Warren Buffett (NYSE:BRK.A) is successful in both his real estate and equities investments, because he considers all investments in a businesslike way. This is an idea he culled from The Intelligent Investor, a book written by his mentor, Benjamin Graham. In fact, Buffett (NYSE:BRK.B) attributes a change in his fortunes to his purchase of The Intelligent Investor in 1949.
Applying Graham's Thinking Style
Two examples below highlight Buffet's businesslike way of thinking:
1.) In 1986, Buffett bought a 400-acre farm, 50 miles north of Omaha, for $280,000 from the FDIC. Although he did not know how to farm, he talked the matter over with his son, who loved farming. Buffet learned what profitable crops to grow, estimated his operating costs, and calculated his normalized rate of return. 28 years later, his farm had tripled its earnings and was valued five times more than he paid for it.
2.) In 1993, Buffet purchased a New York retail property from the Resolution Trust Corporation at a bargain price. His principle reason for purchasing the property was that it was surrounded by vacant stores and located near New York University. It would also be managed by someone he knew was very good at looking after property. By 1999, the property was worth far more than he had paid.
The income from both the farm and the retail property not only earned back what he had paid for it and became worth many times more than his purchase price, but it continues to earn--and likely will continue to do so for his children and grandchildren.
The paradigm of investing for the long-term-in contrast with temporary, ecstatic victories--has been fundamental to the success of Berkshire Hathaway.
7 Extrapolated Principles
The two purchases above illustrate important investing principles Buffet learned from Graham:
1. You do not need to be an expert to buy something, but do hire experts to run things for you.
2. Avoid the temptation of quick returns, and let value increase over time.
3. Keep a transaction simple to make it workable.
4. It's enough to estimate average returns after costs to develop a fairly good idea about the future. If the deal is too complicated to predict, it's better to pass on it.
5. How an investment behaved in the past is not an indication of its future performance. This is speculation and unreliable. The only thing that really matters is what value an asset can continue to produce.
6. Macroeconomic predictions have little to do with deciding how well an asset will do. A macro-economic view is only an opinion and can blur practical considerations.
7. Rely on commonsense. Buying the farm and the rental property was based on a reasonable assumption that corn would continue to grow in Nebraska, and students would continue to go to New York University.
A fleshing out of the points above can be found in an exclusive excerpt of Buffet's letter to shareholders here.
Buffett and his Berkshire Hathaway team are successful "thin-slicers", a term used by cognitive psychologists to describe those who can cut to the essence of a complicated idea quickly--discarding a great mass of interesting but largely irrelevant details.
As Buffet starts to consider his legacy, the wisdom he shares, based on decisions he makes for his company Berkshire Hathaway, are a testament to his core beliefs-and strongly suggest the continued success of Berkshire Hathaway as a growth investment when he decides to step down.
Other concrete, intelligent investment decisions of Buffet's have recently included the hiring of Tracy Britt Cool, a young MBA graduate. Cool has made swift, critical decisions in several of Berkshire Hathaway's core companies. Buffet has also been increasing his stake in General Electric (NYSE:GE) to 10 million shares.
Berkshire Hathaway stock has been strong and steady the past half-decade and we expect this trend to continue over the next decade.