Intelligent Investor

How to be an intelligent investor according to Warren Buffet


Warren Buffet is one of the few men in the Universe who does not need any introduction. Currently, among the wealthiest persons in the globe, Warren Buffet is one of the most sought businessmen alive. Many love to define him as the “Oracle of Omaha” due to his mythological Midas touch (although he prefers to invest in stocks rather than gold). In one of many speeches, he affirmed to have won the “Ovarian Lottery” because he was born at the right time and place. Besides his modesty Buffet is a wise man before then a wise investor. For such reasons we deemed compulsory to account here some of the advises that he publicly gave about life and investments. Also, Warren Buffet’s official biography, The Snowball” by Alice Schroeder is a detailed account of all the principles that served as a guide throughout his life. However the chances to become as wealthy as Warren Buffet are extremely low (maybe you have better chances of winning the lottery); On the other hand, Buffet’s advice is meant to be a starting point to build a successful career in business. Therefore take these six guidelines as a catalyst to your success:

The future is not the past

For how petty this point may seem, it is actually very important in Warren Buffet’s world. One of the hardest things to comprehend when dealing with stocks is that we cannot derive from the past future’s stock results. For such reason Buffet never wasted his time trying to predict financial markets, or how they will react to the next Federal Reserve move. This concept may even be harder to get for those who received formal training in finance. In fact, too often business schools teach how to derive the “future value” of a stock based on the projections of its recent past performance (3-5 years). The consequence is that the model itself is stunning (excel-psychos make the tool become the end rather than the mean) although worthless.

Beware of the Noise

Newspapers, TV Shows, second by second charts are all engineered to produce a great deal of noise. That sensational clamor is what the wise investor knows how to avoid. The reason to avoid noise is not only psychological but also physiological. Indeed, not only noise makes us more vulnerable to rumors, but it also makes us more apprehensive and stressed. Our brain is not wired for losses; Cognitive psychologists showed that we perceive losses extremely more than gains. Consequently, it is wise to reduce the frequency to which we are updated about our portfolio’s performance.

Circle of Competence

This idea is simple but very powerful. Warren Buffet built his life around this concept. To become successful one must learn how to avoid screw-ups. Many of those come from our tendency to fall into the “mimicry trap.” In other words, we feel we have to start a venture or invest in the stock just because our neighbor did so. It is essential to draw a line and determine what the things we truly understand are. For example, as reported in “The Snowball” by Alice Schroeder, Warren Buffet recognized himself as an expert on money, business, and his own life. That is one of the reasons Buffet did not get involved in the bubble. In fact, he did not necessarily think there weren’t companies worth investing (Buffet is Bill Gates’ good friend); but he did not understand those businesses, and therefore he avoided them because they fell outside his circle of competence.

Don’t go into debt

Buffet learned this principle very early in his life. In fact, as reported in “The Snowball” by Alice Schroederspend less than you make” and “don’t go into debt” represented Buffet’s Family dictum. While this principle is easy to understand rationally, it is tough to implement practically. When you contract debt and spend more than you earn, for instance, you will stop accumulating and compounding your wealth. This was the practical reason for which Buffet implemented this principle throughout his life. If many so-called “gurus” do not practice what they preach, conversely Buffet has always done the contrary. For instance, Buffet still pays himself $100,000 per year, a pretty meager salary compared to Wall Street multi-millionaire bonuses. The main reason for that is not only symbolical but also practical. If management is paid too “generously,” this would divert resources away from the company which to be successful has to keep its compounding growth.

Not in the Game for money

One may argue that Buffet is a billionaire and as such of course he loves money. But this isn’t the case. What Buffet loves is “how to make money” but not money itself. Not by accident, the Oracle of Omaha donated over $21bn to charities (Buffet’s Donations to Charity), and it is likely that this amount will considerably grow in the next years. Buffet learned this principle from his mentor, and (super)intelligent investor Benjamin Graham.

Work-Smart not hard

Ever since childhood, Warren Buffet disliked manual labor but understood that financial freedom was what he wanted in life. Therefore, he started from early experience to create a system to become financially independent. For instance, the system he used already existed, and it was the financial market. On the other hand, this principle applies to any other aspect of life. This leads to the difference between scalable and not scalable jobs. Although this concept matured from “The Black Swan” by Taleb, it interestingly applies here as well. There are two categories of jobs. The non-scalable, which strictly depend on a number of hours you put in. If you are an accountant you will earn per hour, therefore the more you work, the more you make money. And the scalable ones, where there is not the correlation between hard-work and earnings. If you are a writer or an investor the success of the book or investment does not necessarily depend on a number of hours invested in it. In the non-scalable spectrum, to become rich you have to work extremely hard. In addition, the level of income is strictly tied to the amount of work. This implies that you will never be free from your job. In other words, your income is your job, but your job is yourself. Therefore you are your income! As soon as you stop working your income stops as well. On the scalable spectrum, instead, you are not your income. In other words, you depersonalized your job, by creating a system that works for you. When you stop working, no longer your income will halt. This principle seems to have been instilled in Buffet’s mind at a very early age.

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Published by

Gennaro Cuofano

Creator of | Head of Business Development at | International MBA

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