Warren Buffett’s Ground Rules

Warren Buffett's Ground Rules

I remember that when I first saw this book, there was no Chinese translation of this book. I spent a whole day reading the English version, thinking that someone should translate it into Chinese.

The reason I recommend this book

Warren Buffett’s Ground Rules” is a book on stock investing that I recommend to many of my friends from time to time. I recommend this book for three main reasons.:

  • It is one of the few books that has been endorsed by Buffett himself and mainly describes Buffett’s “earliest investment career”. I always think that for most book writers or film directors, their personal first work usually has an irreplaceable status, and it is usually the most worthy of study. Because most of the most primitive works can be used to generalize most of their later career works, the central idea of ​​a person’s life is difficult to change. And this book fully presents the earliest stage of Buffett’s investment career and is worthy of in-depth study by everyone.
  • The earliest period of Buffett’s investment career (i.e. Buffett Partnership) described in the book is most suitable for all retail investors to imitate . Why? Because Buffett at this stage is no different from you and me. His main investment targets are buying shares of listed companies on the open market. Especially after he bid farewell to his partner’s investment career and established Berkshire. After Berkshire Hathaway (ticker:s: BRK.A and BRK.B), the main investment method has been completed through mergers and acquisitions, which is a typical institutional investor investment method. Only about one-third of Hathaway’s investment portfolio is stocks of publicly listed companies. In contrast, this institutional investor investment method is not suitable for ordinary retail investors; Interested readers can refer to another article in my blog “The advantages of retail investors“.
  • The author has collected many original documents related to Buffett’s early investment career, including how the partnership works? How is the profit distributed? The main stock selection goals and investment methods, as well as the annual shareholder letter to the partner investors, etc. By studying these original investment documents of Buffett’s early days, readers can get a good understanding of the most primitive way of thinking of the most successful contemporary investor before he became famous, his daily activities, and what kind of corporate information he collected? The criteria for filtering investment targets and his logical derivation process. For retail investors, these are very rare and extremely precious public experience.

Concise and easy to read

This book is very thin, simple to the point, and easy to read. After sorting out by the author, the following are the key points of Buffett Partnership’s investment period (excerpted from the author’s catalog). These key points are to become a successful long-term investor.

Topics included

Clear basic concepts:

The basic concept of investment

Predicting the future: As Buffett’s phrase “predict the market, that is what God is doing.” What should happen is more important than when it happened.

The power of compound interest: This is the greatest benefit of long-term investment. The power of compound interest can only be realized by reinvesting the profit from the investment for a long time. Investing in high-quality stocks can grow with the company and enjoy the benefits of long-term growth compound interest.

Index funds: This point is repeated every year by Buffett. The average person is suitable for the investment method of index funds, which can obtain market-induced long-term returns, and can reduce risks and investment time.

Let the fund manager’s interests be consistent with yours: Only when your fund manager is required to invest most of his net worth in the same fund, will he have the motive to seek the best reward and effectiveness for you.

Investment Strategy

Identify value stocks with undervalued stock prices: The investment strategy that Buffett implemented in the early stage is, in general, the cigar butt philosophy of his mentor Graham. That is to try to find companies whose value has been underestimated in the market and buy them when they are low-end.

Arbitrage: Buffett has long understood that arbitrage is a kind of investment operation that makes a profit without losing money, such as using companies to be merged to carry out arbitrage.

Holding investment: Due to the increasing success of investment, the book uses Dempster as an example to illustrate how Buffett used to buy a large number of stocks to control the board of directors of companies and intervene in the operations of some companies.

How to measure the cumulative effect: We must measure the cumulative effect of investment in 3-5 years, and don’t focus on short-term and immediate benefits.

Warren Buffett's Ground Rules
credit: amazon.com

Psychological bias

The traditional approach is not necessarily sound: following the crowd and seeking approval from peers is not feasible in investment. Investors should allow the opposite, independent thinking and judgment, to succeed.

Don’t just focus on tax avoidance: Investors should put the search for rewards first; not just because they consider how to avoid tax, they don’t see the woods for the trees. The highest after-tax income should be the final goal.

Is the more funds the better the operation? Buffett said, “Give me a million, and I can earn 50% for you every year. Well, I say I can do it, I can guarantee it.” For the reason, please refer to my “The advantages of retail investors” The description of this article.

Why can’t active investment be operated for a long time? Don’t dance with the crowd. Investing in momentum or chasing the hot stocks in the market will eventually make you fail.

Isn’t the stock the best investment? In the later stages of the partnership relationship, Buffett saw that the market was clearly overvalued (3 years later, the market really collapsed). With his investment method, he really couldn’t find a stock that fits his investment criteria, so he resolutely decided to end the partnership investment company in 1969.

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