Simplicity is the best word to describe the life of philanthropist and mega-billionaire Warren Buffett. The same single word also depicts his multi-billion worth of investment principles and strategies (Cunningham, 2008, p. 18). For more than fifty years Buffett was able to build a multi-billion investment empire with his simple investment philosophy. Like his more than 60 billion dollar fortune under his name, Buffett, who is by far the greatest philanthropist of all time for donating almost all of his wealth to the Bill & Melinda Gates Foundation, is also one of the most observed and most admired personalities in business with countless of articles, books and blogs written about him.
If most common people look at him as the most generous man in the world today, people in the corporate world regard him as the greatest guru” or even God” in the realm of investment. With his great fortune, he is considered God in investment because of his ability to spot real value when everybody focuses their attention on market movements and because of his unparalleled skills and knowledge to transform simplicity into greatness. If most billionaires like Bill Gates and Lakshmi Mittal built their business empires through managing profitable technology corporations and industrial firms, Buffett made billions by simply knowing how and when to invest his money.
How He Started
To know more about the investing secrets of Warren Buffett, it is necessary to look at how he managed his most precious property” his life, and how he lives it (Schroeder, 2008, p.1). He learned how and when to earn money at an early age, and he filed his first income tax return when he was only 13 (Sosik, 2006, p.149). Buffetts value investment career started when he put his money in Berkshire Hathaway, a little known and ignored holding company based in Omaha, Nebraska in the 60s. Now everybody is startled to know that if you invested $10,000 in the company in 1965, the value of that money today would be more than $30 million (Investopedia Staff, 2007).
If his close billionaire friend Bill Gates dropped out of Harvard University to focus on Microsoft Corporation, Buffett, who is known in the business world as Oracle of Omaha, was rejected by Harvard Business School. This experience somehow taught him a great deal not only about business but also about life. To most people Harvard is one of the best, if not the best, schools in the world, but Buffett thought otherwise” his basis of choosing school was not the institution, but the people who would impart the requisite knowledge and values.
So when asked about his mentors, Buffett only had three people on top of his mind” his father, Benjamin Graham, and Phil Fisher. His father” Howard Buffett” taught him the positive values he needed to live, while Graham and Fisher taught him the basic principles in investment and how to make money in this profession. His investment style is consisted in the following rubric” think outside the box.
When he graduated from college, he wanted to make money in Wall Street, but his father and Graham discouraged him (Miles, 2004, p. 30). The two believed that there were great opportunities waiting for him outside Wall Street. That was the time when everybody wanted to work on Wall Street and when everybody focused their attention on the stock market. Buffett believes that stocks are more than just an asset or capital; it is business.
It would be futile to know the secrets of his billion dollar secrets without knowing how he thinks and what he believes in. Unfortunately, most of his biographers failed miserably to look into what is in the mind of the worlds greatest investor. In fact, a review of some literatures and articles would reveal that they just focus on the extrinsic side of Warren Buffett; they failed to look at the intrinsic aspect of his life. Many believe that his philosophy is consisted in these two major Buffet rules” first, never lose capital; and second, dont ever forget the first rule (Miles, 2004, p. 70). It would be best to say that this does not embody Buffetts philosophy but rather his tactical investment approach.
A business philosophy is something that one holds as his primary direction in life” the fountainhead of his concepts and beliefs, the beacon of his goal, and the reason for living. Buffertts business philosophy can be expressed by his following simple quote” Be feaful when others are greedy and be greedy when others are fearful (Hagstrom, 1997, p. 52).
Essentially this buffett-line expresses the inherent nature of free-market system, which he and his friend Bill Gates have in common. Under a free-market system, it is rational and ethical to be greedy, since the primary goal of a capitalist is not just to earn profit but to expand it and ensure that it creates limitless profits and opportunities.
For some this statement may sound ironic or paradoxical since it contradicts the popular or media-fed persona of Warren Buffett. With this belief” that greed is good, Buffett was able to transform his meager investment into a multi-billion dollar empire that even exceeded that of Gates and Mittal. His investment experience proves that by creatively and greedily investing ones money” one can make a good or even great fortune out of creative value investment.
So what does it take to be like Warren Buffett? Definitely it takes a rational and moral philosophy, proper knowledge, and non-conventional investment point of view to follow the billion dollar investment footsteps of Buffett.
