I first read the shareholder letters of Warren Buffett in 2016. I was a young entrepreneur, just starting to learn about business strategies and financial markets. I was eager to make informed decisions for my ventures, and I often sought advice from experienced professionals.
During this time, I networked with investors and business leaders who shared insights on wealth-building strategies. One book consistently came up in conversations: The Intelligent Investor by Benjamin Graham. It changed my life forever when I finally got around to reading it years later. I'd like to think permanently for the better!
In this article we'll explore some of the timeless principles found in those letters that have stuck with me over time and continue influencing my thinking today (and hopefully yours too!).
Principle 1: Invest in companies with competitive advantages rather than competitive parity
The first principle Buffet teaches is to invest in companies with competitive advantages rather than competitive parity.
Competitive advantage means that a company has the ability to earn above average returns on capital and have high growth rates.
Warren Buffett invests in companies who have competitive advantages because he regards them as having sustainable competitive strengths that will allow them to maintain their earnings power over time. For example, Coca-Cola (NYSE:KO) has been able to consistently grow its earnings at least 5% per year for the last 30 years, beating the S&P 500 by 8x during that period.
Principle 2: Invest in businesses that are simple and understandable
The second timeless principle I learned from Mr. Buffett is "Invest in businesses that are simple and understandable." This principle is related to the first one, which says: "Don't invest in businesses you don't understand."
The reason why these two principles are related is because they both boil down to the same thing: simplify your investment decisions as much as possible so that they become easier for you to make and follow through on them.
Simplicity also has other benefits besides making things easier for yourself: It allows you to focus on what matters most - the core business of the company - without getting bogged down by excessive details or complex metrics. When a business's model is simple, then there won't be any unnecessary distractions that may lead us away from our objective (making money).
Principle 3: Invest in businesses that have an enduring moat
An enduring moat is a sustainable competitive advantage that protects a business from competition. Buffett defines an enduring moat as "a wide and sturdy wall built around a valuable castle." A moat can be established in several ways—for example, it may be based on a brand, a patent or copyright, or simply being first mover in the market. Moats are hard to build but easy to defend; if you have one, focus on defending your moat instead of trying to expand it!
Principle 4: Buy companies with strong management and a management philosophy you agree with
Warren Buffett is a great example of this principle. He has been a great investor because he has bought companies with strong management and a management philosophy he agrees with. In other words, he buys only companies that are run by people who have the same vision as him and are willing to follow his investment principles. It doesn't matter whether they're selling soap or selling stocks; if their company's management doesn't believe in what they're doing, then it won't work for Buffett either. When looking for investments, look for companies where the CEO or Chairman is involved in every aspect of running their business; this shows that they care about it just as much as their customers do (if not more).
Principle 5: Buy companies when they are available at a large discount to their intrinsic value
The fifth principle is to buy companies when they are available at a large discount to their intrinsic value. Buffett has said that he has found the best time to invest in a business is when it is undervalued by 20% or more.
The intrinsic value of a company is calculated by adding up all of the cash flows that will be generated by the business over its lifetime, discounted back to today's dollars using an appropriate interest rate (usually 10%). So if you were able to sell your business tomorrow and receive $1 million after paying off all of your debts, how much would that be worth today?
This calculation tells you what the enterprise is really worth if you were selling it today. If someone offered to buy your company for $900,000 (10% less than its intrinsic value), then this would be a great deal for you because they are willing to pay for something with much less risk than going out on their own and starting something new from scratch
Principle 6: Be patient, disciplined, humble and opportunistic
Patience. If you want to win in life, you have to be patient and disciplined. You also need humility—the ability to admit that there are things that others know better than you do. But don't confuse patience with inaction; if an opportunity presents itself, take advantage of it! Being opportunistic means seeing opportunities where others don’t. For example, I love buying stocks during a recession because they tend to bounce back stronger than ever afterwards (e.g., Amazon). However, I won’t buy any stock at any time just because its price has fallen or risen dramatically over the last few days or months—that would be foolish and an attempt to time the market (which Buffett says never works). By being patient and opportunistic, I may miss out on short term gains but will instead achieve long term success
Principle 7: Expect the uncertainty of market prices and use them to your advantage
Uncertainty is normal, be prepared for it.
Uncertainty is an opportunity to make money: Buffet has used uncertainty to his advantage in many ways. He mentions that some of the businesses he owns are trading at prices below their book value (the amount of money the company would be worth if it were sold). This means that even though these businesses may not be doing well, their assets are worth more than what they’re being traded for! Buffet also uses this principle when talking about how complex businesses can make things more difficult for investors and analysts alike. In other words, you shouldn’t worry too much about understanding every aspect of a business because there will always be something you don't understand and that's okay! The important thing is making sure whatever decision you come up with makes sense at its core before moving forward with it., and then letting go of your need to control everything once your investment has been made..
Principle 8: Look for margin of safety (intrinsic value) but don’t always buy at a significant discount
Buffet is a huge proponent of the “margin of safety” principle in investing. This means he believes that the price you pay for a stock should always be lower than the intrinsic value of it. He recommends buying stocks when they are trading at a discount to their fair value, which is defined as what a rational buyer would pay for them (given all available information).
