Warren Buffett & Charlie Munger’s Investing Checklist
Warren Buffett (worth a cool $US 75 billion according to Forbes) made 99% of his fortune after the age of 50.
That’s right, the ‘Oracle of Omaha’ and CEO of Berkshire Hathaway Inc. (NYSE: BRK.A), was worth ‘just’ $300 million at age 50.
More than 96% of his wealth came after age 60, according to Collaborative Fund’s Morgan Housel.
Skill + Time = Wealth
“More than 2,000 books are dedicated to how Warren Buffett built his fortune,” writes Housel. “But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.”
Buffett started investing at age 10. Had he waited until age 22 (around the time I started) he would be worth ‘just’ $1.9 billion today, according to numbers from Collaborative Fund.
Clearly, one of Buffett’s greatest strengths is his ability to compound his money over uber-long periods of time. For that, he needed the right financial structure and the right strategy.
The 4 Things Buffett & Munger Look For in Companies
According to this BBC interview with Charlie Munger, Buffett’s long-time investing partner and fellow billionaire, the duo look for four key characteristics in an investment.
1. They buy shares of companies they can understand.
I think this goes for anything we buy or invest in.
As the famed investor Peter Lynch once wrote: “If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”
Alarmingly, many of us struggle to explain even our largest investments.
2. The business must have a durable competitive advantage.
Also called a “moat” (like the moat around a medieval castle), this is a harder one to determine.
When buying a share, ask yourself:
- What makes this company stronger and better than any other?
- Could it withstand years of competition?
Those are the key questions you must ask.
3. Management must have integrity and talent.
Like any employee or manager, CEOs must have a purpose for doing what they do.
My goal as a small silent investor in a company is making sure the CEO’s purpose or reason for doing something is aligned with mine. They must have integrity, talent and energy.
Not sure what to look for?
4. The price must “make sense” — you must have a margin of safety.
A “margin of safety” is the difference between price and value.
As Buffett says, price is what you are asked to pay but the value is what you’re willing to pay.
You wouldn’t buy a pair of Nike’s for $100 which you think are worth $50. Likewise, you shouldn’t do it with your investments.
Is Buffett’s strategy perfect?
All types of investing have some risk, but especially shares. Perhaps that’s why Peter Lynch also said:
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
Clearly, you’re not going to be right everytime. Keep that in the back of your mind before you do anything you might regret.
Cheers to our financial future!
Founder, The Rask Group
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