Book: The Tao of Warren Buffett by D.Clark and M.Buffett
Learn a lot, be candid, don’t listen to Wall Street, take advantage of the short-sighted market and invest during temporary crises with a margin of safety in a concentrated portfolio of businesses in your circle of competence, with great underlying economics, high returns on equity, widening moats, and able and honest management.
- Success is being loved by people you hope love you, not by being rich.
- The happiest rich people love the business life and don’t care about other’s people wealth.
- Do a job you love so much you would do it for free.
- Work for good businesses from a value investing standpoint. More money, more promotion.
- Be frugal and let compound what you didn’t spend.
- Writing forces you to think and get your thoughts straight.
- Habits seem weak at first but are powerful later. Time is the key.
- Value investing requires the right temperament with the right intellectual framework.
- To persuade, find what the other needs or wants, and give him.
- Money makes you more of what you already are. If you were a jerk, you’ll be a jerk with money. If you were generous, you’ll be even more.
Learning and intellectual honesty
- Learn from your mistakes, and from other’s people mistakes too. But don’t dwell on them, or get stuck in regrets. Look forward.
- Recognize your mistakes and get out of bad businesses.
- To be able to understand your mistakes, you need to do things you fully understand in the first place.
- Be ready to do mistakes to be able to learn.
- Stay within your circle of competence when you invest or give advice.
- You don’t need advanced math to be an investor.
- Warren Buffett’s role models are Benjamin Graham (buy companies for less than their intrinsic value) and Phil Phisher (buy high-quality businesses and hold them forever).
- In investing, age and experience can be greater virtues than youth and enthusiasm.
- Smart journalists and teachers are the foundation of a good society because many important decisions from investing to voting are based on the information they provide.
- Candor and honesty are the foundation of trust.
- Stay away and don’t deal with people you don’t trust.
- Don’t listen to stockbrokers.
- A good reputation can be destroyed in minutes.
- Hire honest, smart, and hardworking people. Without honesty, the two others will kill you. If they can’t be trusted, make sure they are also dumb and lazy.
- Nebraska Furniture Mart was bought at the price Mrs. B asked, $40M because Warren trusted her more than her accountants.
Take advantage of the short-sighted market
- Most investors, from retail investors to institutional funds, are very short-sighted.
- They are largely incompetents to correctly analyze individual businesses and their long-term associated risks. Some are driven by greed and envy. And funds are chasing these investors’ money.
- Since most funds (mutual funds and hedge funds) are paid on assets under management plus short-term performances, they are incentivized to show amazing results in the short term.
- Passive index funds blindly replicate the valuations created by the active investors, so they blindly follow the market into any folly.
- Therefore, the vast majority of actors in market value are short-sighted.
- The whole system is short-term focused, which creates huge mispricing in both directions. Short-term efficiencies often create long-term inefficiencies. Prioritizing today’s pleasure instead of doing your homework leads to a poor long-term situation.
- The market is therefore relatively efficient to price the short-term value of companies, but sometimes, usually during a crisis, there are huge differences with their long-term value. Value investing is about buying good businesses during these mispricing in our favor.
- Ignorance combined with debt leads to economic collapse, an opportunity for value investors.
- Greed, fear, and folly will happen, and they’ll bring over or under-valued stocks. But it’s impossible to tell when.
- Be greedy when others are fearful, and be fearful when others are greedy.
- Mispricing also happens during times of uncertainty.
- Stocks can stay mispriced from intrinsic value longer than we expect, but never indefinitely.
- Mr.Market is here to serve you, not to guide you. The stock market is just a place to get a price quote of the short-term worth of a company.
- Bubbles usually begin with major technologies, like radio, airplanes, autos, computers, biotech, and the internet.
Be contrarian, stay away from the crowd and what Wall Street does.
- Don’t follow the herd in investments. Avoid what’s popular.
- Don’t trust “insider tips”, they could be outdated or fraudulent (to drive up the stock price and dump them to gullible investors)
- Never ask someone who is paid to solve problems if there is a problem.
- Many professions make things harder than they should be so you need their assistance.
- Complex investing strategies make the adviser rich, not the advisee.
- Forecasters tell you what they are paid for. Wall Street is paid to make you move your money around, buying and selling stocks, moving from one fund to another.
- Buy and hold strategy would starve to death stockbrokers.
