Charlie Munger's opinion of Benjamin Graham's deep Value Investing

Why Charlie Munger Hates Value Investing

When Charlie Munger ( Trades , Portfolio ) came to Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) in the late '60s, Warren Buffett (Trades, Portfolio) was still running the business and investing how his teacher, Benjamin Graham, had taught him to - by buying a selection of cigar butt type companies and holding for many years.

Unlike Buffett, who had essentially grown up under Graham's wing, Munger had no such attachment to the godfather of value investing. Instead, Munger seems actually to dislike deep value investing:

"I don't love Ben Graham and his ideas the way Warren does. You have to understand, to Warren - who discovered him at such a young age and then went to work for him - Ben Graham's insights changed his whole life, and he spent much of his early years worshiping the master at close range. But I have to say, Ben Graham had a lot to learn as an investor. 

"I think Ben Graham wasn't nearly as good an investor as Warren Buffett is or even as good as I am. Buying those cheap, cigar-butt stocks was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can't do it with billions of dollars or even many millions of dollars. But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals - probably the only intellectual - in the investing business at the time." - Charlie Munger, The Wall Street Journal September 2014

When he arrived at Berkshire, Munger actively tried to push Buffett away from deep value toward quality at a reasonable price, which he did with much success.

All you need to do is to look at Buffett's acquisition of See's Candies in the late 1960s to realize that without Munger's quality over value influence on Buffett, Berkshire wouldn't have become the American corporate giant it is today.



A love of high quality

Munger always had a fascination with buying high-quality businesses, and in the early days, his style differed greatly from that of Buffett. He always placed a premium on the intangible assets of a company, those assets that had no financial value to other companies but were worth billions in the right hands.

"Munger bought cigar butts, did arbitrage, even acquired small businesses. He said to Ed Anderson, 'I just like the great businesses.' He told Anderson to write up companies like Allergan ( AGN ), the contact-lens-solution maker. Anderson misunderstood and wrote a Grahamian report emphasizing the company's balance sheet. Munger dressed him down for it; he wanted to hear about the intangible qualities of Allergan: the strength of its management, the durability of its brand, what it would take for someone else to compete with it. 

" Munger had invested in a Caterpillar ( CAT ) tractor dealership and saw how it gobbled up money, which sat in the yard in the form of slow-selling tractors. Munger wanted to own a business that did not require continual investment and spat out more cash than it consumed. Munger was always asking people, 'What's the best business you've ever heard of?'" - "The Snowball: Warren Buffett and the Business of Life" by Alice Schroeder

Munger understood that it's these businesses where big money is made as the high returns on capital, and a nonexistent need for capital investment ensures shareholders are well rewarded over the long term.

For example, in his 1995 speech, "A Lesson on Elementary, Worldly Wisdom As It Relates to Investment Management & Business," Munger said:

"We've really made the money out of high-quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses. 

" Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return -even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you'll end up with a fine result. 

" So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects."

Buffett added some meat to this statement at the 2003 Berkshire Hathaway meeting:

"The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth. But there are very very few businesses like this. Coke ( KO ) has high returns on capital, but incremental capital doesn't earn anything like its current returns. We love businesses that can earn high rates on even more capital than it earns. Most of our businesses generate lots of money but can't generate high returns on incremental capital - for example, See's and Buffalo News. We look for them [areas to wisely reinvest capital], but they don't exist."

These quotes do a great job of summing up Munger and Buffett's investment strategy. Even though there are thousands of pages of investment commentary from both of these billionaires, their investment style can be summed up with the simple description of quality at a reasonable price, and the above quotes show exactly why they've both decided this style is best.

By: GuruFocus

http://www.nasdaq.com/aspx/stockmarketnewsstoryprint.aspx?storyid=why-charlie-munger-hates-value-investing-cm774232

The 7 classes of arbitrage and special situations that Warren Buffett has invested into.

Warren Buffett has focused on seven classes of arbitrage and special situations.

