How Buffett Does It

I bought 2 books from Borders (QueensBay Mall, Penang) recently as gifts to my colleagues. One of them is “How Buffett Does It: 24 Simple Investing Strategies from the World’s Greatest Value Investor (Mighty Managers Series)“. I made a note to myself before handing the book to my fellow colleagues.

Below is the summary of the book:

  1. Choose Simplicity over Complexity: When investing, keep it simple. Do what’s easy and obvious, advises Buffett; don’t try to develop complicated answers to complicated questions. Remember that degree of difficulty does not count in investing. Look for long-lasting companies with predictable business models. If you don’t understand a business, don’t buy it. Don’t forget that Buffett’s simple strategies have led to his extraordinary results.
  2. Make Your Own Investment Decisions: Don’t listen to the brokers, the analysts, or the pundits. Figure it out for yourself. When approached by an investment advisor or other financial expert, ask, “What’s in it for them?” If their answer is not satisfactory, walk away. Become a value investor. It’s proven to be a very rewarding technique over the long term. An understanding of Buffett’s ideas and practices will provide you with a code of conduct that you can follow yourself without needing the services of anyone else.
  3. Maintain Proper Temperament: Let other people overreact to the market, Buffett advises. Keep your head when others do not, and you will benefit. Don’t own any stock that would cause you to panic and dump your shares if the price falls by 50 percent. To succeed in the market, says Buffett, you need only ordinary intelligence. But in addition, you need the kind of temperament that can help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can prevail.
  4. Be Patient: Think 10 years, rather than 10 minutes, advises Buffett. If you aren’t prepared to hold a given stock for a decade, don’t buy it in the first place. Learn to practice Buffett’s discipline of patience. It will help you to amass greater stock market profits in the long term. Don’t dwell on the price of stocks. Instead, study the underlying business, its earnings capacity, its future, and so on. If the question is, “How long will you wait?” – in other words, how long will you hold a particular stock – Buffett’s answer is, “If we’re in the right place, we’ll wait indefinitely.”
  5. Buy Businesses, Not Stocks: Once you get into the right business, you can let everyone else worry about the stock market. Business performance is the key to picking stocks. Study the long-term track record of any company that is on your buy list. Search for certainty in uncertain markets – businesses that are likely to outperform their peers over the long run. Don’t think about “stock in the short term.” Think about “business in the long term.”
  6. Look for a Company That Is a Franchise: Some businesses are what Warren Buffett calls “franchises.” They have high walls and deep moats around them. They are more or less unassailable. These are the businesses you want to find. Search out the fortress-like firms. Find companies that stand out from their competitors. Do not dart in and out of the market. Research shows that frequent trading leads to mounting losses. If you see piranhas and crocodiles in a big moat surrounding a big castle, says Buffett, you have the type of long-lasting business that can reward investors.
  7. Buy Low-Tech, Not High-Tech: In Buffett’s world, successful investing is rarely a gee-whiz activity. It’s less often about rockets and lasers and more often about things such as brick, carpets, paint, and insulation. Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will doing more business.
  8. Concentrate Your Stock Investments: Avoid what Buffett calls the “Noah’s Ark” style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each. When you are convinced of a strong business’s prospects, be aggressive and add to your position rather than buying the fifteenth or twentieth stock on your list of possible investments. Portfolio concentration – the opposite strategy of diversification – also has the power to focus the mind wonderfully. How? If you’re putting your eggs in only a few baskets, you’re less likely to make investments on impulse or emotion.
  9. Practice Inactivity, Not Hyperactivity: There are times when doing nothing is a sign of investing brilliance. Do not trade for trading’s sake. Frequent trading is the hallmark of overactive investors, who tend to wind up with more losses than gains. When in doubt, be lethargic. Better to practice your snoring than to spin your wheels and incur costs.
  10. Don’t Look at the Ticker: Tickers are all about prices. Investing is about a lot more than prices. Wean yourself. Shun the ticker. Abstain from looking at share prices every day. Warren Buffett doesn’t know what his own company – Berkshire Hathaway – is selling for today. He doesn’t know and doesn’t much care what it was selling for yesterday or will sell for tomorrow. He does care what it will be selling for a decade from now – because that will be a measure of the company’s performance and therefore its true value.
  11. View Market Downturns as Buying Opportunities: Market downturns aren’t body blows; they are buying opportunities. If the herd starts running away from a good stock, get ready to run toward it. Search for quality business that go “on sale” for reasons other than the underlying fundamentals of the business or the quality of its management. Buffett says that investors don’t lose when markets fall – only “disinvestors.” So be like Buffett: Be an investor.
