When the greatest investor of all times offers you his free advice to help you achieve financial success, the thing to do, in my own opinion, is to shut up, listen and take notes!
For a blog like mine whose purpose is to collect and diffuse all the necessary information to help people achieve financial freedom, the annual letter to shareholders of Berkshire Hathaway (BRK-A & BRK-B) written by Warren Buffett’s hand is definitely a gold mine.
But, his last letter is richer in advise and tips than most previous letters he wrote and I think it deserves to be read again and again.
Here’s 1001 advice from Warren Buffett to help you achieve financial independence!
Compounded interest is the greatest force of the universe!
Warren Buffett understood it a long time ago and have used this force for his own advantage with great success.
Since 1970, our per-share investments have increased at a rate of 19.3% compounded annually, and our earnings figure has grown at a 20.6% clip. It is no coincidence that the price of Berkshire stock over the 43-year period has increased at a rate very similar to that of our two measures of value. Charlie and I like to see gains in both sectors, but we will most strongly focus on building operating earnings. (Warren Buffett)
If you would invest 1000$ in a business that you return you 19,3% per year and reinvested all these profits in you business, after 5 years, your investment would be worth 2025$. After 10 years it would be worth 4900$. After 20 years, your investment would be worth approximately 28600$. You wouldn’t be able to retire over that single investment huh?! But wait…
Ten years later, your 1000$ investment would be worth 167000$. Wow!
But it’s still nothing. After 40 years, that single investment would be worth 975000$, almost a million!!!
After 50 years, 5 700 000$!!! And after 60 years? How much? Simply an astonishing 33 250 000$!!! Yep! 33 Million dollars!
This is exactly how Warren Buffett has built his fortune : with time, compounded interest and an extraordinary ability to invest wisely!
Imagine now how you could transform the life of your kids if at their birth you would invest even small amounts of money with intelligence.
What Warren is teaching us here is composed of two parts. First, markets are not efficient in the short-term. People tend to overreact to events, creating discrepancies between the market price and the intrinsic value of the business.
But, in the long run, the stock’s price will come back to the fundamentals of the underlying business.
So, with that knowledge in hand, you should ask yourself why so many people are investing in stocks who’s underlying business has poor fundamentals? These people simply invest with their emotions and not with intelligence.
Benjamin Graham, one of Warren Buffett’s greatest mentor has said a very important thing :
Investing is most intelligent when it’s most business like.
Ok, so the second important thing that Warren meant to say here is that the stock price will grow at approximately the same rate than the earnings growth over time. So he’s focusing on increasing his company’s earnings!
Is it clear? No?! It’s simple! Only buy shares of highly profitable businesses because over the long run, the stock value growth should coincide with the earnings growth of the business you picked.
Okay now how can I get a consistent compounded return of 20%?
This is the 1 000 000$ question! Especially in this era of very low interest’s rate and uncertainty. A guaranteed capital investment will return you what? A meager 2 or 2,5%? With the inflation near 2%, your real gain won’t be very interesting… For a comparison, with a rate of 2,6%, your 1000$ investment would be worth around 2105$! Yeah, only that. We are far from the value of a 19,3% compounded interest investment. And after 60 years, it would be worth around 4550$!!! Where is the 33 millions dollars you were supposed to have?
Some say that it is impossible today to get an investment that would yield more than 10%. But, to recruits of Warren Buffett have proved them wrong. Even in 2013, with the S&P500 who has gained more than 20% over the last 12 months, these guys have been able to outperform the Index!
In a year in which most equity managers found it impossible to outperform the S&P 500, both Todd Combs and Ted Weschler handily did so. Each now runs a portfolio exceeding $7 billion. They’ve earned it. I must again confess that their investments outperformed mine. (Charlie says I should add “by a lot.”) If such humiliating comparisons continue, I’ll have no choice but to cease talking about them. (Warren Buffett)
Based on Warren Buffett’s saying, anyone who would really want to learn how to do it could obtain a great return on his investments. To illustrate his purpose, in his letter talks to us about an investment he has made 30 years ago in a farm. Knowing nothing about the farm industry, he decided to buy one for 280000$ for his son who was more knowledgeable in the domain. Thirty years later, this farm is worth more than 1,2 Million dollars! He visited it only twice in thirty years… But, he knew that people would continue eating, that the land would continue taking value over time, that agricultural techniques would continue improving over time and that productivity could also increase with those improvements.
One of the ways to profit from the incredible growth that Warren Buffett has been able to generate over time could simply be to buy shares of his company Berkshire Hathaway. Only the B series is affordable. They currently sell for around 125$ (BRK-B) per share, their highest high in history. You could have bought the same share at approximately 45$ between 2001 and 2003. You would have tripled your investment in 10 years which would have given you a compounded interest rate of over 10% per year!!!