Classic Arbitrage 

1. Friendly Mergers
2. Hostile Takeovers
3. Corporate tender offers for a company's own stock

Special Situations

1. Liquidations
2. Spin-offs
3. Stubs
4. Reorganisation

WHEN TO SELL by Buffett

When To Sell Quotes

Warren Buffett’s advice on when to sell is fairly straightforward. Sell when the business you are invested is performing poorly (and will likely continue to do so).

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

As an individual investor, you can’t fix a declining business. Your energy is best spent cutting losses and moving on.

“The most important thing to do if you find yourself in a hole is to stop digging.”

Buffett sells infrequently. He is a long-term investor that would rather hold forever than sell as long as a business maintains its competitive advantage. Even Buffett gets it wrong sometimes. When you make a mistake, learn from it and cut your losses.

Selling businesses in decline is a form of risk management. 

http://www.suredividend.com/warren-buffett-quotes/#when to sell

WHEN to Buy by Buffett

Warren Buffett on When To Buy

Warren Buffett’s buying wisdom can be condensed into 2 statements:

1. Buy great businesses when they are trading at fair or better prices.
2. This occurs when short-term traders become pessimistic

The 8 quotes below clarify Warren Buffett’s thinking on when to buy great businesses.

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

In the quote above, Buffett explains that he acquired his value-focused mindset from his mentor Benjamin Graham. Graham was the father of value investing and a fantastic investor in his own right. It makes sense that his philosophies significantly influence Warren Buffett.

There is a stark difference in investing style between Graham and Buffett. Graham focused on deep value plays – businesses that were trading below liquidation value. These were typically poor businesses that were undervalued because they had such bad future prospects.

Buffett focuses on great businesses trading at fair or better prices, as the quote below clarifies:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

Wonderful companies compound your wealth year-after-year. Poor quality businesses that are exceptionally cheap only grow your wealth once (when you sell them – hopefully for a profit).

Note that Buffett does not say to buy great businesses at any price.

“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

Overpaying severely limits the growth of your wealth. If you pay for a large part of future growth today, you will not benefit from that growth down the line. Great businesses can be very overvalued…

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

You don’t need to be a contrarian to do well in investing, but you do need to exhibit emotional control and be realistic.

Just as great businesses can be overvalued, they can also be undervalued.

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

It’s not easy to buy great businesses when they are ‘on the operating table’. That’s because the zeitgeist is decidedly against buying – stocks become undervalued because the general consensus is negative. Intelligent investors profit from irrational fears.

“Be fearful when others are greedy and greedy only when others are fearful.”

Fear and market corrections create opportunities for more patient, long-term investors. The two quotes below expand upon this.

“So smile when you read a headline that says ‘Investors lose as market falls.’ Edit it in your mind to ‘Disinvestors lose as market falls—but investors gain.’ Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.”

&

“The most common cause of low prices is pessimism—some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”

Paying too high a price is an investing risk that can be avoided (for the most part) by staying disciplined.

Buying is only half of investing. The next section covers when to sell.

http://www.suredividend.com/warren-buffett-quotes/#when to buy

WHAT to Buy by Buffett

Buffett Quotes on Great Businesses & Competitive Advantages

Investors can be divided into two broad categories:

• Bottom up investors
• Top down investors

Top down investors look for rapidly growing industries or macroeconomic trends. They then try to find good investments that will capitalize on these trends.

Bottom up investors do they exact opposite. They look for individual investment opportunities irrespective of industry or macroeconomic trends.

Warren Buffett wants to invest in great businesses. He is a bottom up investor.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

Buffett prefers to invest in businesses that have differentiated themselves from the competition. Commodity selling businesses don’t have a differentiator (unless they are the low cost producer).

“Stocks of companies selling commodity-like products should come with a warning label: ‘Competition may prove hazardous to human wealth.’”

Commodity business (in general) are not quality businesses for long-term investors. The reason is because competition will erode margins and make investing in the business a zero-sum game.

Commodity businesses that have found a way to survive are not great businesses. The analogy below emphasizes this point:

“A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”

Don’t invest in horses that can count to 10. Invest in businesses with a strong competitive advantage that allows for large excess profits…

And make sure that company’s competitive advantage is durable.

