What's the secret to Warren Buffett's stunning success? Unlike other high-profile billionaires such as Jeff Bezos or Bill Gates, he's not a technological genius. He made his billions by buying stock in existing companies, which is something most of us can do. Why has it worked so incredibly well for him?
Because of a simple fact he has put into practice throughout his career: There's nothing more powerful than learning, and the more you know about a project or an investment, the likelier you are to do well with it.
Buffett filed his first tax return at 14, and he credits the 1936 book One Thousand Ways to Make $1000 by F.C. Minaker--which he pulled off a library shelf at age 7--for giving him his start. The book is full of excellent (if dated) advice about how to start making money, but one recommendation early in the book likely inspired Buffett:
Read. Read as much as you can.
"You will find many people who will laugh at the idea of learning how to make money in books. They will tell you that business success depends upon inherent trading ability and action. They will cite men who never read a book in their lives and still made lots of money in business. Do not be influenced by these views. No man ever started in business for himself, who did not short-cut the time it took him to become established, by reading about what others had done."
Buffett started his lifelong practice of study with Minaker's book and never looked back. After college, he attended Columbia Business School, where he studied with the legendary investor Ben Graham, whom Buffett later said was the second biggest influence on him after his father.
Graham was known as the father of value investing, which Buffett also practices, which consists of thoroughly analyzing a company's business and assets to assess its true value irrespective of its share price.
Graham advised buying with "a margin of safety," advice Buffett has also echoed. In fact, it's likely the explanation for one of Buffett's best-known and most perplexing dictums about investing: "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."
Many investment experts over the years have debated what that actually means, especially since Buffett himself has sometimes suffered losses, as any investor at his scale would have to do.
The comment makes a lot more sense if you consider Graham's "margin of safety," which is generally viewed as when the price of all a company's shares is actually lower than the company's assets, or the company's earnings are a lot higher than its stock price would suggest.
Does that guarantee you will never lose money on that investment? No--there will always be things that can affect share price that are well outside your control. But it does give you the best chance of staying well within Rule No. 1.
And indeed, that's how Buffett built the first phase of his wealth, investing in companies that he compared to partially smoked cigars that still had a few good puffs in them--companies that were undervalued by the market because they were out of fashion or outside of rapidly growing industries.
The catch, of course, is that you cannot find these margin-of-safety investments merely by reading a few analyst reports or investing in growing industries or looking at the historic performance of their share prices--you have to actually study their financial reports and other information, which is what Buffett spends most of his time doing.
That's it--deep study. That's the whole secret behind Buffett's immense investing success. In this age when college students start companies that turn into unicorns and seemingly simple ideas come to dominate old-line industries, it's easy to suppose that the world is full of shortcuts to extraordinary wealth. Buffett's whole message is that there aren't--or if there are, you probably won't find them.
On the other hand, the slow-and-steady route can get you to extraordinary wealth just fine, if you take the time and effort to do your homework, think for yourself, and learn to ignore fads, so-called experts, and the whims of the market.
It's an approach that's helped get Buffett where he is today. That's a good enough reason for you to try it too.