But what is the role of philosophy in Warren Buffetts billion dollar investment strategy? The problem with most people is that they tend to mainly focus on tips, secrets, or strategies. Most successful people did not achieve their status by keeping success secrets or strategies but by putting into action a rational philosophy that motivates and creates values.
A simple look at the life and investment career of Buffett would reveal that it is his rational philosophy that continues to motivate him” that keeps on pushing him to do what he does best. As what Fridson said, budding investors must focus on uncompromisingly rational investment philosophy of Warren Buffett. This is because investment secrets or strategies can be absorbed or learned in a very short span of time or even overnight, but it takes an indefinite period of time to absorb and embody a rational philosophy to translate these secrets or strategies to reality.
Of course, this billionaire will not exactly say what people would like to know. Contrary to the many written articles about his investment secrets or strategies, Buffetts secret is in fact consisted only of three simple words that should be practiced everyday” read, research, and think (Miles, 2004, p. 70). Vague and ambiguous as it may seem but this three-pronged strategy is what Buffet practiced and embodied throughout his more than fifty years in the world of investment. That is why it is stressed in this paper that simplicity best describes the life and investment principles of Buffett.
For example, this read-research-think approach of Buffett is the essential element of his cigar-butt investment method. Buffett in fact creatively applied this three-pronged approach in his early years as a value investor. Unlike most investors, Buffett put much premium on his rational judgment than on what most people see in the market. His investment style can be likened to that of a diamond prospector. He knows how to assess which diamond is real or not in just a single glance. He reads, he researches, and he thinks.
His Investment Strategy
Buffetts investment strategy is governed by two rules and a number of principles. These dual rules have been mentioned above. This sets the difference between his investment philosophy and his investment strategy. Thus in this paper, Buffetts investment strategy is composed of rules and principles. Under his primary rule, it is not sensible or moral for an investor to invest and then later on lose his money. Thus this can be avoided by paying attention to his three-pronged investment approach” read, research, and think.
By following the aforementioned approach, a young investor may be able to discover several things that are essential in investments decision-making process. Buffett considered Graham as his investing mentor. According to Miles (2004, p. 72), it was the Graham school from which Buffett learned not just the basics but also the quantitative principles in investment.
On the other hand, he learned a great deal about Fishers qualitative side of investment, such as brand, management skills, soft skills, and competition. Thus he said: I am an active reader of everything Phil Fisher has to say (Miles, 2004, p. 72). Now every promising and even established investor is eager to hear what he has to say. Despite his unparalleled success as an investor, he still gives credit to his two mentors, as he likes to say that he is 85 percent Graham and 15 percent Fisher (Hagstrom, 1997, p. 27).
The reason why it is important to read, research and think is because in investment, it is highly indispensable to consider the following aspects: a) study the business; b) know well who runs it; c) put money in profits; and the most important of all d) have self-esteem. On the other hand, Buffetts basic steps when investing are the following (Miles, 2004, p. 70):
For example, before investing his money, Buffett researched first the nature and potentials of Gillette, which is still the worlds top producer of razor blade. Warrens holding company Berkshire Hathaway invested $600 million in Gillette in 1989; four years ago it already owned 11 percent of said company. This means that from the original $600 million investment, Warrens holding companys investment grew up to over $3 billion. When he decided to purchase Gillette, he did not mind its value in the market but the potential profits it could muster in the long run.
As a value investor, Buffett put money in securities with low prices according to their intrinsic value. In determining the value of a stock, there is no commonly acknowledged method to get the right figure. Basically, the focus of value investors is not on what the market says but on what the companys potentials and fundamentals offer. This is because there are some companies that are undervalued by the market yet with good potentials to grow and rake in long-term profits. This is the attitude that Buffett showed to modern investors. Markets only reflect the short-term value of a company, and it takes proper knowledge, better understanding, and courage to discover which company is undervalued and has the capacity to establish a long-term profit-making success.
His investment methodology
Buffetts methodology is composed of quantitative aspects in value investment. Under this process, he considers the relation between a stocks quality and its value. Based on his method, the return on equity is equivalent to net income over shareholders equity (Investopedia Staff, 2007).
