Warren Buffett, the greatest investor of all time, was asked how he wished to be remembered.
He answered, simply, as a teacher.
Lessons Learned From Warren Buffett
Here are ten great things he taught me:
Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference
The following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More
1) Be Fearful When Others Are Greedy, Greedy When Others Are Fearful.
As anyone who has managed a three-dog household can tell you, dogs behave differently in packs.
So do people.
Crowds behave as few individuals would on their own.
The stock market is just one enormous crowd.
And most people are crowd followers.
“But Ma! All the other kids are goin’!”
Get carried away by the crowd and buy oversold stocks at inflated prices.
Or dump depressed shares that flower in the next market spring.
The contrarian view espoused by Warren Buffett is so often the true one.
2) No One Knows What The Market Is Going To Do Tomorrow. I Know America Is Going To Move Forward After Time
Since antiquity people have sought confident predictions.
And they believe them.
Even from people who do nothing else right.
Like the disheveled racetrack tout who insistently promises you the winner of the next race.
And he makes you forget, for the moment,
That no one knows the winner of the next race!
No one can reliably predict the stock market in the short term.
But anyone can appreciate the stock market in the long term.
As Tony Curtis, playing an ersatz millionaire in “Some Like It Hot,” pipes, “Up! Up! Up!”
The Dow Jones Industrial Average rose from 151 in 1940 to over 27,000 in 2020.
Invest for the long term and make a sure bet.
Invest for the short term and make a bad bet.
But somehow people love to make bad bets.
A long shot that could pay off big time is simply more thrilling than a sure shot that pays off on time.
So it is pure cinematic joy when [spoiler alert], against all odds, Luke Skywalker explodes the fiendish Death Star in “Star Wars”.
Han Solo cries, “Great shot, kid! That was one in a million!”
And the spirit of Obi-Wan Kenobe intones, “The Force will be with you, always.”
And we experience movie magic!
But what works in the movies doesn’t work in the market.
For the very rational Warren Buffett, the choice between a sure bet and “one in a million” is obvious.
A sure bet compounds over time to make anyone rich.
“One in a million” leaves most everyone poorer…
And breathlessly awaiting the next bad bet.
3) Someone Is Sitting In the Shade Today Because Someone Planted A Tree A Long Time Ago
We evolved to live in the present moment.
To find food and mates.
To detect enemies and predators.
We have what evolutionary psychologists call “recency bias.”
An irresistible focus upon the now.
It takes thought and hard work to perceive long-term goals and plan for the future.
To learn from history and anticipate the distant future.
George S. Clason’s “The Richest Man in Babylon” is a very old book that pretends to be even older.
Because its wisdom is older than time.
It is the wisdom of compounding.
It teaches that you must set aside 10% or more of your earnings and invest them at a reasonable return.
And you will grow rich over your lifetime.
“Wealth, like a tree, grows from a tiny seed.”—The Richest Man in Babylon
The earlier it is planted, the bigger it will grow in your lifetime.
Then you will bask beneath the tree and enjoy both shade and fruit and no longer labor for your money.
As Warren Buffett has written, if Queen Isabella had invested but $30,000 at 4% instead of funding Christopher Columbus, were she alive today she would be worth over seven trillion dollars.
4) Stocks Work Out Better Than Bonds Most of the Time
Long-standing investment practice is 60% stocks, 40% bonds.
Because bonds provide safety in a downturn and stocks provide growth in an upturn.
But to a purely rational thinker like Warren Buffett the safety of bonds is largely illusory.
Because inflation destroys much of the value of a bond over its term.
While the price of common stock can rise to compensate for the effects of inflation.
And common stocks pay dividends—easily reinvested—and typically provide additional growth over time.
“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”—Warren E. Buffett
5) A Market Decline Isn’t Bad News Unless You Have To Sell
We all hate to lose.
Take a toddler’s toy and they cry:
Grab a dog’s bone and get bit.
Nature wired us to abhor loss, in any form.
Evolutionary psychologists have shown by experimentation that loss hurts two to three times more than gain feels good.
So people dread market reversals and crashes.
They feel suddenly bereft and poorer because their portfolio has “lost value.”
