Today’s Chapter is based on the book “Buffett: The Making of an American Capitalist” by Roger Lowenstein.
Warren Buffett is an American investor and philanthropist, long known as the “Oracle of Omaha” and regarded as one of the most successful investors in history. He served for decades as chairman and CEO of the conglomerate Berkshire Hathaway and has pledged to give away nearly all of his vast fortune to charitable causes.
Here’s what I learned:
Patience
“Patience is not passive, on the contrary, it is concentrated strength.”
— Bruce Lee
Perhaps one of the greatest lesson we can take from Warren Buffett’s life is his understanding of patience. From a young age, Buffett understood the importance of allowing time to make compounding work. As a matter of fact, Buffett was great with numbers and purchased his first stock at age eleven. It was a great lesson of patience as he bought three shares of Cities Service at $38 a share, but the stock plunged to $27. When the stock recovered at $40, he sold quickly, which was a great mistake as the it continued to climb to $200 shortly after.
As such, it is not surprising that Warren Buffett became a discipline of Benjamin Graham, the father of value investing. His understanding of patience allowed him to truly master the concept of “Mr. Market”, coined by Graham. He understood that the stock market is not a weighting machine, but a voting machine and that stocks should be seen for the businesses beneath their stock certificates rather than to their stock price.
Buffett, an avid baseball fan, often compared investing to baseball, but with a crucial difference.
“I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
— Warren Buffett
This baseball metaphor captures the importance of patience in Buffett’s investment philosophy perfectly. While most investors feel compelled to act constantly, swinging at every pitch, terrified of missing an opportunity, Warren Buffett vouched for discipline, waiting sometimes for years for the right opportunity at the right price. As he once said, “You would be better off if you got a punch card with 20 punches on it—and every financial decision you made you used up a punch.“
Furthermore, Buffett’ patience extended beyond waiting for buying opportunities, he was a long-term investor. Once he owned a business, he rarely sold. This idea comes back to his concept that investments are not pieces of paper to be traded but as businesses to be owned. As he once explained, “to turn around and sell because someone offered 2x or 3x was kind of crazy.”
However, it would be wrong to believe that Warren Buffett was passive. In fact, I’d argue that his patience was active and disciplined. While he may not be taking decisions to buy or sell a stock on a daily basis, he spent his days reading, analyzing, and waiting. He was compounding his knowledge to become better a identifying the intrinsic value of a company.
“If you buy a bond, you know exactly what’s going to happen, assuming it’s a good bond, a U.S. Government bond. If it says 9 percent, you know what the coupons are going to be for maybe thirty years.... Now, when you buy a business, you’re buying something with coupons on it, too, except, the only problem is, they don’t print in the amount. And it’s my job to print in [to figure out] the amount on the coupon.”
— Warren Buffett
This reminds me how patience and compounding is not only important for investing, but also in accumulating knowledge. As we have learned from Edward Thorp, the understanding of compounding interest is the first and most important mathematical concept to learn. Not only is it important in investing, but it is also useful in terms of seeking wisdom and obtaining good habits.
As a matter of fact, a one percent improvement every day leads to 37x improvement in a year. Similarly, it is very possible to become wealthy even if our investments grow at a small rate as long as it happens on a long period of time. Edward Thorp once said that “Over a sufficiently long time, compound growth at a small rate will vastly exceed any rate of arithmetic growth, no matter how large!”
The rules of compounding are very simple once you get the concept: start early and do not ever interrupt it. As Charlie Munger famously said, “The first rule of compounding: Never interrupt it unnecessarily.” Thorp understood the importance of compounding beyond the stock market. As a matter of fact, it is this principle that encouraged him to lead a healthier lifestyle. For every hour he spent on fitness was one less day he would spend in a hospital.
“Americans supposedly spend an average of forty or more hours a week watching television. Those who do have plenty of “junk time,” which they can use instead for an exercise or fitness program. Five hours a week for this can add five years of healthy life.”
— Edward Thorp
Circle of Competence
“I want to think about things where I have an advantage over other people. I don’t want to play a game where people have an advantage over me. I don’t play in a game where other people are wise and I am stupid. I look for a game where I am wise and they are stupid. And believe me it works better. God bless our stupid competitors. They make us rich.”