“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.”

Chewing gum doesn’t change much. Neither does Coca-Cola (KO), or banking with Wells Fargo (WFC), or Ketchup at Kraft-Heinz (KHC). Buffett invests in slow changing businesses because they will compound growth over the long run. 

Businesses in rapidly changing industries have shorter periods of time in which they can compound investor wealth.

Now that we have covered what to buy, it is time to see Warren Buffett’s thoughts on when to buy.

http://www.suredividend.com/warren-buffett-quotes/#circle of competence

Buffett's Investment Philosophy. That's it. That's the secret formula.

Buffett’s investment philosophy is succinctly summarized in this quote below:

“We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business:

(1) favorable long-term economic characteristics;
(2) competent and honest management;
(3) purchase price attractive when measured against the yardstick of value to a private owner; and
(4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge.”

That’s it. That’s the basic ‘secret formula’ to Warren Buffett’s $60 billion fortune.

http://www.valuewalk.com/2016/04/107-profound-warren-buffett-quotes-learn-build-wealth/?all=1

Benjamin Graham's Classic Deep Value Investing versus Warren Buffett's Moat-Type GARP Investing.

Why Guy Spier Rejected Warren Buffett’s Investment Strategy

in warren buffett

Here's a question: Give the fact that Warren Buffett is the most successful, respected, and wealthy investor of all time, why would any professional value manager reject Warren Buffett's contemporary investment strategy? It's seems odd, but Guy Spier has his reasons.

Who Is Guy Spier?

If the name Guy Spier seems familiar, it may be because of his growing reputation among the value investing community. Spier is famous for paying $650 000USD, along with Monish Pabrai, to have lunch with Warren Buffett. His 2014 book, "The Education of a Value Investor," has also made the rounds and is becoming a very popular book. It's currently rated a 4.5 star read by 295 people on Amazon.

Spier was born in South Africa and educated at the City of London's Freeman School, later receiving his MBA from Harvard. He started out as a professional money manager in 1997 with $15 Million mostly from family and friends. Since then he's managed to wrack up outstanding returns versus the S&P 500. In 2011, his gains totalled 221.6% versus the S&P 500's 36.7%. That's an impressive record especially when most managers fail to beat the market over even a moderate period of time.

Guy Spier's investment vehicle is his Aquamarine Capital, an investment partnership inspired by Warren Buffett's early partnership. Aquamarine is fairly restrictive with regards to who it manages money for, and fund information is only distributed by request.

Citing Buffett, Munger, and Pabrai as major investment influences, you'd be forgiven for thinking that Guy Spier sticks to Warren Buffett's moat-type businesses. While Spier was once a card-carrying Buffetteer, his true preference is for classic Graham deep value investments.

What's Guy Spier's Problem With Warren Buffett?

In 2011, Jacob Wolinsky of Value Walk fame conducted a masterful interview with the man himself, which was published by The Manual of Ideas. Jacob's conversation with Spier revealed some valuable insights into how a small investor should manage his portfolio.

"Pretty soon after I started I fell in love with this whole GARP idea. I spent a lot of time around Ruane Cunniff by researching their ideas and attending their annual meetings, where I had the chance to listen to and meet some of their brilliant investors and analysts, including Bob Goldfarb, Greg Alexander, Jonathan Brandt, and Girish Bhakoo. I learned about why Warren had moved into the business of buying, and paying up for better businesses."

GARP, or "growth at reasonable prices," is a strategy that boils down to selecting companies that are expected to grow at high rates relative to their industry, or businesses in general, and then to buy those firms when their stocks are trading at reasonable valuations. What counts as reasonable is a matter of perspective, though, and many investors are split between using Discounted Cash Flow or classic Ben Graham measure of value.

Just like many other investors who are just starting out in value investing, Spier only focused on Warren Buffett's modern investment strategy, buying growing companies with strong moats at decent prices. He dug deep into Buffett's strategy, dissecting exactly what he looked for when he hunted large, well run, businesses with durable competitive advantages, and then formed his investment partnership around that.

