Book summary of Warren Buffett's Ground Rules by Jeremy C. Miller
Some of the best quotes in partnership letters from the world's great investors Warren Buffett's Ground Rules
in Two Words
Warren Buffett's Ground Rules(2016) is a study of the investment strategy of the great investor Warren Buffett. During the fundraising from 1956 to 1970, Buffett wrote a semi-annual letter to his partner, authored by Jeremy C. Miller analyzes and isolates some of the main strategies that investors can use to their advantage in the stock market. Who is it for - anyone who quotes the Gordon Gecko of Wall Street - gamblers trying to gain a foothold in the stock market - aspiring to the economics glory of the 1980s and 1990s
About the Author
Jeremy C. Miller is a New York based Investment Analyst of Leading Investment Company Mutual Funds. He has over 15 years of experience in the financial industry, working in equity shares and research. This is Miller's first book.
CHAPTER 1:
Be patient.
Thoughtful investment is better than hasty guesses. Have you ever thought that "life is very good, I just don't understand anything about this money?" Surely it is not so with you. Has happened. If there is one thing that people have in common, it is the desire to make as much money as possible with the least amount of effort.
And in the current era, seeing the success of people like Warren Buffett, the world's fourth-richest person, it seems easy to earn money from the stock market. A general idea is very famous, buy less and sell more. It is no surprise that making money from the stock market is not as easy as it seems. But the good thing is that Buffett has given us some ideas. When he started the Buffett Partnership in 1956, he used to write reports to his partner at that time.
He used to share his understanding of the market, his predictions and his investment ethics. Still, investing in the stock market is not easy. But with the help of letters written by Buffett for 14 years, you can start your career in the stock market. And what do you know if you are lucky and work diligently, then you too become rich. In this summary you will learn why buying the Monalisa was not a better financial decision in France. How did Warren Buffett make his first arbitrage deal despite not knowing anything, and why is it so important for investors to be patient?
So let's get started!
There's a very basic rule that people like Wall Street don't want us to know. This is the secret that helped Warren Buffett make $88.9 billion. Are you ready to go this secret? Investing is not rocket science but still it is difficult. People like it, the better one guesses, the better he invests. Nothing takes them more than the task of making investment estimates. But the difference is, when you talk about spectator ration calculation, then under this, an attempt is made to get rich by guessing about the unpredictable market. On the other hand, investors based on very careful analysis and values. Shop and then wait. Well-known billionaire Warren Buffett is an investor, he is from the Midwest but he attended business school in New York. His methodical and direct way of talking characterizes his letters and investment philosophy. Inspired by his mentor Ben Graham , Warren Buffett learned that most financial assets like stocks fall in line with their real value . When you buy a stock, you are buying a very small part of the business.
Changes in a stock's price over time show how the business is doing. If there is profit then the business grows further and the share price also increases. But if the price of the business falls, there is a scandal, etc., then the share price also falls. Sometimes the value of the business cannot be estimated from the stock price . Those investors who buy shares in a company whose price is low in the market, then they wait for the market to correct, this is a different way to make money.
The aim is only to understand what the market should do and not when it should be done. If you think that the market price will reveal the real value of the business, then you can expect profits. Due to this thinking, you will be saved from selling when the market falls. And for this patience you will get compound interest and this is the cost of long - term investment . Compound interest means to reinvest the money that came in your profit so that the pie can be used to earn money. Einstein called compound interest the eighth wonder of the world. He said that "those who understand compound interest remain in profit and those who do not understand suffer losses."
Buffett's favorite story shows the power of compound interest in the French government's decision to buy the Monalisa painting. King Francis I spent $20,000 for a painting in 1540. If it were invested with 6% compound interest, then by 1964 France would have 1 quadrillion dollars. By now you must have got an idea of the power of investing, next we will know how to develop your own investment style.
CHAPTER 2:
One thing is common among investors, they do their majors with great dedication.
Warren Buffett has always been a very confident investor. Even though he was an experience fund manager, he still considered New York's famous stock index Dow Johns Industrial Average as his competition. His only job was to move his fund faster than the market pace . It sounds great but it was not that easy either. We all know how stressful it is to check your bank balance after spending a great weekend , equally scary to step on a weighing machine while losing weight . For many people, handling the anxiety of failure is a big deal. But to become a successful investor, you have to face those concerns.
Careful measurement , sound analysis and sticking to your job even when the market is going down is the way to become a successful investor . Let us tell you directly in Buffett's style. The reality is that many people do not have the judging quality to beat the market. It was a big deal for Buffett to deliver more than 7% profit in a year. But you will be able to take advantage of compound interest only if you can outperform the market for financial gain. Knowing what to major and then doing it well is a guarantee of being on the right track.
So how do you major? You have to track your investment everyday to see how it is doing in comparison to the past, and be patient when the market is down. It takes energy, commitment and honesty. Overall, know enough that you need to know when to wait for the market to correct and when to sell your shares. You do not have to measure your result only in comparison with past performance. The result of each year should also be measured in comparison to the market. This means if the market is in loss and you have lost less than that, it is also a win for you. There is also a good news for you, when Buffett was a young investor, it was very difficult in today's comparison to perform better than the market.
In today's era because of index fundswas difficult. This task is easy in today's era because of index funds. Starting in 1975, an index fund combines slices of multiple companies on any one stock exchange. Meaning its return matches the overall losses and gains of the market. Those who do not have the time and energy to invest, Buffett recommends buying the index. Otherwise, compulsive measuring, ie understanding the market by applying all the rules very carefully, is the only way to drive yourself on the right track. Young investors should focus on buying shares in an undervalued company, this is called Buffett Generals.
