On May 4 2013 I attended Warren Buffet’s Annual General Meeting in Omaha, Nebraska. His company Berkshire Hathaway is worth $268 Billion and has more than 280,000 employees across the globe. Warren Buffet is personally worth $50 Billion; below are his secrets.
1. Stay sane when others go crazy – don’t following the crowd mentality and forget about keeping up with the Joneses.
2. Act when markets are in distress – you will have 4 or 5 opportunities in a lifetime to act to create real wealth.
3. Stock market offers a unique opportunity to buy that you will never get when buying new businesses.
4. Focus on buying companies below their intrinsic values.
5. If you are thinking of buying some shares in a company, treat it like you are buying the whole company and you are happy to own it for 5-10 years, based on good solid economics.
6. Don’t think you are smarter than you are. Avoid getting excited when others are getting excited; avoid buying at the wrong times. If you’re an amateur investor, stick to index managed funds. Warren Buffet made a bet for $500,000 5 years ago that any hedge fund would not beat an international index over 10 years. Cumulative return so far 31 Dec 2012 over 5 years – 8.69% for index Vs. 0.13% for hedge funds.
7. Buy brand name companies with long term sustainable competitive advantage: Berkshire Hathaway owns 8 Fortune 500 companies.
8. Owning businesses is better value than owning fixed dollar investments.
9. Number 1 tip for a young person: You need to be excited about what you’re doing in order to be successful
10. There is no reason to make stupid decisions because of a long-term timeframe
There is another great tip I learnt from Warren Buffet and it needs a bit of explanation, so I’ve left it till last.
The concept actually helps explain several of the points in the ten listed above. It’s called “Mr Market” and it’s quite a simple idea that, nevertheless, has the power to change the way you consider stock prices, improve your investment choices and raise your returns.
Suppose a man called “Mr Market” is your business partner who, every day at the office, offers to buy your share of the company or sell you his.
Mr Market is not a stable guy, emotionally, and suffers from highs and lows, meaning that his offering price to buy your part of the business fluctuates according to his mood – from very high when he’s feeling good, to very low when he’s on a downer.
In his “feeling good” state the catch is that, if you decided you wanted to buy his share, he only wants to sell his share at a premium.
Conversely, when he’s having a bad few days, he just wants to get rid of the business and offers it at well below the value. The worse he feels, the lower the price, as he just wants to get shod of the whole thing.
It’s important to understand that the actual value of the company does not fluctuate at all throughout this process – just Mr Market’s mood.
So you have a choice to make: ignore his offers; buy; or sell. You need to make that decision based on the actual value of the company, safe in the knowledge that, if you choose to ignore him, he’ll be back the next day with a new offer.
Your behaviour towards Mr Market is just how you should behave in the real market. The stock market is selling parts of companies for you to take ownership of, if you want. The price is available each day and you make a choice whether to buy or sell.
If you find a company that is clearly selling below its value, as you may find in times of distress, then owning a piece of it makes sense; solid companies always recover and get back to their “emotional highs”, meaning a high selling price.
Next time you consider stock prices, treat them as if they are emotional quotes from an unstable business partner. As long as they are the emotional ones – not you – you will come out on top of the deal.
If you found these tips useful, but don’t know where to start, please contact Mike Sikar at enquiries@deltafinancialgroup.