Your $85 Billion Average Joe
Warren Buffett is the fourth richest man in he world. To McDonald’s, however, he’s just that guy that drives through each morning, willing to spend exactly $3.17 on his breakfast. A voiceover in his HBO documentary describes him as “your $44-billion average Joe.” Now, his net worth is more accurately estimated at $85.6 billion, however he pledges to give away 99% of his wealth to charitable causes. Warren Buffett is the world’s most successful investor, a feat that speaks to his excellent decision-making skills. His methods and practices―how he chooses which stocks to invest in, and when to buy and sell―have formed the basis of over 60 books and countless lectures and research papers, and gained a following around the globe.
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“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
Value investing―investing in relatively few well-researched stocks that you intend to hold for several years.
Many investors will tell you that the first step to investing in stocks is diversifying your portfolio; in other words, investing in a wide range of different types of stocks so that if one sector of the economy plummets, you have your other stocks to rely on.
By this, they mean you should invest in a variety of industries: buy stocks in new apps, in pharmaceuticals, in entertainment companies that have been successful for decades, among others. Diversifying your portfolio ensures that you have your eggs in many baskets.
When you have your eggs in too many baskets, however, you may start to lose track of the eggs, or care a little less about each one because there’s enough of them, according to Warren Buffett. In his view, over-diversifying is just as much a problem as under-diversifying. Rather than recklessly investing a little bit of money everywhere, Buffett proposes that you are better off making well-informed decisions about few stocks, and mindfully investing your money in companies that you have reason to believe will succeed.
The intellectual ideas for value investing were first laid out in the 1920s at Columbia Business School, by finance adjunct professor Benjamin Graham and finance professor David Dodd. They expanded on these ideas in their 1934 edition of the book Security Analysis, which was later referenced in Buffett’s 1984 article, entitled “The Superinvestors of Graham-and-Doddsville.”
“Remember that the stock market is manic depressive.”
In this article, published in Columbia Business School magazine Hermes, Buffett vouched for Graham and Dodd’s idea of value investing, arguing against people who thought it obsolete. He proved that the market can undervalue certain stocks. He thought that thorough research into the business fundamentals of different companies can predict which stocks may be under- or overvalued by the stock market. Buffett studied nine successful investment funds that all proved to be more successful than the market predicted, and all of which were managed by Benjamin Graham’s alumni using this strategy.
He showed how people often invest their money in a wide range of stocks, and immediately sell as soon as any of those stocks aren’t doing well. His strategy, rather, suggests staying loyal to few stocks; researching them well, believing in their businesses, and trusting that they will eventually pay out a high return.
“An investor should act as though he had a lifetime decision card with just twenty punches on it.”
In his book, The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy, investment writer and fund-manager Robert Hagstrom coined the term “focus investing” as another way to describe Warren Buffett’s investment approach, since it offers the opportunity to focus on a few stocks rather than juggle many.
The idea of value investing maintains that you should choose your stocks with intention and trust, as a result of research in their business practices, and stay loyal to them for the long term. If you read, for example, that the Apple stock is going up in price, don’t rush to sell―continue to research Apple’s business strategy and future prospects, so that you can have confidence that your investment will pay off in the long term.
The idea of value investing has high stakes for stock shareholders, companies, and the overall financial market. When people blindly trust the values of the market and don’t do their due diligence, they may make reckless financial sales and investments, causing their own wealth to be less than its potential.
“You should invest in a business that even a fool can run, because someday a fool will.”
On the flip side, taking into account value or focus investing offers investors the opportunity to spend time analyzing the underlying principles of the companies they invest in, helping them feel a vested interest in their success. People can and should choose wisely based on what they see as effective business planning, and then hold onto these stocks even when they’re doing somewhat poorly, with faith that they will bounce back in time. According to Buffett, when you invest in stocks, you should plan to hold onto them for the long term.
“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”
Value investors are less volatile with their money, which leads to personal benefits and overall market gain. Also, they are more deliberate when they first choose to invest and thus have to pay less constant attention to their stocks later on.
Historically, the value investing strategy has consistently outperformed the market. From Buffett’s idea, we are now more equipped to make mindful, evidence-based decisions about how, when, and why we choose to invest our money.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Warren Buffett was born in Ohama, Nebraska, where he developed a love for business at a young age. Throughout his childhood and teen years, Buffett ventured many of what we might today call “side hustles,” selling things like gum, magazines, and golf balls, door to door. At age 13, he filed his first tax return, deducting $35 for the use of his bike and watch on his paper route.
“In the business world, the rearview mirror is always clearer than the windshield.”
After high school, Buffett was keen to go straight into the business world, however his father insisted he attend university. He entered the Wharton School of the University of Pennsylvania in 1947, and after two years got fed up, feeling that he knew more than his professors. He soon transferred to the University of Nebraska, where he graduated with a Bachelor of Science in Business Administration.
Upon finishing his studies, Buffett applied to graduate school and was rejected by Harvard. After learning that Benjamin Graham, his eventual mentor, taught at Columbia Business School, he enrolled there to earn a Master of Science in Economics. Finally, he briefly attended the New York Institute of Finance.
“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
Once finished with his studies, Buffett worked as a stockbroker and taught an Investment Principles night class at the University of Nebraska. Through his investments, Buffett’s personal savings were growing to hundreds of thousands of dollars (about a million dollars today), which allowed him to open his own investment firm, Buffett Partnership Ltd. as a young adult.
As a result of his successful investment firm and a few other partnerships, Buffett became a millionaire in 1962. He decided to merge his many business partnerships into one and invested heavily in the textile manufacturing firm Berkshire Hathaway.