  12. Don’t Swing at Every Pitch: What if you had to predict how every stock in the Standard & Poor’s (S&P) 500 would do over the next few years? In this scenario, Warren Buffett – one of the greatest investors of all time – doesn’t like his chances. But what if your job was to find only one stock among those 500 that would do well? In this revised scenario, Buffett now likes his odds, which he figures at something like 9 in 10. There’s the investing equivalent of the strike zone – and also the investing equivalent of the “sweet spot”. A few good investments are all that is needed.
  13. Ignore the Macro; Focus on the Micro: According to Warren Buffett, the big things – the large trends that are external to the business – don’t matter. It’s the little things, the things that are business-specific, that count. It’s possible, admits Buffett, to imagine a cataclysm so terrible that the markets would collapse and not bounce back. (He points to the use of weapons of mass destruction by terrorists as one such scenario.) But other than that, Buffett says, the externalities don’t matter – and you can’t predict them, anyway. Focus on what you can know: the workings of a good business.
  14. Take a Close Look at Management: The analysis begins – and sometimes ends – with one key question: Who’s in charge here? If management stresses the appearance of performance over the substance of performance, says Buffett, keep your wallet in your pocket.
  15. Remember, The Emperor Wears No Clothes on Wall Street: Wall Street, says Warren Buffett, is the only place where people go to in Rolls Royces to get advice from people who take the subway. The prospectuses of most mutual funds say – in small print – that past performance is no guarantee of future success. Buffett says the same thing about the market: If history revealed the path to riches, librarians would be rich.
  16. Practice Independent Thinking: When investing, you need to think independently. Stay away from a rampaging herd. If you don’t, you and your investments might get stampeded. Gather your facts, sit down, and think, advises Buffett. There is no substitute!
  17. Stay within Your Circle of Competence: Develop a zone of expertise, operate within that zone, and don’t beat yourself up for missing opportunities that arise outside that zone. If you can rule out 90 percent of the businesses in the United States as outside your circle of competence, you’re likely to do a far better job investing in the remaining 10 percent.
  18. Ignore Stock Market Forecasts: Short-term forecasts of stock or bond prices are useless, says Warren Buffett. They tell you more about the forecaster than they tell you about the future. The more volatile or more speculative the markets, the more likely that people will begin to turn to forecasts for help – but this is when forecasts have the least chance of being right. The more precise someone claims to be in a volatile market, the more skeptical you should be.
  19. Understand “Mr. Market” and the “Margin of Safety”: What makes for a good investor? According to Warren Buffett, a good investor is someone who combines good business judgement with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, says Buffett, remember Ben Graham’s “Mr. Market” concept, and look for a “margin of safety.” Some people complain about market volatility. Not Buffett: He believes that volatility – Mr. Market’s dramatic mood swings – is what creates opportunity for savvy investors. Wait until other people start acting foolishly, and then act wisely.
  20. Be Fearful When Others Are Greedy and Greedy When Others Are Fearful: You can safely predict that people will be greedy, fearful, or foolish, says Buffett. You just can’t predict when or in what order. What will happen tomorrow? Will the market go up, down, or sideways? To Warren Buffett, these are uninteresting questions – except insofar as the “contagious diseases” of fear and greed will affect his own investing prospects, either by driving down prices and creating opportunities (fear) or by driving up prices and closing off opportunities (greed). When opportunities arise, Buffett is prepared to move. When greed prevails, Buffett is prepared to wait on the sidelines.
  21. Read, Read Some More, and Then Think: How does Warren Buffett – the world’s greatest investor – spend his time? By his own reckoning, he spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks. Buffett believes that – unlike some other industries – the investment industry is one in which knowledge accumulates and is there to be uncovered by those who are willing to do some digging. His advice: Be a digger. In most cases, this translates directly into Be a reader.
  22. Use All Your Horsepower: How big is your engine, and how efficiently do you out it to work? Warren Buffett suggests that lots of people have “400-horsepower engines” but only 100 horsepower of output. (Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways.) The person who gets full output from a 200-horsepower engine, says Buffett, is a lot better off. Financial success is a “matter of having the right habits.”
  23. Avoid the Costly Mistakes of Others: Buffett’s friend and associate Charlie Munger always emphasizes the study of mistakes so as not to go there. The hidden fees associated with many kinds of investments will kill your returns. Becomes a savvy investor by asking questions and watching costs. Learn from the other guy’s mistakes, says Buffett. There’s no reason to live through an unhappy drama that someone else has already lived through.
  24. Become a Sound Investor: Buffett’s says that Ben Graham was about “sound investing.” He wasn’t about brilliance investing or fads and fashions, and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor, which is even better. It’s less about solving difficult business problems, says Warren Buffett, and more about avoiding them. It’s about finding and stepping over “one-foot hurdles” rather than developing the extraordinary skills needed to clear seven-foot hurdles.