LESSON ONE

THE SECRET SAUCE

“Our goal … is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.”

Let’s be clear.

Berkshire Hathaway founder Warren Buffett says he and vice chairman Charlie Munger (who passed away in November 2023) are not “stock pickers; we are business pickers.” This approach is called value investing. The goal is to focus on buying and holding top-performing stocks rather than trading stocks based on short-term price fluctuations. 

The secret sauce focuses on two important attributes of a business:

  • long-lasting favorable economic characteristics

  • trustworthy managers

Here are 4 questions Buffett and Munger ask themselves before investing in a business:

  • “Develop an idea of where a company is going to be in 10 years, if not for decades. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

  • “The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle.”

  • “We’ve never succeeded in making a good deal with a bad person.”

  • “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Here’s what Warren Buffett says gives you opportunities for investments.

TAKEAWAY CONCEPTS

dedicated savers • value investing • invest for the long term • pick businesses, not stocks • Integrity and talent • let the winners run • buy-and-hold strategy

HELPFUL
DEFINITIONS

  • The amount of profit realized from a business’s core operations after subtracting those expenses that are directly associated with running the business, such as the cost of goods sold (COGS), general and administration (G&A) expenses, selling and marketing, research and development, depreciation and other operating costs.

  • A distribution of a portion of a company’s earnings to some of its shareholders; they can be issued as cash payments, stock shares or even other property.

    Interesting: Start-ups and some high-growth companies, like technology or biotechnology sectors, rarely offer dividends because their profits are reinvested to help sustain higher-than-average growth and expansion.

  • The places where individuals and firms trade assets such as stocks, bonds, commodities and derivatives.

    The financial market is where all trades involving financial assets happen.

    The capital market is where companies and governments go to raise long-term capital.

    The stock market is where people buy and sell equity in listed corporations.

    The bond market is where people buy and sell bonds.