Many investors and business people across the world admire Warren Buffet's business model and try to emulate. However, it has proven to be tough task. This article attempts to help whoever wants to try Berkshire Hathaway (holding company of Warren Buffet’s businesses) model.
Step 1: Become an Analyst
Buffett followed his master, Ben Graham, who taught him value investing. Through in-depth analysis he would find forgotten or discarded companies, trading at deep discounts to the value of their net assets.
He had passion for analysis & over time he became an expert. He would find companies which offered ‘value arbitrage’ i.e which he could extract a little bit of value. These stocks were often ‘not so great’ companies, but were trading below liquidation value, so offered ‘value arbitrage’. Buffett called them “cigarette butts,” because like discarded butts—from which one could enjoy one last puff—they offered one last bit of value. While most investors looked for some great companies, Buffett mastered extracting that value from such “cigarette butts.
Step 2 – Take calculated ‘big’ risks
When Warren Buffet decided to go big, he decided to close his investment partnerships. Then he bought a textile mill in late 1960s and took charge as its main decision taker. He had no plans in dominating textile industry, but using the funds of the textile mill he bought and insurance company – but it was a brilliant move and the net cash outflow was zero.
After one year, the ‘cash floats’ from the insurance company and whatever surplus (cash) the textile company produced were channeled into ‘value investing’ . But in this second stage, Warren Buffet moved beyond “cigarette butts’ and focused on large companies.
Buffett might have started with unknown companies, but his analytical skills provided him with insights to make his fortune in brand names like Coca-Cola. When he accumulated Coco-Cola shares, the company was coming out of a bad phase – what looked for others as ‘big’ risk, was a ‘value arbitrage’ for Buffet. i.e. the value arbitrage in terms of future performance.
Step 3 – Develop Passion for what you do
All successful entrepreneurs say this. You have to get passion so that you can be optimistic when everyone around you is pessimistic. This allows you to put more efforts despite initial failures. Buffett’s edge was similar. He was willing to put in the time reading Moody’s manuals and annual reports cover to cover when no one else bothered. It takes immense discipline, patience, time, and lots of energy to know a business inside and out, but the effort is worth it.
Step 4 – Become a Leader
While many books speak about Warren Buffet’s investing techniques, not many speak about his leadership skills. He is a fantastic leader, because he is able to find talented, skillful and passionate CEOs to run his 100+ companies. He rarely speaks to them or gives them guidance. In this auto-pilot system, the CEOs work for Warren Buffet’s holding company without the usual top management push and pulls. I think he trusts his CEOs and seems that if couldn’t trust some CEO, he would fire him and would get a man he could trust in the job. In some cases, empowering others leads to phenomenal results.
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