It’s not often that God himself shows up to direct his disciples towards the path of enlightenment.
There’s an exception though for the world of investing, it’s the Oracle of Omaha – Mr. Warren Edward Buffett.
Buffett, the incumbent CEO of Berkshire Hathaway Inc., is considered no less than a God in the investing fraternity. The 3rd richest man (with a net worth of USD 73 Bn, almost equivalent to 1/30 of the Indian economy), holding the title of the most successful investor of the 20th century, delivers an annual address to the shareholders of his company. This keynote address, in its essence is a primer not only for investment principles but also gives an insight to the human psychology involving greed and irrationality.
2015, marks the 50th anniversary of Buffett leading the Company with his long-time friend Mr. Charles T Munger.
We present to you the 10 Golden Principles from his Golden Anniversary address delivered to his “partners “ (wait till last and you’ll know why I didn’t say shareholders) earlier this year.
Damn the sage he is.
- Selecting a marriage partner requires more demanding criteria than does dating –
Demanding quick returns is admirable and ambitious, but impatience can land you in soup. An investment opportunity can be weighed on a number of parameters, and being too casual about your basics can prove to be a major weakness. Buffett says that buying out businesses working at break –even levels for a bargain may be feasible when planning to invest a small sum, but with large sums, it would never work well. Hoping to build up a large enterprise on a weak foundation can never do.
- Buy wonderful businesses at fair prices.
Buffett suggests that it’s not the valuations which matter, but the potential of the underlying business, future earning capacity and competitive advantage over other. He says its best to forget what you know about buying fair businesses at wonderful prices; instead, focussing to buy wonderful businesses at fair prices.
Buffett says “I always knew I was going to be rich. I don’t think I ever doubted it for a minute.”
- The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive.
Buffett reflects that several of his subsequent errors involved the use of Berkshire shares to purchase businesses whose earnings were bound to decline with each passing day. Mistakes of that kind are deadly. He advises that going into all cash deal is much easier than putting your shares on the table – for you don’t know what value does such dilution hold.
- Every Napoleon meets his Watergate
Buffett emphasizes that Conglomerates have a terrible reputation with the investors. He says most standalone entities when on a spree of acquisitions in the 1960’s when the IPO revolution was at its peak. These conglomerates CEO’s use promotion, personality and dubious accounting to engineer sky high PE levels for their common stock. The basics of accounting- prudence and full disclosure got ignored and the result was a certain downfall.
For his first job, Buffett delivered newspapers for The Washington Post
- Money-shufflers don’t come cheap
Though Buffett is not a big supporter of conglomerates he justifies viability of Berkshire Hathaway as one on the grounds of efficient capital allocation, tax savings and carefully crafted structure in place. He makes sets the record straight on the fact that finance is not business. Businesses create wealth, and finance is there to “manage” it. From investment bankers, accountants, consultants, lawyers and financiers- all intermediaries perform jobs at rates which does not make sense.
- Eventually, the clock strikes twelve, and everything turns to pumpkins and mice.
Cautioning against the fraudsters present in the world of business, Buffett conveys that the ending to such instances is always the same: Money flows from the gullible to the fraudster. By using a general boom in the markets for issuance of stock, the sums that get blocked can be staggering. He says that both Buffett Partnership Ltd. (BPL) and Berkshire, have never invested in companies that are hell-bent on issuing shares. He believes that such behaviour is one of the surest indicators of a promotion-minded management, weak accounting, and a stock that is overpriced and – all too often – reflects outright dishonesty.
Buffett made his first stock purchase in 1941, when he was just 11 years old.
- Don’t ask the barber whether you need a haircut.
This one advice comes for the business owners wanting to turn their businesses liquid. The Oracle dwells upon the practises followed by Berkshire of buying out a business and not its management, while not getting confused by the intermediaries involved. He says that asking investment bankers and specialists on decisions of buying and selling of businesses is of no use when you know what their answer would be.
- Periodically, financial markets will become divorced from reality.
You can count on that. Buffett’s suggestion: whatever be the case line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is — zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices – nuff said!
Just to reinforce the power of compounding, 99 percent of Warren Buffett’s
wealth was earned after his 50th birthday
- Tackle the ABCs of business – Arrogance, bureaucracy and complacency
On succession, Buffett says that his successor will need to have the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. He describes them as the cancer of business under which even the strongest fail.
- Although our form is corporate, our attitude is partnership
Buffett believes in re-investment and growth. Berkshire has a reputation for increasing shareholder’s wealth through appreciation of stock rather than through dividends. The Company’s shareholders when asked if they would like to stick to this trend replied positively– making Buffett refer to fellow owners as partners.
You don’t have to be a genius to invest. Buffett is an example of how simple value investing can make you money – lots of it! Sticking to the basics is of utmost importance.
Let’s end with 2 important rules of the game-
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1