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


  1. CIao DGI,
    Very good post, I think that it's important to stress that changing conditions require changing attitudes and strategies. Up to 10 years ago I was engaged in bond ladders, recently I started DRIP. In the end the targets are pretty much the same (have a stable and relatively safe rising income), but adopting a new stance was a must. If I hadn't changed strategies I wonder what my bond ladder PF would be performing now...
    In any case it's not an easy job, I have a lot of difficulties to keep track of stocks and opportunities, but the other option is to leave it all to other people who are quick to take merits when bulls are coming and refrain to take the blame when bears come out of their caves... In the end it's "my" money, so the learning and reading that needs to be done it's a "burden" (but I do not see it like that) that comes with the asset...

    Ciao ciao


    1. Ciao Stalflare,

      I totally agree that you are the one that cares about your money best. Most everyone else is mostly interested in earning fees off your hard earned money.

      Good luck in your investing journey!


  2. Another excellent post and very inspiring for the new investors out there (myself included). I've always considered myself a life long learner, and investing is no different. I doubt i can read 10k's every single day, or 500 pages; but as my free time allows I try to improve and get better!

    Keep up the good work DGI, I really enjoy and appreciate reading this blog.


    1. I know it is difficult - I myself experience it on a daily basis. I subscribe to the philosophy that it pays to go to bed a little smarter than when I woke up. Little incremental progress, compounded over time, will result in magnificent results down the road.

      Thanks for stopping by and reading J!

  3. Yes, I think if there is any one lesson from the Snowball to be learned, it is the sheer industriousness of Buffett at all ages, even to the exclusion of his family and other people close to him.

    1. There is a price to pay for the ultimate success on Buffett's scale. If you truly love doing something, you will think about it all the time, and do it most of the time. For example, I love investing, so I sometimes I analyze investments in my sleep.

      It is funny though how in many industries these days ( IT, Law, accounting, finance, engineering), people work 80 hour weeks, and rarely see their families anyway. And many of these people spend most of their pay on stuff, rather than invest it. They spend that time whether they enjoy it or not, and do not have the freedom of Buffett either.

      You have to ask yourself, if you hit your number, would you keep going? I have revised my number upwards a few times already, and I think that even if I hit it again by end of decade, I may still keep going. It is tough to go from earning 100 and saving 60 - 70%, to only earning 30 and not saving anything.

  4. I absolutely agree.

    The willingness to continually look to grow your knowledge and experience is a critical part of successful investing. It is hard, but it is also the most rewarding...and pays the best dividends!

    Thanks for the great post.

    1. Yep, I have learned a lot over the past decade, and I keep learning how to grow my net worth

    2. Here's to the next decade then!

  5. Hey I think you might want to add this article to your "Warren Buffett Investing Resource Page".

    1. Thanks for the suggestion and reading. I just added it!

  6. Really like the post. And I think a big part of what people sometimes forget when they talk about Buffet's strategy is the huge amount of hard work he puts into it; reading, researching, and all the hard leg work he did to get to the point of starting his own businesses and buying stocks.


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