IBF Talks

IBF Talks - Warren Buffet

MQTrader Jesse
Publish date: Tue, 06 Jul 2021, 12:12 PM
MQTrader Jesse
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Investment, Business, Finance Talks
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Introduction of Warren Buffet

Warren Edward Buffett (born August 30, 1930) is an American investor, business tycoon, philanthropist, Berkshire Hathaway’s Chairman and CEO. He is considered to be one of the most successful investors in the world. As of April 2021, his net worth exceeds US$100.6 billion thus making him the seventh richest person in the world. Below is one of his famous quote, 

 
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
 
This quote can be applied to the stock market and is directly related to the price of assets. It means that when other people are greedy, prices usually boil, so you should be cautious to prevent them from paying too much for a certain asset, resulting in poor returns. good. When other people feel scared, it may provide a good value buying opportunity. 
 
 
Buffett was born in Omaha, Nebraska. He became interested in business and investment in his youth, and eventually entered the Wharton School of the University of Pennsylvania in 1947, and then transferred to the University of Nebraska at the age of 19 and graduated. He then graduated from Columbia Business School. He revolves around the investment philosophy of the value investment concept proposed by Benjamin Graham. He attended the New York School of Finance to focus on his economics studies and soon began various business partnerships, including business partnerships with Graham. He founded Buffett Partnership Limited in 1956, and his company eventually acquired a textile manufacturing company called Berkshire Hathaway and established a diversified holding company under his name. In 1978, Charlie Munger joined Buffett as the vice chairman. Since 1970, Buffett has been the chairman and largest shareholder of Berkshire Hathaway. Global media called him the "Oracle" or "Sage" of Omaha.  Buffett is also a well-known philanthropist who promised to donate 99% of his wealth to charity mainly through the Bill and Melinda Gates Foundation. He and Bill Gates co-founded the "Giving Pledge" in 2009, according to which billionaires pledged to donate at least half of their wealth.
 

Investment Journey

Buffett purchased his first stock when he was 11 years old and world in his family’s grocery store in Omaha. His father, Howard Buffett owned a small brokerage, and he would spend his days watching what investors were doing and listening to what they said. After graduating from the University of Nebraska in three years, Buffett applied to Harvard Business School. But during a brief interview with the school that would determine his acceptance, the staff said to Buffett: “Forget it. You’re not going to Harvard.” After much disappointment from the rejection, Buffett discovered that his idols Benjamin Graham (“the father of value investing”) and David Dodd were professors at Columbia Business School. “I wrote them a letter in mid-August," Buffett shares. "I said, 'Dear Professor Dodd. I thought you guys were dead, but now that I found out that you're alive and teaching at Columbia, I would really like to come.' And he admitted me."
 
In 1962, Buffett acquired the textile company Berkshire Hathaway and transformed it into a holding company, in which he established a diversified corporate empire. Buffett became a self-made billionaire in 1986 at the age of 56. After Berkshire Hathaway sold its Class A stock for the first time, his net worth exceeded $1 billion. The core strategy of Berkshire Hathaway is to identify valuable companies and then acquire more and more of them. One of its most valuable holdings is its stake in American economic giants such as Coca-Cola (9.3%) and Apple (5.4%)-its most valuable share, with a market value of more than $120B.
 
Buffett is a disciple of Benjamin Graham's intelligent investment philosophy.  The main investment method outlined by Graham in "The Intelligent Investor" is value investing. Value investing is an investment strategy that targets the stocks of undervalued companies that have the ability to act as a company's long-term performance. Value investing has nothing to do with short-term market trends or daily changes in stocks. This is because the value investment strategy believes that the market will overreact to price changes in the short term without considering the fundamentals of the company's long-term growth. In the most basic terms, value investing is based on the premise: if you know the true value of a stock, then if you can sell these stocks, you can save a lot of money.
 
