In the chaos of the 2008 market crash, Buffett predicted with uncanny accuracy that Lehman Brothers and Merrill Lynch would follow Bear Stearns as targets for collapse. He said the Federal Reserve had no good options to protect the financial system, and he said the recession triggered by the crash would turn out to be long and deep. On Berkshire’s behalf, Buffett himself was looking for undervalued stocks and stooping for cigar butts. He was even dabbling in derivatives, selling credit default swaps to protect investments that he considered underpriced. But he didn’t recommend trying to follow his example.
Over time, he said, sound stocks were the only real asset to be trusted. Whatever happened to debt instruments and the value of money, stocks in good companies would reflect real economic activity and intrinsic value. And in Alice Schroeder’s biography that he authorized but didn’t censor, The Snowball, Buffett added a final word of advice to ordinary investors.
“Don’t think you can outsmart the market,” he said. “Very few people should be active investors.” The keys to success, he said, are to avoid buying and selling at precisely the wrong times – as most investors wind up doing – and to avoid the high trading fees that eat up profits. What most people should want is a cross-section of industry that will do well over time. So in the end, the best route for them “is to buy a low-cost index fund and to buy it over time.”
That’s probably not the investment advice most of us want. But as Warren Buffett’s story shows, you ignore it at your peril. And all of us can be grateful to him, both for his example and for his advice.
Lessons
Apart from that basic message, what can ordinary mortals learn from Warren Buffett’s example?
Start early, and understand your goal.
Be guided by your own talents and passions. From early boyhood, Buffett was interested in money and numbers, and he drew his conclusions from the facts of any case - to the point where he began to doubt his religion when he figured out that the writers of hymns weren’t blessed with longer-than-average lives.
Work hard and save your money.
Buffett never counted on windfalls or lucky breaks (although he got a few) to build up his stake. His success is based on energy, initiative, and dogged hard work. His boyhood newspaper delivery route meant getting up before dawn, folding the papers to be delivered, and riding his bike for miles in all kinds of weather to fling them onto front porches. When he made good money, he saved it. Early on, Buffett discovered the miracle of compounded capital and saw each dollar in his pocket as a potential ten-dollar bill if he put it to work instead of spending it. And even when he bet on horses, he wagered conservatively, seeing it as a kind of investment.
You can never know too much.
In any deal, the one who knows the most will usually come out on top.
Keep a margin of safety.
In every deal, be sure there’s something to protect you on the downside. Buffett first learned how to pick sure things at the race track, when he and his friend stooped to scavenge winning tickets that careless bettors had thrown away. In Ben Graham’s office, he learned to adapt that technique to find “cigar butts,” companies whose stock was trading for less than their assets were worth.
Look for great businesses, and be patient.
As Buffett told Berkshire Hathaway shareholders in one of his latest annual reports, Charlie Munger taught him decades ago that it’s much better “to get a wonderful business at a fair price than to get a fair business at a wonderful price.”
Stick to what you know. Never run with the herd.
In the late 1990s, when high-tech stocks were eclipsing everything else in the markets and seemingly everyone was chalking up profits from them, Buffett took scathing criticism for refusing to climb aboard the bandwagon. He shrugged it off. He might well be wrong, he conceded, but he knew nothing about technology, and he had learned never to invest in anything he didn’t understand. Berkshire’s price stagnated. Then it dropped almost by half, and some investors sold out in disgust.
Own up to your mistakes.
Always the first to point out his errors, Buffett has won a reputation for candor, humility, and cheerful self-deprecation – not to mention wrenching triumph from the jaws of his disasters.
We can’t all be Warren Buffett. But we’d all be better off if more of us behaved like Warren Buffett. And remember, he was doing that long before he became a billionaire, so it’s an example you can follow.
Contributed by: The Editors of New Word City
Great
Leaders Warren Buffett
