Can You Replicate Warren Buffett’s Success, Investing in Stocks?

I think the immediate answer that you would get if you ask any successful investor on how to successfully invest in stocks would be to “Invest like Warren Buffett!” However, can you replicate Warren Buffett’s success investing in stocks even in this century? Let us analyze.

First of all, how did Warren Buffett become the richest person of the world in 2008? What were the essential traits that lodged him in the top slots of the Forbes billionaires list starting from scratch? Warren’s success can mainly be attributed to the reasons that I am going to discuss below.

Compounded Money

Albert Einsteen once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” It is the human race’s greatest invention of all time, or the most powerful force of the universe according to Einsteen. So if you want to get rich, you should first know the power of compounding. Warren knew at a very young age the secret that compound interest would make him rich over time.

Started Young

So Warren knew he could become rich by compounding money. Remember, compounding only works through time. Time is the factor that has a significant impact on compound interest, the longer you allow the money to compound, the richer you become, that is the time value of money. Since Warren knew the time value of money and started as early as his childhood, he had this factor in favor of him.

Voracious Reader

Warren grew up and started his career in an era when there were no business television channels, computer or Internet to get information. He didn’t have access to any resources that we have now, except annual reports, newspapers, and statutory public reports filed by the corporations. Warren delved deep into them and books to fetch relevant information. Continuous learning is required for you to have any significant achievement in the world. Warren got this message right at childhood and voracious reading is one of the reasons for his success. One of his early reads, The Intelligent Investor, by Benjamin Graham who turned out to be his mentor later in his life, became the turning point in his life.

Thought Rationally, Avoided Herd Mentality

An investor’s emotion is his most detrimental enemy. He should be ruled by rational thoughts rather than emotional thoughts and should trust in the business fundamentals without being concerned about the price movements in the stock market. Price movements in the stock market can mainly be attributed to the supply and demand which in turn is controlled by greed and fear of the participants. To preserve capital in the stock markets and to make the most out of it, you need to think rationally, shed the herd mentality, and always swim against the flow. You should exploit the follies of the market rather than becoming a part of it. Mr. Market is there to serve you, not to guide you. Warren was much aware of this fact and is one of the reasons for his success.

Deferred Taxes

Capital gains tax eats up your gains in a significant proportion if you constantly churn your portfolio. By holding a stock for lifetime, you have the tax amount in your hands and have the advantage of compounding that money too. According to Warren, the deferred tax is an “interest free loan” from the government! Warren got hold of this strategy later in his career and inevitably almost all of the stocks that he buys for Berkshire or for himself are meant to be held forever!

Maintained a Concentrated Portfolio

The most expensive lessons in investing are typically a result of making too many investment decisions, not too few. So to make very few decisions, you should have thorough information about the company and its business in which you are going to invest. For that, you need to thoroughly do your homework of fundamental analysis and arrive at some conclusions. Once you are very much confident that you are buying a very good stock, a rare opportunity, why not keep all your eggs in that single nest? Though early in his career Warren moved in and out of stocks, later he laid all his eggs in one stock, Berkshire Hathaway, with 98% of his wealth concentrated in just one stock! Ask any financial adviser about investing in equities, the advice would be to go by the conventional wisdom of not keeping all the eggs in a single basket; however, Warren Buffett is of the view that excess diversification could hamper returns on investment as much as the lack of it. According to Warren, diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing. You only have to do a very few things right in your life so long as you don’t do too many things wrong.

Value for Money

Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. -Warren Buffett

Warren always looks value for money in whatever he buys. For a margin of safety giving room for errors, he is interested in buying a stock that is worth a dollar for half a dollar. According to him, price is what you pay and value is what you get. Cash is always the king as far as Warren is concerned. He is interested in preserving capital along with some cash returns on the invested capital rather than mere capital appreciation by greater fool theory. He is very much interested in the cash flows in the businesses he intend to buy, the excess of which can be deployed buying other businesses, thereby building multiple income streams, a prime reason for his success. Money makes money!

Bought Businesses not Stocks

Warren views stocks as fractional ownerships of businesses and other shareholders as partners. He is not interested in the technical analysis of a stock or what chartists say but rather is interested in the fundamentals of the underlying business of a stock. So if the business does well, the stock price inevitably should reflect the health of the business in the long run. Sit back and think, that is very much true!

Chose Proven Businesses that Withstood Time

There is a greater chance of running into trouble when you invest in a company without any track record. Warren is interested in the historical performance of a company’s business and not in the historical price movements of the stock of a company. The average year of origin for the companies that Warren Buffett has invested in is 1909, twenty one years before he was born and almost sixty years before Warren took over the management and acquisition decisions for his holding company, Berkshire Hathaway. Basically Warren is interested in owning a business that has withstood time for decades and one that requires very little capital to grow.

