Lessons From Warren

One of the dumbest things I ever did was sell my two shares of Berkshire Hathaway stock many years ago. “Warren Buffett is getting old,” I said to myself, “and he certainly can’t continue this kind of record!” Well, he has! The overall return (based upon market value) of Berkshire Hathaway stock for the past 50 years has been 1,826,163 percent compared with the Standard & Poor’s 500 index return of 11,196 percent.

I’ve been a fan of Buffett’s investing advice and have read his annual letters to shareholders for many years. But his advice goes way beyond investing; it’s just as much about leadership and life. Here are some lessons I pulled from the 2014 edition:

Follow logic over emotion. Falling in love with your investment or ideas and ignoring logic can have disastrous consequences.

The hell with short term! Buffett has always been a proponent of long-term investment. You hear leaders grouse about being forced to look for short-term returns, but if you pick your shareholders correctly, he proves that you don’t have to do this.

Sometimes, do nothing. Leaders are action-oriented, but sometimes Buffett does nothing when no good options are apparent.

Hire great managers and leave them alone. If anyone has a right to believe his own headlines, it’s Buffett. Yet he seems to rarely get involved in managing the companies he invests in. There might be a broader message here about allowing people the latitude to make mistakes and judging them over the long term.

Be honest about your mistakes. I love how humble Buffett is. Do you think you’d find quotes like this in many other shareholder letters? “A few, however, have very poor returns, the result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong.”

Even if you are brilliant, don’t promise brilliance. Buffett is the master at underpromising and, as evidenced by the total return mentioned above, overdelivering!

Prioritize cash (flow or float) over everything else. A great message for business leaders! For instance, insurance companies (Buffett’s largest area of investment) use the large amount of cash they generate from policies (float) to invest. However, generally accepted accounting principles (GAAP) require them to list float as a liability. You need to get beyond the traditional accounting, which leads me to the next one. …

Don’t let incorrect measurement lead to stupid decisions. Buffett is primarily concerned with “intrinsic value,” not book value. If the company can produce a lot of cash, why get hung up on how it looks on financial statements?

Have a sense of humor! While making the point that experience matters, Buffett references a cartoon with Eve looking wishfully at a confused Adam with the caption, “There are certain things that cannot be adequately explained to a virgin either by words or pictures.”



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