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The Superhero Of Finance
Perspective | 22 January 2010
By: Xavier Lim
Articles (51) Profile

Warren Buffett, the ‘Sage of Omaha’, is generally considered to be the world’s most successful investor. Everyone loves to know the secret of his success – to know how he has become one of the world’s richest men, and a living legend.

Although Warren Buffett has not actually written a book about his investment principles himself, there are a lot of books written about Warren Buffett by others who have tried to put together the story and ideas behind the man and his fortune.

If you find those books somewhat of a boring read, this writer recommends you to pick up this book, ‘Warren Buffett: An Illustrated Biography of the World’s Most Successful Investor’, authored by Ayano Morio. It is an easy to read illustrated novel, providing basic information about Warren Buffett’s investment philosophy and summarises the principles of Buffett into short lessons that can be quickly learnt and applied.

The 7 Rules For Success

No matter if you are running a business or selecting the right company to invest, Buffett’s 7 rules for success will come into play. Here are some brief explanations of these 7 rules.

RULE NO. 1:
Ascertain The True Quality Of A Company And Its Top Managers

In 1963, devastated by a scandal involving a large quantity of nonexistent salad oil, American Express Company (Amex) saw its stock price plummet from around US$60 to US$34. However, after carefully studied and analysed the company, Buffett concluded that Amex virtually owns the nation’s traveler’s check business and possesses by far the strongest credit card assets that were entirely unaffected by the scandal. These constituted an unassailable franchise – what Buffett calls “a castle with a moat around it,” his new margin of safety.

RULE NO. 2:
Stockholders Are Not Managers. They Should Leave The Running Of A Firm To Competent Managers With Integrity

In 1965, Buffett accumulated 49%-stake in Berkshire Hathaway and named himself Director. The company was nearly into the ground due to terrible management by the major shareholder. Immediately, Buffett made Ken Chace the President of the company, giving him complete autonomy over the organization. The company started to make profits under the leadership of Ken.

RULE NO. 3:
Don’t Invest In Businesses You Don’t Understand

In the 1960s, technology stocks like Polaroid and Avnet Electronics sold for over 100 times earnings, while IBM traded at a multiple above 80 times. Buffett did not invest a single cent in these technology businesses, because they make no sense to him and was overly priced according to him. He dissolved his investment partnership in 1969, returning cash to investors because he believed that 
the market was overvalued. By the end of 1969, stock market saw a big fall in stock prices.

RULE NO. 4:
Give Help And Advice If They Want It, But Let The Managers Make Their Own Decisions

In 1976, the Government Employees Insurance Company (GEICO) announced a US$126m loss and the company’s shares, which had traded as high as US$42, were down to just under US$2. Buffett took the view that the company’s core business was sound and arranged to meet with John Byrnes, then new boss of GEICO and helped to intercede with the insurance regulators to ensure that GEICO kept its licences.

RULE NO. 5:
Never, Ever Break The Law

Salomon Brothers may have died many years ago if Buffett had not stepped in to a leadership role at the firm in 1991. Buffett came in during a scandal involving the firm’s efforts to corner the market in U.S. Treasury bonds.

RULE NO. 6:
Owners Are Owners And Managers Are Managers – But They Should Work As Partners

The best people to help you solve problems, particularly those involving customers, are the ones who experience them on a daily basis. Yes, that is right! Your employees are a wellspring of ideas on how you can make your customers happier. Hold a meeting designed to get them to share those ideas.

RULE NO. 7:
Keep Your Distance From The Market. You’ll Understand The Business Better

Never follow the day to day fluctuations of the stock market. The market only exists to make it easier to buy and sell, not to set values. Keep an eye on the market only for someone who is willing to sell a stock at a not-to-be-missed price.

Warren Buffett: An Illustrated Biography of the World’s Most Successful Investor


Ayano Morio: Warren Buffett – An Illustrated Biography of the World’s Most Successful Investor

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.


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