Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Lessons from Warren Buffett - LVIII - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Oct 22, 2008

    Lessons from Warren Buffett - LVIII

    In the previous article based on Buffett's 2006 letter to shareholders, we covered his tribute to a fellow value investor Walter Schloss whereby he discussed the latter's value investing based investment strategy and how he (Schloss) had beaten the markets by a huge margin over a long investment horizon.

    Let us now move to the letter from the year 2007 i.e., his most recent letter to the shareholders of Berkshire Hathaway and see the investment wisdom on offer therein.

    The Three Gs
    Let us suppose that you are planning to lock away the surplus money with you in a bank savings account and three different banks approach you with three different offers:

    1. The first bank takes a one time deposit and pays you a very attractive interest rate, which will continue to increase as years pass by;
    2. The second bank pays a decent interest rate but also asks you to increase your yearly deposits at a fixed rate, which will also bear a decent interest rate; and
    3. The third banks pays you a very poor interest rate and also asks you to increase your deposits at a high rate, which in turn yield the same poor interest rate.

    It is difficult to imagine a depositor choosing any other sequence than the one mentioned above if asked to rank his preferences. However, while investing in companies, the very same depositor fumbles quite often. He ends up investing in firms that exhibit the characteristics of deposit schemes similar to options b) and c) listed above.

    Warren Buffett has mentioned that virtually all the businesses could be classified on the basis of three characteristics mentioned above and he has gone on to name these businesses as Good, Great and Gruesome. Needless to say businesses of the 'Great' kind are what excite him the most and he tends to avoid the businesses labeled 'Gruesome'.

    Let us see what he has to say on the characteristics of each of these businesses:

    The golden words
    On 'Great' businesses, Buffett says, "Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There's no rule that you have to invest money where you've earned it. Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."

    Furthermore, Buffett likens 'Good' businesses to industries like the utilities where the companies will earn a lot more 10 years from now but will also have to invest a substantial amount to achieve the same. The returns though are likely to be satisfactory.

    Let us now move on to businesses that Buffett has labeled as 'Gruesome' and he proffers the following view on them. He says, "The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers."

    Indeed, if investors stick to 'Great' and 'Good' businesses in their investment lifetimes and buy them at attractive prices, they are unlikely to end up poor.

    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 - LVIII". Click here!

    24 Responses to "Lessons from Warren Buffett - LVIII"


    Nov 10, 2013

    The concept is Simple but effective - just like many other concepts of warren Buffet. In the Indian context, my own assessment is Private Banking sector, Pharma (Export oriented) sector, and IT sectors are Great. FMCG, Telecom are good. Airlines is Gruesome. Iron and steel, Power Generation and Infrastructure sectors could become good or even great - if a Government which 'decides and allows' is ruling the country - not otherwise.

    Like (1)


    Jan 6, 2013


    Earnings on an Investment depends on the decision where to invest and how long to invest but selecting the business/company where to invest is a critical question. This has answered and suggested in Lessons from wannen buffet are true experiences and useful for every one.

    Thanks a Lot,

    Like (1)


    Oct 5, 2012

    please mail the lessons form warren buffet thanks

    Like (1)

    J Makwana

    Sep 10, 2012

    It is pleasure with benefit to have knowledge when we read something from the great Warren Buffet... I request you to Mail me directly all the articles related to him, particularly, "Lessons from Warren Buffet "..THANKS..

    Like (1)

    Ramesh Gadapa

    Jul 4, 2011

    Dear Sir,

    Lessons from Warren Buffet is very interesting & eye opening.
    I shall be highly obliged if you send all of "Lessons from Warren Buffet" to my mail id.
    Thanking You,
    Ramesh Gadapa

    Like (1)

    John Mathai

    May 16, 2011

    Dear Sir,

    Lessons from Warren Buffet is very interesting & eye opening.

    I would like to have full set of lessons right from Lesson 1. i shall be highly obliged if you can send the same in my mail.

    Thanking you,

    John Mathai

    Like (1)

    salim morbiwala

    Apr 2, 2010

    Dear Sir,

    Thanks For The Lessons from Warren Buffet If We understand it well surely will become smart investor and earn good profit


    Like (1)


    Mar 27, 2010

    Dear Sir,
    Please send all of "Lessons from Warren Buffet" to my mail id its very interesting and useful for future developement for every individua

    Like (1)


    Mar 26, 2010

    its very interesting and useful ......


    Like (1)

    Prakash Bendale

    Sep 27, 2009

    Dear Sir,
    Please send all of "Lessons from Warren Buffet" to my mail id its very interesting and useful for future developement for every individual

    Like (1)
    Equitymaster requests your view! Post a comment on "Lessons from Warren Buffett - LVIII". Click here!

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 03:36 PM