The Tao of Warren Buffett: Warren Buffett’s Words of Wisdom by David Clark is a collection of Warren Buffett’s aphorisms, aimed at uncovering and organizing the nuggets of wisdom he offers.
Here are the key takeaways:
- Always be learning.
- Don’t follow the herd.
- Stay within your circle of competence.
- Take big, infrequent bets.
Investing
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
Compounding is severely affected when you lose money. Like in running, the most important thing is to avoid injuries, allowing the training to compound.
Businesses to look for
- “Our method is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That’s all I’m trying to do.”
- If a business performs well, the stock will eventually follow.
- Look for businesses that don’t require a lot of capital to grow.
- You can always boost sales with a cheaper product, but it’s difficult to return to higher quality—the previous experience leaves a lasting wound.
Predictability
- Seek businesses that will remain fundamentally the same in 15 years.
- “We don’t go into companies with the thought of effecting a lot of changes. That doesn’t work any better in investments than it does in marriages.”
- “Predictable products equate to predictable profits. Think beer, candy, car insurance, soda pop, chewing gum, and razor blades.”
Learning and Doing Your Research
You know you understand an idea when you can explain it in simple terms.
Why Learn
Investment must be rational; if you don’t understand it, don’t do it.
- “It is impossible to unsign a contract, so do all your thinking before you sign.”
- Making big money requires independent thinking. You must be comfortable standing alone.
- Diversification is a protection against ignorance. It makes little sense for those who know what they are doing.
Bet heavily on what you KNOW.
What to Learn
- Do as much research when buying a stock as if you were buying the entire business.
- Learn accounting.
- “Read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them.”
- You don’t need more than addition, subtraction, multiplication, division, and the ability to quickly calculate percentages and probabilities to be a great investor.
General Advice
- It takes twenty years to build a reputation and five minutes to lose it. If you think about that, you’ll do things differently.
- Learn from the mistakes of others; don’t only study success stories.
- Integrity is the most important trait in a partner. “You can’t make a good deal with a bad person.”
- People who are paid to fix problems will always find a problem.
- “If you let yourself be undisciplined in small things, you will likely be undisciplined in large things as well.”
- “There is nothing like writing to force you to think and get your thoughts straight.” This is why Buffett puts so much thought into his annual reports.
- “If we can’t find things within our circle of competence, we don’t expand the circle. We’ll wait.”
Patience
- Fund managers face constant pressure to deliver short-term wins. When performance lags, capital flows out of their funds.
- “The key is that the stock market basically just sets prices, so it exists to serve you, not instruct you.”
- Uncertainty is the friend of the long-term value investor. It creates panic on Wall Street, leading to mispricing that allows real investors to buy at a good price.
- “What would you buy today and feel comfortable with if they closed the stock market for the next ten years?”