Category Archives: Building Wealth

FTC Proposes to Ban Noncompete Clauses

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The Federal Trade Commission proposed a rule to prohibit employers from imposing noncompete clauses on employees — a widespread practice that economists say suppresses pay, prevents new companies from forming and raises consumer prices, according to a Washington Post article.

The ban would make it illegal for companies to enter into noncompete contracts with employees or continue to maintain such contracts if they already exist, and it would require that companies with active noncompete clauses inform workers that they are void. Such agreements typically prevent workers from getting jobs at a competitor of a current or former employer for a defined period.

The FTC estimates that banning noncompete contracts would open new job opportunities for 30 million Americans and raise wages by $300 billion a year. If enacted, the rule could send shock waves across a wide range of industries.

One widely cited survey of economists from 2014 found that close to 20 percent of workers in the United States are bound to noncompete clauses across a variety of jobs, from hairstylists to software engineers to nurses. These contracts have forced workers to take on loads of debt during lengthy job searches, locked workers out of their own professions or shunted them into lower-paying industries.

A growing body of research shows that noncompete contracts reduce wages and mobility for workers across various industries by ensuring that employers do not have to compete against one another for workers by raising wages or improving working conditions.

The U.S. Chamber of Commerce contends in a letter to the FTC that reasonable non-compete clauses are pro-competitive because they protect an employer’s special investment in, training of and disclosure of sensitive business information to its employees. For these reasons, state legislatures and courts nationwide continue to protect and enforce such clauses. Moreover, in recent years, many states have adopted non-compete laws that restrict non-compete clauses in order to prevent abuses and to regulate to whom they may be applied, the circumstances in which they are appropriate, and to ensure procedural protections.

References:

  1. https://www.washingtonpost.com/business/2023/01/05/ftc-noncompete-ban-lina-khan/
  2. https://www.uschamber.com/assets/documents/210927_comments_noncompete_clauses_ftc.pdf

The Power of Compounding

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There are two things to direct your attention to.

  • First, the power of compounding. A 12% return in one year isn’t life changing, but stay invested for 20 years and, on average, you’ve grown your capital nearly ninefold.
  • Second, notice that the lowest number on the chart is the worst one-year return, a 39% loss. As the time extends, not only do the average results improve, but the worst losses also get smaller.

Over the long-term, the worst 20-year S&P 500 returns result has been a gain of 155%. The fact that risk decreases with time is apparent in the annualized standard deviations, which are lowest for the longest holding periods. That means the annual returns are not independent of each other, but rather, are mean reverting. And that’s good to know after a year like this year.

That’s why buying stocks only for investors who can leave their money in the market for multiple years is encouraged. If you expect to cash in your stocks in just a year, you expose yourself to a loss that is multiples of your expected gain. If you can wait five years to cash in, your expected gain is multiples of the worst historical loss. And if you can wait 20 years, there has never been an outcome worse than doubling your investment.

You shouldn’t buy stocks if you expect to sell within five years. And you’re  also discouraged market timing. Most investors tend to throw in the towel after large losses and go all in after large gains. History says the opposite has produced better results market tended to increase more than usual following a bear market. The average two-year increase was 33% after hitting down 20%, meaning the market had usually recovered more than all its losses within two years. Further, that 33% gain was nearly double the median two-year increase. This positive outlook can be hard to wrap your arms around given that most advice you hear, especially from professionals, is to get more cautious after the market has fallen.

The tendency of good periods following bad and vice versa is part of the reason why the long-term risk-return characteristics of equities have been so favorable. The table below shows the average 1-, 5-, 10- and 20-year total returns for the S&P 500 for the past 77 years and the best and worst returns for each period.

References:

  1. https://oakmark.com/wp-content/uploads/sites/3/documents/2022-0930_Oakmark-Funds_Annual_Report.pdf

Difference Between Being Rich vs. Being Wealthy

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“Taking a nuts and bolts approach to your money is a pretty good indicator that someone is going to be successful. If you know how much you earn, what you need to live on, and where your money is going, you have a foundation on which to build your financial future.” ~ Paul Sullivan, “Wealth Matters” columnist, The New York Times

Between New York Times columnist Paul Sullivan’s ”Wealth Matters” first column in 2008 through of his final column in October 2021, he cataloged the shifting attitudes surrounding what it means to be wealthy in the U,S., the money habits of the rich, and which billionaire excess is worth the money. Among his biggest takeaways: “I always drew the line between people who are wealthy and people who are rich,” he says.