As Guy Spier explains, this sort of strategy has a few major pitfalls.

"Something I learned during the financial crisis was that when you pay up for a better business, you can suffer greatly when the price people are willing to pay for that business goes down dramatically, as it did in 2008. Many “better” businesses fell in price more rapidly than other businesses because, as the crisis came about, many investors were not willing to pay up for growth or quality. ...I lost more money owning those businesses than I would have if I had owned the right cigar butts..."

But large drops in price during bear markets wasn't the only investment trap that Spier spotted. As it turned out, GARP firms also pushed investors into making major behavioural mistakes when investing.

"If you talk about your stocks, it will affect how you think about them as well as the portfolio decisions you make. At the time, I did not believe it would skew my decision making. But if I go back over the life of Aquamarine Fund and examine my letters to investors, I can see clearly how this created a bias for better businesses, simply because it was more fun to talk about them. (Or perhaps a better way to put this is that I developed a bias for businesses that are fun to talk about.)"

If Buffett was right in calling inflation a corporate tapeworm, psychological biases are definitely an investor's tapeworm. They cause us to overestimate the returns we can expect from a particular stock, how fast the company will grow, the profit the company will produce, or even how durable the competitive advantage of the company is itself. This trap is often due to the Halo Effect, the tendency to attribute or overestimate a range of good traits that a company may not actually have based on the existence of a single good trait that actually exists. In dating, for example, a beautiful woman may be seen as more sociable, better adjusted, or more popular, by virtue of her looks when she may not actually possess any of those attributes.

By contrast, Cigar Butts tend to sidestep this issue much of the time. They don't readily lend themselves to producing the halo effect and you're much less likely to talk about them at a party, keeping those psychological and social chains off so you can easily change your opinion when the facts change. They're also known to trigger an investor's gag reflex, so investors systematically underestimate a Cigar Butt's future growth rate and stock return.

Ironically, despite providing investors with better returns, small retail investors prefer great companies to Cigar Butts because they cause less psychological or emotional strain.

"Owning things that Mike Burry says have an “ick” factor or cigar butt investment ideas that have a lot of hair on them is not something your investors want to hear about unless you have a very sophisticated group of investors. In my case, many of my investors had never owned stocks before so they were not going to feel too comfortable about me owning companies with a high “ick” factor. So I was immediately biased toward buying better businesses at a reasonable price. With most audiences, it is much easier, for example, to talk about Heineken and their phenomenal sales growth in Russia and other BRIC countries, or about Nestle and their Nespresso brand, than to talk about businesses that are either “hated, or unloved,” as Whitney Tilson would put it."

Part of the reason why these "dirty" stocks work out so well is due to a phenomenon called "reversion to the mean." Reversion to the mean is a basic law in both life and investing. The principle is that abnormal results, either positive or negative, tend to not last.

Take height for example. A freakishly tall father and mother will have tall children, but those children will usually be shorter than their parents. The height of future offspring reverts to the average height of people in general.

Guy Spier's Aquamarine Fund Vs. The S&P 500

The same principle is at work in investing. It's why Cigar Butts tend to work out well in the end. Inevitably, the company's business improves or some piece of good news comes out to send significantly undervalued shares skywards. Conversely, great returns don't last and firms with higher levels of profitability tend to get beaten back to more average levels of profitability. This is why Buffett loves moats, but even moats can't fend off natural forces indefinitely.

"When I started investing I used screening software to find companies with the metrics you mention — high ROE, low price to book, and high return on invested capital. I was looking for all of those types of things.

I think all of those metrics have a potential downfall, and I will give you an example: In general, you want to invest in high ROE businesses, and you can run various types of a screen to find high ROE businesses, but to the extent that in the vast majority of businesses, ROE is going to revert to the mean, you may have paid up for something that might not be there in five years. The ROE five years forward might be a lot lower than the ROE you are paying up for today."

As Guy Spier explains, you end up paying a large price up front for a business that is facing an immutable law of nature. Eventually, that return on equity will shrink and the business will be far less profitable than when you spotted it. While the risk-reward relationship may still be in an investor's favour, the company's margins face a tremendous amount of pressure.

