What is the secret to Warren Buffett’s impressive success? Unlike other high profile billionaires like Jeff Bezos or Bill Gates, he is not a tech genius. He made his billions by buying shares in existing companies, which is something most of us can do.
Why did it work so incredibly well for him?
Because of one simple thing that he has put into practice throughout his career: there is nothing more powerful than learning, and the more you know about a project or investment, the more likely it is to succeed.
Buffett filed his first tax return at age 14 and credits his successful start to the 1936 book, One Thousand Ways to Make $1000 by FC Minaker, which he took off a library shelf at age 7. The book is full of excellent (if dated) advice on how to start making money, but one recommendation at the beginning of the book inspired Buffett:
Minaker writes:
“You will find many people who will laugh at the idea of learning how to make money on books. They will tell you that business success depends on inherent business ability and action. They will cite men who never read a book in their lives and still made a lot of money in business. Don’t be swayed by these views.”
Buffett began his path of study with Minaker’s book and has never looked back. After college, he attended Columbia Business School, where he studied with legendary investor Ben Graham. Buffett credits Graham as the second biggest influence on him after his father.
Graham was known as the father of value investing, which is also practiced by Buffett, which involves taking a deep look at a company’s business and assets to assess their true value, regardless of share price.
Graham advised buying with “a margin of safety,” advice echoed by Buffett. In fact, it’s likely the explanation for one of Buffett’s best-known and most perplexing quotes about investing: “Rule #1: Never lose money. Rule #2: Never forget rule #1.”
(If you want to know more incredible phrases from the tycoon, click here)
Many investment experts over the years have debated what it really means, especially since Buffett has sometimes suffered losses.
The comment makes much more sense when we consider Graham’s “margin of safety,” which is generally considered when the price of all a company’s shares is lower than the company’s assets or the company’s earnings are much higher. than the stock price might suggest.
Does that guarantee that you will never lose money on that investment?
No, there will always be things that can affect the stock price that are out of your control. But it gives you the best chance of staying within Rule #1.
And indeed, this is how Buffett built the first phase of his wealth, by investing in seemingly “bad” companies: companies that were undervalued in the market because they were out of fashion or outside of fast-growing industries.
The catch, of course, is that you can’t find these margin-of-safety investments simply by reading some analyst reports or investing in growth industries or looking at the historical performance of their stock prices: you have to really study their financial reports and more information, which is what Buffett spends most of his time with.
That’s it, deep study. That’s the secret behind Buffet’s immense investment success. In this age when college students start companies that turn into unicorns and seemingly simple ideas come to dominate old-line industries, it’s easy to assume that the world is full of shortcuts to extraordinary wealth. Buffett’s whole message is that there aren’t any, or if there are, you probably won’t find them.
On the other hand, the slow and steady route can lead you to extraordinary wealth, if you take the time and effort to do your homework, think for yourself, and learn to ignore fads, so-called experts, and the whims of the market.
It’s an approach that helped Buffett get to where he is today.
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