Buffett’s Formula for Success: Coca Cola, Dairy Queen, & Snowballs?
10 Jul 2017
Here at Premier Investments of Iowa, I am often teased by other advisors about how much I like Warren Buffett (it’s all in good fun, of course). Bob Bruce, host of the BBRE on KXEL and our Sunday morning TV show, even jokes that I might have a poster of Warren in my YMCA locker I don’t. However, I have been a huge fan of Warren’s since I first started in the investment business in 1993. Maybe it was the appeal of Warren as a “Midwestern boy taking on Wall Street” or the fact that since I’ve been following him since 1993 the share price of his company (Berkshire Hathaway) has increased from $8,854/share to (are you sitting down?) $254,990/share today.
Warren’s company Berkshire Hathaway (named after a textile mill Warren bought) is a holding company that owns shares of company stock, but also owns companies outright, including MidAmerican Energy, GEICO, Dairy Queen, BNSF Railroad, and Fruit of the Loom.
So what’s the secret to Warren’s success? In a 2008 biography about the Warren by Alice Shroeder entitled “The Snowball” Warren declares, “Life is like a snowball. The important thing is finding wet snow and a really long hill.” Come on Warren! There has to be more to investing and life than that? On further review, as I’ve read the book several times and I often refer to it on our AM600 radio show, here is Warren’s 5 step formula for investing
#1) INTRINSIC VALUE: When you know what the future value of the income generated from this company or stock is.
#2) COMPETENCE LEVEL: Only buy businesses or stocks of companies you really understand.
#3) FOCUS: Do you have the time, knowledge and desire to dedicate 6 to 12 months in research.
#4) MARGIN OF SAFETY: Can you buy the stock or company using income generated from another investment (Warren especially good at reinvesting the “unused” premiums he receives from the insurance companies that he owns).
#5) COMPOUNDING: Let the income generated from 1 business invest in the next and have the income generated from that business invest in the next until you have a “compounding” effect (or it might be like “finding wet snow and a really long hill.”)