".........you want to own something that makes the situation unusual and gives you an unusual risk/reward. That is not necessarily a cigar butt, but you have to identify what it is that will result in a return of 3x in two years. I am trying very hard to own things that will give me a return of 3x in two years rather than settle for something that will appreciate at a few percentage points better than the market."

One of the huge advantages of net net stocks, the classic Cigar Butt, is that the risk-reward profile is heavily skewed in the investor's favour. Roughly 75% of net nets produce large positive return over a two year period, and the average results of a net net stock portfolio over time is 15% over and above the market. That makes for a 25%+ annual average return.

Often investors new to net nets make the mistake of only buying a few stocks and assuming that they'll all see massive advances in price. This is just not the case. While net nets work out well, some stocks are bound to disappoint which means that a proper net net strategy requires a decent amount of diversification. Still, net nets are probably safer than you assume. James Montier found that these stocks only see major (90%+) losses in 5% of cases. That compares to 2% for stocks in general, showing just how safe a well diversified net net stock portfolio is versus the market.

Keeping in mind basic requirements of good net net stock picking (no Chinese firms, resource explorations firms, etc) the highest returning net nets are often the stocks that are selling for the cheapest prices relative to net current asset value (NCAV). Buy cheap enough and you can bag the 3x advance in 2 years that Guy Spier favours.

But, as he explains, price to value often isn't enough.

"Tom Russo has said, “flying an airplane requires you to focus on five or more instruments,” and you can’t favor the altimeter over the speed indicator, or the vertical speed indicator over the pitch indicator, for example. You have to look at all the instruments together and fly the plane integrated. Tom has used this plane analogy to discuss investments. There is no single metric you should look at but rather keep an eye on all of them."

This is why investors should be using a high quality scorecard when assessing their stocks. For my own investing, I use our Core7 Scorecard to help dissect the net net stocks that I buy to see if they're the sort of stocks that are bound to avoid losses and produce meaningful returns. I've compiled most of the thinking that's gone into this checklist into my net net stock guide, Retire Young & Rich. Ultimately, it takes more than blindly following Buffett's current strategy to produce the best possible investment results. As Guy Spier said,

"Thus, you could say that my approach to investing, in contrast to Buffett, has gone in the reverse direction. My approach today has become more similar to the way Warren Buffett invested when he got started. The important thing to realize is that if Buffett today was running a fund the size of Aquamarine, he would be investing differently than the way he does today."

Start putting together your high quality, high potential, net net stock strategy. 

http://www.netnethunter.com/why-guy-spier-rejected-buffetts-contemporary-investment-strategy/?utm_source=facebook&utm_medium=value-investing&utm_campaign=cp1

Businesses with challenging fundamentals - commodity type businesses

Producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage.

As long as excess productive capacity exits, prices tend to reflect direct operating costs rather than capital employed. (Buffett)

This means that the prices of finished goods are lower than the full production cost, which should include amortization.

The capital employed not only does not earn a return, but also does not reinstate itself.

After Berkshire Hathaway's textile business closed in 1985, Buffett commented that over the years, there had always been the possibility of making a large capital investment in the textile business that would have resulted in a reduction of variable costs.

Those investment opportunities, if viewed throught the prism of standard return on investment tests, would have brought greater economic gains than if similar investments had been made in other Berkshire businesses (candy and newspapers).

However, the potential benefits from investing in the textile industry were imaginary.

Berkshire's competitors were implementing the same types of capital expenditures, and once a certain proportion of the industry participants had made these investments, the reduced cost base in the industry would have resulted in a reduction in prices.

Considered individually, each company's investments appears to be justified, but viewed collectively, these decisions affected every company and did not benefit the individual players ("just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes").

After each cycle of capital investment, all the companies had more money tied up in the bsiness, but their returns did not improve.

As Buffett's parade revelers rising on tiptoes demonstrate, the managerial decisions of individual participants in uniform industries are intertwined.

Poor judgment by a single manager may lead to future losses for all involved.