The No. 1 money habit of wealthy people

“You can be wealthy ‘whether you’re a schoolteacher or a billionaire’” ~ Paul Sullivan

 

  • Wealth can be defined not as a dollar figure but in terms of what your savings allow you to do.
  • Lack of control over your own financial decision-making can be a key indicator of not being wealthy.
  • The number one money habit of wealthy people is to write everything down.

Over his tenure writing the column The New York Times, Sullivan talked to nearly several thousand about wealth in America. Unsurprisingly, his No. 1 piece of advice from this collective money wisdom boils down to a rather simple idea. “Have a plan. Write everything down,” Sullivan says.

“As simple as it sounds, it’s important to know how much I’m making, how much I’m saving, how much the house costs,” he points out. “It’s a tedious exercise, but people are always shocked.”

“The wealthiest and most successful people have a plan,” he said. “And it’s not necessarily rigid. They’re regularly looking at it, revising it, and they know where they stand.”

By writing everything down, Sullivan says, you can establish the beginnings of what he calls a “locus of control” — an intentionality around money that is common among people who have the wealth to freely spend on the things that they want.

This content is provided for informational purposes only and is not intended to provide, and should not be relied on for, financial, accounting, legal, or tax advice. Consult your accountant, tax, or legal advisor regarding such matters.

No level of diversification or asset allocation can ensure profits or guarantee against losses.

The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.

References:

  1. https://www.acorns.com/learn/earning/wealthy-vs-rich/

New Year’s Letter

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“The struggle ends when the gratitude begins.” — Neale Donald Walsch

Motivational speaker Tony Robbins reminds us that, “Life is a gift, and it offers us the privilege, opportunity, and responsibility to give something back by becoming more.” So, it’s important to live this gift of life with gratitude, meaning and purpose.  And, the best and simplest way to live a life of meaning and purpose are by embracing an attitude of gratitude, giving back to your community and serving others without expecting anything in return.

Forget resolutions. Write a letter to yourself each year instead

The beginning of the year is a natural time for reflection and the New Year is a good time to commit to leading your best life, explains Fast Company. Goals and resolutions, however, can be impersonal, says Scott Simon, author of Scare Your Soul: 7 Powerful Principles to Harness Fear and Lead Your Most Courageous Life.

To encourage people to hit the core of their goals and values, Simon suggests taking time to write yourself a letter.

“This is a letter that nobody else will see,” he says. “It’s not about resolutions; it’s about feelings and values, and it comes from your heart. Most people have probably never taken the opportunity to write a letter to themselves, but when you do it, magical things start to happen. You start to lead your life according to your own set of goals and wishes that that come from within.”

HOW TO WRITE YOUR LETTER
Your letter should talk about the year you want to have ahead. Simon says the letter should answer five questions:

  • What are the fears you plan to tackle, those things you believe are holding you back?
  • What are adventures you will embrace in the year to come?
  • How will you connect or reconnect with others in your life?
  • How will you plan to grow?
  • What can you do to serve others?

“These are the key questions that seem to evoke the deepest reactions,” says Simon. “They are what bring up key issues. They’re not necessarily what you’re going to do in Q1 and Q2 for goals. It’s deep, internal, intimate value work.”

REVIEWING YOUR LETTER
Once you write your letter, refer to it over the course of the year. Reading your letter over again will become a key motivator throughout the course of the year. Since it’s personal to you, it will remind you what your key values and goals are.

View your letter as a gift. “Use it to push through and say ‘yes’ to something that may feel uncomfortable but that you feel is the right thing to do,” says Simon. “It can be an incredible upward spiral where one thing will lead to another, then all of a sudden you are leading your best life.”

Your letter should address each of these 7 areas of your life in which you want to win, succeed or grow in 2023!

  1. Spiritual
  2. Financial (Building Wealth and Financial Freedom)
  3. Career
  4. Intellectual
  5. Health and Fitness
  6. Family
  7. Social and Emotional Well-being

Setting goals in this many areas may seem overwhelming, but you can do it! You have the power to make significant change in your life, and even though that change won’t happen overnight, you can start today.

You should never lose sight that true happiness comes from fulfillment and the sense that life has meaning and purpose. The choice to pursue spiritual growth, health, wealth or fulfillment is personal. Whichever decision you make, you must live it.

