Saturday 18 February 2012

Why I love Warren Buffett

Why I love Warren Buffett

It is very easy for investors to be enamoured by the returns generated by Berkshire Hathaway over the past several years. Despite Buffett's sage advice, it is even easy to envy him for all his wealth and for his fan following.

However, the reason why I love Warren Buffett is simple:

  • His simplicity in thinking
  • His clarity of expression
  • His sound logic
  • His ability to communicate fairly complex things in a very easy-to-understand manner.

Take a look at this gem from him:

In the above wonderfully written piece, he demolishes common myths about the perceived "safety" of fixed income products as well as gold.

The problem with Buffett, however, is to follow his advice.

Will I be able to follow his advice? I'm certain that I won't. Here are a couple of key reasons:

  • Partially due to ignorance (of which businesses will do well).
  • Partially due to fear - What if the businesses that I buy go down in value? What if the market as a whole crashes?

Precisely due to the above two factors, I'll go back to the text book theory of "Asset Allocation" and of "Diversification". This is nothing but a simple case of hedging one's bets.

After all, the simple truth is

  • "If you know that XYZ limited is going to be the best performing stock over the next 3 years, I'll simply dump everything else and load up my net worth with shares of XYZ Limited."

Unfortunately, we don't know that. None of us do. Hence, we take a call on two key issues:

  • How much of money can be deployed in shares?
  • Within that quantum, how much can be deployed in any individual company?

The above decision is obviously going to be based on a wide range of factors such as asset allocation, risk appetite, time horizon, reliability of future cash flows, financial commitments, etc. And the decision would have to be taken separately by each individual based on his/her own "ground realities".

Just remember the lessons from the Oracle of Omaha. And proceed with care! 

Regards,

N


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