— Charlie Munger
Warren Buffett genuinely believed that successful investing begins with knowledge and understanding the limits of his own circle of competence. He didn’t speculate on technologies he couldn’t grasp or businesses he couldn’t explain to a child. This discipline became one of his investment philosophy’s most defining characteristics.
In terms of investing, Buffett’s believed in simplicity. He argues that if you can’t understand a business, you can’t value it, as the key concept of investing is to figure out how much cash flow you can return from such investment. Therefore, Buffett had the tendency to avoid investing in sectors that was out of his circle of competence. During the Go-go era, Buffett once said, “We will not go into businesses where technology which is away [sic] over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszez.”
“Everybody’s got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.”
— Warren Buffett
While this self-awareness may be seen as a limitation, it was actually one of his superpower. By knowing precisely what he didn’t know, Buffett could focus his considerable intellect on areas where he had genuine expertise. More importantly, it would allow him to make less mistakes. As he once said, in investing, the rule number one is to not lose money and that investing outside your circle of competence is a direct path to permanent capital loss.
Nonetheless, Buffett mentions that one didn’t need a big circle of competence to succeed in investing, but it was primordial to know the limit of it. As Lowenstein mentions, Buffett “explained that he evaluated stocks exactly as he would an entire business: he looked for companies he understood, run by honest and competent managers, with favorable long-term prospects, and available at a decent price. He made no attempt to anticipate the short-term price action.”
This, however, didn’t mean that Buffett was satisfied with the limit of his circle of competence. On a daily basis, he was always trying to widen it through reading annual reports and business publications. He would often spend hours reading over Moody’s manuals studying every single companies appearing on them, similar to a small boy reading comics.
“By now, Buffett was familiar with virtually every stock and bond in existence. Line for line, he had soaked up the financial pages and the Moody’s books; day after day, he had built up a mental portrait of Wall Street. He could measure each stone against the skyline, and there was no one else whose analysis he trusted better than his own.”
— Roger Lowenstein
The concept of circle of competence is another one that can be compared to baseball, especially to the legendary hitter Ted Williams who understood the importance of discipline and selectiveness. As a hitter, Williams was known for his exceptional ability to wait for the right pitch, the one in his “happy zone” where he could maximize his chances of success. He believed that even the greatest hitters couldn’t be successful if they swung at bad pitches.
As a matter of fact, Williams notes that “a good hitter can hit a pitch that is over the plate three times better than a great hitter with a questionable ball in a tough spot. Pitchers still make enough mistakes to give you some in your happy zone. But the greatest hitter living can’t hit bad balls good.“
“The first rule in the book... is to get a good ball to hit.”
— Ted Williams
Similarly, this concept of waiting for the right pitch is directly applicable to investing. In the world of finance, there are countless opportunities to invest, but not all of them are worth swinging at. Investors often make the mistake of chasing every market trend or jumping on every stock that seems to be rising. However, like Williams, successful investors know the value of being selective. They don’t invest in every opportunity that comes their way; rather, they wait for the right opportunity—one that fits within their own circle of competence.
Legendary investors like Warren Buffett and Charlie Munger have long advocated for this approach. Munger, in 1994, delivered a talk to the USC Business School called “A Lesson on Elementary Wordly Wisdom” where he explained how Buffett succeeded in investing by being extremely selective in his bets.
“When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
He says, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
Again, this is a concept that seems perfectly obvious to me. And to Warren it seems perfectly obvious. But this is one of the very few business classes in the U.S. where anybody will be saying so. It just isn’t the conventional wisdom.
To me, it’s obvious that the winner has to bet very selectively. It’s been obvious to me since very early in life. I don’t know why it’s not obvious to very many other people.”
— Charlie Munger
Reputation
“Character is much easier kept than recovered.”
— Thomas Paine
Another lesson we can learn from Warren Buffett’s career is that reputation is your most important asset. Whether he was managing money through his partnerships in his early career or acting on behalf of Berkshire Hathaway’s shareholders as the CEO, Buffett did not merely try to make money, he tried tried to build trust. He understood that trust was the key to making a long-term partnership possible.
For example, when he first started his partnership, it was important for Buffett to invest alongside of his partners. Having skin in the game made him that much more trustworthy. As Lowenstein writes, “It was enormously important to Buffett that his partners see him as trustworthy. He and Susie put more than 90 percent of their personal money in with the partners’, as did Bill Scott, Buffett’s assistant. “So we are all eating our own cooking,” Buffett assured them.”