References:

  1. https://www.fastcompany.com/90824133/forget-resolutions-write-new-year-letter

Return on Invested Capital (ROIC)

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Return on invested capital, or ROIC, is a valuable financial ratio. Understanding ROIC and using it to screen for high ROIC stocks is a good way to focus on the highest-quality businesses.

Put simply, return on invested capital (ROIC) is a financial ratio that shows a company’s ability to allocate capital.

A high return on invested capital (ROIC) means investors are realizing strong returns on their investment in a company.

The higher the ROIC, the better a company is investing it’s capital to generate future growth and shareholder value.

For example, let’s say a management team had $1 million dollars to invest, and they could either invest in a new product line, or enhancements to their existing product line. After thinking it over, the Company invests the $1 million in a new product line. One year later, the Company looks back at what they have earned on the new product line, only to find out that it’s a measly $100,000.

As it turns out, if they had invested in the enhancements to their existing product line, they would have earned $500,000 over the same period of time. What does this mean?

Well, there could be more factors at play, but based on this example, the Company’s management team made the wrong decision.

As an investor, you want your management teams making the right decisions and investing in the areas that will generate the highest returns for you as an investor.
The common formula to calculate ROIC is to divide a company’s after-tax net operating profit, by the sum of its debt and equity capital.

Once the ROIC is calculated, it is evaluated against a company’s weighted average cost of capital, commonly referred to as WACC. If a company’s WACC is not immediately available, it can be calculated by taking a weighted average of the cost of a company’s debt and equity.

Cost of debt is calculated by averaging the yield to maturity for a company’s outstanding debt. This is fairly easy to find, as a publicly-traded company must report its debt obligations.

Cost of equity is typically calculated by using the capital asset pricing model, otherwise known as CAPM.

Once the WACC is calculated, it can be compared with the ROIC.

Investors want to see a company’s ROIC exceed its WACC. This indicates the underlying business is successfully investing its capital to generate a profitable return. In this way, the company is creating economic value.

Generally, stocks generating the highest ROIC are doing the best job of allocating their investors’ capital.

By calculating  a company’s return on invested capital, investors can get a better gauge of companies that do the best job investing their capital. Yet, ROIC is by no means the only metric that investors should use to buy stocks.

References:

  1. https://www.suredividend.com/high-roic-stocks/#top
  2. https://www.discoverci.com/stock-scanner/roic-screener

Top Investing Rules

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The number one rule of investing is: Don’t lose money. In other words, preservation of capital and management of risk are most important for investors than maximizing returns and income.

What follows are 10 proven rules of investing to make you a more successful — and hopefully to build wealth — investor.

Rule No. 1 – Never lose money

Legendary investor Warren Buffett stated that “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” The Oracle of Omaha’s advice stresses the importance of avoiding loss in your portfolio. When you have more money in your portfolio, you can make more money on it. So, a loss hurts your future earning power.

What Buffett’s rule essentially means is don’t become enchanted with an investment’s potential gains. Instead, focus on downside investment risks and preservation of capital. If you don’t get enough upside for the risks you’re taking, the investment may not be worth it. Focus on the downside risk first, counsels Buffett.

Rule No. 2 – Think like an owner

Think like an owner. Remember that you are buying fractional ownership of companies, not just stocks.

While many investors treat stocks like gambling, real businesses stand behind those stocks. Stocks are a fractional ownership interest in a business, and as the business performs well or poorly over time, the company’s stock is likely to follow the direction of its profitability.

Investing involves an analysis of fundamentals, valuation, and an opinion about how the business will perform and produce cash in the future.

Rule No. 3 – Stick to your process

The best investors develop a process that is consistent and successful over many market cycles. Be discipline and don’t deviate from your process because of short-term challenges and market volatility.

One of the best strategies for investors: a long-term buy-and-hold approach. You can buy stock funds regularly in a 401(k), for example, and then hold on for decades. But it can be easy when the market gets volatile to deviate from your plan because you’re temporarily losing money. Don’t do it.

Rule No. 4 – Buy when everyone is fearful

When the market is down, investors often sell or simply quit paying attention to it. But that’s when the bargains are out in droves. It’s true: the stock market is the only market where the goods go on sale and everyone is too afraid to buy. As Buffett has famously said, “Be fearful when others are greedy, and greedy when others are fearful.”

