have sometimes defied the concepts that are taught in the business schools. Many might not believe in his theories and might dismiss them. But the success that Buffett has achieved by following his strategies to invest proves that the only logic that prevails when it comes to making an investment decision is patience, farsightedness, ability to evaluate, and not be afraid of charting your course rather than following the others. If there’s one take away from his entire body of work, it is that if an individual who learns the art of displaying sage-like wisdom and calmness in the face of the volatility that the market offers is sure to reap in the enormous benefits.
Disclaimer: The above-mentioned lessons have been gathered from the essays of Warren Buffet available in the public domain. These should not be considered as professional investment advice, endorsement, or recommendation by anyone. Investors are advised to thoroughly research all opportunities. PaySense will not be liable for any results born from following the advice listed above, or by that of Mr. Buffett.
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