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Portrait of Warren Buffett, chairman of Berkshire Hathaway Inc., by Mukul Pandya, from a presentation at a Wharton executive series, April 21, 1999.
WARREN BUFFETT ON INVESTING AND LEADERSHIP:
“I’m Wired for This Game”
By Mukul Pandya, Senior Editor, Wharton School
If you were asked to select a person and told that you could retain 10 percent of his or her earnings for the rest of your life, whom would you choose? Someone with the highest SAT or IQ test scores? Probably not. Chances are that you would pick someone with a steadfast character, whom you could trust to function well through life. Conversely, what kind of person would you shun? Most likely, the type who cuts corners and is generally undependable. Each of these qualities is a characteristic of choice and can make the difference between success and failure. That insight into the link between character and success comes from Warren Buffett, CEO of Berkshire-Hathaway, the world’s second richest man after Microsoft CEO Bill Gates and arguably the most successful investor the world has known.
Developing characteristics such as trustworthiness and integrity, Buffett believes, is a matter of forming the right habits. “The chains of habit are too light to be noticed until they are too heavy to be broken,” he says. People who stray from these values often show up on Wall Street; they may initially even shine; but eventually they self-destruct. “That is sad, because it does not need to happen,” says Buffett. “You need integrity, intelligence and energy to succeed. Integrity is totally a matter of choice -- and it is habit-forming.”
Speaking to a packed audience of students, faculty members and staff at the Wharton School on April 21, Buffett offered insights into the investment philosophy that has turned Berkshire-Hathaway into a $120 billion powerhouse, with holdings in industries ranging from soft drinks to insurance. Jeremy Siegel, a professor of finance at Wharton, reckons that a person who had invested $1,000 with Buffett when he was starting out four decades ago would have turned that investment into $61 million today. In contrast, had that $1,000 been invested in S&P 500 stocks, it would have grown to $100,000.
Asked what advice he could provide to young people on the verge of careers in managing investments, Buffett boiled down his principles into four cardinal rules:
1. Understand the business in which you are investing. “You can’t make money in stocks unless you understand the business,” he said. “I look for businesses within my circle of competence.” Having a large circle of competence is less important than having one with a well-defined perimeter.
2. Look for sound fundamental economics. Investors should seek out companies that have a sustainable economic advantage -- a phenomenon Buffett called “a castle with a moat around it.” Consider Coca Cola, for example. The company’s brand name has represented enjoyment for generations, which no competitor can buy for millions of dollars. “Share of market follows share of mind,” noted Buffett.
3. Find competent leadership. Companies with a sustainable economic advantage need honest, capable and hardworking leaders to retain their lead. Berkshire-Hathaway’s managers have one instruction: Widen the moat. That keeps the castle valuable.
4. Buy at the right price. Purchases must be made at the right price if they are to pay off.
Buffett cited example after example to show how he had used these principles to make investment decisions during his career. As a young investment manager, he took Moody’s manuals and went through them page by page until he found the companies he sought. A bus company in Bedford, for example, had $100 a share in cash, but its stock was being traded at $40 a share. Buffett found such deals because he went looking for them. “No one will tell you about them,” he said. “You only get told about things someone is pushing for some reason.” Buffett invested in companies like Coca Cola and The Washington Post for similar reasons. Berkshire-Hathaway built its empire on the success of these investments.
Asked why he has not retired despite his phenomenal wealth, Buffett said the reason is that he has more fun doing what he does than anything else. “The fundamental thing is that the process should be fun,” he said. “I had just as much fun when I had $10,000 to invest as I do now. It’s crazy to do things for your resume. It’s like saving up sex for your old age. You should do what you enjoy as you go along, and work with people you admire. I look forward every day to the next day. I’m wired for this game.”
New, recommended Buffett Biography by Roger Lowenstein:
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