WARREN BUFFETT STARTED INVESTING WHEN HE WAS 11; FILED HIS FIRST TAX RETURN AT 14
Learning from the greatest business leaders of the world
Billionaire Warren Buffett is known as the third richest investor in the world, with a net worth of US $ 87.1 million. But he wasn’t always as filthy rich as he is today. In fact, about 99.7 percent of his immense wealth was earned after his 52th birthday.
The background of Buffett is extraordinary. He bought his first stock in 1941 at the age of 11, buying six shares of Cities Service, an oil service company, at US $ 38 per share. He filed his first tax return aged 14, after making US $ 500 by delivering newspapers. By the time he finished high school, Buffett had bought a stake in a 40-acre farm.
He still lives in the same modest house that he bought in 1957 for US $ 31,500. The billionaire is known for his frugal habits, like his daily Mcdonald’s breakfast and insistence on using a flip phone. He turned 88 years old on August 30.
Buffett is the opposite of a speculator. He and his company, Berkshire Hathaway, buy or acquire large shareholdings in businesses they believe have a competitive edge that will allow them to perform well over a period of decades. Consequently, the company has seen an average compounded annual gain over the last 48 years of 19.7 percent, compared with an equivalent gain of 9.4 percent from the S&P 500 (The index S&P 500 tracks the 500 largest publicly traded companies by market value).
In 2012, Buffett said, “It’s our job to increase intrinsic business value at a faster rate than the market gains of the S&P. If we do so, Berkshire’s share price, though unpredictable from year to year, will itself outpace the S&P over time.’ Otherwise, investors might as well invest in a low-cost S&P Index fund.”
Buffett’s early life talks of newspaper rounds, leasing pinball machines to barber shops and investing in a farmland. At Columbia Business School, he studied under investment gurus Benjamin Graham and David Todd, whose essential investment philosophy was to see stocks as businesses and to look for companies whose business was undervalued by the stock market.
In 1956, he opened his first investment partnership, Buffett Associates Ltd, with US $ 105,000 invested by family and friends. Within a few years, Buffett was running five investment partnerships. These were merged to form The Buffett Partnership in 1962, by which time its funds were over US $ 7 million.
One of Buffett’s investments was in a textile manufacturing firm, Berkshire Hathaway, which became the holding company for Buffett’s activities, managing a number of subsidiaries. Buffett acquired a number of insurance businesses which, apart from being profitable investments in themselves, offered the advantage that insurance premiums held against payment of future claims (‘the float’) can be invested elsewhere.
The insurance businesses generated cash for new investments; Buffett prefers to buy shares or whole businesses with cash rather than part with equity in Berkshire Hathaway.
Buffett’s essential investment philosophy has been to seek companies that are trading at discounts to their true worth. He mistrusted the usual measure of company’s profitability – ‘earnings per share’ but preferring ‘return on equity’. Shareholder equity is defined as a company’s assets minus its liabilities – what a company and its shareholders actually own.
Buffett also thinks long term, looking for companies that he believes can continue to succeed for the next 25 years. He declined to invest in the tech sector in what turned into the dot-com bubble because he didn’t think it was possible to know which companies would have a competitive advantage over a reasonable period of time.
The strategy has resulted in a wide variety of investments: outside of the company’s major interests in insurance, Berkshire Hathaway has investments in clothing, retail, newspapers and building, amongst others. According to the Fortune magazine, ‘for all his renown as a stock picker, Buffett has long preferred to have Berkshire grow, not by buying stocks that go up, which is what most people would assume but by adding businesses.’
Buffett does, however, also own stocks: his substantial shareholdings in major corporations include Heinz, American Express, Cocacola, IBM, Kraft Foods and Wal-mart.
“The first rule of investing is do not lose money,” says Buffett. “The second rule is don’t forget Rule No. 1.” However, Buffett is a generous philanthropist having given away more than US $ 27 billion in the last decade.
What life lessons can we learn from Warren Buffett? 1. Do work that you love
“There comes the time when you ought to start doing what you want. Take a job that you love. You will jump out of bed in the morning.” (Warren Buffett)
2. Don’t “thumb suck”
Buffett makes swift, well-informed decisions and act on them just as fast. “Do your research thoroughly, well in advance. Gather all the necessary information and act decisively. Say ‘no’ if you have to.” (Warren Buffett)
3. Spell out the specifics of a deal beforehand
“You must have all the specifics of the deal spelt out beforehand, including your monetary benefits. Your bargaining leverage is always greatest before you begin a job – that’s when you have something to offer that the other party wants.” (Warren Buffett)
4. Assess the risk involved
“Assessing risks carefully helps you see where you are struggling and can guide you to make smarter decisions. I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” (Warren Buffett)
5. Exercise vigilance over every expense
“Being frugal and conservative with your spending helps you avoid waste. And when you avoid waste, you make your money work for you and save enough to invest for the future. If you buy things you do not need, soon you will have to sell things you need.” (Warren Buffett)
6. Limit your borrowing and what you owe others
Warren Buffet has never borrowed excessively, even when he was starting out in business. He says, “Nothing sedates rationality like large doses of effortless money.” He has always negotiated with creditors to pay what he can and when he is debt-free, saved his money to invest. “Living on handouts, loans and credit cards will not make you rich.” (Warren Buffett)
7. Reinvest your profits
In high school, Warren Buffet and a friend bought a pinball machine and put it to work in a barbershop. With the money they earned, they bought more machines until they had eight of them in different shops. The friends later sold the venture and Buffett used his proceeds to buy stocks and the rest to start another business. By the time he was 26, he had amassed US $ 174,000, which is equivalent to about 1.8 million in today’s value. “Even a small investment can generate great wealth if you are diligent enough to favour substance over form.” (Warren Buffett)
8. Judge yourself by your own standards
“You don’t have to swing at everything—you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’ Instead of following the crowd, measure yourself by your “Inner Scorecard”—your own standards and not the world’s.” (Warren Buffett)
9. Know when to quit
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. Know when to walk away from a loss. And remember in businesses and in people, better quality businesses are more likely to grow and compound cash flow; low quality businesses often erode.” (Warren Buffett)