Source: Changpo Xue
The key to success lies in learning from those who have succeeded. In the field of investment, Wall Street has a history spanning over 300 years, and Buffett has achieved success for nearly 70 years. Undoubtedly, studying the history of Wall Street and Buffett's investment journey represents a shortcut to achieving investment success.
Regarding the history of Wall Street, Changpo Xue recommended in 'Six Essential Books for Investors' that readers should consider reading 'The Great Game.' So, how did Buffett navigate his investment journey? This article attempts to outline the evolution of Buffett's investment approach, which will undoubtedly provide some inspiration to our readers.
01. Read everything
Perhaps due to his father's profession, Buffett was fascinated by the New York Stock Exchange from a young age. By the age of seven, he had already developed an interest in investing and dreamed of becoming an investment expert in the future.
He jokingly referred to himself, saying that he had wasted his youth before the age of seven.
At the age of twelve, Buffett purchased his first stock. It was 1942, shortly after the Pearl Harbor incident and when the United States had just entered World War II. In other words, Buffett bought his first stock during World War II.
In March of that year, he used his sister’s money to buy three preferred shares of Cities Service Company at $38 each. After purchasing, the stock continuously declined, with its price dropping as low as $27. His sister repeatedly reminded him on the way to school that the stock was falling, placing immense pressure on young Buffett. Later, when the stock price rebounded to $40, he sold the shares. Unexpectedly, the stock subsequently rose to over $200.
Failing to earn more than four times the return left Buffett regretful for a period. But even if he had earned it, it would have been due to luck because his investment method at the time was incorrect – he relied purely on technical analysis, drawing charts and following patterns in the stock market.
Reflecting on his early investments, Buffett remarked: I simply read a lot of books. I may have read every book on stocks in the Omaha Public Library.
In 1950, he came across Benjamin Graham's 'The Intelligent Investor,' which was like a ray of light illuminating Buffett's life and changing his destiny.
When he discovered that Graham was still alive, he enrolled at Columbia University where Graham taught, thus embarking on a journey of value investing.
Therefore, Buffett often advises young people: Read everything you can get your hands on. He believes that in any field, if it is your interest, doing this at a young age provides a significant advantage.
02. Master the basic principles of investing
From 1950 to 1956, over six years, Buffett read Graham's books, studied under him, and even worked for two years at Graham's company, an experience that allowed Buffett to grasp and understand the fundamental principles of investment.
At the shareholders' meeting, Buffett once stated: You must develop your own investment framework—I developed mine from reading Graham's books; I didn't come up with it on my own.
The core of Graham's investment framework consists of three principles: Buying stocks means buying companies; viewing the stock market correctly; and maintaining a margin of safety.
These principles may not sound complicated, but they are golden words both in the American investment scene of that time and in today’s Chinese investment community. It is not easy for investors to truly understand these three principles and put them into practice consistently.
In fact, Buffett also made some evolution based on Graham’s ideas. When it comes to the investment value of companies, Graham placed greater emphasis on asset value, adopting an undervaluation-based approach, whereas Buffett in the later stages of his career focused more on the company’s profit potential, typically employing a 'buy-and-hold' strategy.
However, these changes still remain within the overarching framework of 'buying stocks means buying companies.'
Buffett later remarked: I really haven't learned any new fundamental investment principles; the basic principles all come from Graham. In terms of seeking better businesses, I was influenced by Charlie and Fisher.
In Buffett's view, the investment principles advocated by Graham will become the cornerstone of rational investing, now and for the next 100 years.
Changpo Xue believes that understanding the investment framework provided by Graham fundamentally aligns investors with the right direction in their investment journey, but to achieve investment success, one must continue learning—acquiring more business knowledge, gaining a deeper understanding of businesses, etc.
03. Continue learning and acquire common sense
At the shareholders' meeting, Buffett stated: (Once you have built your investment framework) you must spend your lifetime searching for opportunities that fit within this framework, but you won’t find opportunities every day. You can learn every day, but you cannot act every day.
At the 2005 shareholders' meeting, Buffett informed everyone that he had been reading the annual reports of Anheuser-Busch (a beer brewing company) for 25 years. Long before we invested in Coca-Cola, Gillette, and other companies, I had already read their reports.
On a daily basis, Buffett’s work involves reading—including industry magazines, corporate annual reports, and biographies of entrepreneurs.
The ultimate goal of reading is to have all the companies of interest stored in your mind, so that occasionally you might experience an epiphany and discover new investment opportunities.
Munger said: Buffett knew those basic investment principles long ago, but (knowing only those) would not have enabled him to make his recent investment decisions.
Over the past few decades, I have been observing Warren, who has learned a great deal. Thus, this is a continuous learning game. It was also this mindset that led him to uncover the hidden potential of PetroChina (which was significantly undervalued). If you don't persist in learning, others will surpass you.
The ultimate goal of continuous learning is to cultivate one's business acumen. Investors cannot and do not need to have insight into everything.
Therefore, Buffett advocates for simplicity, knowability, and predictability; while Munger refers to it as common sense.
Munger stated: An old friend in Omaha often said that so-called common sense is knowledge that ordinary people lack. When we say someone has common sense, we actually mean they possess genuine insights that ordinary people do not have.
Accumulated over time, in the later stages of Buffett’s career, he often made correct decisions within a very short period. When people called Buffett saying, 'I have a fantastic business idea, blah blah blah,'
Buffett would respond: 'There’s no need to spend 10 minutes on this because, you see, just from their first sentence, you can tell it’s not a great idea.'
04. Cultivate appropriate character traits
In addition to fundamental investment principles and business acumen at the cognitive level, Buffett also emphasized the importance of character and temperament.
Buffett once emphasized: Character in investing is the most important. High intelligence is not required for investing. If your IQ exceeds 125, you can disregard the remaining points.
So, what constitutes appropriate character and temperament? Although Buffett has not provided a systematic explanation, Changpoxue summarized a few key points from his sporadic remarks:
First, the ability to control one's emotions. Amidst market surges and crashes, investors must not allow their emotions to be swayed out of control by market movements; if emotions spiral out of control, investment failure follows. If you have a tendency to panic when others panic, then you are unsuited for investment.
Second, the ability to think independently. Investment is ultimately an individual endeavor, a monetization of one’s own cognition. You cannot rely on others' advice or depend on someone else’s understanding to generate returns for yourself.
Third, patience and long-term thinking. In the internet era, information travels at lightning speed, making it easier for investors to be influenced by short-term market fluctuations. To succeed in investing, one must adopt a long-term perspective, looking beyond daily, weekly, monthly, or even yearly trends. Patience is key, along with maintaining a vision spanning at least three years or more.
Fourth, adhering to one’s circle of competence. Once you have cultivated a specific area of expertise, remain within that domain. Do not mistakenly believe you can excel in an unfamiliar field simply because you succeeded in another—just as winning a table tennis championship does not imply proficiency in soccer.
Buffett once said in a speech that the secret to accumulating wealth lies in consistently doing things within one's capabilities.
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Editor /rice