"BUFFETT: The Making of an American Capitalist by Roger Lowenstein"
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Warren Buffett is widely regarded as the most successful investor in history
Of course, since most everybody's mindset is under the capital gains illusion, I was curious to see how Warren Buffett would stack up as an income investor.
Most people know that Warren E. Buffett has multiplied the market value of Berkshire Hathaway to a very high multiple of what he bought it for back in the early 1960s. And if you were one of the first people to invest your money in a partnership with Warren Edward Buffett back when he started out in 1955 (long before Berkshire Hathaway), he has multiplied the market value of your money many more times over.
There's no doubt that, measured by market price, Buffett has been enormously successful and has raised the paper value of many people.
Therefore, I read this book to see how this might apply to income investing
First, I must say that is book is primarily a Warren Buffett biography, not a book on investing, so a lot of material is about Buffett the person. Most of that is not particularly interesting, except for his surprisingly unconventional domestic relationships.
(After their children were grown, Buffett's wife moved out of their house. But they maintained a loving and public relationship. Also, his wife suggested that he get to know a local woman named Astrid, and was happy when Astrid moved into Buffett's house in her place.)
What struck me is that although Buffett's goal is to increase the market-measured price of his portfolio, he USES income investing.
That is, he looks for good businesses. He measures this through their financial statements -- balance sheets and income statements.
He looks for businesses that are earning a lot of money and which he believes will continue to earn a lot of money in the future
Without the need to reinvest that money in capital equipment (With a few exceptions which were mistakes: he got Berkshire Hathaway out of the textile business and he sold US Air.)
That's why Buffet likes paper businesses, such as The Washington Post, American Express and Geico Insurance.
He used the income generated by the early businesses he bought, such as See's Candies, to buy bigger businesses.
I could not find even one example where he bought a company that was not making any money just because he thought he could sell it for more money in a few months or few years.
Isn't that amazing?
Warren Buffett wants an investment to put cash into his pocket while he's still an owner of the business
Yet ordinary stock investors buy stock in a company that doesn't pay any dividends, just because they think the market price will go up in a few months or years.
Once Buffett buys a company, he keeps it for as long as it is a good business generating cash profits.
I'm not the first to point out the famous Buffett quote that his favorite holding time is "forever."
He will sell a business if he believes that its future prospects are declining.
So, in many ways, Warren Buffett invests as I urge you to:
1. Buy stocks of good businesses that pay you high dividends.
2. If you don't need to live on your current income, reinvest the dividends so that your portfolio value keeps growing because the number of shares you own keeps growing. Which will make your dividend checks grow as well.
3. Hold the stocks of good businesses for as long as they're good businesses paying you dividends.
Of course, billionaire Buffett does a few things you can't, because of all the money at his disposal. He sometimes intervenes in the management of companies he owns, etc.
Still, the essence of what he does and what I advocate is similar.
He uses the income streams from his earlier investments to make bigger investments, then measures his success by market price gained. To minimize taxes and transaction costs, he won't sell an investment unless he's forced to.
I advocate you focus on maximizing the income streams
In the long run, the market price of your stocks will go up, but who cares? I also advocate you minimize taxes and transaction costs by not selling unless forced to.
Now, you may know that Berkshire Hathaway has not paid its shareholders a dividend in about 40 years. The one time it did, Buffett claims that the rest of the board voted for it while he was in the bathroom.
So I do NOT advocate you go out and buy a share of Berkshire Hathaway.
Invest the way Warren Buffett invests, NOT the way Berkshire Hathaway shareholders invest
Yes, they have enormous paper profits -- but no income from it.
This Warren Buffett book doesn't explain everything about the Buffett way, but does go into his relationship with his mentor Benjamin Graham, his partner Charlie Munger and also another famous Graham student Peter Lynch.
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