Lessons on Investing from Warren Buffett

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Warren Buffet
Warren Buffet KU Visit
Erwin Building
HARBOR SPRINGS, MICHIGAN / UNITED STATES – JUNE 11, 2015: The Erwin Building, at the corner of State and Main Streets in downtown, houses Berkshire Hathaway Home Services and Between the Covers Book Store.

Warren Buffett has recently become especially generous in sharing the investment wisdom he has gained over the years. One way that he shares his thoughts is through his Berkshire Hathaway shareholder letters, which are sent out every year. Buffett has been leading the company since 1965, and helped increase book value per share by a compound annual rate of a whopping 19.4%.

Aside from his letters, Buffett has also given a number of speeches and lectures over the years. During one lecture at Notre Dame in 1991, Buffett shared some great words about investing.

On the topic of a business’s competitive advantage, Buffett describes a woman starting a company in 1937 with $500. Most suppliers boycotted her, and took her to court on allegations of violation of fair trade laws. Standing before the judge, she stated that she paid three dollars a yard for her carpeting. A competing carpet store paid three dollars as well, but they charge $6.99 for the item. She charged just $3.99. In a frank manner she asked the judge, “How much do you want me to rob people?”

The newspaper picked up on the story, and the judge visited her store purchase $1,400 worth of carpet. The woman beat competitors in court four times. Today, her company is one of the largest home furnishing stores by a factor of 2 to 1.

The woman Buffett was talking about was, of course, Rose Blumkin. Blumkin was known as Mrs. B. She proved that sometimes a company’s biggest competitive advantage is simple: provide the lowest price to your customer.

Costco has followed a similar model. Even as a retailer, Costco doesn’t make much of a profit from the sale of its products as the company does not mark up the prices of any products it sells by more than 15%. The company earns most of its profits from membership fees. Costco’s commitment to offering low prices helped earn the trust of the public and keep its members happy. On top of this, it has turned Costco into a remarkable market-beating stock. Over the last 20 years, Costco’s shares have raised capital gains of 1,668%. The S&P 500 has climbed just 246% during the same time period.

Buffett also gave advice on how to find business leaders. Finding the right leader often starts with finding business people who have a passion for what they’re doing. Most investors don’t have the chance to interact with management companies, but there are helpful resources that can help us understand what drives the company’s leader.

Take Neo Kah Kiat for example. Neo was the chairman, founder, and chief executive of Neo Group Ltd. In July 2012, Neo told Straits Times that he started out in the kitchen, and that he was a food man. Neo knew everything about his food. The kitchen was his passion. At first, he did research and development on the ground, but now he does planning strategy and supervision.

Clearly, Neo has a passion for food, and that’s important considering that his company is in the business of preparing catering meals. Neo was also quoted as saying that he originally had plans to retire at 40 and was advised by his neighbor that 40 is too young of an age to pack up the bags. Neo is now 45 and is still leading the company.

You can learn from Warren Buffett and his shareholder letters. You can view past letters on the Berkshire Hathaway website to gain more insight from Buffett.

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