Lessons from Warren Buffett - XXXVI - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Lessons from Warren Buffett - XXXVI

Apr 24, 2008

In the previous article, we read why Warren Buffett prefers long periods of inactivity when it comes to making investments. Let us go further down the same letter (1996) and see what other investment wisdom he has on offer. As ordinary investors, we would expect Buffett to be a prognosticator of the highest order and skillful at investing in industries that are going to emerge as the winners in the future. After all, if one is compounding money at such a great rate, one has to stay ahead of the crowd and invest in every potential multi bagger there can be. However, nothing could be further from the truth. The master, contrary to what we think of him, detests change when it comes to investments. Instead, he prefers industries with longevity and stability to the ones that grow exponentially in the initial years but eventually decline in few years.

EV Stocks: Which is Tanushree's Top Pick?

The reasons would not be difficult to find. As individuals, we always endeavor to stick with the tried and the tested, especially when the stakes are high. But in investing, the greed of earning outsized returns is so high that we tend to invest in companies that show a lot of promise by being in industries at the forefront of technological breakthroughs but have little by way of earnings. This may not be such a good idea because while a lot of companies try to reach the top, very few manage to do so and hence our odds of zeroing in on a winner are not in our favour. Further, there is also an additional risk of technological obsolescence associated with the products of such companies, which may prove to be a big drain on cash flows, thus lowering returns. Little wonder, the master prefers businesses that are able to grow their profits for many years into the future and whose products are not impacted by the dynamics of technology that otherwise improves the standard of living of society.

Let us now read the master's thoughts on the issue in his own words.

"In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek."

"I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good. As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride."

Lessons from Warren Buffett Series - Previous article | Next article | All Articles
Try the Warren Buffett Quiz

Equitymaster requests your view! Post a comment on "Lessons from Warren Buffett - XXXVI". Click here!

  

More Views on News

Top Indian Drone Companies to Watch Out for in 2022 (Views On News)

Jan 21, 2022

Several companies are adopting drone technology for regular business operations.

Insiders are Buying into these 6 Stocks Aggressively. More Details here... (Views On News)

Jan 19, 2022

While promoter holding is an important parameter, it should not be the sole reason for buying a stock.

These Penny Stocks Started 2022 with a Bang. This is what You Need to Know... (Views On News)

Jan 19, 2022

These penny stocks are up more than 30% already since the beginning of the year.

8 Things to Know About the Vedant Fashions IPO (Views On News)

Jan 28, 2022

The owner of ethnic clothing label 'Manyavar', Vedant Fashions' shares are commanding a premium of Rs 105 in the grey market today.

How to Evaluate the LIC IPO? podcast (Views On News)

Jan 28, 2022

There is a credible alternative to buying insurance stocks.

More Views on News

Most Popular

Buffett Style Investing

A detailed peek into how Warren Buffett identifies the value of a stock, his concept of margin of safety and more.

These 5 Penny Stocks are Held by Rakesh Jhunjhunwala. Worth a Look? (Views On News)

Jan 18, 2022

Rakesh Jhunjhunwala is holding these penny stocks in his portfolio for several years now.

Tech Mahindra's CTC Acquisition: Too Expensive? (Views On News)

Jan 18, 2022

Tech Mahindra's acquisition of European IT-company fails to excite investors.

5 Hidden Tata Group Companies to Add to Your Watchlist (Views On News)

Jan 18, 2022

Here's all you need to know about these five Tata group stocks that aren't as popular as the others.

Insiders are Buying into these 6 Stocks Aggressively. More Details here... (Views On News)

Jan 19, 2022

While promoter holding is an important parameter, it should not be the sole reason for buying a stock.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jan 28, 2022 (Close)

MARKET STATS