This principle makes sense on some level, but I think it could be taken too far (like when someone buys a stock because they think it will go up) — sometimes there are better strategies than buying low and selling high.
Principle 9: Invest in yourself. You are your own best investment.
Invest in yourself. You are your own best investment.
We have seen a lot of people make money by investing in stocks and other investments, but we have never seen anyone make money by not investing in themselves. Warren Buffett says that “it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
He also said that he would rather hire someone with an IQ of 130 than someone with an IQ of 100 if they had the same work ethic. The same goes for anything else: Investing in yourself will always be more valuable than anything else you can invest in because it increases how much you can earn, how much you know about any given subject, and how much value you bring to the world as a whole.
The Orangutan Effect: Gaining Clarity Through Explanation
The Orangutan Effect refers to the surprising power of explaining your ideas to others, even if that "other" is as unlikely a candidate as an orangutan. The concept was humorously highlighted by Charlie Munger, Warren Buffett’s longtime business partner, in the 2022 Berkshire Hathaway annual shareholder letter. Munger explained that if you take the time to articulate your thoughts clearly enough for an orangutan who certainly won’t understand, you’ll likely find yourself with a much better grasp of the concept.
This phenomenon demonstrates the cognitive value of teaching and verbalizing complex ideas. While the listener may not always be the most qualified to provide feedback, the process of explaining forces you to refine your thoughts, uncover gaps in your logic, and ultimately think more clearly. The simple act of breaking down your ideas, no matter the audience, can illuminate insights you may have missed otherwise.
For entrepreneurs, the Orangutan Effect can be a useful tool in decision-making and problem-solving. Whether it’s explaining a business model, investment strategy, or a new idea, talking through your thoughts helps you see challenges from new perspectives and often leads to breakthroughs.
Build Authority
Build authority by building a reputation for being an expert.
Build authority by building a reputation for being trustworthy.
Build authority by building a reputation for being ethical.
Build authority by building a reputation for being consistent.
Build authority by building a reputation for being transparent and open, so people know what you stand for and what you won't do, even if it costs money or time or something else valuable to the business (but not necessarily so valuable that it's worth losing your customers).
Chase Arbitrages
Arbitrage is the process of taking advantage of a price difference between two markets for identical goods. This can be accomplished through purchases or sales, but in Buffett’s case he does it by using leverage and the cash flow from other investments to buy stock at a discount.
Chasing arbitrages is more than just making money; it helps you understand how businesses work and how to use your knowledge to profit from them. For example, if you notice that sugar prices are lower in Brazil than they are in Quebec, this could be an opportunity for an investment. Similarly, if you see that Coca-Cola is selling its beverage products at a higher price on Amazon than in Walmart (or vice versa), then there may be an arbitrage opportunity available to you as well!
Perfect Value Capture
In the 1988 shareholder letter, Buffett highlighted the importance of capturing value:
“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.”
The key to this idea is how you define “perfect value capture." In other words, what's perfect? How do you measure it? While I can't answer those questions for you (because there isn't one right answer), I can tell you what's perfect for me: making sure my investments are earning more than they're losing. It may seem simple on its face—but in practice it's not so easy!
Lean into Contrarian Thinking
Buffett's advice is to be a contrarian, to buy when others are selling and sell when they're buying. To achieve this aim, you must be prepared. You must have the discipline to take the other side of popular opinion and keep it there until the price moves back in line with your expectations of value.
To be a successful contrarian investor, preparation and discipline are key.
Focus on Absolute Results
Buffet has built Berkshire Hathaway into a multi-billion dollar company by focusing on absolute results. He says that if you want to make money, it’s not just about how good you think you are, but also about how bad your competition is.
And this idea of focusing on absolutes doesn’t just apply to business – it also applies to our lives. It means that we should focus on the long-term instead of short-term rewards or costs.
Embrace the Virtue of Sloth
Sloth is the opposite of workaholism. It's a virtue that Buffett has been known to value in others, and it's one that I find myself appreciating more and more as I grow older.
The virtue of sloth does not mean lying on the couch all day; it means being able to sit still, relax, and enjoy life rather than constantly trying to fill your time with something productive or useful. Being lazy doesn't mean being idle, it just means taking breaks when you need them instead of always running yourself ragged at work or in your personal life.
Time is the Enemy of Mediocre Businesses
You will have time to do all the things you want to do. I've said that before and I'll say it again: Time is the enemy of mediocre businesses and the friend of great ones. The more time passes, the greater the divergence between these two types of businesses becomes. As a result, if you're running a mediocre business, your life won't be as good as it could be compared with those who run great businesses. And remember, Warren Buffett has no problems with admitting he's "mediocre." In fact, he once said (and I'm paraphrasing here), "If you have to pick one word or phrase to describe yourself in an hour meeting with someone new or old...choose 'mediocre.'" So while there's no shame in being mediocre (like him!), also know that there are many benefits associated with being exceptional instead.
Conclusion
Warren Buffet is a legend in the investment world and his letters are a great place to start if you want to learn from a master. I hope these 9 timeless principles will help you on your journey to financial freedom.