In this summary, you will learn
Why having a feminine temperament is ideal for an investor,
How Warren Buffett’s stock-selection approach reflects the way most women invest and
What tactics Buffett’s stock-buying principles suggest to ordinary investors.
Warren Buffett is “the most successful investor of all time.”
His calm, rational, considered approach resembles that of many female investors.
Given their patience and deliberative nature, women are, generally, temperamentally better suited to picking stocks than men.
Many male traders make investment decisions based on testosterone rather than thoughtful judgment.
Fully research a company before you buy its stock.
Never invest in a firm you don’t thoroughly understand.
Make only a few trades, but make sure they are the right ones.
To invest in value and avoid risk, buy stocks of solid companies when prices are right.
Buy stocks you believe in, and keep them for the long run.
Investing is always a risk. Do all you can to limit your exposure to loss. Figure out your “margin of safety,” and stick to it.
The Right Temperament for Successful Investing
Warren Buffett is the “greatest investor of all time.” The book value of Berkshire Hathaway, Buffett’s umbrella investment firm, increased 490,409% from 1964 to 2009. For more than four decades, Buffett’s compounded annual book value has been twice the return of the Standard & Poor’s 500. He is one of the world’s richest men, perhaps because he has the ideal nature for an investor. Buffett is unemotional, skeptical and patient. He avoids risk. He’s not concerned about the actions of other investors. He remains calm and methodical, and, before selecting any stock, he does exhaustive research. He never invests in businesses he does not understand.
During the catastrophic stock slide of 2008, when the Dow Jones fell below 10,000 points for the first time in four years and the S&P 500 dropped by 42%, many Wall Street traders and other investors dumped their shares. Buffett assessed the financial carnage, examined many famous corporations whose stock prices had fallen to bargain rates and began to invest. Buffett spent $20 billion “in companies like Goldman Sachs and General Electric.” He remained centered and hewed to the basic rule of investing: Buy low and sell high. Once he buys a stock, Buffett normally holds onto it for a long time. He jokes that his “favorite holding period is forever.”
“Warren Buffett and the women of the world have one thing in common: They are better investors than the average man.”
Temperamentally, Buffett is the opposite of the stereotypical overconfident male Wall Street traders, who tend to trade too often, take undue risks, think only short term and follow the herd thinking of other investors. Many let testosterone rather than careful decisions drive their choices. These men hit the panic button in 2008, helping to make a dismal financial situation infinitely worse.
“Your goal as an investor is to have each and every dollar maximized and invested in the best possible place.”
Studious Women Traders
Buffett’s disposition more closely resembles that of many studious, thoughtful female traders. Most female investors buy stocks only when they are certain it is the right move. Many women excel at collaboration and are often more patient than men. They work hard to develop relationships. Such qualities could have helped stem the market mania that roared through Wall Street in 2008. Unfortunately, at that time, men called the shots in the financial community. According to neuroeconomics and behavioral finance research, women investors exhibit a variety of useful investing tendencies, including:
Women don’t trade as often as men.
Women don’t suffer from overconfidence.
Women avoid risks that men accept.
Women are not as optimistic or unrealistic as men.
Women spend more time researching their stock picks.
Women keep their minds open to alternative viewpoints.
Women are less likely to succumb to peer pressure.
Women learn valuable lessons when they make mistakes.
Testosterone does not drive women’s decisions, which results in less risk taking.
“Buffett has said he went through all the Moody’s Manuals twice – all 10,000 pages – when he was working as a stockbroker at his father’s Omaha firm, looking at each and every business.”
These are the ideal traits for any investor, so you shouldn’t be surprised to learn that female investors often outperform male investors. The hedge funds women manage do better than hedge funds run by men. But, male or female, no one invests more successfully than Buffett.
“The most important quality for an investor is temperament, not intellect.”
“You can be the smartest securities analyst around, but not having the correct mind-set can absolutely sink you as an investor.”
“Basing an investment decision only on knowing that you love Starbucks lattes won’t fly...but it’s a good starting point for your research.”
Buy Like Buffett
Here are 12 of Buffett’s most important investing principles:
1. “Embrace Feminine Influences”
Buffett invests like a woman and has relied on smart women, both personally and professionally, throughout his life. The women who influenced him include his late wife, Susan Buffett; bridge expert Sharon Osberg; reporter Carol Loomis; and Rose Blumkin, the famous “Mrs. B,” who founded and ran the Nebraska Furniture Mart in Omaha. Buffett also was close to the late Katharine Graham, owner of TheWashington Post.
“Past performance is a better indicator of future performance for female-managed funds than for male-managed funds.”
2. “Trade Less, Make More”
Buffett detests short-term trading. He once proposed that the US government should tax profits from short-term trades – wherein investors hold a stock for less than a year – at a 100% rate. Buffett envisions his stock purchases as actual brick-and-mortar companies with real products, employees and management teams. He says each person who buys a stock should think of the process as a “punchcard” with only 20 punches permitted during a lifetime. Each stock purchase represents one punch.
