Berkshire Hathaway’s stupendous performance is inspired from its CEO Warren Buffett’s investing principles. Here are some financial lessons to learn from him
Berkshire Hathaway’s price per share crossed over $6 lakh on February 11, 2024 pushing its market capitalisation to $863 billion. Hathaway’s Chairman and Chief Executive Officer, 93-year old Warren Buffett’s investment wisdom has played the biggest part in this success story.
His strategic decisions in using long-term, quality-oriented approach to pick stocks is famous in the investment world. Here are some financial lessons from Warren Buffet.
In his 2013 letter to Berkshire shareholders, he shed light on how he has allocated 90 per cent of his portfolio in his Will to low cost S&P 500 index funds.
“Put 10 per cent in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund,” Buffett said. Long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers,” he said.
An index fund is a type of passive mutual fund or exchange-traded fund (ETF) designed to replicate the performance of any particular index, such as Nifty 500 index and this investing in same companies constituting the index.
Buffett remains very sceptical about cryptocurrency, and has cited its non-productive nature.
“In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending,” Buffett had cautioned in 2018 and has maintained the same position since then.
“If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it, but I would never short a dime’s worth,” Buffet has said. He has further said that he wouldn’t buy Bitcoin even if it dropped to $25, calling it “rat poison squared”. “Whether it goes up or down in the next year, or five or 10 years, I don’t know. But the one thing I’m pretty sure of is that it doesn’t produce anything,” Buffett had said in 2022.
One of Warren Buffett’s famous rule is, “The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are.”
For this he advocates a buy-and-hold philosophy. Buffett says you shouldn’t own a stock for 10 minutes if you don’t feel comfortable owning it for a decade. He also proved it with his actions. He held on to the bulk of his portfolio even during the 2008 financial crisis, which he himself had referred to as an “economic Pearl Harbor”.
Buffet says that “if you are to be happy having $20,000 or $50,000, you won’t be happy having $5 million.”
“Loads and loads money do not make people happier. You are happier when you have financial security. The best investment by far is...anything that develops yourself. Address whatever you feel your weaknesses are and do it now. Whatever you want to learn more, start doing it today. Don’t put it off to your old age,” he says. He cites an example where he conquered fear of public speaking by taking a $100 public speaking course, a transformative step that changed the course of his life.
Buffett cautions against taking debt, particularly credit card debt. “I’ve seen more people fail because of liquor and leverage — leverage being borrowed money,” Buffett had warned in a 1991 speech at the University of Notre Dame.
He adds: “You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
He also asks people to completely avoid credit cards. He says: “Interest rates are very high on credit cards. Sometimes they are 18 per cent. Sometimes they are 20 per cent. If I borrowed money at that rate, I’d be broke.”