As a New Zealand investor and co-founder of a business focused on everyday investing, I’ve followed Buffett as some sort of super hero mentor for years.
I have a library of his quotes, but the real takeaway from his wisdom is not about what stocks to buy – it was about how to think. I’ve chosen a few lessons and lightbulb moments that Buffett has given me over the years.
Lesson #1 ‘The stock market is a device for transferring money from the impatient to the patient.’
Investing is one of the things in life that can’t be rushed and as Buffett said: “You want to be greedy when others are fearful. You want to be fearful when others are greedy. But above all, you want to be patient enough for compounding to do its work.”
An early realisation from Buffet for me was how I thought about long-term investing – I was just not thinking long enough. I first bought shares on the stock market that I picked based on names I knew and numbers I didn’t understand when I was about 20. Every day I checked how they were doing and every day I was disappointed. I lost patience and I sold them all at regrettable prices.
I hope the person who bought them was more patient because Auckland Airport, Fisher and Paykel Healthcare and Mainfreight Shares would have anchored a solid portfolio 17 years later, even if a couple of the others didn’t fare so well.
Lesson #2 ‘Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t, pays it.’
This is normally attributed to Einstein, but Buffett used it regularly. He put it most bluntly as “if you don’t find a way to make money while you sleep, you will work until you die”. Compounding returns is your money making money, it works slowly at first but, given time, really gathers steam. “It’s pretty easy to get well-to-do slowly. But it’s not easy to get rich quick.”
The other side of the compounding lesson is debt. Debt, or leverage, can super-power your returns when things are going well. But leverage also amplifies the downside when things are not going so well.
I’ve worked in the banking and finance sector for most of my career. Over that time, interest rates only went one direction, down, and housing and investments only went one direction, up.
This is a shared experience of many investors on the Sharesies platform over the last two to three years where those with home loans and debt experienced a near-immediate increase in expenses and a decrease in disposable income. It highlights how important Buffett’s strategy of low leverage and large amounts of cash on hand has been to Berkshire Hathaway’s success.
I like that Buffet regularly referred to other areas of life that can be compounded too, particularly around self development: “The best investment you can make is in yourself. The more you learn, the more you earn – and that too compounds over time.”
Lesson #3 ‘Someone’s sitting in the shade today because someone planted a tree a long time ago.’
I am excited that we are introducing more financial education into our schools. I think Buffet would very much agree. His constant drive to share his knowledge, where others might have thought to keep it to themselves, is a hallmark that has made him almost universally respected.
“You only have to do a very few things right in your life so long as you don’t do too many things wrong” has real relevance for young people.
One of those things to get right is getting started investing as early as possible, ideally as kids, but if you missed that, then today. Buffett has been a humble champion of retail investors for as long as he has been investing on their behalf.
In many ways, after many years of subdued retail involvement, it seems that the time of the retail investor – everyday people owning the businesses whose services we use every day – has come again.
And with that, I’m reminded of another regular message from Buffett: “You invest in companies, not markets.”
It’s a truth that can be clouded by headlines, volatility and index obsession. The stock market is a tool – not the target. Buffett has admitted that even he didn’t fully appreciate this in his early years, and that ultimately Charlie Munger helped get him there. The focus should be on understanding businesses and the people in them, not outguessing the crowd.
It’s a mindset – and if you’re keen to learn, he’s still teaching
Buffett is largely regarded as the greatest investor of all time. He has been planning this handover for many years and is leaving Greg Abel, the new CEO, over US$340 billion in cash to make something happen when the time is right.
My favourite quote from this year’s AGM: “Patience is not a constant asset or liability. You don’t want to be patient when the time comes to act.” And I expect that is how Berkshire Hathaway will be run for many years to come.
Buffett’s legacy is far more than Berkshire’s market cap. It’s a mindset – and if you’re keen to learn, he’s still teaching.