Similarly, one of my favourite quotes from Warren Buffett is “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.” This line of Buffett is one of his most famous because it genuinely applies to everyone. No matter what profession you are working in, a career can be damaged quickly by dishonesty, carelessness, or vanity, while trust often grows slowly through repeated proof. And, in the case of Buffett, his character has as much to do with his success as an investor than his intelligence.
“Buffett’s genius was largely a genius of character—of patience, discipline, and rationality. These were common enough virtues, but they were rare in the heat of financial passions, and indispensable to anyone who would test his mettle in the stock market.”
— Roger Lowenstein
Furthermore, what makes Buffett truly impressive is that his character did not change even after he became wealthy. As a matter of fact, his private habits shows that he was not interested in wealth for the wrong reasons. He treated money as a scorecard, but not as a substitute for character. As Lowenstein mentions, “Buffett was a billionaire who drove his own car, did his own taxes, and still lived in a home he had bought in 1958 for $ 31,500. He seemed to answer to a deeply rooted, distinctly American mythology, in which decency and common sense triumphed over cosmopolitan guile, and in which an idealized past held firm against a rootless and too hurriedly changing present.” Similarly, Buffett never sold a single share of Berkshire Hathaway and was content with giving himself a salary of only $50,000.
In fact, while Buffett’s drive to become rich was evident from childhood, it was clear that it wasn’t because he wanted Ferraris or material comforts, but rather because he enjoyed making money compound over time. As Buffett once said, “It’s not that I wanted money. It’s the fun of making money and watching it grow.”
This was also made evident when he was seven and hospitalized due to appendicitis. While he was ill, Buffett refused to eat, but left alone, he took a pencil and filed a page with his numbers. He then explained to the nurse that these numbers represented his future capital and said, “I don’t have much money now, but someday I will and I’ll have my picture in the paper.”
This reminds me of Chung Ju-Yung’s experience at Hyundai which is a perfect example of how important reputation is for a businessman. He once mentioned that “a man’s trustworthiness, sincerity and honest are his capital.” In fact, he explains that while it would be ideal for a company to have enough internal capital to run on its own, it is still possible to run a business without any capital, as long as it has a good reputation.
As a matter of fact, Chung first success started when he was running a rice shop which he was entrusted by his boss due to his diligence and honesty. He was also able to get capital to start his business because of his reputation for being trustworthy.
“In my life, many business people claiming to have the next “big thing” have asked me for money. They professed that they didn’t have anyone else to ask. In those situations, I always said, “What you lack is credibility, not capital. It’s not because your character is flawed. It’s just that you haven’t established trust that would allow a stranger or a third person to lend you money. That’s why it’s so hard for you to get it. If you can convince the other person that you are trustworthy, money will naturally flow in.”
— Chung Ju-Yung
By consequence, whenever he ran Hyundai, Chung always made sure that his credibility would remain intact. In fact, even whenever he got into a project that would certainly amount to significant loss, he made sure to complete the project in time to make sure that his company held their words. He fully understood the meaning behind’s Warren Buffett’s saying that “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
When he was once advised his brother to give up on a project, he responded with: “Trust is everything to a businessman. The moment you lose trust, it’s all over. It’s my dream to create the best construction company in the Republic of Korea, and you’re telling me to abandon it all? Whatever happens, we’re going to finish this job. We have to.” More importantly, Chung Ju-Yung’s understood that in international projects, it wasn’t just his reputation on the line, but the credibility of the entire country that laid on his shoulders. He once mentioned that “if Hyundai were to have quit after becoming the first Korean company to take an overseas project, we would have been kicking away the ladder for other Korean construction companies trying to enter foreign markets.”
“A contract is a contract. Even if we are in dire monetary straits, we have to build Thailand the high-quality expressway they are expecting within the time we have. That’s why we are here. We cannot and will not just cut and run. We have to finish what we started for the good of the Hyundai brand and for the good of the country.“
— Chung Ju-Yung
Beyond the Book
Read "The Surprising Power of The Long Game" by Farnam Street
Read "Active Patience" by Farnam Street
Read "Mastering Success: Navigating Within Your Circle of Competence" by Farnam Street
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