Words on Wealth: Investment lessons from guru Warren Buffett

Warren Buffet Photo: Facebook.

Warren Buffet Photo: Facebook.

Published Jun 1, 2024


You have probably heard of Warren Buffett, the “Oracle of Omaha”. Among the top 10 richest men in the world, with a fortune of about $136 billion (R2.5 trillion), he is regarded by the investment fraternity as little less than a god.

Investment experts hang on to every word that emanates from his company Berkshire Hathaway’s annual shareholder conference, which he co-hosted with his long-time business partner Charlie Munger for many decades. Munger died in November last year, two months short of his 100th birthday.

Buffett is 94 years of age, in good health by all accounts, despite his penchant for Cherry Coke and fast foods.

He is famously frugal and lives a simple life in his hometown, Omaha, Nebraska, in a middle-class five-bedroom house that he bought in 1958 for $31 500. When asked whether he should move to a more luxurious home, he told a BBC interviewer in 2009: “I’m happy there. I’d move if I thought I’d be happier someplace else. This house does just fine. I’m warm in the winter, I’m cool in the summer, it’s convenient for me. I couldn’t imagine having a better house.”

One thing he does splash out on a bit is his collection of ukuleles, an instrument he has played since taking it up in his teens to impress the girl who would become his first wife, Susan Thompson. He is an avid bridge player, enjoys the odd round of golf, and spends a great deal of his time reading.

Which brings us to his investment philosophy and the investment-related wisdoms he has imparted over the years. Berkshire Hathaway’s incredible success as an investment holding company can be largely attributed to the following principles (I quote directly from his sayings and writings):

Knowledge is gold

You need to do your homework when investing in a company, but your knowledge needs to be broader than that. By reading hundreds of pages a week, of newspapers, books and company reports, Buffet says he has built “compound knowledge” over decades. “The beauty of it is that the knowledge is cumulative … What you’re learning about Company A will help you when thinking about Company B.”

Quality is paramount

Buffett likes companies that have good long-term prospects and are operated by honest and competent people. “Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or when the reports are a little dishonest or biased. And we like people who are smart. I don’t mean geniuses ... we like people who are focused on the business.” The quality of the business itself, however, takes precedence. “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

Value is important

Buffett is a disciple of the father of value investing, Benjamin Graham, who held that it was no good buying a profitable company if its share price was too high. “The key to Graham’s approach to investing is not thinking of stocks as part of a stock market. Stocks are part of a business. Shareholders own a piece of a business. If the business does well, they’re going to do all right, as long as they don’t pay way too much to join that business.”

Simplicity is key

“We try not to do anything difficult … this is not like Olympic diving. In Olympic diving, they have a degree of difficulty factor. And if you can do some very difficult dive, the pay-off is greater if you do it well than if you do a simple dive. That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right … Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.”

Buy and hold

Investing (as opposed to speculating) is not for the impatient. Buffett often says his favourite holding period is “forever” and recommends buying shares that you wouldn’t ever want to sell. He will, however, sell the shares of a company that loses its long-term competitive advantage or if he thinks the money can be used better elsewhere.

Don’t try to time the market

“We don’t have an opinion about where the stock market’s going to go tomorrow or next week or next month. So, to sit around and not do something sensible because you think there will be something even more attractive, that’s just not our approach … Picking bottoms is basically not our game. Pricing is our game. And that’s not so difficult. Picking bottoms, I think, is probably impossible.”

Consider passive

If you don’t have the time or inclination to do the homework successful investing demands, passive, low-cost index-tracking funds are your best option. “The goal of the non-professional should not be to pick winners – neither he nor his ‘helpers’ can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost index fund will achieve this goal.”

* Hesse is the former editor of Personal Finance