Wednesday, June 24, 2015

The one lesson about Warren Buffett's success that no one wants to hear

Warren Buffett is the most successful investor of all time. Warren Buffett was able to keep learning about investments and business from the age of 11, which allowed him to compound money for decades.

The real secret behind Buffett's success is that the guy worked incredibly hard to achieve his record all his life. Buffett loves learning, thinking and breathing about investments. That is why he has been able to spend 60-70 hours a week for 70 years in a row, doing what he loves best, and building his fortune to over $70 billion. Buffett always liked his freedom to pursue his own passions at his own pace. He was actually financially independent at the ripe age of 25

You cannot put that into a formula. There is a lot of money to be made selling "secret formulas" to investors. Some even write papers, and reach erroneous conclusions that he only made money because of his investment float or because he collected high fees during the days of the Buffett Partnership. In reality, Buffett made money because he is a great investor - the insurance float only magnified his returns. And during the days of the Buffett Partnership, he was paid for performance, and he still trounced all benchmarks.

It is true that his net worth has been greatly enhanced by his hedge-fund like Buffett Partnership, as well as from the float from his insurance operations at Berkshire Hathaway. However, these tools simply added extra layers of returns on his already outstanding investment record. If float was all there is to generating outstanding returns, AIG would have never had to ask for $200 billion from the US treasury in 2008. You need smart capital allocation, and superior risk management when you are dealing with leverage.

Actually, if one had followed the SEC disclosures of Berkshire Hathaway stock investments between 1976 and 2006, they would have made 25% per year. Not too bad.

Buffett reads all the time about business and investments. He has flipped through thousands of pages if Moody's and Standard and Poor's stock manuals. He even did that on his honeymoon. He also is familiar with approximately 1500 - 2000 companies, and skims through their annual reports every year.

This was all possible because Buffett was a learning machine. In a speech in front if students, he mentioned that he reads 500 pages per day. He reads annual reports, industry publications and business press. The one thing to take away from this article is to keep learning about business and investments. When a student asked him how to learn about all investments, Buffett replied, start with the A's.

I know that it is difficult to achieve this with a full time job and a family. It is doable if one applies themselves, and focuses their time on the best value added activities to improve their lives. If you want to be successful in investing, it might pay huge dividends for you to try and find a little bit of extra time to learn about the topic. You can always leverage other resources such as this website and others on the topic like dividend growth stocks or dividend mantra, which could provide with short cuts on information gathering for you. If you keep learning beyond those resources, you might do even better over time in uncovering quality companies selling at attractive valuations. Remember, knowledge accumulates over time just like compound interest.

If I were just starting out as a dividend investor, I would start my research by reviewing the list of dividend champions. There are approximately 100 dividend champions these days. If I were starting out, I would develop my own screening criteria, and develop working knowledge about these companies that meet it. I would try to understand the businesses behind each stock, and determine whether this success in raising dividends can continue in the future. After that, it would be helpful to expand your level of knowledge about the remaining champions. After you learn about enough dividend champions, learn about dividend achievers and possibly even the dividend contenders.

It would be helpful to develop a system to keep learning. I look at dividend increases for undercover dividend gems, analyze individual companies, and other than that think about strategy and how to get the most dividends for my dollars, as safely as possible. Yield and growth plus valuation is always a tradeoff for me.

I have found that it is important to be disciplined, and have some mechanical way for screening out companies. However, it is equally important to learn how to weed out companies that are unsuitable, for one reason or another. This second qualitative method is more subjective, but becomes a little easier once the investor achieves more experience in investing and researching businesses. Unfortunately, there isn't a magic formula or a simple shortcut to easy investment success that applies to everyone.

In summary, I believe that to be successful in investing, one needs to identify their ultimate goals, and select a strategy to reach those goals within a certain timeline. In order to find the strategy that is the right fit for you, you need to do some learning. This will help you stick to your guns when things get tough, and not abandon ship. By continuously learning about investments, companies and business, you will be better prepared when the right opportunity presents itself. By continuously improving on your process, you stand a better chance of attaining your goals.

In Warren Buffett's case, he started out owning farmland, pinball machine businesses and a paper route. He used his earnings to invest in the stock market. In the 1950s and 1960s he focused on pure Graham value investments. Later on, he adapted to changing conditions, and changes in assets under management, and focused on businesses with solid competitive advantages. His success is due to continuous learning, adaptability, and the inner desire to be independently wealthy from a very early age. As we learned from this article, his success is unique to his personality, and not because of a magic formula. If you follow strict formulas for success, you might end up being disappointed down the road. All of us can learn from the Oracle himself however, and apply the thirst for knowledge and financial independence into our own lives.

Full Disclosure: Long BRK/B

Relevant Articles:

The Most Successful Dividend Investors of all time
What would happen to Berkshire Hathaway after Warren Buffett is gone?
Warren Buffett Investing Resource Page
How to become a successful dividend investor
How Warren Buffett built his fortune

Popular Posts