“This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
In 1965, Buffett took over as Chairman and CEO of Berkshire Hathaway, a role he still holds today. Buffett has made most of his income investing stocks into companies he predicts will do well based on business research. He has purchased 7% of The Coca-Cola Company’s stock, for $1.02 billion.
Under his leadership, Berkshire Hathaway has acquired companies as diverse as GEICO, Dairy Queen, Fruit of the Loom, Benjamin Moore & Co., among others. Buffett essentially took the company from a small business to one of the world’s most successful corporations with a hand in nearly every sector of the economy.
“Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy.”
In 1970, Buffett began writing an annual letter to the public shareholders of Berkshire Hathaway. In these letters, Buffett, to this day, writes candidly about his investment philosophy and gives investing advice. The letters are now regarded as one of the most significant works ever written in the business and investment world and they have been made into a book, the latest edition of which is entitled Berkshire Hathaway Letters to Shareholders 1965-2012.
Along with value investing, Buffett is also well-known for the idea behind the Buffett Rule, a tax plan proposed by Barack Obama in 2011. When Buffett famously said it was wrong that he pays lower tax rates than his secretary, since income coming from investments was not taxed, Obama’s government passed the Paying A Fair Share Act. This controversial Act requires millionaires to pay at least 30% of their income in taxes.
“The stock market is designed to transfer money from the active to the patient.”
In 1990, Buffett became a billionaire. Throughout the 1950s and ’60s, Buffett married his wife and had three children. He still today lives in Nebraska, in the first house he ever bought for $31, 500.
Although a millionaire by age 32, Buffett made 99.7% of his current income after age 52. He has announced that he plans to give 99% of his wealth away to others. To date, his largest contribution has been to the Bill and Melinda Gates Foundation; other contributions have been towards efforts as diverse as endangered species protection, financial services for the poor, and sex trafficking prevention.
Books, articles, and lectures
“The Superinvestors of Graham-and-Doddsville” (1984): Published in Columbia Business School magazine Hermes, Buffett wrote this article to increase the clarity and fame of Graham and Dodd’s idea of value investing.
There are more than 60 books written with Warren Buffett’s name in the title. Here are a few noteworthy ones:
The Warren Buffett Way (1994): This book, written by Robert Hagstrom, outlines the principles of value investing that Warren Buffett practices, and teaches how to choose which stocks to invest in.
The Essays of Warren Buffett: Lessons for Investors and Managers (1997): This book features some of Buffett’s best writing on the basic principles of his business practices.
The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy (1999): Hagstrom’s follow-up book guides the reader on how to properly manage stocks once they’ve been chosen.
The Essays of Warren Buffett: Lessons for Corporate America (2001): Edited by American scholar Lawrence A. Cunningham, this book compiles more of Buffett’s famous writing and lessons distilled from his famous letters to shareholders.
Warren Buffett on Business (2009): This book distills Buffett’s letters to shareholders into easy-to-understand wealth management strategies and best business practices. It also touches on the “soft skills” of business: responsible corporate governance, ethical behavior, patience and perseverance, the importance of transparency, and passion.
Warren Buffett and the Interpretation of Financial Statements (2011): Written by Buffett’s daughter-in-law Mary Buffett and ‘Warren Buffett expert’ David Clark, this is a simple guide to reading financial statements from Buffett’s perspective.
Berkshire Hathaway Letters to Shareholders 1965-2012 (2012): This is an anthology of 50 years’ worth of Warren Buffett’s annual letters to the shareholders of Berkshire Hathaway, providing chronological updates, strategies, and advice on investing.
Q+A with University of Nebraska students: In this informative lecture, Buffett talks about how to acquire wealth at a young age and draws on anecdotal experience to teach important business lessons.
Warren Buffett Lecture Series (2016): The 15 parts of this “lecture series” pull from a variety of Warren Buffett interviews and speeches on his best investment insights and advice.
Becoming Warren Buffett (2017): This HBO documentary, available on YouTube, follows Buffett’s early life and education into an exploration of how a simple boy became one of the world’s richest men.
- Bloomenthal, A. (2020, Feb 8). Warren Buffett’s Investing Strategy: An Inside Look. Investopedia. https://www.investopedia.com/investing/warren-buffetts-investing-style-reviewed/
- Curtis, G. (2019, June 25). 8 ways to think like Warren Buffett. Investopedia. https://www.investopedia.com/articles/stocks/08/buffett-style.asp
- HBO. (2017, February 11). Becoming Warren Buffett [Video]. YouTube. https://www.youtube.com/watch?v=PB5krSvFAPY&ab_channel=SAVIOP
- Kagan, J. (2019, Sept 20). Buffett Rule. Investopedia. https://www.investopedia.com/terms/b/buffettrule.asp
- Kenton, W. (2020, July 28). Behavioral Finance. Investopedia. https://www.investopedia.com/terms/b/behavioralfinance.asp
- Parker, T. (2019, June 25). 4 Behavioral Biases and How to Avoid Them. Investopedia. https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp
- The Superinvestors of Graham-and-Doddsville. (2007, June 21). Wikipedia, the free encyclopedia. Retrieved December 15, 2020, from https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville
- Town, P. (2020, June 18). 50 Warren Buffett quotes on investing, life & success. Rule One Investing. https://www.ruleoneinvesting.com/blog/how-to-invest/warren-buffett-quotes-on-investing-success/
- Warren Buffett. (2003, April 16). Wikipedia, the free encyclopedia. Retrieved December 15, 2020, from https://en.wikipedia.org/wiki/Warren_Buffett
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The Decision Lab
The Decision Lab is a Canadian think-tank dedicated to democratizing behavioral science through research and analysis. We apply behavioral science to create social good in the public and private sectors.