One thing that Buffett considers is debt/equity. Before investing, he conducts research whether a company kept away from excess obligation. This is actually a basic principle in investment” do not invest in a company with huge debt. To Buffett, a debt-ridden company has a low capacity to guarantee return on equity. Debt/equity can be measured by dividing the total amount of obligations by shareholders equity (Investopedia Staff, 2007).
If a company has more debt than equity, it is not advisable to put money in such company since it uses debt to finance its assets and operations. For instance, a company that has a higher ratio of debt vis- -vis equity has an unpredictable earning capacity and is prone to high interest expenses (Vick, 2000, p. 169). When one is investing in a particular company, it is advisable to look at the long-term obligation rather than the total amount of debt.
Another aspect that is considered by Buffett is the profit margin. However it is not only important to know if a companys profit margin is high, what is more important is to know whether it is growing. The capacity of a company to earn long-term profits relies not merely on having a positive profit margin but on constantly expanding this profit scope as well. The attitude of Buffett towards investment can be explained by how he managed Berkshire Hathaway. He purchases stocks to keep the same and he does not look at stocks as a commodity that can be bought and sold but as a business entity. His investment style is simple” he buys stocks and treats them as his own business, and this business makes profits not just for a short span of time but for as long as it stays profitable.
He also considers the age of the company” the longer the better. Those that stay in the business for at least ten years are good investment opportunities. Since Buffett admits that he only has a limited knowledge in technology corporations he only puts money in a business which he absolutely understands.
He puts much premium on longevity, and this principle brought him where he is right now. When he invested in Berkshire Hathaway, he envisioned of a long-term business that could earn a limitless amount of profit. This is what he learned from Graham, which most researchers consider as the proponent of old school in investment. Perhaps the new school in investment is the buy-and-sell style of most investors wherein profits are short-term and limited.
Interestingly, Buffett also looks at the nature of business of a particular company. If most investors usually look at numerical figures, Buffett focuses on the qualitative sides of a company. For example, if a company depends on a commodity like gas and oil, he thinks that such company only offers limited returns on equity (Investopedia Staff, 2007). If the product of a company is identical from those of its market rivals, he thinks that competition would hamper the profit-making ability of such company.
To understand the importance of this approach in investment, it is necessary to look at the biggest stock holdings of Berkshire Hathaway. The holding company owns 9.5 percent of Gillette, which is the leader in razor blade industry (Jubak, 2004). It also owns 9.2 percent or $10.1 billion of Coca-Cola, which is one of the biggest companies in the beverage industry. The other companies which Berkshire has shareholdings are the following: American Express, American Standard, Ameriprise Financial, Anheuser Busch, Burlington Northern, Comcast, Comdisco, Conoco Phillips, Diageo, First Data Corp., Gannett Inc., GAP, H&R Block, Home Depot Inc., Ingersoll-Rd Co., Iron Mountain, Johnson & Johnson, among many others (Losch Management Co., 2006).
Billionaire Warren Buffett is indeed an unconventional value investor who thinks outside the box. At a time when most people paid attention to what the stock market says, Buffett relied only on his competent judgment, on his rational philosophy, and on his self-styled investment principles and strategies. That investment philosophy” be greedy when others are fearful put him to where he is right now, with billions of dollars in his. Despite his unmatched success, he remains humble and still retains the ethical values he learned from his father (Boroson, 2002, p. 18).
In business, greed is moral and good. In contrast, fear is something that must be overcome to earn limitless profits from investment. Indeed, Buffett attained his unparalleled success by being greedy while others cowered in fear of losing their money. Taken as a whole, his investment tactic can be summarized into three essential principles” a) make your strategy simple and understandable; b) be consistent with your operations and approaches; c) focus on positive long-standing prospects.
One interesting point to take into account is that Buffetts philosophy and investment strategies never contradict each other. When he advises new investors to be greedy, he means profits and business. And when he tells people who would like to follow his footsteps to read, research, and think, he would like them to rely on their own judgment and not be affected by other peoples opinion and market trends.
With his more than fifty years in business, Buffett introduced the importance of self-esteem in investment. That it is important to rely on ones moral judgment. By relying on his own judgment, Buffett maximized his profit-making capacity through Berkshire Hathaway. This means that there is no difference between the work ethics and potentials of a value investor and an industrialist. If Bill Gates and Lakshmi Mittal both create technology through their colossal industrial empires, Buffett creates limitless potentials through his creative and self-inspired investment principles.
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