Warren Buffett : Basics of Investment

In our daily routine of looking at investments, Do You Think Returns, Liquidity, Volatility, and Predictability matter? People might be wondering about this approach, but there is nothing wrong with it; instead, those who successfully employed and got much of this right are better than 99% of investors in the whole market. Due to our busy daily schedule, we only look at what investments are instead of looking at a deeper meaning of what they are.

Though, some investors tend to step back and think more about it. Here is what Warren Buffett wrote in the letter to his shareholders. He speaks about the stories of two small investments he made (according to him- Small). Both investments he made were very unusual from his other investments.

One was a farm near to the place he lives, i.e., in rural Nebraska, and the second one was a retail property, more of a mini-mall with no. of shops in downtown New York City in 1986. Both investments were made when the business outlook didn’t seem fine.

Buffet’s Reasoning Behind Investment

Back to the investments, Buffet did – Farm and Retail Property. So, did Buffett apply his “Returns, Liquidity, Volatility and Predictability” formula? No!!!. Here is how he judged the sales.

About the farm, he said: “I have no idea about the operations of a farm, but I do have a son who loves farming. Thanks to him, I learned about the number of soybeans and corn the farm could produce and what would be the operating expenses for such production. From these basic estimates, he evaluated the normal return with consideration of no extra knowledge and intelligence about the ups and downs of his investment.

He applied the same logic with New York retail property as well. Incomes from both of his investments would increase in the decades to come. However, the gains won’t be astonishing, but these two investments would be solid and satisfactory for his life following his children and grandchildren, Buffett said.

Buffet’s Logic Behind The Evaluation of the Investment

The point he is trying to explain is very simple; you don’t need to be an expert to invest to achieve satisfactory returns from your investment. But if you are not, you need to pay some attention to your limitations. Focus on the future productivity of the asset you are investing in. If you cannot make at least a rough estimate, just forget about it and move on.

Although, the key is not what other investors are paying for the asset or what they would be in the future. The basic logic behind any investment is that it does not matter what it costs or may cost but the value it will provide in the future.

Buffett was not much of a fundamentalist in his letter to the shareholders about the logic of paying for any investment.

Instead, it would be best if you focused on speculating the possible change in the price of the inspected purchase(assets). There is nothing wrong with that. I try and cannot speculate successfully, and I am also skeptical of those who claim continuous success in speculating.

Conclusion & Recommendation

Buffett did not consider the past value of the assets, the macro outlook of the experts on the economy, or any of the dozens of factors affecting investment. He only thought about the productivity of the two assets and their everlasting productivity and the purchase price, which made the assets of a good future productivity value.

This illustration is just one face of it, resembling investments in equities, especially in the current pandemic. Though, the principle holds both upsides and downsides more strongly. So, Do You, Yourself, see the logic behind the investment evaluations.

If your answer is “Yes“. Then it would be an investment; otherwise, it would count as something you should avoid.