Michael Jordan is in basketball as Warren Buffett is in investing. The Nebraska native is closer to celebrity status than anyone else in the investment world, and for good reason. When Buffett buys a stock, he considers it the same as buying a business – there is an extensive checklist he goes through before he even considers making a purchase. Within that list there are several key lessons for all investors. Here are a few:
Find trustworthy and sincere leaders
Buffett must have full faith in the reliability of a company’s leadership team. While not everyone has the luxury of sitting down with company executives to assess their reliability, we can all do our homework. How?
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Buffett listens to several past earnings reports from a company in question before considering an investment. This sounds tedious, but it’s a great way to tell if a CEO is overstating expectations.
Take note of the predictions offered in the calls as executives give unscripted comments and answer analyst questions. If several quarters go by and your expectations have not been met, executives may not be trustworthy.
Whenever Buffett’s prediction does not come true, he is the first to bluntly acknowledge it; many other leaders avoid such candor. In the most recent Berkshire Hathaway shareholders meeting, Buffett admitted his purchase of Occidental Petroleum the credit was, in hindsight, ill-advised. Very refreshing.
Buffett further warns investors to stay away from CFOs who make aggressive adjustments to comply with the above guidelines and openly criticize those who do. “Adjusted EBITDA” is an increasingly popular term on Wall Street that Buffett’s partner Charlie Munger openly despises.
Reliability and reliability are absolutely vital to Buffet. Regardless of promising profitability or ingenious product design, misleading the public is a deciding factor for this empathetic billionaire.
Find good capital managers
Beyond emphasizing absolute honesty and sincerity with shareholders, Buffett seeks leaders who use capital efficiently. If a company retains profit and produces less profit as a result, that is an immediate red flag. Capital expenditures are vital to expansion, but shareholders would be better off with a $ 0.90 growth dollar, especially if the prospects for expansion resulting from an investment are muted.
As an investor with a longer time horizon, Buffett makes an exception to this rule. If the long-term growth prospects of an investment are promising enough, then you can approve. An example is Amazon. The incredible growth opportunities before the trillion-dollar company even lured Buffett amid multi-digit, dividend-free profits.
Ignore daily market movements
Perhaps most importantly, Buffett makes no effort to negotiate the daily movement of stock prices. He calls the stock market “Mr. Market”. Sometimes Mr. Market is happy, while other days he is angry. Buffett avoids noise by not trying to predict that time. Would you sell a business that you researched extensively and enthusiastically selected a day later because you could earn .8%? I hope not.
Buffett wants to own companies not for a few days or months, but for several years. And generally it does. This year alone, Warren authorized his Berkshire Hathaway company to sell shares of Goldman Sachs that it bought during the financial crisis of 2008-2009, and still own shares of Coca Cola since the late eighties.
Buffett is not perfect: He sold the assets of Berkshire airlines in the last quarter in what appears to be a generational low even as the markets were 40% off their lows, setting a fundamental change in the industry. Still, he is right much more often than he is wrong, and it is no coincidence why. You may be incredibly lucky, but your flawless approach to investing is far more likely.