Invested in Businesses with Widening Economic Moat

Though Warren made a mistake investing in a textile company stock, Berkshire Hathaway, that had no competitive advantage, he looks to invest in businesses with widening durable competitive advantage around them, what he calls as widening economic moat. So basically he is fascinated by consumer stocks, the business fundamentals of which are easy to understand, and have a brand value that influences customers’ buying decisions. The products of those companies are consumed regularly and consumers are prompted for repeated buying. The products are meant to meet immediate, short-term needs fulfilling a short-term desire of the consumer. That means regular business, regular cash flow and regular profits, whatever is the state of the economy. Moreover, a business with a durable competitive advantage is free to increase the prices of its products right along with inflation, without experiencing a decline in demand. That way its profits remain fat, no matter how inflated the economy gets. Another cornerstone for Warren’s investment success!

Invested Within the Circle of Competence

Warren believes in operating within his own limitations, what he calls the circle of competence. Staying within the circle of competence is a great way while investing in stocks because it narrows down the list of available options to make fewer and better decisions. It forces us to think more on each decision and thereby reduces the chance of mistakes. In investing, the big thing to do is avoid being wrong. If Warren couldn’t understand the business of a company, then it is beyond his circle of competence. So he wouldn’t attempt to value it. Since he had no expertise in technology, he avoided the famous Internet stocks in the 1990s. He has, in effect, drawn a line around himself and stays within the subjects on which he is an absolute expert. So here is another reason for his success: Warren knew very well what his strengths, weaknesses, and limitations are and what suits him well.

Invested in Owner Oriented Companies

Warren is interested in companies that focus on a long-term objective of shareholder wealth maximization. He looks for companies in which the managements have a reputed integrity and are honest, talented, profit minded and shareholder friendly. If you too want to become rich investing your hard earned money, invest in owner-oriented enterprises and have the management work for you, a principle that Warren has adopted for a long time which has made him successful.

Avoided Leverage

Warren Buffett doesn’t like debt, personal as well as in a business, and doesn’t like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, interest rate increases can affect a company’s profits drastically and could further make future cash flows less predictable. In the worst scenario, debt that cannot be repaid can toss a company into bankruptcy.

I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing. -Warren Buffett

However, he found that insurance companies to be hoarding large sums of cash collected as premium, to be paid later as claims, what is called as float. In the intermittent period, the owner of an insurance company has the liberty to invest the float. To take advantage of this, Warren started buying insurance companies for Berkshire and turned it to be primarily an insurance conglomerate. Again, the underlying principle is intact, you are not borrowing but owning the insurance company and thereby the float available with it. Grow yourself rich using others’ money! Somewhat similar strategy that he employed early in his career with his Buffett Partnerships! Smart, isn’t it?

Disciplined and Self Motivated

What will be our first investment when we start earning? Of course a home! And we will go for a big home, as big as it could bury 20 to 40 years of our savings! However, Warren was very much clear in the early days of his career that investing in a home could be a bad decision with all the money that he had at that time; it would be just like a carpenter selling his toolkit in return for a home! Later he bought a home which just cost him one-tenth of the wealth that he had at that time. That’s the difference between us and him, discipline in investing! Similarly Warren restrained himself from buying stocks that didn’t pass through his investment filter. He is confident of what he is up to and worked smart, self motivated, to reach where he wanted to.

I always knew I was going to be rich. I don’t think I ever doubted it for a minute. -Warren Buffett

Focused Thought and Positive Thinking

You are what you think. Our thoughts determine who we are as individuals. Right from childhood, Warren was determined to become the richest person of the world one day. He was very much focused on his target of becoming rich. Warren is as good as picking stocks in picking his managers and judging personalities and extracting the maximum out of them. He has nothing but praises for every manager under him and he gives managers free hand to operate in their own way. In a matter of minutes, he is good at ascertaining all the positive aspects of a person. He is optimistic, he is optimistic about America, he is optimistic about economy, and I don’t think anyone heard any pessimistic talk from him. He is all positive and finds opportunity in every doom, the necessary trait that anyone needs to develop to become successful both in life and as a businessman.

Chose What He is Passionate About
Do what you are passionate about and money follows. Warren is passionate about capital allocation and growing money. He enjoys himself so much in it that he tap dances to work everyday.

Find your passion. I was very, very lucky to find it when I was seven or eight years old. You’re lucky in life when you find it. And you can’t guarantee you’ll find it in your first job out. But I always tell college students that, come out. Take the job you would take if you were independently wealthy. You’re going to do well at it. -Warren Buffett

Yes choosing to do what you are passionate about is also another secret to getting rich.

Conclusion:

So, those are the traits, reasons, and factors that propelled Warren Buffett from scratch to the zenith. Can you replicate Warren Buffett’s success investing in stocks even in this century? He says, yes anybody can. Warren advices to start as early as possible and that possibly from childhood one should look at buying stocks.

Here is his answer for our question:

The basic ideas of investing are to look at stocks as business, use the market’s fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing. -Warren Buffett

Warren is successful strictly adhering to the principles what his mentor taught him. If you too could stick to Warren Buffett’s open secrets of success that we discussed above, avoiding the usual investment mistakes, whatever your age may be or country you are from, I still believe that anyone can repeat his success and become rich even in this century. If you find age as a barrier, at least familiarize your child with business and money matters early in life and bring him/her up to become the richest person of this century. Good Luck.