Warren Buffett Invests Like A Girl
By LouAnn Lofton
When the markets were collapsing in September 2008, Warren Buffet was accumulating GE & Goldman Sachs. He had a cool temperament and he kept putting it out to people that it was the right time to buy.
Buffet has said, “The most important quality for an investor is temperament, not intellect. You need a temperament that gives great pleasure from neither being with the crowd nor against the crowd”.
Temperament can be linked to the root causes of financial crises:
- Too much of short-term thinking
- Risk taking in ridiculous excess
- Debt levels rising beyond reason
- The inability to see the bigger picture
- The cynical profiteering off the next rube around the corner
- Panic less in times of distress
- Don’t exhibit overconfidence
- Are pessimistic in their choices
- Do not assume undue amounts of risk
- Trade much lesser amidst market swings
- Learn from their mistakes
Women, in general, do not exhibit better stock picking skills but the above traits help them perform better and with consistency.Female professional investors also exhibit relative patience in their investment decisions as against their male counterparts.Women tend to research their investments more thoroughly than men do. They are also less likely to give in to peer pressure. When being observed by peers, men tend to choose riskier bets than they usually would afford. Women are not carried away by peer pressure.Lack of testosterone makes women calmer and, thus, more disciplined investors than men. Excessive testosterone levels can push the market higher into a bubble. Excessive cortisol can make a scary market drop even worse.Women have only 5%-10% testosterone of what men have. Adding more women on the trading floors and in boardrooms can help dampen hormonal swings in the market.The qualities that Warren Buffett exhibits in his investment philosophy are similar to the traits that women exhibit in general. Buffett’s principles are:
Trade less, make more: Buffett is a stickler for buy and hold. He even has petitioned for tax rewards for long term investors. When you invest in a company’s stock, you partially own the company. Thus, knowing the executives, offerings and future plans is imperative. When the herd of short term investors moves the market, the independent minded long-term investors can take the opposite side and eventually earn superior returns. Any mistakes on the way are to treated as lessons and moved over with.
‘Be greedy when others are fearful and be fearful when others are greedy’ – Buffett
Sometimes, your investment tanks as soon as you buy it. But if your research has been thorough, you must have patience.
Rein in Overconfidence: ‘Economic Moat’ protects the company and its profit making potential from competitors. These moats should be wide and sustainable. Invest within your own circle of competency. Do not invest in businesses that you don’t understand. But conduct a deep research before making the final call.
Shun Risk: Do not speculate. Focus on ownership. Look for margin of safety – if you believe a stock is worth 100 while is trading at 75, you have a 25% margin of safety. The bigger the margin, the better it is for an investor. If you are targeting a stock with higher volatility, try to have a bigger margin of safety. Tread carefully while leveraging your investments or investing in heavily leveraged businesses. While venturing into foreign markets, complexities are higher due to geopolitical climate, accounting rules and legalities. Your investments should compensate for the additional risk assumed.
The positives of pessimism: Buffet wrote in Forbes in 1979, ‘The future is never clear. You pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values’. Be level-headed about your investments. Do not get excited by looking at market swings. Buffett also said, ‘When investing, pessimism is your friend, and euphoria the enemy’.
Research extensively: The more you read, the faster you are at absorbing MDA, financial statements and economic indicators. Do not only look for information that validates your stand. Try looking for rebuttals, too. Avoid confirmation bias.
Ignore peer pressure: Be willing to be contrarian, as uncomfortable as it may be. Live by your own inner scorecard.
Learn from mistakes: Buffett had made some investments because he was sitting on large amount of cash and didn’t find the right avenues. In fact, one investment even made some money for Berkshire but Buffett called them all mistakes because he invested in them without fully understanding the businesses that also lacked moats.
- You will make mistakes. Don’t regret. Learn from them.
- Assess what went wrong
- Develop a framework so as to avoid repeating mistakes
Question the masters: Buffett learned a lot of his investing principles from Benjamin Graham. However, his orientation is unique to himself. He showed some inclination towards the qualitative aspects while Ben focused only on quantitative. Buffett moved away from Graham’s cigar butt approach of investing where he would invest in dirt-cheap stocks only to make money upon liquidation of assets. While investing in multiple stocks was reduction of risk for Graham, it meant lack of understanding for Buffett.
- Learning never stops even if you have excelled in what you do
- You may differ and have quest for better ways than what your guru taught you
- There is nothing wrong in questioning
Act fairly and ethically: Buffett and Munger have been once pulled by the SEC for overpaying for an acquisition. Their justification was that the business was worth it. Warren Buffett wants his employees to not do anything they did not want their spouses and children to read about them in the newspapers. He said, “Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless”.
You can be good and rich; one doesn’t preclude the other. Look for companies that communicate in an open, honest way. You, as an owner, deserve to be treated this way.
Value People and relationships: WB is invested in Costco. Jim Sinegal is a co-founder and CEO of Costco. His straightforward approach and determination make Costco a worthy investment. Look for cues like how much of the stock is owned by the CEO and the management. A CEO who has large stock options but hasn’t exercised them could be red flag. You can learn a lot about a company by how the tone of their communication in their letters to shareholders or their conference calls.
Warren Buffett had surrounded himself with some great women who had a great influence on what he has become professionally and personally.
- Susan Buffett: His first wife
- Carol Loomis: A journalist who was also responsible for the articulate letters to the shareholders of Berkshire Hathaway
- Sharon Osberg: Buffet’s best friend and a champion Bridge player
- Kathrine Graham: The widowed owner of The Washington Post
- Rose Blumkin: A Russian immigrant who ran Nebraska Furniture Mart which was eventually purchased by Berkshire
Each of these women were instrumental in shaping WB’s approach to investing.