Buffett's insightful thoughts from a popular investor talk
19-Aug-2021 •Research Desk
Warren Buffett, also known as the Oracle of Omaha, is the chairman and CEO of Berkshire Hathaway. One of the most successful investors in history, Buffett received investment education from Ben Graham at Columbia University. Berkshire Hathway boasted 20 per cent annual returns from 1965 to 2020, outperforming the S&P 500's 10.2 per cent gains, including dividends, during the period. Here we look at Buffett's 2001 talk at Terry College of Business (https://bit.ly/3iIBLqi).
In today's connected world, it isn't hard to find intelligent and motivated people. But what separates big winners from smaller ones? Buffett answers, "Three things when we hire people we look for - intelligence, initiative or energy and integrity. And if they don't have the latter, the first two will kill you." Certainly, that is what separates a Narayan Murthy from a Nirav Modi.
Circle of competence
Buffett advises that investors should have their circle of competence, which means having an in-depth understanding of the economics of particular sectors or companies. He says, "When I say I don't mean to understand what the product does or anything like that, I mean understand what the economics of the business are likely to look like 10 years or 20 years from now." Stocks undergoing bankruptcy, such as DHFL, Jet Airways, etc., have seen huge volatility in the recent past. However, investors with zero knowledge of investing in such special situations should stay away and invest only in companies that they understand.
Sunrise sectors don't mean sunrise returns
It is tempting to invest in companies belonging to growth sectors, however, Buffett expresses caution by giving an example of the automobile sector in the US. He says, "At the start of the 20th century, you had seen what the auto sector was going to do...but of those 2000 auto companies, three basically survived and they haven't done that well. So, how do you pick three winners out of 2,000? It's not so easy to do."
The telecom sector in India has seen similar faith. The 2000s saw an unprecedented growth of phone users, attracting new players, such as Tata Teleservices, Reliance Communications, etc., to the sector. However, the sector today is primarily left with three players, with one of them having an uncertain future.
It pays to invest in wonderful businesses
Although Buffett started his investing career by buying stakes in lousy companies trading at dirt-cheap valuations, he soon realised that investing in good businesses makes more sense. He explains, "You want to be in a wonderful business because time is the friend of the wonderful business, you keep compounding, the company keeps doing more business and you keep making more money. Time is the enemy of the lousy business." As investors, we are tempted to invest in lousy businesses such as DHFL, Jet Airways, etc. However, it is better to stay with Asian Paints, HDFC Bank and HUL.
Avoid acts of omission
In the stock market, one may not get many opportunities to invest wherein one may get a wonderful business at a fair price. However, when it does, investors should seize the opportunity. Buffett explains, "The biggest mistakes I've made by far are the mistakes of omission and not commission. It's the things I knew enough, they were within my circle of competence and I was sucking my thumb."