“Be greedy when others are fearful, and fearful when others are greedy.” – Warren Buffett
3. “Rein in Overconfidence”
Buffett never invests in companies he doesn’t fully understand. This includes technology firms, which Buffett says do not fall within his “sphere of understanding.” Investment involves estimating a firm’s future prospects. Buffett doesn’t believe he can do this for technology companies. Don’t invest in firms if you don’t understand their business.
“Buffett believes that long-term focused investing within your circle of competence will result in wealth for smart investors.”
4. “Shun Risk”
Investing is always a risk. But smart investors like Buffett do everything possible to limit their risk when they purchase stocks. For Buffett, this involves the “margin of safety” concept, an idea he learned from Graham. It works like this: You believe a firm is worth $100 per share. Since it currently trades at $75, you have a 25% safety margin. Careful value investors purchase stocks only if they offer a safety margin of at least 40%-50%. Exhibit similar prudence when you buy shares.
5. “Focus on the Positives of Pessimism”
Buffett is an optimist and a strong “Buy American” proponent. However, as a seasoned investor, he understands that depressed financial periods offer unusually profitable opportunities for savvy investors. In a 2008 op-ed piece for The New York Times, Buffett wrote, “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”
“Avoiding negative information can be deadly for investors.”
6. “Research Extensively”
Buffett never invests in a company until he performs extensive research about the firm, its competitive position, its products or services, its management team, and any special attributes that distinguish it in the marketplace. Do the same with your stock selections. The Internet makes research so much easier than when Buffett started out. Buffett would go to the Securities and Exchange Commission to review corporate filings. He did the same with Moody’s and Standard & Poor’s. He visited companies and talked to their senior executives. Never buy a stock unless you first secure the vital information required to make an intelligent investment decision.
7. “Ignore Peer Pressure”
To many in the investment community, Warren Buffett is an anomaly, someone who is seriously “out of step,” as the Omaha investment genius described himself in a 1960s letter to his investment partners. He is an anachronism. Many mock Buffett’s aversion to technology stocks. This has no impact on Buffett, who maintains his value investment philosophy no matter what others say or think. Thanks to his independent attitude, Buffett has avoided bubble markets that inevitably burst. Employ this same frame of mind about your investments. Do your own careful research, and select your stocks accordingly.
8. “Learn from Mistakes”
Even Buffett makes mistakes when he invests. The trick is to learn from your mistakes so you won’t make them again. For Buffett, these blunders fall into two categories: “mistakes of commission” – investments he shouldn’t have made – and “mistakes of omission” – investments he failed to make. The latter bother Buffett most. For example, he decided not to invest in Walmart at a certain price, an omission that cost him $10 billion in lost profits. But, he never beats himself up. Instead, he admits his errors and learns from them.
“Like risk, mistakes are an unavoidable part of investing, so it’s best to learn to embrace the lessons that can come from them.”
9. “Maintain Consistent, Persistent Results”
Buffett is reliably consistent. At age 25, he began managing other people’s money. Since then, year after year, he has achieved returns for his investment partners that no one else has matched: 32% average annual returns (less fees) in his initial partnership and, at Berkshire Hathaway, a 20.2% “compounded annual gain in per-share book value from 1965 to 2010.” Clearly, Buffett’s value investment system works for him and you can put it to work for you.
10. “Value People and Relationships”
Buffett believes strongly that people make up a firm’s value. When he finds a firm with an executive team he likes, Buffett stays invested with that company, even if a hot new competitor appears that excites everyone else. As Buffett says, “It seems foolish to rush from situation to situation to earn a few more percentage points.” Buffett always attempts to maximize his return on capital. His willingness to forego incidental profits to stay invested with a firm run by people he respects demonstrates how important this concept is to him.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” – Warren Buffett
11. “Question the Masters”
Buffett has the greatest respect for the legendary Benjamin Graham and his philosophy of value investing. However, he adapted Graham’s investment approach to suit his style. For example, Graham believed that investing was basically a numbers game. Graham didn’t care about the actual companies, who ran them or where they stood in the marketplace. He focused solely on bottom-line value. If Graham could purchase a company’s stock at a price less than his evaluation suggested, he considered it a promising investment. Instead, Buffett wants to know everything about a company before he purchases its shares. Buffett learned a lot from Graham but has always been willing to think – and act – for himself.
12. “Act Fairly and Ethically”
Buffett believes that all stakeholders should receive the same advantages. In the past, Wall Street did not agree; most firms updated big institutional investors ahead of small investors. This “selective disclosure” policy is now illegal. Buffett explains that at his company, “We do not follow the usual practice of giving earnings ‘guidance’ to analysts or shareholders.” As Buffett shows, you can act ethically as an investor and still become wealthy.