Takeaway number one: The making of an American capitalist
In many ways, Warren Buffett's success in the stock market was foreshadowed
Already at an early age did he show that he understood some of the most critical aspects of successfully beating the market
Take, for example, when he learned how to walk
Baby Buffett used a very smart risk minimizing strategy here:
He walked with his knees bent, so that if he were to make a mistake, the fall wouldn't hurt him too bad
And in this, Buffett showed that he already
understood the concept of a margin of safety
Or just look at when Buffett and one of his friends showed that they had an knack for market research
They counted every bottle cap of the soda machine at a nearby gas station
in order to understand which of the soda companies that was the better business
Perhaps this was the start of Buffett's love of coke as a beverage and
perhaps it even foreshadowed his later purchase of the company stock, which was the ultimate case of "putting your money where your mouth is"
At the age of 12, Warren Buffett was forced to leave his hometown of Omaha
when his father, Howard Buffett, got a job as a congressman in Washington
Warren got very very homesick. Already at this age,
he showed a propensity towards holding on to things. Something which turned out to be one of his most profitable
characteristics, which we'll discuss in takeaway number three
Anyhow, Warren Buffett began a type of "mental warfare" against his parents and
in a few weeks, he was allowed to move back to Omaha to live with his grandfather
Finally, just before Buffett was legally allowed to vote, he had his first real taste of the wonders of compound interest
He and one of his classmates were acquiring pinball machines
which they placed at local barber shops, splitting the profits with the barber
The more pinball machines they were able to acquire, the quicker they were racking up profits form even more pinball machines!
Buffett had found his eldorado - money which earns money, which earns even more money
Takeaway number two: The role models of an American capitalist
All who have achieved success within any field have had great people within that same field that they have idolized
For Buffett, within the field of investing, it comes down to primarily three persons:
Benjamin Graham
At the age of 19, Buffett started to study at the Columbia Business School
where Benjamin Graham, "the father of value investing", was a lecturer
Graham taught Buffett about many important concepts, such as the before-mentioned Margin of Safety, the ideas about
"Mr. Market", and those of Intrinsic Value,
but most importantly, Graham taught Buffett about the need to adhere to an investment approach that is
well, first and foremost profitable, but that is also repeatable
Before Buffett met Graham his investments had been all over the place. He had bought the aforementioned pinball machines,
Invested in farmland in Nebraska, and he had even been trading at some point
Graham taught Buffett about the art of value investing - how to systematically find fair companies at wonderful prices
Charlie Munger
Charlie Munger is Warren Buffett's right-hand man at Berkshire Hathaway and
they have been bouncing investment ideas with each other for about 60 years now
If Graham taught Buffett to find "a fair company at a wonderful price",
Munger persuaded Buffett that it would be even more profitable to find "a wonderful company at a fair price"
He shifted Buffett's focus from tangible balance sheet assets to intangible business assets
Buffett would now say that: "The main qualification is still a bargain price
but we will also pay considerable attention to qualitative factors"
Philip Fisher
Fisher is only mentioned briefly in Roger Lowenstein's book,
but Buffett learned something important from him that Graham never taught. It was the so called "Scuttlebutt" method
This means getting out into the real world and using Main Street resources to beat Wall Street,
gathering qualitative data from sources such as employees,
competitors and customers of stock market companies
Warren Buffett used this successfully in 1964 when he was doing due diligence on American Express
The company had had a setback due to a
"Salad Oil Crisis", and Buffett reasoned that it was probably a temporary one
He went out to the customers of American Express,
primarily retailers and restaurants who accepted the AMEX card, and
asked about how their trust for the company had been affected by the crisis
Most of them didn't even know about it or didn't care at all
Buffett decided to acquire a large stake in the company
Benjamin Graham, Charlie Munger and Philip Fisher have all written books about their investment careers and
I'll link to a playlist of their greatest works at the end of this video
Takeaway number three: Marry your stocks
No matter if we are talking stocks, friends, preferred beverages and foods, places to live, or as we're now going to discuss,
romantic partners, Buffett was always keen to hold on to things
His strategy for choosing stocks could well be likened with how one should think about choosing a significant other
For starters, if you think this way about stocks, you'll pick them more carefully
You will do your due diligence before you decide to invest
Imagine that you're at the local bar. Your friend points to a woman by the counter
"Bro, she looks pretty hot". Should you put a ring on her?
