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Rupert Hargreaves
Rupert Hargreaves
Articles (1367)  | Author's Website |

Warren Buffett: How to Understand the Foundations of Investing

Buffett's thoughts on how to develop a base of investing principles

October 08, 2020 | About:

Investors never stop learning. Even Warren Buffett (Trades, Portfolio), who is considered the greatest investor of all time and has been buying stocks for around seven decades, has said that he is continually learning new things.

The business world is always changing and developing. New rules and regulations are introduced all the time, new technologies are developed and new companies come to market. To be successful and stay on top of all of these developments, investors need to keep learning, developing and refining their skills.

To keep up with all the information, investors need to have a natural interest in business; that's the only way they can stay interested in all that's going on. A natural hunger to learn more and stay ahead of the market is essential if you don't want to be overwhelmed. However, it is extremely difficult to develop the extra knowledge required without a basic understanding of business and investment principles.

The foundations of investing

The foundations of investing and financial planning fill a similar purpose to the foundations of a house. You can't build a house without foundations, and in the same way, you can't build wealth without a basic understanding of financial principles. When these financial foundations are acquired, additional information can be layered on top, which creates a sort of building of financial knowledge.

The best place to find these financial foundations is, according to Buffett, in the pages of Ban Graham and Phil Fisher's books. Buffett explained this at the 2004 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting of shareholders:

"But I know more about businesses than I knew 20 years ago, or 40 years ago. I haven't really changed the principles. The basic principles are still Ben Graham. They were affected in a significant way by Charlie [Munger] and Phil Fisher, in terms of looking at the better businesses. But I didn't leave Graham behind on that. And I really haven't learned any new fundamental principles."

As he went on to explain, once these fundamental principles are in place, it's easier to build out an understanding of different sectors and industries:

"I think you ought to learn everything you can about industries and businesses that — where you think you have the ability to get your mind around them if you work at them. And with that arsenal, you'll do very well, and if you've got the temperament for the business."

Munger then took over the conversation. He noted that Buffett had developed a lot over the previous few decades. While the basic principles he learned at the beginning had helped, they weren't the only skills that have enabled the Oracle of Omaha to achieve the record he has:

"But those basic principles alone, that he [Buffett] knew a long time ago, wouldn't have given him the ability to make the recent investment decisions as well as he's made them. It's a life-long game, and it you don't keep learning, other people will pass you by."

So, investing is a never-ending quest for information. For most people, this might seem like an overwhelming assignment. It takes a special kind of person with a special type of mentality to be an active investor for an extended period of time.

But if you do have the mentality, the best places to achieve the foundations required to be successful in the long-term are Graham and Fisher's books, as Buffett recommended. In may also be sensible to go back and review Berkshire's shareholder meeting transcripts as well.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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