"In a business selling a commodity-type product, it is impossible to be a lot smarter than your dumbest competitor."  (Buffett)

If your competitors set prices at a level that is lower than your production costs, then you also must set prices at that level and suffer the losses if you are to remain in business.

"The trick is to have no competitors.  That means having something that distinguishes itself." (Buffett)

While the degree to which it is possible to introduce product differentiation within an industry may change because of technology developments or the evolution of consumer preferences, in many industries differentiation among products may be simply impossible to implement.

A few producers in such industries may consistently do well if they have a wide sustainable cost advantage, but such exceptions are rare or, in many industries, nonexistent.

For the great majority of companies selling "commodity-type" products, persistent overcapacaity without regulated prices (or costs) results in poor profitability.

Overcapacity may eventually self-correct as capacity shrinks or demand expands, but such corrections are often long delyaed, and "when they finally occur, the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates ovecapacity and a new profitless environment."  (Buffett)

I have learned mainly by reading myself.

Buffett: "I have learned mainly by reading myself. So I don’t think I have any original ideas. Certainly, I talk about reading Graham. I’ve read Phil Fisher. So I’ve gotten a lot of my ideas from reading. You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.”

"ORIGINALITY is overrated. I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart." Charlie Munger

"What’s really astounding, is how resistant some people are to learning anything … even when it’s in their self-interest to learn. There is just an incredible resistance to thinking or changing. Bertrand Russell once said: ‘Most men would rather die than think. Many have.’ And in a financial sense, that’s very true." Warren Buffett.

Charlie Munger Fan Club

How smart is Warren Buffett?

"We've seen oil magnates, real estate moguls, shippers and robber barons at the top of the money heap, but Buffett is the first person to get there by picking stocks" [Rothchild, 1995]


1982            Buffett first appeared on the first Forbes list

1992            Reached top position in 1993 with a fortune of $8.2 billion.

2001-2007  Buffett was in second place (after Bill Gates).

2008            Buffett was again in first place with a fortune of $62 billion.

2010-2012   Buffett remained in third place (by that time he ha transferred some of his fortune to a charitable fund)

2013             He was in fourth place.



"Stocks are simple.  All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability.  Then you own those shares forever". [Buffett]

The data on Buffett's results are reliable and his performance is very well documented.

"Is this a result of Buffett's application of his methodology, or did it happen by chance?"
"Is it possible to replicate this achievement?"
"What is required for replication?"

The question of whether financial success is achieved by chance or through application of a methodology is the central point of discussion on the rationality and efficiency of financial markets.

Buffett would not have achieved his results without the "right" investment process and without his unique abilities as a business analyst.  But icebergs always have much larger submerged parts.  The true "secrets" may hide there.  Supporting the investment process that he developed is the intellectual foundation (intellectual core) beneath his accomplishment.  

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. 

Buffett - The making of an American Capitalist (Roger Lowenstein)***

https://www.youtube.com/watch?v=7nXDyOfmj34

Focus on What is Knowable and Important

It is useful to think about the world in terms of a four-quadrant matrix where the horizontal dimension comprises what is knowable and unknowable and the vertical dimension comprises what is important and unimportant.

                             Knowable    Unknownable

Important

Unimportant

It should be obvious that you should not spend any time on what is unknowable and unimportant.

The trick is steering clear of the Unknowable/Important box and the Knowable/Unimportant box.

The trick is to focus on what is important and knowable. For example, it is very important to try to understand where a prospective business investment will be in ten years, even if it cannot be done with precision. It’s equally important to limit the time you invest thinking about investments to those businesses where this is actually possible. You can’t do this very often, but this is what you should be looking for.

Focus on spending your day in this quadrant. This is where meaningful decisions are made. This is where you can gain an edge over those who are unwittingly wasting time on the unknowable and the unimportant.



http://gregspeicher.com/?p=3299


Comment:  Peter Lynch - If you spent 13 seconds contemplating the macroeconomic factors affecting your investment prospect, you would have wasted 10 seconds of your time.  This time is better spent learning more of the company.