Once you understand this major task, you can start developing your investing style. Every investor is unique. Your investing style should reflect your personality , objectives , funds and in particular your ability . If you are an alpaca rancher then you should not try to get rich with the help of computer chips. Here is another good news for you, that if you are a young investor who has less money, then this is an advantage for you in comparison with investors who are managing more funds. This means you can invest in that company which is not listed in the stock market, which can give you more profit. Once you have more money, you will need a better deal to convert the result.
When Warren Buffett started his fund in 1956, he had only $ 100,000. By 1966 his fund was worth $1,90,000. They believe this return was achieved because of their focus on small and correspondingly less impressive investments. The main message here is - Young investors should focus on buying shares in an undervalued company called Buffett Generals. Buffett's best skill is to estimate the value of any company with patience. In the beginning, he focused on buying general, for which he says that "this is a good business at a low price." Meaning the quality of the companies was good but for some reason their price was not so good in the market. His patience was beneficial.
Most of the generals remained in his portfolio for many years . Buffett preferred to buy shares in companies that were dead more than alive, meaning they were running in liquidation. In this way, if the business started going to waste, he could liquidate it (the process of winding up the company by giving the company's assets to its owners, called liquidate) so that their money would not be wasted. This type of business is called net-net. More cheap stocks and net-nets are not very popular either. Buffett calls these "cigar butts". But when Buffett looked back after a 12 - year career in investing , he realized that he was the best in terms of average return . As his business grew, Buffett's definition of value changed.
He started moving towards the quality of the business ahead of the cheap stock price list , focusing on whether the earnings were sustainable or not . As his experience increased, instead of buying a good business at the best price, he started focusing on buying the best business at a reasonable price. Once you have a good experience as an investor, you can become involved in managing one of your investments. Buffett may ask to walk straight, but you'll need to follow some other guidelines, which we'll talk about later.
CHAPTER 3:
If you take more risk consciously, then it can also benefit you more.
When Warren Buffett was young, he used to buy 6 packs of Coca Cola from his grandfather's shop for 25 cents. And then he used to sell each bottle for the cost of a nickel. Surely it was risky work. If someday the neighborhood children were not thirsty , they would have to suffer , but if those children were thirsty , they would have made a profit of 20% on every six pack bottle . Buffett did not know, but he made his first attribute in the sentence of that 25 cent Coca Cola bottle. He was making money on the basis of different prices of Coca - Cola in two different markets , one in the store and the other in the neighborhood children 's market.
Artibase is one way to bet on what will be the price of a company in the future. The advantage here in the case of Artibase can be very attractive but to maintain it you have to understand the business and their market. When any product is part of the company, it is called merger artifact. Merger was Buffett's specialty in the early days of artifact investing. He used to buy a product of one company and he knew that when it would be combined with another company, its price would increase. The returns obtained in merger artwork are very attractive, but the risk can also be very high. That's why this job is difficult for average investors. If many things do not come under your specialized field, about which you have read very well, then it is better to leave it.
But experience investors who do not want to take the risk of artifacts can take the help of "controls". Control here is the situation under which you buy the product of a company listed on the public stock exchange, whose power you have the power to influence the way it works. You must have guessed that in such a situation, a stressful situation can be created between the company owner and the board of directors regarding the way they work. In the early days of his career, Buffett felt that he was saving the company by making such changes.
But as he matured more he stopped being involved in the controls , which make things uncomfortable or worse in the middle of the group . Even then, his basic investment principal did not change. In the next lesson, we will learn why persistence is what makes his investment career so successful. Your methods may change as the market changes, but your principles should not change. Walking with the crowd can be beneficial. If people are running away from something that you cannot see, then you better go with them. But doing so can create problems when it comes to investing, most people are not better than average. So to become a successful investor, you have to do something different from the crowd. Warren Buffett's Investing Style suggests that there is only one situation in which you should put your money on the line - when you have a complete understanding of the environment and the whole picture. Apart from this, you should wait in some other condition, even if other people are making money then what happens. Warren Buffett has always been a careful investor. When he started his career in investing in 1956, the stock market was considered huge.
Instead of changing itself, the stock market started confusing people more. Buffett not only maintained his strategy but also strengthened his ultra conservative investing approach. And other good investors were making a lot of money. In New York Jerry Sai started a different type of investment , which took advantage of the general public 's desire to have a speculation . Jerry's investment approach was the exact opposite of that of Buffett, he would have been quick to own a stock and then exit. This approach of Jerry was also effective for some time. Despite his fund taking both losses and gains as the markets changed , he made a lot of money . But Buffett knew it wouldn't last long. When the market changed in 1966, Buffett became active. He announced that he would no longer take any new partners and halved his performance goal. His fund started performing well , its return in 1968 was 58.8 . But Buffett knew when he should step back.He was taking a risk in a market that crashes every now and then. Jerry's last round was just about to arrive and he too saw it coming. He sold his funds at the right time in 1968 .
In the early 1970s, the Dow experienced a huge speculation crash after the recession. Buffett did not suffer any loss because he took all the money out of the market. Jerry barely survived the failure but his investors lost 90% of their assets . The decision-making ability that was inside Buffett is needed by every investor. Know what you think, what your investment style is and then play the big game when the opportunity comes. You don't have to face defeat.
Overall, making money from the stock market is not an impossible task. Anyone can do this work. But it cannot happen overnight and if you do not take it seriously then it will not happen at all. Measure carefully, be persistent and most of all, be patient, by following these three advice of Buffett, you too can become a successful investor.
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