Inspired by Warren Buffett

I’m 150 pages into The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor, a book that was published ten years ago that I bought onsale for $5.98. I have been slowly and carefully studying this book, marking it up, and writing each big idea that I find inside the back cover, in good Tim Sander’s fashion. I truly want to understand why Warren Buffett has succeeded.

Here are a few of the key points so far (I have highlighted more than 100 key ideas):

  • Insurance companies make most of their profits from their investments, not from writing policies. The most important role in an insurance company is Chief Investment Officer. Buffett has been really big in insurance for decades–now I know why. Investing the cash flow well creates large fortunes.
  • Buffett says, “I am a better investor because I am a businessman, and a better businessman because I am an investor.” He doesn’t play the stock market or focus undue attention on macro economics and government reports to time his purchases. He buys stocks with intrisic value with the long term in mind. He said the nine most important words ever written about investing are from his mentor Benjamin Graham: “Investing is most intelligent when it is most businesslike.” When you invest in a company, you own part of a real company, not just paper for trading. Therefore, know everything about the business when you invest in it, as if you were the CEO.
  • Invest only within your circle of competence. What this means to me is that while Buffett avoids high-tech stocks, that is all that I know. My holdings would be entirely different from Buffett’s. But my expertise in internet marketing and online business models will inform my decisions, so I can have a “margin of safety” and know that a company’s value is greater than it’s current stock price (based on an informed model showing net present value of future earnings) before making any purchase decisions. Last year, I bought Audible.com at $0.58. From my experience in internet marketing and online subscription business models, I knew that they were just about to turn the corner. By avoiding bankruptcy and because of their franchise value as the defining player in the field of digital audio books, their value would skyrocket. The company reported their first profitable quarter in 24-25 quarters and the stock started picking up. At the end of the year, I sold Audible for about $4.00, locking in a nearly 600% return in just a few months. But why did I sell at that time? I made no calculations projecting future earnings potential. I didn’t build a financial model as Buffett would to show whether or not the stock was overvalued. Instead I sold just because I could. Today Audible.com is trading north of $27.00. I blew this one, because I didn’t do it the Buffett Way.
  • As an investor, inactivity is good. Sloth and lethargy are literally his strategy. He doesn’t believe in trading stocks continually just because you can. He says all of his success can be traced to a small number of investment decisions in his life. He says we should act as if we are each given a punch card in life and we can make 20 trades in our life. That’s it. Not hundreds. Not thousands. But twenty investment decisions. If we take this approach, each investment decision we make will be informed by a deep knowledge and understanding of the company’s financial statements and economics and the management team.

In all my years of business and limited experience in investing, I’ve never before taken time to understand Warren Buffett. Now that I’m studying his approach to investing, I want to learn even more. Next April 30, Berkshire Hathaway holds its annual stockholder meeting in Omaha. I understand that 15,000 people flood into Omaha each year for this annual event. I’d love to attend.

Question #1: Does anyone know if this event is only open to Berkshire stockholders? Or is it open to the general public?

Question #2: Besides the book I’m studying, what is the single best source of information on Warren Buffett’s approach to investing? (I intend to study some of his recent annual reports, which are available on the Berkshire Hathaway website.)

Trivia Item #1: Warren Buffett’s father Howard was a stockbroker-turned-Congressman from Nebraska.

Trivia Item #2: Overstock CEO Patrick Byrne’s father was close friends with Warren Buffett and was president of GEICO insurance from 1976-1986 (one of Buffett’s major holdings.)

Link #1: If you want to spend an incredible hour, watch the streaming video of Patrick Byrne speaking at BYU earlier this year. He claims that Buffett taught him some of the most valuable lessons of his life.

I look forward to your comments.

P. AllenBlogger

6 Comments

  1. I guess the Berkshire event is open to every potential stockholder. I’m not sure about them, but every stockholder meeting I have ever heard about is open to the general public. A potential ever should be able to attend, since its a good source for information to base his/her investment on…

  2. Paul :

    Nice bit of learnings.

    I have been a avid follower of Buffett for a long time. I think there are a lot of books on Buffett (40+ on last count).

    The two books suggested in the comments column are good too. But do remember there is no book which distills the idea of buffett and his wisdom.

    What you need to do is this?

    1. Read a couple more books and get his idea better.
    2. Read all the annual letters. They contain the gems of his thinking more clearly than any book can provide.
    3. Make you own notes for each decision required from Buffetts ideas and try to use them.

    (frankly I have not done this myself. Your post has provoked me to write this. Now I will take up the job and write down buffetts tenets for myself)

    Cheers,
    Suhit

  3. Mario

    Not every shareholder meeting is open to the public. Unfortunately I can’t tell you more information about the Berkshire Hathaway annual meeting.

    If you are convinced that there is ‘value’ in the teachings of Warren you could buy a ‘cheaper’ B class share and gain entrance to that Omaha Festival.

    Buffett: The Making of an American Capitalist by Roger Lowenstein is highly recommended to gain a further understanding into the main person behind Berkshire Hathaway.

    http://www.sandmansplace.com/index.html is a nice resource on the web that teaches you even more about Buffett&Berkshire.

    Of Permanent Value: The Story of Warren Buffett, 2005 Edition offers you 1542(!) pages of information.

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