The Buffet of Life

Warren Buffet, the world’s richest man has two rules of investment. 1) Don’t lose money. 2) Don’t forget rule 1). It’s a neat aphorism but it doesn’t exactly describe the practice. While not losing money is important because – as he says – a 50% loss requires the correction of a 100% profit, he has another, much more important maxim which is the secret to his success as an investor: “I buy a stock which I would be happy to earn even if the stock market were to close for 10 years”. What he means by that is that, within reason, whatever the value of the stock in the short term (and of course they go down as well as up) he’s happy to trust the phenomenal amount of work he’s done before buying the stock and place his faith in its Long Term prospects. Short term losses are a possibility in the quest for long term gain.

Argos prints 2 million brochures ever year. Of these it estimates that 88% are either thrown away or not directly responsible for a single sale. Naturally it wants this number to be as low as possible. But since the remaining 12% generate revenues in excess of £3bn a year – paying for the additional catalogues with much to spare – the short term losses are soon forgotten.

The life of a door-to-door salesman is not a happy one. Whatever the weather they are outside in the neighbourhood trying to sell whatever they have to whomever will be good enough to chat to them. A good door to door salesman works on a hit rate of about 5-8% success for every door he knocks on. Short term failure, long term success.

One organization, The Amway Corporation sought to increase that figure and came up with the idea for a “BUG” – a pack of free samples which it leaves with the customer for 24, 48 or 72 hours. During this time, the customer uses some of the products, with no obligation, and at the end of the period has a 15% chance of becoming a closed sale, a threefold increase on their natural propensity to buy. In just a few years, the Amway corporation has gone from a basement operation to a $1.5bn company. By increasing it’s short term losses, it increased its long term results.

Warren Buffet understands – like Argos and Amway – does everything he can to make sure he is as successful as possible, that’s why the first rule is Don’t lose money. But just like Argos and Amway,  Buffet knows that the ONLY way he’ll annualize 23% a year is by accepting short term setbacks and devaluations in his stock prices along the way. He doesn’t panic. He knows he’s in it for the long term, in his case 10 years. Not all of us have that luxury.