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How You Can Think Like Warren Buffett

Warren Buffett

What is so great about Warren Buffett?

Well, he basically transformed a dying textile company, Berkshire Hathaway (NYSE: BRK-B), into one of the largest conglomerates in the world and in the process, amassed billions of dollars in personal wealth (Buffett’s fortune is estimated to be US$65.1 billion currently by Forbes). And oh, he did it mostly by just the ‘simple’ act of investing either in publicly-traded equities or privately-held businesses.

This might raise the question of how exactly did he accomplish all that he did. To answer that, let’s take a closer look at two particularly important aspects about Buffett that separates him from the rest of the pack.

1. Thinking you have only 20 attempts at success

Buffett has been giving this particular piece of advice for a long time: When you invest, imagine you have a ticket with only 20 slots that would represent all the investments you can make in your life.

This would force you into two things: 1) You would to look at your investments really carefully and; 2) you would think about your investments with a very long time horizon. If you can only make 20 investments in your life-time, you wouldn’t want to waste any of the tickets by making hasty, short-term decisions.

Framing our thinking about investing like in the above is particularly useful for investors as it teaches us that we do not need to buy into every investment that we come across – it is okay to miss out on any investment if we do not fully understand it. As investors, all we need to know is where our strong spots lie and then stay within that boundary.

2. Thinking in terms of probabilities

Life is inherently uncertain and so is investing. There is never a sure bet.

No matter how much you know about a company, there is a still the possibility of making a mistake when you invest in it. What makes Buffett such a great investor is that he looks at every investment in terms of the probabilities of success and failure and sizes his bets accordingly.

If he is more comfortable with a particular investment, he will invest a larger amount. If he feels there is a higher chance of the investment not working out as planned, he might invest a much smaller amount or just pass it up completely.

This is a rather complex skill to master but would certainly be very useful for all of us to learn. For example, if you are looking at the property space, you might analyse both CapitaLand (SGX: C31) and City Developments (SGX: C09) to know their similarities, differences, strengths, and weaknesses. With those information in hand, you can then assess the probabilities of each company weathering any property downturns safely and then bet on the one with a higher chance of success. This of course, has much broader applications than just for the two aforementioned real estate giants.

Foolish Summary

Although Buffett has many more great attributes that has helped mould him into the Oracle of Omaha today, mastering just those two skills above should be able to make us a good investor by any standard.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.

See all posts by Stanley Lim, CFA


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