Warren Buffett is the greatest and most famous investor of recent times. The rules of doing business formulated by him in his book Warren Buffett Essays on Investments, Corporate Finances, and Company Management became a kind of Bible of the securities market. New York brokers have a sign: if during a game on the exchange you will whisper the quotes from his books, you will definitely be lucky. Some believe his truisms, others believe that he is simply lucky. The rest think that he sold the soul to the devil. On March 3, 2011, Forbes magazine ranked Warren Buffett with $50 billion in third place in the ranking of the richest people in the world. The other two people are:
- Carlos Slim
- Bill Gates
First Profit at 6 Years Old
Warren Buffett was born on August 30, 1930 in Omaha, Nebraska’s largest city, to the family of a stockbroker Howard Buffett. He learned to read early, already knew the basics of mathematics at school age. From the very childhood, he surprised his parents with the ability to multiply multiple figures in his mind, and he learned the basics of financial art in six years. In 1936, he bought Coca-Cola packaging in his grandfather’s store for 25 cents, and then sold each of the six bottles for 5 cents. Thus, the total revenue was 30 cents, and Buffett’s profit – 5 cents: that’s how a Buffet got his first profit.
At 11, young Buffett began to take the first steps in the stock market. Thanks to his father-broker, he had access to stock information, which he decided to use. Taking money from his father and combining his children’s capital with the modest savings of his sister Doris, with the help of his father, he bought three preferred shares of Cities Service Preferred for $38 apiece, and waited.
Immediately after the purchase, the stock price fell to $27, the young investor became nervous, but did not sell the stocks. And after a while the price per share rose to $40. Warren sold the shares and even earned on this transaction, which could be considered a serious success, if not for one thing. A few days later, the price of the action Cities Service soared for a mark of $200. Warren promised himself that he would never again hurry.
If by 30, I Won’t Become a Millionaire – I’ll Jump Off the Highest Roof
At 13, Warren started delivering the Washington Post. Having developed his own strategy, he optimized the route, which allowed him to bypass far more addresses in the morning, which means he could earn more money. In the end, his monthly income equaled the salary of the director of the post office, and then twice exceeded it. A year later, according to Buffett’s recollections, his savings amounted to almost $1,500, which he did not hesitate to spend by buying a land plot for rent to local farmers.
Inspired by success, he surprised all relatives, saying that if he was not a millionaire by 30, he would jump off the roof of the tallest building in Omaha. Buffett successfully overcame the 30-year mark, and earned his first million when he turned 31. Then, in 1943, at 13, Buffett paid his first income tax of $35.
Business Management Style According to Warren Buffett Essays
Warren Buffett is sometimes called the Oracle of Omaha for his ability to combine a supernatural gift with the placement of capital and simple folk wisdom. He is considered the greatest investor of our time. He masterfully conducts the cold analysis of figures, works tirelessly, is honest, and has a strong personality.
The most famous and most often cited illustration of the success of Warren Buffett’s strategy is the fact that $10,000 invested in his company back in 1965 would now bring about $30 million.
Warren Buffett himself steadily figures in the list of the world’s three richest people, compiled by Forbes. He believes that investment implies a partnership in which managers and owners share mutual responsibility on an equal basis with mutual benefits.
Warren Buffett, even at his own company, allows his managers to maintain autonomy in the conduct of business and conducts general meetings only at their request. Buffett needs results, and he achieves them, demanding from his employees to be honest and trust each other. He abandons planned investments only after his best managers fail to succeed from the deal.
The methods of Warren Buffett improved over time having mastered the art of buying what you need at the right time and sell as it should. He buys shares secured by serious assets, in the expectation that sooner or later the market will evaluate these securities. Its main strategy is to buy undervalued companies.
To date, the methods of Buffett described in Warren Buffett Essays are even more interesting than the size of his income. Their study provides valuable lessons for private investors. The successful work of Buffett at the stock exchange is not due to his connections to the necessary people on Wall Street, but due to his ability to read and analyze the annual business reports available to everyone.
Buffet willingly shares his rules for doing business:
- Rule number 1. Money should be invested in a simple and understandable business, for example, the production of soft drinks, sweets, and banking.
- Rule number 2. Money should be invested in companies whose activities have always been consistent, with favorable long-term prospects.
- Rule number 3. Money should be invested in companies with an international franchise network and a guaranteed growth prospect.
- Rule number 4. Money should be invested in companies with strong management teams, for which the main task is to increase the share capital.
Obviously, Buffett considers it possible for him to invest only in stable companies – banks, manufacturing firms, retailers, firms working with real estate, and so on.
Although Buffett approvingly refers to companies working in the field of high technology, he does not hurry to invest money in them. During the boom of internet companies, many people reproached him for losing a profitable opportunity to invest. But he is skeptical about these companies, whose products he doesn’t use himself.
A very important principle of Warren Buffett is non-interference in the operational management of purchased companies. Warren buys a company that seems attractive to him, and the only operative decisions that he takes include:
- The appointment or reassignment of the CEO of the company
- Determining the size and order of his remuneration
As a rule, remuneration provides for the managers to receive options for shares of the company when certain results are achieved. All other decisions remain on the conscience of the manager.
In the vast majority of cases, this approach again justifies itself – in an effort to increase their own remuneration, managers increase and capitalize the company, which is what Warren Buffett is seeking.
Minimizing risks is one of the cornerstones of the Warren Buffett’s strategy. He says that he would give up an interesting acquisition, rather than go on increasing the debt burden of his company.
It is no coincidence that his Holding Berkshire Hathaway is now one of only seven issuers with the highest credit rating according to Moody’s version of the AAA. A high credit rating provides Warren Buffet with a low cost of capital. Buffett believes that one of the evils that are detrimental to the modern economy is the wrong reward distribution system among the participants in the financial market.
In his opinion, a significant part of transactions in the stock market is recommended and produced for the personal enrichment of intermediaries – various types of brokers and traders. It would be perfectly reasonable to limit the number of transactions allowed for each person throughout his life. Warren Buffett cites the figure 10 – no more than ten transactions in life for each of the participants in financial markets.
The strategy of Warren Buffett is set out in the 13 principles of corporate governance that he formulated in Warren Buffet essays.
Warren Buffett considers himself, as well as other executives of Berkshire and the company’s shareholders, not as parties to a share purchase transaction, but as partners who jointly invest their funds in stocks.
In a letter to shareholders, Warren Buffett once confessed that 99% of his personal fortune was invested in Berkshire Hathaway. His closest associate, Charlie Manger, invested 90%. The shares in Berkshire Hathaway are owned by family members of the company directors, their friends, and acquaintances.
According to Warren Buffett, this approach justifies itself, since the high diversification of Berkshire investments significantly reduces their riskiness.