Source: Warren Buffett
In this article we will deal with Buffet’s vision of the concept of investment and the way in which each person approaches this very important life practice:
Investing well is not linked to a high IQ. With normal intelligence you can invest excellently. It only takes character to control the irrational impulses that ruin other intelligent investors. To avoid such impulses, it is convenient to reflect a lot on investments. And to do it, the best way is to just be in a room and think. If that does not work, believe me, nothing else will.
When I was an adolescent I spent 8 years doing graphics to earn money in the stock market (chartist). Then someone told me that none of that was necessary, that it was enough to buy something below its value. Knowing first-hand the chartism makes you step more firmly when you leave it definitively to look for the fundamental value in your investments.
Investing with little money improves yield expectations, contrary to what many people think. With little money and few opportunities to invest it, we usually choose much better. However, most people attribute their failures to the shortage of millions and not to their bad decisions (from our vision as Multi-Family Office we can assure that this is totally true, the greater the patrimony of a new Client that comes to us , paradoxically more inefficient is usually the management of it).
I want to own assets that are productive. It seems obvious, but it is amazing how many people agree with this phrase and yet invest their money in non-productive assets, waiting for someone to pay more for them in the future, and that is the essence of the speculation.
Speculation is not immoral, nor illegal, nor fattening, nor is it sin. But it is playing something totally different than investing in something that will produce you income over time. From the moment I buy something, be it a farm or any company, I forget its quotation and focus on what it produces each year, and whether that production is satisfactory or not in relation to what I have paid.
I do not think that if the president of the FED would tell me in my ear the decisions that would be made in the future, I would change my opinion about my acquired businesses. I’m just going to have them for many years while those businesses work. If you really understand business, you probably should not have more than 6. If you can identify 6 good businesses you do not need more diversification, because the odds of twisting more than one or two are really low if you know and analyze correctly. If instead you invest in a seventh and an eighth, instead of putting more money in your first and second, you’re going to make a mistake. Almost nobody has become rich thanks to his seventh best idea.
The concentration must be directly proportional to the knowledge of the assets in which you invest. On the other hand, for the population in general, without interest or dedication to business analysis, and therefore ignoring them, diversification is the key to their success. The same can be said to investors in mutual funds. If they do not engage in the analysis and selection of active investment funds – or hire someone to do it for them – that allow them to select a handful of funds that manage to outperform the markets, the best they can do is invest in funds of passive investment, which will at least assure them not to do worse than the Market. It is true that the Berkshire Hathaway company selection has obtained a higher profitability, but investing in US companies. as a whole (passive management funds or ETFs) has not been a bad investment to date, and that is something anyone can do if they have enough patience.
Patience is another key for the investor. In fact, the Market is a system that distributes money from the impatient to the impatient. And is the obsession for the price of things and not for its value that generates the fatal impatience. Attempt buys a dollar for 60 cents. And if I see possibilities of getting it, I do not care how long I have to wait. But if I see something attractive today, I will not let the opportunity pass, waiting for something even more attractive to appear later on.
If you go down the road and see a bridge that supports a maximum of 4,000, do not try to cross it with a 3,950 truck. Go on another road and cross over a bridge that supports 7,000. That is the same margin of security that they must maintain when they make an investment. They should not buy a business worth 100 for 95, but look for one that is worth 100 but that they can buy for 60.