How to Think Like Warren Buffett, Part 1
Posted by admin in Investing
Everyone loves Warren Buffett. More important, everyone wants to be rich like Warren Buffett, me included. So, in the first installment of this 29-part series, I am combing through all of Warren Buffett's annual Letters to Shareholders of Berkshire Hathaway. Today I analyze 1977 to see what secrets Buffett knew way back when.
(By the way, if you want one of those nifty Berkshire Hathaway hats like that you see in this post, go to Berkshire Wear. I receive no compensation if you do, not even a lousy beach towel.)
Here we go:
In 1977, Berkshire Hathaway made $22.54 per share in 1977 on $21,904,000 in operating earnings. Pretty good, yes?
One of the things you have to admire about Buffett is his no-dance honesty:
The textile business again had a very poor year in 1977. We have mistakenly predicted better results in each of the last two years. This may say something about our forecasting abilities, the nature of the textile industry, or both.
An entrepreneurial lesson comes when Buffett discusses the insurance business:
It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned – and, unfortunately, sometimes re-learned – is the importance of being in businesses where tailwinds prevail rather than headwinds.
On securities investments made by Berkshire Hathaway's insurance companies, classic Buffett:
We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.
Looking at this letter from 28+ years ago, what hits me is that Warren Buffett's style hasn't changed, and it's this consistency that has created the long-term success that Berkshire Hathaway shareholders have enjoyed.
Want to think like Warren Buffett? The lesson from '77 is to be consistent in your investing style, whether you are big enough to buy other companies or just buy shares of them on the open market.
UPDATE: You loved it? Great! Here's Part 2, Part 3, Part 4, Part 5, Part 6, & Part 7, Part 8, Part 9, Part 10.
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Nice series! I also started a short series on Warren Buffett’s investing tenets on August 1st. Looking forward to seeing the rest of this one! =)
“In 1977, Berkshire Hathaway made $22.54 per share in 1977 on $21,904,000 in operating earnings. Pretty good, yes?”
What was the stock trading at in 1977 when it had that EPS/operating earnings. Those numbers are entirely relative.
This article is crap too and wasn’t worth my time.
From a novice learning to invest, how do you assess a business to be “available at a very attractive price”? That’s a 40 billion dollar question! I’m all ears for anyone who has had any success doing so.
Awesome series. It would come in handy on my million dollar quest. Thanks for sharing it.
I
DO VERY MUCH LIKE YOUR SERIES ABOUT THE INVESTING STYLE OF WARREN BUFFETT.
Where did you find that goldmine of information? The more you read the wiser investor you become. And consistency pays off.
Hi,
I’m doing a similar thing over on http://www.TheRichestManInAtherstone.co.uk and am looking forward to reading through your articles to see if we have picked up on the same things.
After my first share purchases didn’t do too well, I’m making sure I get a sound foundation of information from arguably the world’s best before I try again
Arkad
a great series that you have hear, i post about it on my blog along with a wealth of information on Warren Buffett and Berkshire Hathawy
I particularly appreciate WB’s comment about “operated by honest and competent people”
I like to be az warren buffett
Found this article thru Googling. Thanks for this entire series. Will peruse thru all of them as I am also a lot interested with how to think like Warren Buffet.
Thanks for this extremely interesting and helpful series.
Everyone wants to be rich like Warren Buffett…Thanks for sharing it.
Hmm it’s a well known fact that Warren Buffet is being loved by everybody. Thanks for such a great blog on the legend himself!