Warren Buffett invests like a Girl – Part 2

11^th June 2020

Warren Buffett invests like a Girl – Part 2

Dear Fellow Travellers,

Namaste from Hitesh! We had dealt with the number one quality of Buffett is to TRADE LESS yesterday. Today we will deal with other quality. Here we go.

Exhibit less overconfidence: men think they know more than they do, while women are more likely to know what they don’t know

How Buffett keeps his overconfidence in check?

Two keys to understanding how Buffett invests are the related concepts of “economic moat” and “sustainable competitive advantage.”

Think of the idea of a moat just as you would the traditional fairy-tale moat around a castle, keeping a pretty long-haired girl protected from hungry dragons and lustful princes. A moat, in the business world, protects the company and its profit-making potential from hungry and lustful competitors. It’s anything that separates a company and gives it an advantage over its competition, resulting in higher profits for longer periods of time.

A company like Coca-Cola is protected by its brand, for example, giving it a competitive advantage Buffett can understand and reliably count on in the future. It would be incredibly difficult for an upstart soda outfit to come in and compete effectively enough with Coke at this point to inflict serious injury on it. The company’s moat is too wide, its reach too far, and its products enjoyed by too many people the world over. Buffett can look ahead 150 years in the future and he can imagine people teleporting all across the globe, downloading music directly into their brain, and all the while happily putting a $5 bill into a Vend-o-Tron to synthesize and drink their favourite Coke product.

The strength in Coke’s brand and business makes it so.
It’s vital, too, that the competitive advantages be “durable” or “sustainable.”

Quoting Buffett himself talking in 1999 about the state of the stock market and the insane prices for technology companies (which he compared to other revolutionary yet ultimately money-losing societal advances like autos and airplanes), “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

This is what is lacking in the world of technology for Buffett. He can’t see the moats, and he can’t predict just which companies are going to survive, much less thrive. In other words, he knows what he knows, and what he doesn’t know, and he sticks to it.

The lesson for investors here isn’t necessarily that we should avoid technology just because Buffett does, but rather that we should understand and abide by our own circles of competence. Maybe you work in the world of high-tech and are therefore uniquely positioned to have insights into the flashy companies Buffett wouldn’t even entertain investing in. Or perhaps you’re in the health-care industry, another area that can be complicated and difficult to understand, and you can rattle off the names and competitive advantages of pharmaceutical stocks galore. If so, excellent—don’t be afraid to use that knowledge. If not, though, don’t worry about sticking to your knitting, things you know, and understand.

Investing in companies you understand is important, so remember:

1. Buffett’s “sphere of understanding” may be different from your own.

2.  Think about and learn what your own circle of competence covers.

3.    Stick to it, no matter what.

What Next?

We had seen rule number 1 – trade less make more yesterday. Today Buffett is showing us how to manage our overconfidence. I hope this may help you in your journey to becoming a successful investor.

Happy Investing.

Follow me on Twitter @hiteshmparikh / WhatsApp – +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh