How Smart is Warren Buffet?


If you know who Warren Buffet is, great. If you don’t, you probably should. Warren Buffet is called by many; “The Oracle of Omaha” for his long-term investing viewpoint and his even longer-term success as an investor. He is the CEO and chairman of Berkshire Hathaway (which owns GEICO among other insurance holdings) and through that insurance company owns significant interests in some of the biggest and most successful companies in the market today.

What Does Warren Buffet Know and Should We Care?

He is one of the foremost proponents of value investing and has shown the discipline to consistently “buy low and sell high” which is easy to say, but hard to do. Over the years he has shown extraordinary discipline to purchase companies and large stock positions in major companies that he felt were significantly undervalued. He figured that the easiest way to make money investing was to invest in assets that were worth far more than their asking price.

For example, one of his earliest purchases was for a company called Sanborn Map. Shares in the company were selling for $45, but the company owned investments worth $65, so the map company was being valued at a minus $20 per share! That is a great example of buying at a discount!

If you study his writings, you will eventually run across his 2 rules for investing; “Rule #1, never lose money, Rule #2, never forget Rule #1”!

He came to this conclusion after studying the math; if you lose 10%, you must earn over 11% to break even. Lose 25% and you need to earn over 33% to break even, and a loss of 50% requires a 100% gain to get back to where you started. This is why losing money is so devastating to wealth accumulation, it doesn’t just cost you money, it costs you TIME! And that is an asset we only have so much of and there is no place to buy more.

Warren Buffet in 2018


Knowing that Warren Buffet does not speculate or do short term trading, his rules tend to provide lessons and guidance for those of us with a longer-term view. He understands that there are times when large returns come with less risk and other times where there are smaller returns available with higher risk. This is one of those times where smaller returns are available but the risk is much higher.

Berkshire Hathaway is currently holding over $129 billion in cash on its balance sheet!! That is the most they have ever had, and that is despite buying $12 billion in new stock investments in the second quarter. This is considered a sign that Warren Buffet and his advisers can’t find stocks or companies that are a good value right now.

So, Warren Buffet has a record amount of cash, so what?

Well the last 2 times the amount of cash went up this dramatically, it was a precursor to a significant correction. The pile of cash at Berkshire grew in 1998-1999 and again in 2005-2007. When the markets dropped dramatically after each of those periods, Buffet was able to make huge returns buying in during the subsequent market drops. This lead to huge profits!!

The Takeaway on Warren Buffet


What we can learn from this is that logic, objective measurement of value, and patience can lead to huge gains with greatly reduced risk. Set your investing parameters and then stick to it!

Understand how much losing money hurts wealth creation and takes time away from growing wealth for our financial security.

The logic: markets at or near all-time highs have much more downside risk than upside (after all, passing all-time records is uncharted territory, but the downside is familiar).

Investing parameters: know what your investment philosophy and metrics are. How you decide if it is time to buy or sell is an important discipline to have. A written investment philosophy can be very helpful in this area, or using financial tools with less risk, that suit your investment policy.

Patience: don’t buy because “my money isn’t doing anything.” Earning nothing is far better than losing 20-40% or more. In markets like our current one, being selective in what you buy, with protections in place to prevent significant losses is key. If you are approaching retirement or in retirement, this is even more important!

If you would like to see more of the research that went in to this post, give me a call at 415-331-9030 as I am happy to discuss this further.

If you feel like Warren Buffet does, that value is hard to find these days, let’s set up a time to talk, there are still some areas showing great value and I can help you protect what you have built.

Final Thoughts

I am not predicting that the market will crash tomorrow, neither is Buffet. What I am saying (and so is he with his actions) that risk is very elevated and proceed with caution, while preparing for the opportunities ahead. Remember, when things are tough, CASH IS KING!