Buffett regularly makes the difficult, sound very easy. His knack for simplifying things, in a way a mass audience can understand, often gives the false impression that investing is easy.
“Simple, but not easy” best describes it.
Still, his simple messages get misinterpreted often. It leads some people to believe you can do it too without much effort. Others seem to think Buffett has a super secret formula that always spits out winners and he just refuses to share it.
If only that were true.
I was reminded of this when I came across some notes on a 2008 video of Alice Schroeder, who wrote Buffett’s biography The Snowball.
The insights she offered up on the concepts behind Buffett’s value investing philosophy and his investment process makes it worth watching (she gave an example of his process using the Mid-Continent Tab Card Company).
But in a roundabout way, there’s a reminder that you’re better off following the methods that led to Buffett’s success, rather than searching for some Holy Grail formula that doesn’t exist. His formula is a combination of temperament and an investment process he’s honed for years thanks to a few good habits:
- Hard Work – I think we can all admit that you won’t make the Forbes 400 list by being lazy. Hard work to the point of obsession is at the heart of it. The fact that Buffett is doing something he loves makes it easier for him to do the work each day.
- Learning – Buffett is a learning machine. The cumulative knowledge he’s built up over 80ish years helps him make better, quicker decisions. His secret is reading…a lot…every day. And he started as a kid. Schroeder talks about a book Buffett wanted for Christmas – Bond Salesmanship by Townsend. He was 7 years old!
- Handicapping – Buffett wants low-risk investments with a high probability of success. Notice I didn’t say high reward. He wants high returns just not at the risk of big losses. You get a good sense of this when Schroeder explains the first step in Buffett’s investment process. He asks, “What could go wrong?” What are the odds that this business is subject to catastrophe risk? Could it fail? If there’s any chance (not guaranteed chance) of failure, i.e. permanent loss, he passes. Most investors focus on “what could go right” – the dream and possibilities – but realize what could go wrong after it happens.
- Compounding – Not a habit per se, but a big benefit to his habits and ability over many years. Buffett understood the power of compounding and what it can do to a dollar invested over decades. It’s one of the few things everyone can take advantage of with a habit of saving.
- Margin of Safety – The most overlooked part of investing is the idea that you might be wrong. Margin of safety literally builds in room for error, so you can be a little wrong, but still make a decent profit (or be very wrong, but not lose much). Ben Graham said this, “The purpose of the margin of safety is to render the forecast unnecessary.” Buffett adds another layer of protection – from needing to predict the future, from being wrong, from bad behavior, from paying too much, from big losses – by having a margin of safety.
As I said, it’s simple, almost common sense, but definitely not easy.
This post was originally published on November 18, 2015.
