Today, one of the greatest, if not the greatest investor of all time celebrates his amazing 91st birthday. Yes, you guessed it (or read the title), Warren is the birthday-boy today. Throughout his life, he accumulated tens of billions of dollars and averages an astounding 20% average yearly return since 1965 – now that is something.
More importantly though, he gave out countless amazing lessons and pieces of advice for life and investing. On the occasion of his birthday, I thought I would share how he influenced me as an investor (and a person). This is not at all a comprehensive list of all his advice – quite the contrary, this is merely my personal list of top 5 in which I find the most value in.
When two people value a company, results should be far enough that no definitive conclusion can be reached
Wait, what? Wasn’t the point of a valuation obtaining the intrinsic value of company to know what it’s worth?
Well, yes, valuation tells you what the company is worth. But it tells you, what the company is worth TO YOU based on your assumptions and preferences. This is by far one of my most favorite concepts, which many people fail to grasp.
There isn’t any “the” value – there is a myriad of values. You see, a valuation is based on inputs such as the cash-flows of the company, the expected growth rate and the discount rate. It is these very inputs that are also biased and colored by the investor’s expectations, methods or expected return, which move the value like a child’s swing. Put simply, no two investors use the same numbers for the calculation.
Why I like this concept so much? Because doing the calculation itself is easy. You just plug numbers into Excel! Anybody can do that. What is not easy is choosing the numbers so that they are sensible, conservative but also realistic. Ultimately, what it boils down to is the qualitative part of the business, how well you understand it and what competitive advantage the business has. These things are hardly put into numbers and thus requires the business acumen of the investor to take into account properly, which is the beauty of it.
Thus, when two investors value a company, the products, i.e. the values are (or should be) reached so far from each other that the qualitative part decides whether it is a good investment or not.
Before buying a company, imagine all your family wealth is in that stock
This is a very powerful concept, especially with today’s super low-cost brokerages and no minimums. We can deposit a few bucks into our portfolio and it tempts you to just disseminate your cash here and there, to whichever stock seems nice at the moment. I see this very often in people’s portfolios, who claim to be value investors – their portfolios have 30, 40 or more stocks.
But regardless whether you have hundreds or hundreds of millions, you should always aim to pick only the best titles. Why? Let’s say you are systematic and a little lucky, and you manage to find a company which you consider really top class, and you also manage to buy it for a fair price.
What is the probability that soon, you will find another, excellent company for a fair price? Not very high. Thus, if you know a company very well and manage the idiosyncratic risks, you should get more and more concentrated on it over time.
How do you persuade your investor mind do be so focused? Imagine all your family wealth is in that stock. That will force you to research the company to the very bone, know it throughout, leading to hopefully the best investment decision. Because of time and energy constraint (you can’t research all companies so deeply), it will lead you to make a more concentrated portfolio, which is much better for the long term from value investing perspective.
You don’t get any extra points for the fact that something’s very hard to do
This one is not only for investing, but for life as well.
Very often, you see people (and investors) build unnecessarily complicated financial models, which are not robust (little change breaks it down), are too complex to understand and bring little to no extra utility. Don’t get me wrong – I love complexity and intellectual challenges – but just because stochastic calculus is hard to do, it doesn’t mean it will earn you any extra money on the market.
Also, I know this might imply that I think people can be lazy and not try hard. That’s not the point, to say “don’t do difficult things”. The point is in order to make it in business, you have to find something that works. Sometimes, it’s very complex and difficult (as for example machine-learning algo-traders) and sometimes, it’s absolutely trivial as looking for high quality companies for a good price. You just have to find what works for you, whether it’s simple or hard.
Price is what you pay, value is what you get
This quote has been uttered millions of times, but it never gets old. And yet, it’s so simple and powerful. Well, if you assume efficient markets all the time, this isn’t true for you. But otherwise, this powerful statement again transfers from investing (simply buy things which cost less than they are worth) to life.
In my experience, there’s always a price and nothing comes for free. I am not talking about money – sometimes, the price might be not doing something or conversely, having to do something. Also, everything has its value and for many things (like stressing about the traffic), it’s close to zero.
The conclusion is, no matter what you do, keep in mind you always have to pay something and you get something for it. Just make sure the latter is bigger than the former.
Buy excellent companies for a good price, not good companies for an excellent price
This one comes in handy in practice the most. The market and its participants are not stupid – they are looking for great companies just as you are. That naturally means they erase any sizeable undervaluation should it occur.
Sometimes, however, you find a reasonably good company for an absolute banger of a price. Why wait?! Just buy it straight away! Well, actually, no.
These companies might sometimes be called “value traps”. It simply means it has a solid balance sheet, not too bad management, more-or-less stable market share and an “okay” product. But such company is going nowhere – no growth, no future potential. Everything is in the past, sort of just swaying around today. Such company is far from a great investment.
On the other hand, from time to time, you have excellent companies (think Apple, Amazon, Google) – lots of cash, solid growth year after year, growing customer base, excellent management and an absolute wonder of a product. Such companies is of course not overlooked, which is why it won’t be cheap. But sometimes, just sometimes, it is oversold just enough to provide sufficient margin of safety, and that, ladies and gentleman, constitutes an amazing buy.
For me, those were Google and Samsung, They were not cheap – truth be told, they were almost at their fair value, but I think these are one of the best companies in the world and I managed to buy them for a good price.
To conclude my point with an example; would you rather have an old TV from 20 years ago for a few bucks from the flea market, or the brand new plasma TV for more bucks but with a reasonable discount?
Happy birthday Warren
To conclude this short article, I want to wish one of my biggest inspirations Warren a happy birthday and many more successful years of investing. You inspired generations, hell, whole industries by your work, and I cannot wait what we will learn from you in the future. HAPPY BIRTHDAY!