Warren Buffett and the law of increasing marginal utility
The law of diminishing marginal utility states that the marginal utility of a product or service declines as more of it is consumed by the individual. However, there are rare exceptions to this law. Listening to/reading and processing the investing wisdom shared by the ‘Oracle of Omaha’ is one such exception, and results in what can be termed the ‘increasing marginal utility’.
This is exactly what followers of Warren Buett and his investment philosophies experienced last weekend by watching him talk at Berkshire Hathaway’s 2024 annual shareholder meeting. Reading his annual newsletters and watching what he has to say in the annual shareholder meeting again and again, year after year, has the eect of making you better and better in the art of investing. Like the way one of the greatest natural wonders of the world — The Grand Canyon — was formed by the Colorado river cutting through the Colorado Plateau for millions of years, years of listening to this once-in-a-century investing legend can have the eect of moulding us into excellent investors.
So, what are the interesting insights Warren Buett oered last weekend? We share here some of the best by gleaning through the question-and-answer session that played out for nearly five hours.
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Warren Buett often makes investing sound very simple. It actually is, but only after you have put in years and years of hard work that have laid the foundation for a successful investing journey. During his investing sermon last week, Buett shared multiple instances of how a lot of ‘hard work’ was behind his investing success. He personally doesn’t term it hard work as he says he enjoys what he does. His advice to everyone to make it less strenuous is to ‘love the subject, not the money.’
Years back, when asked how to prepare for an investing career, Buett recommended reading ‘500 pages a day’ to build knowledge. He noted that knowledge will build up like compound interest if one does this. This is something he reiterated last week when a young shareholder asked him whether his investing approach will change if he was a young 20-year-old investor starting today. Buett explained how, in his early days, he used to read thousands of pages of company-related manuals to understand businesses and would follow the same approach today as well. His focus would be on trying to know everything about everything which will enable him to identify opportunities in businesses he is finally able to understand well.
The lesson is simple — consistent success in investing decisions is built upon years of hard work.
BUILD A FRAMEWORK
In another instance, when a shareholder asked him how he decides when to exit a stock, Buett explained how quick decisions to buy or sell are made after years of thinking about the parameters and building a framework of when to buy or sell a stock. So, while to everyone else it might appear as fast or hasty decisions, to Berkshire insiders it is actually a case of executing a plan when the opportunity comes around (buying or selling a stock). The framework for such decisions was ready for years, and so was the patience in waiting for the right opportunity.
Having such an approach enables better decision-making, especially when markets are in a euphoric or panic phase. This approach has especially enabled Berkshire Hathaway to get the best of bargains in buying stocks — like a situation that Buett terms as ‘times when they will be the only persons willing to act’ — like it was in 2008 during the peak of the Global Financial Crisis.
LEARNING FROM MISTAKES
Buett too has made many investing mistakes, and the best thing about it is that he realises it himself and points it out before someone else does. Even better is the way he learns from those mistakes and puts it to good use.
Last weekend, he shared one such experience. Decades back, he had bought into a furniture store that turned out into an investing mistake. However, that purchase sowed the seeds to understanding consumer behavior and what they expect when they enter stores, and factors that influence their buying decisions. He explained how such insights and ‘millions’ of dierent inputs keep building up over the years, and then something comes along and takes the whole bunch of knowledge and observations you have and crystallises your thinking into big action!
He credits one of his best investment decisions — buying shares of Apple — to learnings he had from his earlier mistake with the furniture store that put him on the path to understanding businesses driven by consumer behaviour, like that of Apple.
According to Buett while we cannot make such ‘light bulb’ investing decisions happen tomorrow, we can prepare to make them happen tomorrow.
These and much more form part of the enthralling five hours that played out at Omaha last weekend, interspersed with rich anecdotes and his witty humour. People from across the world had thronged to learn lessons not just on investing, but also on life from the investing sage. For readers interested in learning more, we recommend watching the full session available in this link: https://www.youtube.com/watch?v=INztpkzUaDw