The good news if you’re a 401(k) investor is that once you set up your account you don’t have to do anything else to continue buying in. This structure keeps your emotions out of the game.

Rule No. 5 – Keep your investing discipline

It’s important that investors continue to save over time, in rough climates and good, even if they can put away only a little. By continuing to invest regularly, you’ll get in the habit of living below your means even as you build up a nest egg of assets in your portfolio over time.

The 401(k) is an ideal vehicle for this discipline, because it takes money from your paycheck automatically without you having to decide to do so. It’s also important to pick your investments skillfully – here’s how to select your 401(k) investments.

Rule No. 6 – Stay diversified

Keeping your portfolio diversified is important for reducing risk. Having your portfolio in only one or two stocks is unsafe, no matter how well they’ve performed for you. So experts advise spreading your investments around in a diversified portfolio.

“If I had to choose one strategy to keep in mind when investing, it would be diversification,” says Mindy Yu, former director of investments at Stash. “Diversification can help you better weather the stock market’s ups and downs.”

The good news: diversification can be easy to achieve. An investment in a Standard & Poor’s 500 Index fund, which holds hundreds of investments in America’s top companies, provides immediate diversification for a portfolio. If you want to diversify more, you can add a bond fund or other choices such as a real estate fund that may perform differently in various economic climates.

Rule No. 7 – Avoid timing the market

Experts routinely advise clients to avoid trying to time the market, that is, trying to buy or sell at the right time. “Time in the market is more important than timing the market.” The idea here is that you need to stay invested to get compounding returns and avoid jumping in and out of the market.

And that’s what Veronica Willis, an investment strategy analyst at Wells Fargo Investment Institute recommends: “The best and worst days are typically close together and occur when markets are at their most volatile, during a bear market or economic recession. An investor would need expert precision to be in the market one day, out of the market the next day and back in again the following day.”

Experts typically advise buying regularly to take advantage of dollar-cost averaging.

Rule No. 8 – Understand everything you invest in

“Don’t invest in a product you don’t understand and ensure the risks have been clearly disclosed to you before investing,” says Chris Rawley, founder and CEO at Harvest Returns, a fintech marketplace for investing in agriculture.

Whatever you’re investing in, you need to understand how it works. If you’re buying a stock, you need to know why it makes sense to do so and when the stock is likely to profit. If you’re buying a fund, you want to understand its track record and costs, among other things. If you’re buying an annuity, it’s vital to understand how the annuity works and what your rights are.

Rule No. 9 – Review your investing plan and goals regularly

While it can be a good idea to set up a solid investing plan and then only tinker with it, it’s advisable to review your plan regularly to see if it still fits your needs. You could do this whenever you check your accounts for tax purposes.

“Remember, though, your first financial plan won’t be your last,” says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group in the Pensacola area. “You can take a look at your plan and should review it at least annually – particularly when you reach milestones like starting a family, moving, or changing jobs.”

Rule No. 10 – Stay in the game, have an emergency fund

It’s absolutely vital that you have an emergency fund, not only to tide you over during tough times, but also so that you can stay invested long term.

“Keep 5 percent of your assets in cash, because challenges happen in life,” says Craig Kirsner, president of retirement planning services at Stuart Estate Planning Wealth Advisors in Pompano Beach, Florida. He adds: “It makes sense to have at least six months of expenses in your savings account.”

If you must sell some of your investments during a rough spot, it’s often likely to be when they are down. An emergency fund can help you stay in the investing game longer. Money that you might need in the short term (less than three years) needs to stay in cash.

Investing is effectively about doing the right things and about avoiding the wrong things. And, it’s important to manage your temperament (emotions) so that you’re focused and disciplined to do the right things even as they may feel risky, scary or unsafe.

References:

https://www.bankrate.com/investing/golden-rules-of-investing/

Lessons of Warren Buffett

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An understanding of the investing lessons of Warren Buffett.

1. Value investing works. Buy bargains which involve buying assets at a price below the asset’s intrinsic value. Value investing takes time, focus, discipline and patient, and is a hard process to implement and follow. It requires a lot of work to determine the fair value of a particular business. If investors could predict the future directions of the stock market, they would certainly not choose to be value investors. But no one can accurately forecast future prices. Value investing is a safe and successful strategy in all investing environments. The biggest obstacle for a value investor is to remain disciplined and patient in every circumstance the market and life might throw at him. Most people quit value investing and long- term investing for this exact reason: because they lack the discipline and cannot sit through periods of poor performance.

