Stewart Hsu

Warren Buffett is the investor’s investor. He’s arguably the most successful investor in history, the Tiger Woods or Michael Jordon of the investment world if you will. His company, Berkshire Hathaway has achieved a stunning 21.1% annual compounded rate of return over the last 43 years.

$100 invested in Berkshire in 1965 would be worth over $310,495 in 2008. Einstein said “the most powerful force in the universe is compound interest,” and it shows.

Perhaps what is most remarkable and most telling is the consistency of results over such a long period of time. Warren was born to invest, he’s been a student of it since he was 11. Charlie Munger, Berkshire’s Vice-chairman, calls Warren “an incredible learning machine”.

I’m reading The Essays of Warren Buffett: Lessons for Corporate America, which is essentially a compilation of Berkshire’s annual reports organized by topic, i.e. Corporate Governance, Corporate Finance & Investing, Mergers & Acquisitions, Accounting & Valuation, etc. As a fellow investor, I’m always looking to learn and expand my knowledge and this book is truly packed full of practical, insightful and easy-to-understand investing wisdom that applies not only to securities/companies but all investments in general.

Warren Buffett’s Most Important Investment Advice: Margin of Safety

Buffett learned the art of investing from Benjamin Graham as a graduate student at Columbia Business School in the 1950s and later went to work for him. Buffett highly recommends people read Graham’s “The Intelligent Investor”; he reiterated this suggestion at the 2008 Shareholder Meeting this year. In the final chapter of that book, Graham states “Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” Upon which Warren remarks, “Forty-two years after reading that, I still think those are the right three words.“

The principle is that one should not make an investment unless there is sufficient basis for believing that the price paid is substantially lower than the value being delivered. This advice may sound obvious, even a bit trite, but how many of us actually follow it in practice? It’s another way of preparing for the unexpected. And if you look at Warren’s results over 42 years of conscientiously applying this idea, we will all do better with our investing by keeping in mind these 3 simple words: Margin of Safety.