In investing, Warren Buffett is a household name, isn’t he? What makes Warren Buffett great isn’t only his dazzling net worth of $71 billion, but also how he differs from most investors.
Buffett’s investment principles and strategies are one of a kind. Even his most dedicated followers find it hard to explain all his investment moves.
Topics we’ll be covering:
- Childhood of Warren Buffett
- Influence of books on Warren Buffett
- How did Benjamin Graham change Warren Buffett’s life?
- Self-discipline & Patience: Success in investing
- The power of compound interest
- The mindset about stock vs ownership
- What Buffett has to say on diversification
Childhood of Warren Buffett
What were you doing when you were 11 years old? Can you even imagine it? I for one can’t do it!
Let’s talk about Warren Buffett. Well, for starters, he had made his first investment at 11. He might have lost money on his first stock, but the wisdom he received from it has remained a lifetime. Buffett himself said that while other children were playing, he was busy reading books about investments.
How many investors do you know that started their investing career at 11 years old? When someone at 11 while others start the same career at around 18, then there will be some obvious differences. The gap of at least 7 years gave him enough time to accumulate a wealth of knowledge on investing.
“I always knew I was going to be rich. I don’t think I ever doubted it for a minute.”Warren Buffett
Influence of books on Warren Buffett
When asked to Buffett about his success secret, he replied by claiming that he reads every day. He encourages us to read at least 500 pages on a daily basis. Knowledge accumulates overtime. That’s how wealth is built.
Though he has read plenty of books, there is one specific book that directed his life into a whole new one. He read The Intelligent Investor when he was 19, which was written by his mentor Benjamin Graham.
Seriously!? Who would start reading such boring books at 19 when you can read books full of pictures?
But anyway, we can see the lasting impression that book had on Buffett.
“At age 19, I read The Intelligent Investor and what I am doing today is running things through the same thought process I learned from the book I read at 19.”Warren Buffett
How did Benjamin Graham change Warren Buffett’s life?
After reading the book The Intelligent Investor, Buffett was keen on meeting Benjamin Graham. He did so when he joined Columbia Business School while Graham was a professor there. From there, their lifelong bonding started.
Graham was known as the father of value investing. As per Investopedia, value investing is an investment strategy that involves picking stocks that trade for less than their intrinsic value.
Graham taught about the concept of value investing to Buffett. Since then, Buffett associates himself with value investing. His major investing success has come from his value investing principle he learned from his mentor.
In this modern world, few investors believe in value investing, after all, it’s boring, as they say. Why buy a stock and do nothing about it for 5 years? This is where Buffett’s self-discipline and patience come into play.
“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.”Warren Buffett
Self-discipline & Patience: Success in investing
In 1989, Warren Buffett had bought the shares of Coca Cola. Till this date, he has rarely sold any of them. How can a person hold one stock for over 30 years, without ever getting bored? Well, if you know that particular stock will make you rich, then perhaps you might be tempted to hold it as well.
Buffett always knew that Coca Cola would be a massive hit. Similarly, he found a few other companies which he thought to be outstanding stocks, including Apple and Bank of America. Most of his choices have paid him great returns over a long time.
Being patient for an extended time could test your limit. For most investors, patience is a word that’s long gone. As this world is moving faster than ever, so as their patience.
Talking about my own experience, I hesitate with the stocks that I have held for merely a year or so. Every day, I feel tempted to play with that stock, hoping to sell it right when its price increases. I got to improve on my patience!
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”Warren Buffett
The power of compound interest
One reason why Buffett is able to remain so patient is the power of compound interest. Buffett quickly learned that the more patient we can be, the more compound interest works in our favor.
Buffett’s net worth shows the perfect illustration of this idea. He started off small. Slowly, his net worth started increasing. It wasn’t until 56 that he earned his first billion.
If we are patient enough, then we can grasp the benefits of compound interest, and see an exponential rise in our wealth.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”Albert Einstein
The mindset about stock vs ownership
One crucial feature that differs Buffett from other investors is his mindset about stocks. For most investors, stocks are stocks. They buy it, hold it for some time, then sell once they see a small rise in its price.
While this might be an easy and a common strategy, it’s not the best out there because of its passiveness – Buffett learned that early. So for him, stocks represent much more than that.
Stocks give Buffett ownership of that particular company. He can now make major decisions for the company. He can attend the annual meetings and raise his voice if he’s not satisfied with the company’s performance.
This is what Buffett has been doing for a long time. He either buys companies that are run by a great management team, or he buys a lot of shares of a company that isn’t well run. He then gets into the position of the board of directors and makes crucial decisions for the company. Even Berkshire Hathaway was built in that way.
“We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own assets.”Warren Buffett
What Buffett has to say on diversification
Should we diversify our portfolio? What do you think? Diversifying spreads our risk. So it must be good, isn’t it? Well, Buffett might laugh at you for saying that.
“Diversification is a protection against ignorance.”Warren Buffett
When you diversify too much, you lose control of what’s happening to your stock portfolio. How will you be able to track each and every one of your 50 stocks portfolio?
If you know what you are buying, then there’s no reason to diversify. Buffett understands the company he is buying. He not only looks at the financial statements but also its management team and its future potential.
But practically, it’s hard not to diversify. What if one of your stocks goes crashing? If you fail to diversify, then you won’t be able to recover your money. Personally speaking, I have to diversify to some extent. I cannot afford to risk it all in only a few stocks (I sincerely apologize to Buffett for doing so).
The Botton Line
So these were a few crucial aspects that differ Warren Buffett from most investors. I am unable to cover the entire differences, as it would require a complete book to do so. Fortunately, there is a book for that. If you would like to read his entire philosophy, then you should definitely check out his book, The Essays of Warren Buffett.
If you learned something and enjoyed reading this article, then please consider sharing this with your wonderful friends as well.
Thank you so much!