Thursday, 16 July 2015

The remarkable journey of Warren Buffett

Much has been written on Warren Buffett.

Sometimes it is not easy to piece everything together.

He started at a very young age in his wealth accumulation.

As a teenager, he read a lot of books on business in the libraries.

He started to earn income through business during his school days.

Earning money at this young age must surely triggered his entrepreneur spirit.

His paying of income tax at a young age was certainly significant.

A young person of his age with that income was definitely going to view the world a lot different from one who was still receiving meagre pocket money from mum and dad.

He knew what he wished to learn, a very important passion few have at this age.

He went to university and discovered that he knew a lot more of business than the course that was taught.

He completed his degree and then went to Columbia to study under Benjamin Graham.

It must be the most exciting time for him. 

Learning magic formulas to make money safely, logically and using his brain power.

He blossomed having met the right teacher, eagerly acquiring the right knowledge that he was able to use repeatedly to compound his wealth.

Of course, Buffett has all the attributes that will make him highly successful on his own too.

How did he acquire so much wealth?

1.  He started to invest in the stock market.  He started to manage funds for investors.  Over the years, he grew the wealth for his investors and for himself.

2.  He did not just stop there.  Soon, he acquired businesses.  He acquired Denver and sold it for a profit.  He acquired Berkshire Hathaway, got stuck with it but then was able to do something quite remarkable.

3.  Though Berkshire Hathaway was not doing so well as a business, Buffett was able to redeploy capitals to other businesses and stocks very productively.  Eventually, the original business of Berkshire was closed down and it became the holding company for all the other profitable companies and stocks that Buffett has acquired.

4.  Another fact that was interesting.  At the time of acquisition of Coca Cola, it was the biggest asset in Berkshire.  It dwarfed all the worth of the other businesses in Berkshire.   Remarkable, pause to think over this for a while.  This was one of Buffett's major success that propelled him to huge wealth.

5.  Just as remarkable, Coca Cola today is a smaller component of the Berkshire empire.  The 70 or so other businesses owned outright by Berkshire now dwarf all the quoted shares of companies that Berkshire owns.  Pause and think again on this transformation of Berkshire.   Over these years, Buffett has diligently used the income and cash generated in the company to acquire businesses increasing its streams of income.  At present, the company is generating high return on its capital and a lot of  free cash flows which Buffett has to seek homes for regularly.

Implications for the  young investors.  

1.  The average young investor is a wage earner.  He would need to manage his money well.  He will need to save early and grow his savings quickly.  If he is smart, he grows his earnings with his career.  If he is hardworking, he can also find additional stream of income with his time.

2.  As early as possible, the young investors to be, should acquire the knowledge to invest safely for the long term.  While staying in their jobs or careers, the stock market is a vehicle which I will recommend,  PROVIDED THEY HAVE THE SOUND KNOWLEDGE. This is the most important prerequisite.  Without a sound investing philosophy and knowledge, the stock market is actually an extremely dangerous place to be in.  Your capital can be easily decimated and you might as well just put your money in risk free fixed deposits.  Therefore, before investing in the market, spend a few years investing in yourself; get yourself educated and acquire a sound financial investing knowledge.

3.  Invest regularly for the long term.  Keep investing.  Stay with good quality growth stocks buying them when their prices are reasonable.  Do not over diversify.  Keep the winners, sell the losers.  Do not overtrade.  Be patient, don't overpay to own any shares.  Hopefully, and with a reasonably high degree of probability, this will build up your portfolio wealth over time.

4.  Be a net investor in the early years of your life.  Soon, your income and cash flows grow.  You would have grown a portfolio of stocks that will appreciate over time and also generate income for you.  Most of you should be contented to achieve up to this stage.

5.  If your income is huge by then, you can then also acquire assets or businesses.  (See what Peter Lim, the Singaporean billionaire, is doing with his money today.)

Contrasting Buffett and Trump

1.  Donald Trump declared as required as a contestant for the Presidential post in US that he has a networth of US 10 billion and annual income of US 350 million or thereabout.

2.  Buffett is worth US 70 billion and growing this by 10% per year presently.

3.  Who wins?  The better question is:  Who would you like to emulate?  Both are fabulously rich.  But if I have to choose, I will prefer to be in Buffett's situation.  It is better to own an asset that is generating high ROA and ROE.  Over the long term, such an asset eventually will continue to reward you hugely. 

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