2. Quality matters, in businesses and in people. Better quality businesses are more likely to grow and compound cash flow; low quality businesses often erode and even superior managers, who are difficult to identify, attract, and retain, may not be enough to save them. Always partner with highly capable managers whose interests are aligned with yours.

3. There is no need to overly diversify. Invest like you have a single, lifetime “punch card” with only 20 punches, so make each one count. Look broadly for opportunity, which can be found globally and in unexpected industries and structures.

4. Consistency, discipline and patience are crucial. Most investors are their own worst enemies. Endurance and long-term perspective enables compounding.

5. Risk is not the same as volatility; risk results from overpaying or overestimating a company’s prospects. Prices fluctuate more than value; price volatility can drive opportunity. Sacrifice some upside as necessary to protect on the downside.

6. Unprecedented events (or Black Swan events) occur with some regularity, so be prepared.

7. You can make some investment mistakes and still thrive.

8. Holding cash in the absence of opportunity makes sense.

9. Favor substance over form. It doesn’t matter if an investment is public or private, fractional or full ownership, or in debt, preferred shares, or common equity.

10. Candor is essential. It’s important to acknowledge mistakes, act decisively, and learn from them. Good writing clarifies your own thinking and that of your fellow shareholders.

11. To the extent possible, find and retain like-minded shareholders (and for investment managers, investors) to liberate yourself from short-term performance pressures.

12. Do what you love, and you’ll never work a day in your life.

13. “The first rule of investing is to not lose money, the second rule is to never forget the first one,” states Warren Buffett. Loss avoidance must be the cornerstone of your investment philosophy. Investors should not stick to bonds or avoid risks at all, but rather that “an investment portfolio should not be exposed to losses of principal capital over five to ten years”, according to Klarman. This, concentrating on avoiding big losses is the safest way to ensure a profitable investing outcome.

14. Ignore Market Price Fluctuations which are completely unrelated to the value of the investment or asset. When the stock’s market price goes down, the investment may be seen as riskier regardless of its fundamentals. But that’s not risk. Investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate market volatility.

15. Avoid Leverage At All Costs.

References:

  1. https://hollandadvisors.co.uk/wp-content/uploads/2021/03/what-ive-learned-from-warren-buffett-seth-klarman.pdf
  2. https://medium.datadriveninvestor.com/how-seth-klarman-achieved-a-20-annual-return-for-30-years-8cd0f39da208

Margin of Safety

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“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.” ~ Seth Klarman

Berkshire Hathaway CEO and Chairman, Warren Buffett, is known for his value investing approach, which involves finding companies that are undervalued by the market and investing in them for the long term. To invest like Warren Buffett, there are a few things you need to know.

  • First, you need to have a clear understanding of what value investing is and how it works.
  • Second, you need to be patient and be willing to hold onto your investments for the long term.
  • Third, you need to have the discipline to stick to your investing strategy even when the market is going against you.

When deciding on how to invest in a company, the first step is to determine its worth or intrinsic value. According to Warren Buffett, the best companies to buy are those that are inexpensive to buy. His investment strategy is based on a few simple principles:

  • Buy quality companies that have a competitive advantage (moat),
  • Buy them at a reasonable price with a margin of safety, and
  • Hold them for the long term.

These principles of margin of safety have helped Buffett generate incredible returns over his career. Margin of safety is a strategy that involves investing only in securities at a significantly lower intrinsic value than their market price.

The margin of safety (MOS) allows investors to avoid overpaying for an investment or asset, and it protects investors from the potential of loss if the market price of the asset falls. Buffett has said that the margin of safety is the key to his investing success.

The margin of safety is a measure of how much room there is between the price of the stock and its inherent value. The wider your margin of safety, the less likely it is that overly optimistic valuation inputs will harm your investment.

Value investing is the process of making investment decisions using margin of safety. It is critical for value investors to find a high-quality, easy-to-understand company with good management priced below its intrinsic value.

The purpose of using a margin of safety in buying is twofold.

  • If your investment does not grow as quickly as you originally anticipated, you may be forced to make more conservative investments in your portfolio. If your estimates are correct, you will be able to achieve a better rate of return over time due.
  • If you purchased the investment at an extremely low price.

