Warren Buffett invests like a Girl – Part 3

12^th June 2020

Warren Buffett invests like a Girl – Part 3

Dear Fellow Travellers,

Namaste from Hitesh! We had dealt with number one and two qualities of Buffett - TRADE LESS and Exhibit less overconfidence in last two days. Today we will deal with other quality. Here we go.

The margin of Safety - Shun Risk: -

Buffett believes that long-term-focused investing within your circle of competence will result in wealth for smart investors. This view is complemented by his risk-averse nature. All investing involves risk, naturally. There are unknowns inherent in making the choice to trade your money for a piece of a company—the future is never certain, after all. But Buffett believes that to be as successful as possible, you should do everything you can to limit your risk, and therefore lessen the likelihood that you’ll lose all-important capital (or money you can invest). He believes in tilting the scales as far as possible away from speculation and toward ownership- minded investing framework.

We’ve already learned about moats and competitive advantages, so now’s the time to embrace the concept that Buffett has called “the cornerstone of investment success. That important concept is called the “margin of safety.”

Example: -

Back in the 1970s, as we mentioned before, Berkshire started buying shares of the Washington Post Company. After analyzing it, Buffett believed its assets were worth at least $400 million, yet the market was giving it a price tag of less than $100 million. This represented a margin of safety of 75 percent—a steal!

Berkshire bought shares and held on, though Buffett wasn’t initially rewarded for his prescience. He made tons of money later on.

Avoidance of Debt: -

Another way that Buffett shuns risk is found in his attitude toward debt. Given his cautious nature, it’s not surprising that he’s not a big proponent of debt, whether we’re talking about personal debt or debt that Berkshire or other companies have on their books, because of the risk too much debt can bring. The problem with debt is that its overuse can be disastrous when times get rocky. He is against the loan – be it for stocks / personal of business. Just read.

Loan for Stock Buying: -

Buying stocks on margin (that is, using borrowed money from your broker), for example, can create trouble when stocks plummet, because your nervous broker is going to want its money back.

Personally, I have seen many investors losing their wealth thanks to margin funding.

Personal Loan or Credit Card Payments: -

Think about credit card debt—the principle is the same. When times are flush, you can use your credit card sensibly, you have no trouble keeping up with your payments, and you can use the credit as it was intended—as a tool but not a crutch. However, one lost a job or big uncovered medical bill later, and it’s easy to get behind if you’ve over-relied on credit and run up an unwieldy amount buying faux-mink neck warmers, gold coffee tables, and a fleet of hot-air balloons. It can turn a bad situation into a much worse one (but at least you have your neck warmers too, you know, keep you warm).

Thanks to COVID – 19, many guys would have lost jobs or cut in the salary. Now, if they have borrowed money on Credit Card – they will be in much more tension now.

Business Loan: -

The same goes for businesses that borrow money, whether to finance new ventures, build or improve buildings or plants, or pay temporary operating costs. A little debt, managed well, normally won’t create havoc. But beware piling it on. Dark times can mean missed payments, which for a company needing loans in the future can mean doubts about its creditworthiness. We have a host of examples like Anil Ambani and many other too big to fail companies coming to Zero due to unmanageable debt.

Buffett Says: -

All investing involves risk. The quicker you get used to and comfortable with this fact, the better. However, there’s no need to take on more risk than is necessary.

Follow Buffett’s lead here:

1.   Insist on an appropriate margin of safety.

2.   Avoid debt as much as possible.

3.   Stay within your circle of competence.

4.   Do your homework before investing overseas.

What Next?

This is my educations series from Buffett. I hope you enjoy it.

Happy Investing.

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

Live With Passion…Invest With Passion.

Hitesh Parikh