This past weekend the National Geographic channel had a special television episode dedicated to Warren Buffet’s life and the investment strategies that have made him one of the richest men in the world.
The segment was called, Warren Buffet – The Modern Midas. I would suggest recording this episode and taking notes (I am sure it will be aired again). What works for Buffet has worked for others and he’ll tell you how to repeat his results.
If you don’t have cable or won’t be able to record the program then keep reading. In the following paragraphs I will give you the highlights from my notes. I’ll tell you why Warren is different, how he runs his business and his 8 investment principles he and his right hand man Charlie Munger follow religiously.
Warrens Simple Life
Warren Buffet lives a simple life 1200 miles west of Wall Street in Omaha, Nebraska. Omaha’s population of 500,000 pales in comparison to the crowded streets of New York and Wall Street.
Buffet’s company, Berkshire Hathaway is valued at $150+ Billion! Company world headquarters are in Omaha and have been there since January 1, 1962. Berkshire Hathaway is run by a couple handfuls of employees at company headquarters. Buffet has two secretaries, two accountants, one bond trader, and a personal assistant who screens his phone calls.
Buffet lives a very frugal life. He doesn’t own the biggest house on he block and he doesn’t own multiple properties.
“How could I improve my life owning 10 houses around the globe?” ~ Warren Buffett
He lives in a modest home that he bought for $31K over 50 years ago.
He also buys hail-damaged cars to get a good bargain and drives them until his daughter is too embarrassed to be seen with him.
Buffet lives a slow paced life and that’s how he has made his money. Buffett doesn’t make quick decisions every minute like those who follow the stock market closely.
Four Point Potential Investment Checklist
Charlie Munger, who is Buffet’s right hand man, has established a 4 point checklist with Buffett to determine if a company is worth buying into or not.
- Deal in things you have a capability of understanding
- Must have intrinsic characteristics that gives a competitive advantage
- Management in place with lots of integrity and talent
- A price that makes sense
Using this 4 point checklist Buffett heavily invested in Coke several years ago and his investment quadrupled. Berkshire Hathaway still owns $10 billion in Coke stock today.
Buffett’s 8 Rules of Investing
Here are Buffett’s 8 rules of investing, which he shared on the television special. Some of the rules he elaborated on quite a bit. Then there were other rules where he simply shared one sentence. Either way, I think you will appreciate his sensible point of view.
Rule #1: Invest…don’t speculate
Don’t focus on the fluctuating price of a company like Wall Street does. Instead focus on the planned outcome from the business. Where is the business headed?
“I think buying a stock and hoping it goes up the next day is pure speculation.” ~ Warren Buffett
Rule #2: You don’t have to diversify
“If somebody owns fifty stocks, can they really like the one they ranked 50 as well as the one they ranked as one? Can they know it as well? I don’t think so.”
Rule #3: Don’t just buy shares, be a business owner
Buffett does most of his research on the company; it’s growth, management, and values more so than it’s financial statements.
Some companies Buffett bought out he didn’t even do financial audits on simply because he trusted the business owner.
Know the company you want to invest in well and know where they are going.
Rule #4: Allocate capital efficiently
Buffett is smooth with all the company managers that Berkshire Hathaway owns and that affords him the ability to use profits from one company to invest in another without managers fusing at him.
He also learned to use capital efficiently when he started buying up insurance companies. Buffett and Munger saw an opportunity to use insurance float.
Insurance companies customers pay premiums upfront, which creates an enormous cash flow that Buffett invests. In other words, insurance float allows Buffett to invest without barrowing or leveraging his money like Wall Street, which leads to his next rule…
Rule #5: Don’t get into debt
Rule #6: Think Independently
Tune out the hype on Wall Street and avoid jumping on bandwagons.
“You have to think for yourself.” ~ Warren Buffet
Rule #7: Break your own rules
Be prepared to break your own rules. Adapt and conquer.
Rule #8: Give it away
Buffett has committed to giving away his wealth to the tune of $31 billion. This money will go the Bill Gate’s foundation. Gate’s who is good friends with Buffett has given away many millions and will continue to give away more and more.
Buffet believes that he is good at making money and there are other people that are better at giving it away than himself.
As you think about your investments and achieving financial freedom try to think like Buffett. Are you frugal? Do you live a simple life below your means? Do you think for yourself or do you follow the crowd?
Do you think Buffett’s investment principles and frugal life choices are still applicable today?
Photo from Aaron Friedman on Flickr