One of Graham's important parables is Mr. Market's parable, which is intended to express the irrational and collective thinking of the stock market. Mr. Market is a hardworking guy. He appears on shareholder offers every day, buying and selling stocks at different prices. Usually, Mr. Market’s quotes seem reasonable, but sometimes they are ridiculous. Investors can freely agree to his offer and trade with him, or ignore him completely. Mr. Market doesn't mind this and will come back to quote other prices the next day.
 
The point of the anecdote is that investors should not view Mr. Market’s whims as a decisive factor in the value of the shares held by investors. He should profit from stupid markets, not participate in them. A common fallacy in the market is that investors are reasonable and homogeneous, but Mr. Market proves that this is not the case. Investors are advised to focus on the company’s real-life performance and receive dividends instead of paying too much attention to Mr. Market’s usual unreasonable behavior.
 
Furthermore, in "Intelligent Investor", Graham explained the importance of determining value when investing. In order to successfully invest in value and avoid participating in short-term market booms and depressions, it is important to determine the value of the company. To determine value, investors use fundamental analysis. Mathematically speaking, the value can be determined by multiplying the forecasted earnings for a particular year by the company’s capitalization factor and then comparing it to the actual price of the stock. The determination of capitalization factors includes five factors, which are long-term growth prospects, management quality, financial strength and capital structure, dividend records and current dividend rate. To understand these factors, value investors look at the company's financial status, such as annual reports, cash flow statements, and EBITDA, as well as the company's executives' forecasts and performance. 
 
A study published by the University of Oxford characterizes Buffett's investment method as "founder-centrism", defined by a deference to managers with a founder's mind set, the collective moral attitude of shareholders, and a high degree of concern for exponential value creation. In essence, Buffett's concentrated investment protects managers from short-term market pressures. 
 
The way of Buffett’s investment style is that Buffet looks for unreasonably priced low-priced securities based on intrinsic value. Buffett did not focus on the complexity of supply and demand in the stock market, but on the entire company. Buffett has been a supporter of index funds for people who are either not interested in managing their own money or don't have the time. Buffett is skeptical that active management can outperform the market in the long run, and has advised both individual and institutional investors to move their money to low-cost index funds that track broad, diversified stock market indices. Buffett said in one of his letters to shareholders that "when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients." In 2007, Buffett made a bet with numerous managers that a simple S&P 500 index fund will outperform hedge funds that charge exorbitant fees. By 2017, the index fund was outperforming every hedge fund that made the bet against Buffett.
 

Key Takeaways

Here are a few points that we can learn from Buffett. He always tell people to live below your own means. Living below your own ability is when you spend less than your own income. In other words, you have money left at the end of the month. You are not living on salary. You don't have to take on more debts to pay for living expenses. Until today, Buffett still stays at his old house which he bought the house for $31,500 in 1958, this house only worth 0.001% of his total wealth.
 
Furthermore, Buffett emphasizes that communication is the skill that you must improve. According  to him “ The best way to improve yourself is to learn to communicate better. If you can communicate better, the results of your life will be magnified. The only diploma I hang in the office is the communication diploma from Dale Carnegie in 1952. Without good communication skills you won't be able to convince people to follow you, even though you see over the mountain and they don't.”
 
Lastly, you should enjoy your work. Buffett says that in the world of business, people who are successful are people who are doing what they love. Doing what you love makes you  invest more time to complete the work, you will be more motivated to succeed. The difference is that you do it out of your will, not because you accept other people’s instructions or feel obligated to do so. On the contrary, you are eager to increase productivity because you believe in what you do-you know that your efforts will bring changes to the world and the people who serve you..
 
Buffett’s key principles of success:
  1. “Rule 1: Never lose money.” “Rule 2: Never forget Rule 1.”
  2. Invest in what you understand.
  3. Invest in companies with favourable long-term prospects
  4. Invest in companies with good reputation
  5. Invest in an attractive or sensible price

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