The Warren Buffett Way
Buffett has been unbeatable in his investing career spanning 70 years+, right from the Buffett Partnership days. 1965 - 2012, he was able to generate a return of 19.7% compounded vs 9.4% for S&P 500.
Since childhood, Buffett was so confident in his money-making skills, that he pronounced he would become a millionaire by age 30. If not, he would jump off the tallest building in Omaha. Today, he has far exceeded his dream, however, it doesn’t mean that his lifestyle has changed. He still lives in an old house that he bought in 1958, drives an old-modeled car and prefers to eat cheese burgers, cokes and ice creams.
Buffett opposes efficient market theory and believes in doing an in-depth analysis of companies and investing a good amount for the long term. A successful business has three advantages:
The driving force behind Warren Buffett’s success is not IQ; rather, it’s rationality. Determining how to allocate capital in a business is the most important decision.
A business owner and investor should look at the business in the same way, as essentially, they want the same thing out of business, the creation of value. Buffett advises students that if you think that market is smarter than you, then do index investing. On the other hand, if you are capable of studying businesses, turn off the market after purchasing individual stocks. Buffett is a casual observer of the economy but does not spend time predicting the economy at all.
The organizational structure of the company is of utmost importance for its success. The success of Berkshire stands on three pillars:
- The company’s subsidiary generates a lot of cash
- Buffett is a capital allocator
- Decentralization. All subsidiaries are managed by a separate management team and Buffett has little intervention in day-to-day activities.