I recently read Warren Buffett’s Ground Rules. It’s a book about Warren Buffett’s investing principles in his partnership years (1956 – 1970), the years before Berkshire Hathaway. The idea of the book is that he managed a relatively small sum back then so the principles are more applicable to individual investors.
The book is an investing book, but also I learned life lessons from it. Here are eight timeless life lessons from Warren Buffett that can help you get ahead in life:
1. Invest in Your Knowledge
While reading the book, I was impressed by the depth of Buffett’s investing knowledge. He was only 25 years old when he began! Now I understand why he became the only student of his mentor, Benjamin Graham, who ever got an A+.
How could he have such depth of knowledge? The answer is that he invested in it. He spent a lot of his time daily on reading.
The lesson here is clear: you should invest in your knowledge. Knowledge is power and having a knowledge advantage will put you ahead in life.
2. Do Your Homework
In the world of investing as in other areas of life, many people do things without really knowing what they are doing. They just blindly follow the crowd or some “experts”.
Not Buffett. He always knew what he was doing. Why? Because he had done his homework. Before making an investment decision, he spent countless hours researching and analyzing the facts. In fact, he was so immersed in it that he could recite the financial reports of many companies!
So, whatever it is that you do, do your homework. Know what you are doing.
3. Acknowledge What You Don’t Know
Related to the previous point, you should be willing to acknowledge what you don’t know. Many people are too proud to say that they don’t understand something. And the result? They end up doing something they don’t understand.
Buffett didn’t hesitate to say that he didn’t understand an opportunity enough to invest in it. In such a case, he would just pass.
4. Be Frugal
Buffett is well-known for his frugal lifestyle despite his immense wealth. The book gives us a reason for that lifestyle: his understanding of compounding.
He knows that a small amount of money today, if invested, will become a huge amount years from now. It’s even said that Buffett thought of a $10 haircut as actually costing him $300,000!
Yes, that’s a bit extreme, but the point is clear: any unnecessary expenses today will cost you a lot in the long term.
5. Stay True to Your Principles
There are times during the partnership when other fund managers, using speculative methods, made more money than Buffett’s partnership. When that happens, it’s easy to get tempted to follow their methods. But Buffett stayed true to his principles. He had the determination not to follow the crowd.
Staying true to your principles doesn’t mean that you don’t evolve over time. To the contrary, you do need to evolve as time changes.
Buffett did this by evolving the principles he lived by. He stayed true to his principles but the principles themselves evolved over time. One of his principles evolved from “buying a fair business at a wonderful price” to “buying a wonderful business at a fair price”.
The only way to make a superior return is to concentrate your investment. In Buffett’s case, he was willing to invest up to 40% of the fund in a single opportunity. There is still some diversification, but not too much. Why? Because it’s better to invest in your best idea than in many mediocre ones.
Similarly, you should have focus in your life. You still need some diversification (e.g. in your social life), but you need to concentrate your effort when you find a great opportunity.
8. Know When to Move On
In 1970, Buffett decided to close the partnership because of the market situation and his own personal interest. He then transitioned into managing Berkshire Hathaway.
The lesson here is that you should know when to move on. There are seasons in life and when the time comes to move to a new one, you should be willing to leave the old one. Many people become so comfortable with the old season that they hesitate to move to the new one.
Fascinating. I would like to hear more expert opinions on this 🙂