But, Warren Buffett is now 84… One day or another, someone else is going to run the company and no one knows how the market will react to that news. But Warren has been able to demonstrate over his whole life that he knows how to pick the right people. Todd Combs and Ted Weschler seem to have Berkshire Hathaway’s blood in their veins! But, only time will tell!
Keep things simple and say no to fast money!
You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.” (Warren Buffett)
At an era where people keep their stock shares for less than 10 days and where some “investors” are trading the same share thousands of time during the same day with the help of super-fast computers, Warren’s advice will probably sound weird. Because he would tell you that the greatest time during which you should hold a good stock is… forever!
But, in our capitalist society, people search immediate satisfaction more than ever. That’s the reason why I was not astonished when I recently read that 1 person out of 3 hope for a lottery gain or from an inheritance from a obscur uncle to plan their retirement. Unfortunately, fortune and financial freedom is not going to be achieved by magic! Magic exists, it’s compounded interest. But, as you know now, it takes quite some time to deliver its real power!
Warren suggest to every serious investors to avoid taking shortcuts, because they are most of the time shortcuts to failure!
Invest only in wonderful businesses!
At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone. (Warren Buffett)
How many stocks are soaring over popular speculation while the underlying company is not even able to generate earnings! Think about some start-ups tech stocks or even Twitter (TWTR) currently selling at around 44$ (it was at 53,88$ very recently) while the company declares a lost of 3,41 per share… If you would quit your job tomorrow to buy a business and live from its income, would you buy a business losing 40000$ per year or a business that would return you an income of 40000$ per year?
This price anticipates the future earnings that the company might achieve. But if it doesn’t, than the stock is not worth anything and anyways, Twitter is going to have to grow its income by a huge lot to justify such a price.
So many people are “playing” lottery with their savings. I’m always amazed to see that. I unfortunately don’t have enough money to risk it that way. For sure, if they hit a homerun they are going to get richer than what they ever wanted, but like with lottery, it rarely happens!
That is why Warren Buffett suggest investors to invest only in the greatest corporations, those corporations who have a wide moat over their competitors. You can recognize these by the return on equity that they are able to achieve year after year. This ROE will be greatly superior to the one of their competitors. Unfortunately, like great baseball players are very rare, these companies are rare too. So, when you find one at a fair or great price, you will have to invest a lot in it!
Because, like Warren says, “that’s when the tide goes out that you see who’s swimming naked!” You will see it when the next crash will occur… and it will occur soon or later. Some companies will be a lot less affected than others. These are the greatest! Those whose stock value was based on expectation or speculation will see their share price fall like a rock dropped from a plane!
To help you start with a restrained list, I suggest you get to my tool’s page.
Don’t be stupid like a monkey! Don’t play your savings like a coin-flipper!
There is nothing improper about speculating. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it. (Warren Buffett)
Like me, you probably know how difficult it is to save a couple of thousands of dollars. Prices are going up so fast, and our salaries are stagnating if they don’t decrease. So, why would you throw away your money by the windows?
Warren explains us that speculation is comparable to coin flipping. If you flip a coin you have one chance out to two to win your toss. And, most people don’t understand that every time you flip the coin, these probabilities reset and you still have one chance out of two to predict it right. And the fact that your friend won 5 times in a row is not going to give you more chances to win! So you might win more than you loss over a couple tosses. But if you play long enough, your probability of wining will return to one out of two!
Never forget that if you lose 50% of your capital, you’ll have to gain 200% on your next investment only to return to the same situation your were at. Mistakes are very costly when you play with the market! Everybody, even Mr Buffett are making mistakes. So make sure they are small mistakes.
Invest in America!
Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead. (Warren Buffett)
Warren has faith in America! He even pretends that the mother iodes of opportunity for the next century still resides in America. Best years of America are in front of us.
Even though he also owns interests worldwide, he recently added to his interests in his “big four” : American Express, Coca-cola, IBM et Wells Fargo. He also recently bought a great share of Exxon.
You can consult his portfolio by a link on my tools for investors page.
Buy a cow for its milk and a business for its dividends!
With my two small investments (farm and rental property), I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays. (Warren Buffett)
Warren highly suggests you don’t look at the tape all the time. The price is what you pay, value is what you get! This does not mean to not take attention to the price you pay. Warren is a value investor. All throughout his career, he has bought businesses or stock at a fair or undervalued price based on his analysis.
His method requires that the company’s business model must be simple and highly predictable like Coke (KO) or Procter & Gamble (PG) because predicting the needs of someone to drink a great beverage or for a man to shave every morning is far easier than trying to predict which pharmaceutical company will find a cure to cancer.