The correct answer is "not necessarily"
She might be a murderer who recently escaped a lifelong jail sentence,
but she may also be a Victoria's Secret model - more research is definitely needed
Okay, let's try a trickier one
You're browsing the comment section of some YouTube channel about personal finance and investing
Someone says that a certain stock looks pretty hot right now
Should you invest in it?
The correct answer is that it depends on the YouTube channel
Nah, just kidding. The answer is again
"not necessarily". The company may be a pyramid scheme (not talking about Tesla specifically here, by the way)
and it may also be the next Apple - more research is needed
To give you a hunch about how informed
you should be before making an investment,
Buffett knew Coke's "per capitas" pretty much all around the world and could dissect a can of coke according to its financial
ingredients before he decided to buy the stock
Secondly, marrying your stocks has a tax advantage
In the U.S., holding on to stocks for the long term, which means more than a year, is
significantly more favorable than trading them frequently
And the same of course holds true for marriages. Not only does it protect your psychological well being but it also protects your wallet
A divorce typically terminates more than 50% of your wealth in a single blow
And thirdly, although this applies only to people with a lot of capital, it may create special opportunities
Most entrepreneurs would prefer long-term owners of their businesses and may only be looking for capital from such investors
Much like being in it for the long run seems to be creating special opportunities within the field of romance and dating too
Takeaway number four: Mastering the market cycle like a Buffett
To be or not to be (in stocks) ... That's the question
Analyzing world events is Wall Street's greatest distraction
There are tons of people that are constantly trying to outsmart each other in the stock market
They are trying to tie certain macro events to movements in the markets
There are a handful of people who have been able to do this profitably over longer time periods, but most fail
Take, for example, the fund manager that stated the following in
1979 when stocks were trading at an average of only eight times their earnings:
"Knowing that stocks are cheap does not impel one to go on a buying spree. The future is clouded by many ugly questions"
Hello ...? Would someone please be so kind to ring a bell for this person to hear when the market is NOT clouded by many ugly questions?
Buffett doesn't give much credit to macro data
Instead, he's focusing on individual companies
Sometimes, as in 1970 when he decided to close down the Buffett Partnership because he couldn't find enough opportunities in the market,
Buffett keeps money on the sidelines
And at other times, as in the stock market crash of 1973 to 1974,
he's finding opportunities everywhere, and he is all in
This is Buffett's way of timing the market
He doesn't care what the Fed is about to do,
he doesn't care about tweets from the president and he doesn't care about potentially pandemic viruses
All he cares about is if he can find individual companies that are a steal
If he can't, he will simply wait for the next pitch
And when everyone else is falling asleep, you can be sure that he will strike
Takeaway number five: The second best option
"Because my mother isn't here tonight, I'll even confess to you that I have been in arbitrageur"
Buffett's preferred strategy was definitely to marry his stocks. But what did he do when he couldn't find any stocks to marry?
Well, apart from stacking up cash, he occasionally visited his mistress: Miss Arbitrage
Arbitrage is the art of exploiting a difference in the price in an asset across two different markets
For example, if gold is trading in Stockholm, the capital of Sweden, at
$50 a gram, but is
simultaneously trading at $51 a gram in New York,
one could buy gold in Stockholm and sell it in New York to rack up a one dollar profit per gram
Now, this doesn't happen very often, and it's typically not as obvious as in my example, but
Buffett has used this approach on several occasions
In 1954, when Buffett was working for Benjamin Graham,
Buffett had found that a chocolate concern called
Rockwood & Co. offered to redeem stocks in the company for an inventory of cocoa beans - of which it had quite a lot
Cocoa beans also traded in the commodity markets, and the price of the beans had recently sought
Buffett used this to his advantage, and for several weeks
he sold beans in the market and bought Rockwood & CO. stock to redeem for beans,
racking up profits equal to the spread between the two
I've made a playlist for you about the greatest books of Warren Buffett's major role models
So if you're interested in hearing more about Benjamin Graham, Charlie Munger and Philip Fisher - head over to that playlist now
Cheers guys, and see you soon!