Warren Buffett’s investment track record is second to none. Not only has he managed to invest successfully, but his patience has made him compound decade after decade.
We can argue Buffet’s skill is investing, but his hidden gem is his patience. 95% of his wealth came after his 65th birthday!
A big part of his success derives from the investing framework that makes him consider each investment buying a slice of a business. This way, he is not distracted by the daily swings in the stock market. He’s confident his stock pickings will do fine over the long term. It makes him sleep well at night and let the compounding do the job.
In Snowball, By Alice Schroeder, the only authorized biography of Warren Buffett, I found a passage that further elaborates on the main framework that sets the guidelines for all his investments. It’s not rocket science, but worthwhile having in the back of your head at all times. On page 133 the author lists the three main investing principles Buffett learned from Benjamin Graham’s lectures:
Buffet’s three main investing tips:
- A stock is the right to own a little piece of a business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.
- Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.
- Mr. Market is your servant, not your master. Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high.
Buffett regarded number two s the most important: always have a margin of safety. The intrinsic value he could estimate with reasonable accuracy, but the margin of safety made him sleep well at night.