But think like Warren Buffett and realize it’s all a passing illusion.
What someone offers you for your car, your house or any asset means nothing unless you have to sell.
In fact, if you have ready cash, as you always should, a market drop is a buying opportunity.
“We want to buy them [great businesses] when they’re on the operating table.” – Warren E. Buffett
6) It Takes Twenty Years To Build A Reputation And Five Minutes To Lose It
Einstein reputedly said that compound interest is the Eighth Wonder of the World.
But compounding is far more than a matter of money.
The wealth and moral capital of individuals and nations.
So why would reputation not compound?
Built over a professional, work or academic life!
If you’re neither honorable nor trustworthy, word gets around.
That’s why grifters and con artists are always on the move, changing their names, outrunning their bad reputations.
7) The Stock Market Is A Device To Transfer Money From The Active To The Inactive
An intuitive algorithm for making money in the stock market is:
- Buy a rising stock;
- Take profits;
- Repeat until rich.
Frequent trading leads to losses.
First observed by Joseph de la Vega at the Amsterdam Stock Exchange, way back in 1688.
And published in his classic, “Confusion de confusiones,” still in print today.
Yet that ancient perception would be news to most stockbrokers and their clients.
News they may never receive!
Warren Buffett assures that if every investor were given a punch card, permitting but twenty trades in a lifetime, their results would always surpass unbridled trading.
8) All Time Is Uncertain…You Just Didn’t Know It
Market declines catapult TV soothsayers into high drama as they delight in improved ratings.
Then they confidently extrapolate: “If current trends continue…”
But current trends never continue indefinitely.
“Every road has a turning,
That’s one thing I’m learning.”
— Gus Arnheim, Abe Lyman, Arthur Freed, “I Cried For You”
The long-term rise of the stock markets is invisible to the short-term thinker.
Because it’s a rocky rise, filled with uncertainty amidst day-to- day fluctuations.
And we all suffer from two evolution-driven misperceptions:
- Recency Bias
- Hypersensitivity to Perceived Loss
Which drive us to overconfident politicians and pundits for reassurance about the future to calm market turmoil.
As Warren Buffett’s partner, Charlie Munger, likes to point out about prognosticators:
“They all have one thing in common: none of them know.”
9) If Returns Are Going To Be 7 or 8% And You’re Paying 1% For Fees, That Makes An Enormous Difference In How Much Money You’re Going To Have In Retirement
Physicist Albert Allen Bartlett said:
“The greatest shortcoming of the human race is our
inability to understand the exponential function.”
Brokers and money managers take full advantage of that exponential blind spot when they assure you they take a mere 1% or 2% annually to manage your money.
If you were to invest $10K per annum in a nontaxable retirement account and earned 8%, as in Warren Buffett’s example, you would have $3,140,862 upon retirement after 40 years.
Shocked? Check it out on an online calculator.
I used Moneychimp.
If you surrendered a mere 1% in fees per annum to your broker or money manager your nest egg at retirement would shrink to $2,348,307!
Nearly $800,000 or ¼ of your retirement lost!
As I wrote in my book, Anyone Can Be Rich!:
“Never be a patsy!”
10) You Cannot Make A Good Deal With A Bad Person
Warren Buffett and his partner, Charlie Munger, say plainly what few in the public eye will.
There are, unfortunately, some bad people in this world.
You will not change them and it is not your job to try.
If you’re playing fair they’ll beat you every time.
They may be attractive.
They may be charming.
And they may mistreat others and treat you well.
How often I have heard someone say, “He/she is not like that with me.”
If you stick around your turn will come.
There are human relationships in which the optimal holding period is zero.
If you enjoyed and profited from this Warren Buffett wisdom, stroll the internet and savor quotations, speeches, interviews and lessons as well as several YouTube documentaries.
If you have HBO check out “Becoming Warren Buffett.”
Warren Buffett’s collected Berkshire Hathaway letters are available free at https://www.berkshirehathaway.com/reports.html
And the mother lode of Warren Buffett wisdom may be mined in the NBC archive at https://buffett.cnbc.com/
Time spent with Warren Buffett is always time well spent.