Two secret skills that made “Warren Buffet” the most intelligent investor in the world
It made everyone always wonder about the top skills that made Warren the richest investor on the planet. It was not an easy task, because there were a lot of ideas about how others thought about it, but not how Warren thought. At last, we found a book that gave us the answer written by Mary Buffett & David Clerk. It says,
The top two skills of Warren are;
1. Identify an exceptional company with a durable competitive advantage
2. Value a company with a durable competitive advantage
Of course! Just hearing of this might be intimated to you at first. But, let us take you to a place where you could end up knowing the secret of being a good investor!
Before that, have a glimpse at the below topic and identify why most investors are failing.
What other investors do wrong when investing?
It is a well-known fact that Wall Street in America is also known as the gambler’s place. It is the place where people buy hot trending stocks every day or sometimes every hour. However, what most people do wrong when buying stocks here is that, they just listen to someone’s words or sometimes, just see newspapers, Television analysts, or tweets before buying stocks. But, unfortunately, these kinds of recommendations have a high chance of changing within a day. It was true that his way of stock purchases are happed not only today but also in the early nineties. Sometimes they make profits from “get rich quick” schemes. But unfortunately, most of them lose their money. So, they jump into a stock one day just by hearing a piece of good news and then jump out to the next on the other day due to a piece of bad news.
Warren’s mentor, Late Benjamin Graham studied and identified this behavior and identified it as a word called ‘Speculation’. Nevertheless, Benjamin wrote a book called ‘The Intelligent Investor’ including the theories he learned from Wall Street. He also then started practicing value investing in 1930.
Warren learned value investing under Graham at Colombia University in the year 1950 and then worked under Graham right after his university education. That’s how Warren learned to study the value of a company without going after ‘Hot moving stocks’.
Before being an investor, it is very important to familiarize the word; “competitive advantage”
What is a durable competitive advantage?
Ø Competitive Advantage
Well, if I ask you two questions, which question will you find most important?; ‘what is a competitive advantage or how to find stocks with a competitive advantage? I know you are looking forward to getting into action. So, let’s see how to find companies with a competitive advantage.
According to Warren, he has understood these ‘Super Companies’ have either a unique product or a service, or else they supply low-cost products or services which consumers need consistently.
As an example, think you want to have a beer at the end of an exhausting day. What will you choose at once? Budweiser? Yes, most probably you might choose it. Or guess you wanted to confirm more details about a piece of news; the first thing that comes into your mind would be ‘The Washington Post’. Right? But what is the reason behind it? Aren’t there any other beer brands? Aren’t there any other places to confirm any news? No, you have. The reason is just the “Brand name”. You are feeling that those brands can offer you something unique.
So, it is a major method of identifying a company that has a unique position in the market or other words a ‘Company with Competitive Advantage’.
The durability of a stock or a company is identified as the ‘Consistency’ of a company. What did Warren explain by the word consistency? It is the consistency of a product or service the company is providing.
To be more exact, let’s say ABC company’s major product is “Y” and they have been consistently manufacturing the “Y” product for years back. However, over time they have changed the advertising
methods, and the packaging methods and also added some new products to the range. No matter what, their core product “Y” has remained the same! And that is simply called “ Durability”
How do you find an exceptional company with a durable competitive advantage?
Maybe this could be a simple question for you. But, most who were on Wall Street were not aware of this. Thus, they were going after news, tweets, or predictions from Gurus and fails in the end.
What you must know is that; “The real gold is hidden in the financial statements of a company”. Every year a company is bonded to publish its financial statements if they are operating in the stock market. So we can find how the company behaved years back and get an idea of how it will behave in the future too.
There are 3 main topics in a financial statement. As Warren says those are the sections we must focus on.
The income statement; shows how much the company earns during a year. Sometimes, the accountants of companies release these statements once in three months.
Balance Sheet; this is the next important thing. This says how much money the company has in the bank and how much money the company owes to others.
Cash Flow Statement; Simply this shows cash inflows and outflows. So you can understand the money flow and capital improvements through cash flow statements.
It is proven that success comes down to analyzing the financial statements of a company. The common thought that everyone has in this matter is that understanding those financial things will be hard. But, hopefully, it is not like that. Regardless of your background, or position, everyone can understand it if you look into it in depth. You may find them as simple if you are familiar with the core concepts. Therefore, be a good investor unless handling everything over to just luck.