At age thirteen, the "Oracle of Omaha" to be, Warren Buffet, filed his first tax return, deducting $35 for his bicycle. By age twenty, he had finished his degree in business at the University of Nebraska with nearly $10,000 saved. Today, he is the chairman and largest shareholder of Berkshire Hathaway, which runs a diverse collection of businesses; it has stakes in companies such as Coca-Cola, American Express and Wells Fargo and its Class A shares trade at $213,000 per share. Investing in his company may make you rich, but the most rewarding investment one could make would be in studying what he has to say and teaching those who are willing to heed his advice as I did.
When I started following the financial markets at age fifteen the first thing I did was read a copy of The Intelligent Investor by Benjamin Graham, as Buffett suggested one should do. I didn't understand much of it then, but today I do. Investing is about value and though price is what you might pay it is value that you get. Investing takes time and requires an investor to look closely at the company they are considering investing in and asking the right questions. Has the company performed well consistently for years? Has the company managed to keep its debt levels low? Are profit margins high and increasing? How long has the company been public? Above all else, is the company undervalued?
If you do not consider these questions when you invest your money in stocks, your investing strategy is likely to consume itself and your money along with it. You should know everything that you can about the business you are buying into. Buffett once said that one should, "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years," and he could not be more right. Companies are real businesses which have real assets and cash flows, they have objectives and employees and are more than just their book value or their share price on any given day. Businesses have value, and that value rarely changes. As long as it is making the most profit it can, then it is a good business and will surely contribute to your wealth building efforts and is preferable to a stock you are paying a premium to hold based on speculation and brand reputation.
After all, it is common knowledge that the market rarely obliges anyone in. Secondly, it least favours the individual in a hurry and who would prefer to risk it all than allow time to work. Such people find themselves taking risks they cannot afford to take with money they cannot afford to lose. They fail to realise the paradox of money: that is, the faster you run, the less distance you will cover. Did you know that in the twenty-year time period between 1988 and 2008 the average stock fund investor earned only 1.9%? It is better to take the slow walk, for you'll get there much faster than the sprinter in most cases.
Buffett taught me that if one wishes to build wealth they should build businesses and that makes sense. The average S&P 500 company has a yield of about 1.5% after all, so if you were aiming to earn an income of say $100,000 per year you would need about $1.66 million worth of stock to earn that through dividend. If you included the amount you would require to cover the money lost to yearly inflation you would require approximately $3.33 million worth of stock, at least. However, if one builds a business instead, it both affords them the opportunity to do what they truly love and build a company that could produce as much as $400,000 in dividend earnings if it makes $4 million in profits a year, which is $300,000 more than you would make if you invested it instead. Building your own business also grants the luxury of being in control and the opportunity to build a family business if one wishes to; one that can grow generation after generation if managed well. The real question then, is why would you choose to invest your money anywhere else? Who knows, one day it could even become a Family Investment Company.
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