Warren tries to avoid most of the time investing in commodities which are not different from each other unless the companies have a strong competitive advantage that should persist over time. He also avoid investing in company which will have to consistently resolve complex problems to grow. Finally, he avoids investing in companies he does not understand how they make money.
Don’t be influenced by other’s analysis! No one knows what the market will do in the short-term!
Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”) (Warren Buffett)
Listening to analysts or what so-called “gurus” have to say about where the market will head during the following days, months or years is a pure loss of time. You will always find an opinion and it’s contrary in the medias. Both will have valuable arguments. In the end, there is always a seller and a buyer and both think that the price will either drop or move higher! This is the market!
So, focus on earnings and earning growth!
Stay in your circle of competence
When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects.
It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. (Warren Buffett)
If you know a lot about the food business but nothing about the technology business, for sure you could take some time and learn. But, Warren highly suggests you not to invest until you know enough because even then, you will make mistakes.
Charlie Munger and Warren Buffett apply techniques of value investing. They have based their strategy on Benjamin Graham’s principles, the father of value investing.
If you’re interested in knowing more about it, I suggest you start by reading Graham’s book. Warren recommends especially chapter 8 and 20.
You can also visit my investor’s tools page.
The intelligent investor will profit from market lows to increase his ownership in great businesses not to sell his great investments!
Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy. (Warren Buffett)
You probably already heard someone say that it’s easy to invest in the stock market. You simply have to by low and sell high. While this statement is obvious, most investors forget it as soon as their emotions invade them. And they keep buying high and selling low, losing money again and again.
It’s a non-sense but, with emotions, it is sometimes hard to use of common sense. We always think we have found the best investment in the world and that were going to be rich! But…
Warren tells us that general fear is the investor’s friend that can offer you great opportunities to buy wonderful businesses at interesting prices. While euphoria might make you buy when it’s too expensive.
If you invest a lot of money at the right time, you’ll be able to achieve incredible returns.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participation in wonderful businesses? (Warren Buffett)
If you don’t understand the stock market than choose the easy path!
In his last letter to shareholders of Berkshire Hathaway, Warren explains us candidly his directions for his estate. His advice can apply to any investors who does not understand the stock market. He claims that his estate will be able to achieve a better return on invested capital than most mutual funds manager or pension plans manager who earn millions to manage your money.
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
The recipe is simple and to your arm’s length! If you want to become wealthy without having headaches, simply invest 10% of your money in short-term treasury bonds and 90% in a S&P500 index fund. Long term results should be more than interesting! Here’s a simple and valuable advice that he gives you. If it’s good for his estate, why wouldn’t it be good for you and me?
Start learning with Warren Buffett’s mentor!
And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase. For me, the key points were laid out in what later editions labeled Chapters 8 and 20. (The original 1949 edition numbered its chapters differently.) These points guide my investing decisions today. I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).
As already said, Warren is a disciple of Benjamin Graham, the author of “intelligent investor”. Knowing that, reading the book would be a great beginning to start learning about value investing.
Years to come will make negative press about public pension plans! In prevision make your own investments!
During the next decade, you will read a lot of news – bad news – about public pension plans. (Warren Buffett)
During the ’70, Warren had written a note to the Washington post’s owner to advise her about the risk related to determined pension plans. Now that we are in front of reality, the advice of Warren takes all its meaning. He even think that the next years will deliver a lot of bad news… as if they were not enough bad already.
What are you waiting for? Take your future in charge. Nobody will do it for you!
The beginning of a great adventure!
Resuming all there is to know about Warren Buffett’s technique in a single post would be pretentious. Luckily for us, Warren loves giving out advice.
If you want to learn more, read this trio :
Finally, the website of Berkshire Hathaway gives you a handful of great advice for every investors. You will be able to download all letters to shareholders since 1977. I know, the website looks… well… just see by yourself. But the important is the content, not the packaging. After all, value is what you get! With more than 800 pages, you’ll have plenty to read before going to bed!
Featured post Image courtesy of Ponsulak / FreeDigitalPhotos.net
[author] [author_image timthumb=’on’]http://quityourdayjob101.com/wp-content/uploads/2014/03/ID-10050051.jpg[/author_image] [author_info]Hi, my name is Allan. I’m the masked blogger. Like you I’m a modern slave, prisoner of a 9@5 job in Corporate America. They told us when we were young that we would live in a society of leisure and that technology would permit us to work only a couple of hours per day. But we live in a society of stress and uncertainty. My situation could be a lot worse and I know it. So many humans are suffering on this planet. But a golden cage remains a cage anyways. At least, I have an escape plan. I will retire before 45 years old over my passive income. This is a dream that is so powerful that I will make sure it happens. To build my wealth, I mainly invest in undervalued dividend growth stocks. [/author_info] [/author]