- Avoid IPOs, there is no chance to get a bargain over the long-term economic prospects.
- As a bidder, away of bidding wars, always in favor of the one organizing them.
- Fundamentally, value investing is about making money by exploiting the difference between short-term under-valuation and long-term intrinsic value during a temporary company or market crisis.
- Stocks are a fraction of a business, not just bouncing prices to bet on.
- Buy businesses with great underlying economics, low rate of change, run by honest and able managers, at a reasonable price.
- Invest only into companies you fully understand and can explain them.
- Do your due diligence before buying.
- Investment is about being rational, not intuitive.
- Buy like if the company would have a very prudent growth, with a big part of your valuation based on current profits. Past growth is not guaranteed to continue, especially at a larger scale.
- Look for opportunities with an active, interested, and open mind, but don’t be in a hurry.
- Wait for the fat pitches, the no-brainer opportunities, high-quality businesses at low prices.
- Don’t try to predict the future. Stick to comparing the current market prices with your long-term rational and conservative evaluations, plus a margin of safety.
- When the market is going into record summits, be extremely prudent before buying anything.
- Be disciplined on the small investments, or you’ll be undisciplined on the big ones as well. Warren once turned down a $2 golf bet because the odds were against him.
- Don’t be afraid to ask for too much when selling, and too little when buying.
- Buy and hold forever good businesses. Make them compound as long as possible. Never lose money, it would kill compounding. It often takes at least 10-15 years to 10x, which equals to 16-25% annual compounding rate.
- Never invest in a company less than 10% of your net worth to force you to have a strong conviction about its future.
- Invest in companies you are comfortable holding for 10 years.
- History is important to understand what can happen but won’t tell you what will happen and when it will happen.
Good businesses have high returns on equity with a widening moat
- Good businesses:
- They have a durable competitive advantage, great underlying economics, high returns on equity, and strong and consistent earnings.
- They can be run by fools.
- They never decrease the quality of their products.
- They have a slow rate of change, like beer, soda, candy, chewing-gums. This is the only point of this whole list where Warren Buffett slowly changed his mind in the last 15 years, investing more into tech companies like Apple.
- Bad businesses:
- They sell commodities, they have low returns on equity and erratic earnings.
- They can’t be fixed. Good management can’t change a bad business. Don’t try to change how managers run the business, it doesn’t work better than in marriage.
- They need a lot of capital to grow. Good ones don’t.
- Bad management may lead them to fake earnings in accounting. Ex: they can transform costs into “investments in partnerships” and make these fake partnerships pay them back fees, booked as “earnings”. Fake earnings and fake costs reduction lead to fake profits. Stock price raises anyway, because it’s hard to spot, and the management takes a big bonus. It’s the story of Enron, but there are plenty of other less famous cases.
- Learn accounting to be able to differentiate good from bad businesses
- It’s easier to stay out of trouble than getting out of trouble.
- Don’t develop skills to run bad businesses. They’ll always stay bad businesses. Energy is better deployed into finding a good business than trying to fix a bad business.
Good managers are honest and able
- Good managers:
- They publicly admit their mistakes.
- They proactively prevent problems before they happen, not reactively fix them when they happen.
- They keep costs low from the start and continuously, not just during hard times. “cost-cutting programs” are a sign of bad management.
- To attract the best managers, the ones who are self-motivated and aggressive in taking on challenges, allow them to make mistakes.
- Bad managers…
- They are looking for excuses.
- They are mostly spotted during hard times. The challenge is to spot them during good times.
- If they promise “to make the numbers” they might be tempted to commit accounting fraud.
- Studies supporting decisions need to be carefully evaluated because even bad managers have studies prepared by people working for them, eager to please their boss.
Concentrate. Don’t diversify.
- Diversification is a protection against ignorance. It makes no sense for those who know what they are doing. It’s only required when investors don’t understand what they are doing.
- Incompetence is a much bigger risk than concentration.
- Wealth is about finding very few investments that clearly make it big, after a very deep analysis.
- There is less than one brilliant investment idea a year. If you find more, that might be the sign there are not so brilliant.
- You can’t keep track of the business economics of 50 companies.
- Wall Street makes money with a lot of transactions. Value investing makes money with as few transactions as possible, letting great companies compound over 30 years.
- If you have 50 good ideas, why not put all your money in the best 3?
- The vast majority of billionaires’ wealth comes from the single company they founded and grew.