Warren Buffet The Snowball – Alice Schroeder

This is a summary presenting the top 5 investing takeaways from Alice Schroeder’s autobiography of the man: The Snowball: Warren Buffett and the Business of Life

Power of Compounding Income

  • Money comes easier the more you have of it
  • Started Berkshire that take 50% of the upside but cover 25% of the downside. That accelerated the growth of his fund
  • Stable growth over long periods leads to exponential growth in capital

Be Very Skeptical of New Paradigms

  • Example of this is the dot com crash
  • Everyone expected 20% growth per year but Buffet concluded that it can be so if 1) interest rates are low and will continue to be so, 2) share of the economy that goes to investor increase and 3) economy starts to grow faster
  • Difficult to avoid herd mentality
  • Should focus on an inner scorecard, which is to make decisions based on self-thought vs. external opinion

Stay within your Circle of Competence

  • Invest in only things you know and have a high degree of confidence in, and not guided by ignorance
  • Example would be to focus on industries aligned with your profession or invest in companies in your domestic market

Use a Margin of Safety

  • Room for error when predicting a stock
  • If you think stock will cost 50 in the future, leave room for a margin of safety and invest if only price dropped to as an example 35

Invest where there is a Toll Bridge

  • Charlie Munger, Warren’s partner focus was more in competitive advantages of the company
  • Example is when a bridge is built, the bridge can increase price in a monopolistic way because there isn’t another alternative to get across
  • Taking this example to companies, look for companies that have such a high competitive advantage that there is a huge barrier to entry and can continue to increase prices
  • As quoted by Warren Buffet, “It’s fair better to buy a wonderful company at a fair price than a fair company at a wonderful price
  • Examples of competitive advantages: Brands (Cola-Cola), Network Effect (Youtube, Facebook), Stickiness/High switching costs (SAP), High set up costs (Railroads)