WARREN BUFFETT’S INVESTMENT TENETS 1 – BUSINESS TENETS

The Warren Buffett Way

WARREN BUFFETT IS ONE OF THE WORLD’S MOST SUCCESSFUL INVESTORS. HE BASES HIS INVESTMENT PHILOSOPHIE ON CERTAIN TENETS (PRINCIPLES). KEEP IN MIND THAT THESE TENETS ARE NOT ONLY MEANT FOR INVESTORS. YOU SHOULD ALSO USE THEM IN CASE TOU INTEND TO ESTABLISH A NEW BUSINESS. WARREN BUFFETT’S INVESTMENT TENETS 1 – BUSINESS TENETS DEALS WITH THREE PRINCIPLES ABOUT THE BUSINESS. FOR A DEEPER INSIGHT, DOWNLOAD THE BOOK “THE WARREN BUFFETT WAY” ON TOP OF THIS ARTICLE. KEEP IN MIND THAT NOT ALL TENETS APPLY TO ALL BUSINESSES.

THERE ARE THREE BUSINESS TENETS YOU HAVE TO OBSERVE TO HAVE SUCCESS.

  1. YOU MUST HAVE AN SIMPLE AND EASY TO UNDERSTAND BUSINESS.
  2.  THE BUSINESS MUST HAVE A STABLE OPERATING PAST (OF COURSE THIS DOESN’T APPLY TO STARTUPS).
  3.  WILL THE BUSINESS HAVE A REALISTIC CHANCE  TO BE SUCCESSFUL IN FUTURE? (SEE: THE WARREN BUFFETT WAY, P. 61 FF.)

AD 1. SIMPLE AND EASY TO UNDERSTAND

IF YOU DON’T UNDERSTAND THE BUSINESS YOU WANT TO INVEST IN, LEAVE YOUR FINGERS OFF. THE SAME APPLIES IF YOU WANT TO ESTABLISH A STARTUP BUSINESS. IT IS NOT ENOUGH TO KNOW HOW THE PRODUCTION PROCESS WORKS. YOU MUST KNOW SOMETHING ABOUT THE POSITION OF THE INVESTMENT TARGET IN THE MARKET. MOST OF THE INTERESTING ISSUES FOR INVESTORS AND STARTUP ENTREPRENEURS ARE LYING IN THE FUTURE. PREDICTING THE FUTURE OF A BUSINESS IS ALREADY DIFFICULT ENOUGH IF YOU KNOW THE BUSINESS. IT NEARLY BECOMES IMPOSSIBLE IF YOU DON’T UNDERSTAND ANYTHING ABOUT THE BUSINESS. OF COURSE, THE SAME APPLIES IF THE BUSINESS IS TOO COMPLICATED IN ITS STRUCTURE.

AD 2. OPERATING PAST OF THE BUSINESS

AS I SAID BEFORE, THIS PRINCIPLE DOESN’T APPLY TO STARTUP BUSINESSES FOR OBVIOUS REASONS. TO QUALIFY FOR A BUSINESS TO INVEST IN, THE BUSINESS MUST NOT ONLY HAVE POSITIVE RESULTS IN THE PAST. NECESSARILY, THE BUSINESS MUST ALSO HAVE CONSTANT POSITIVE RESULTS. THERE IS NO USE, IF THE VOLATILITY IN THE RESULTS IS TOO HIGH. CONSEQUENTLY, A BUSINESS WITH SMALL, BUT CONSTANT INCREASES IN PROFIT IS PREFERABLE. ON THE OTHER HAND, A BUSINESS THAT HAS HIGH PROFITS ONE YEAR, AND ZERO IN THE OTHER YOU SHOULD AVOID. THAT’S BECAUSE THE RISK IS TOO HIGH THAT ONE DAY IT WILL GO INTO MINUS.

AD 3. THE BUSINESS MUST HAVE A POSITIVE OUTLOOK

OF COURSE, IT IS DIFFICULT TO FORESEE THE FUTURE. OBVIOUSLY, THAT ALSO APPLIES TO FUTURE RESULTS OF BUSINESSES. NEVERTHELESS, IT IS NECESSARY TO HAVE SOME IDEAS ABOUT THE FUTURE DEVELOPMENT. THEREFORE, THERE ARE SOME INDICATORS WHICH YOU CAN GIVE YOU SOME HINTS. THE PAST RESULTS OF THE BUSINESS ARE ONE OF THEM. FOR A STARTUP BUSINESS, IT IS MORE DIFFICULT TO PREDICT. BUT, THERE ARE MORE ISSUES THAT PLAY A ROLE HERE. FOR EXAMPLE, DOES THE ENTERPRISE OCCUPY A NICHE TO ATTRACT MORE CUSTOMERS? ANOTHER ONE, IS THERE ENOUGH CAPITAL IN THE BUSINESS TO SURVIVE RAINY DAYS?

YOU SEE, THERE ARE ALREADY MANY ISSUES TO OBSERVE CONCERNIN G THE BUSINESS YOU WANT TO INVEST IN. ALSO, YOU MUST BE AWARE OF THE DIFFICULTIES WHEN YOU START A BUSINESS.

WARREN BUFFETT’S INVESTMENT TENETS 1 – BUSINESS TENETS IS THE FIRST PART OF THIS SERIES. NEXT WEEK, I’LL HAVE A LOOK AT THE MANAGEMENT TENETS. FOR MORE INTENSIVE INFORMATION, TAKE A LOOK INTO THE BOOK. YOU’LL SEE, IT’S WORTH IT.

 

 

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