Discounted cash flow (DCF) is a method of valuing a company or asset using the principles of time value of money.

The objective of DCF is to find the value of an investment today, given its expected cash flows in the future. One popular way to value a company is using the discounted cash flow (DCF) method. This approach discounts a company’s future expected cash flows back to the present day, using a required rate of return or “hurdle rate” as the discount rate. The idea is that a company is worth the sum of all its future cash flows, discounted back to the present.

The DCF formula is: Value of Investment = Sum of (Cash Flow in Year / (1 + Discount Rate)^Year)

The “discount rate” is the required rate of return that an investor demands for investing in a company. This rate is also known as the “hurdle rate.” There are two ways to calculate the discount rate.

There are two ways to calculate the discount rate.

The first is the weighted average cost of capital (WACC). This approach considers the cost of all the different types of capital that a company has, including debt and equity.

The second way to calculate the discount rate is the discount rate for equity. This approach only considers the cost of equity, which is the return that investors demand for investing in a company.

Once the discount rate is determined, the next step is to estimate the cash flows that a company is expected to generate in the future. These cash flows can come from a variety of sources, including operating income, investments, and financing activities. After the cash flows have been estimated, they need to be discounted back to the present using the discount rate.

The present value of the cash flows is then the sum of all the future cash flows, discounted back to the present.

“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may want a little larger margin of safety.” ~ Warren Buffett

References:

  1. https://www.merchantshares.com/margin-of-safety-the-key-to-warren-buffetts-investing-success/
  2. https://www.merchantshares.com/the-dcf-method-of-valuing-a-company/
  3. https://www.merchantshares.com/how-to-win-warren-buffett-39/

Warren Buffett’s Investing Top Four

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“Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.” ~ Warren Buffett, Chairman and CEO, Berkshire Hathaway

Warren Buffett’s philosophy is simple. Buy with a “margin of safety” undervalued companies with strong fundamentals and balance sheet, and then wait. It’s possibly the most boring way to invest in the world. But it’s effective.

For Warren Buffett, deciding what stocks to buy is “simple but not necessarily easy,” according to CNBC Warren Buffett Guide to Investing.

In his Berkshire Hathaway 1977 annual letter to shareholders, he listed four attributes he wanted to see when investing, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock.

1. “One that we can understand…”

When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future.

He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them. At the 2000 annual meeting, a skeptical shareholder told Buffett he couldn’t imagine him not understanding something. Buffett responded, “Oh, we understand the product. We understand what it does for people. We just don’t know the economics of it 10 years from now.”

2. “With favorable long-term prospects …”

Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.”

“Every business that we look at we think of as an economic castle… And you want the capitalistic system to work in a way that millions of people are out there with capital thinking about ways to take your castle away from you, and appropriate it for their own use. And then the question is, what kind of a moat do you have around that castle that protects it?”

— 2000 BERKSHIRE ANNUAL MEETING

A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.

3. “Operated by honest and competent people …”

“Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something.

And it’s just a lot easier to operate with people that are candid.

“And we like people who are smart, you know.

I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING

The quality of the business itself, however, takes precedence.

“The really great business is one that doesn’t require good management. I mean, that is a terrific business. And the poor business is one that can only succeed, or even survive, with great management.” — 1996 BERKSHIRE ANNUAL MEETING

4. “Available at a very attractive price.”

“The key to [Benjamin] Graham’s approach to investing is not thinking of stocks as stocks or part of a stock market. Stocks are part of a business. People in this room (Berkshire shareholders) own a piece of a business. If the business does well, they’re going to do all right as long as they don’t pay way too much to join into that business. — 1997 BERKSHIRE ANNUAL MEETING

Buffett’s goal is to buy with a “margin of safety” or when the market price is below a company’s “intrinsic value.” Buffett has said that the margin of safety is the “most important concept in investing.”

“The three most important words in investing are margin of safety…” ~ Warren Buffett

“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.

“And we’re not perfect at estimating that, obviously.

“But that’s what an investment or a business is all about. You put money in, and you take money out.

“Aesop said, ‘A bird in the hand is worth two in the bush.’ Now, he said that around 600 B.C. or something like that, but that hasn’t been improved on very much by the business professors now.” — 2014 BERKSHIRE ANNUAL MEETING

References:

  1. https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2022/03/22/bwp22links.pdf

Focus, Discipline and Patience are Wealth Building Super Powers!