He’s been called the Oracle of Omaha, the Sage of Nebraska, and from a very early age, he knew that if he had a long life, he was going to end up with a lot of money. Decades later he was the richest man in the world and is still one of the richest men in the world.
Warren’s flagship Berkshire Hathaway has now reached valuations at over $200,000 per share with a market cap of over $300B.
While investing didn’t always come with the lowest level of safety, Warren Buffet managed to maintain his investment values and discpline in his pursuit for wealth. Warren’s virtues of modesty and thriftiness are very much a big part of his investing philosophies.
Everyone needs a mentor. For Warren Buffet, that was value investing giant Benjamin Graham.
Investing in businesses with solid fundamentals is something he learned through him. Graham’s way was to find undervalued stocks that were off the radar. According to Warren, Benjamin Graham taught that the market is there to serve you, not inform you. The market will be wrong, which flies in the face of what other people think. But Graham would say sometimes the market is very wrong and if you look at the prices of stocks as buying pieces of businesses, you will be able to recognize when the market is very wrong.
Warren started his original investing partnership with only a handful of people. He started reading every annual report he could get his hands on and started buying companies with underlying fundamentals that everyone else was ignoring at cheap prices.
Warren eventually wanted to buy companies with the same good underlying fundamentals which he could have a controlling interest in. He realized after the first business he bought with controlling interest that he did not want to buy businesses where he had to get involved with labor disputes, or where he would have to lay off workers , or get involved personally in the management. In other words, he wanted to buy businesses with a durable competitive advantage whose management he trusted enough to leave in place.
The free cash that earned in all these business was not spent. Instead it was reinvested to buy more companies with good underlying fundamentals. In other words, he used the power of compounding interest to grow his investment holdings faster.
When he bought an insurance company, he was able to use part of the insurance premiums people were paying to invest in stocks and companies he wanted. Money would come in interest free from the premiums. Then it gots invested in other bargain businesses he’d find. Those business also delivered interest free cash that could be used for future investments.
When the stock market booms started and stock prices became over valued, it was time for Berkshire Hathaway to be cautious. When valuations of companies had gotten to the point where he could not find the bargain deals he was used to tracking down, he became very cautious.
Warren made mistakes which sometimes got him in trouble. One big one was the convoluted way he and his partners bought other businesses. He used all the free cash from the businesses he bought to buy more businesses. It’s not that Berkshire Hathaway did anything illegal, but when government and security regulators came to investigate all the business dealings, it was so disorganized in structure that it raise unnecessary concerns. His example tells us to keep things more simple when it comes to investing.
Warren apparently isn’t a big fan of diluting stock or splitting stock. He’s not too interested in speculative buying of his stock and the higher process suits Berkshire Hathaway just fine.