Warren Buffett may be a boring billionaire in how he chooses to spend his money, or rather not spend it at all…
The guy still lives in the home he bought for $31,500 in 1958 and drives a brown Cadillac XTS, the kind you can buy for about forty grand…
He drives to work each day, stopping for breakfast each morning but never spending more than $3.17.
One thing is for sure though. There are few other billionaires that I have learned more from than the wisdom of Warren Buffett.
He taught me, “cut your losses short, and let your winners run”.
And this applies to more than just investing. Remember regardless of what business you start or what you are working on, always think like an investor.
Everything is an investment. Yes even your wife or girlfriend is an investment. In fact getting married is the biggest investment you will ever make.
Cutting your losses short is really about looking at the reality of what it is you are invested in. Whether that’s a stock or a business opportunity, or whatever it may be.
One method I have found helpful was something I learned from Brian Tracy…
If you knew everything that you do now, would you still make the same decision to go into this investment?
If the answer is yes, knowing everything you do now you would still go ahead and invest in this stock, start that business or stay with this person… then continue and do so and with a full heart.
If you believe it is a winner long term, then let your winners run. Nothing stupider than finding what works and then stopping doing it.
Yet if you ask yourself the same question, would I do this all again if I knew what I do now?
And the answer comes up as no. No I would not have chosen to do this knowing what I do now…
Then cut your losses short. Get out as soon as you can.
That is cutting your losses short.
Another thing I learned studying Wareen Buffett, or more specifically his trusted lifelong business partner, Charlie Munger…
Is the use of mental modals.
Munger uses what are called “mental models” which are different ways of thinking and looking at a problem or opportunity.
Instead of just thinking about things in one way, Buffett and Munger have literally built up hundreds of different mental models to run their ideas through.
The use of these types of thinking patterns applied to investments has turned Warren Buffett into a billionaire many times over. In fact his net worth is currently north of $80 billion.
Warren Buffett is what is known as a Value Investor
Value Investing is a type of investment strategy that looks to determine the underlying value of a stock.
Because you see, the reason the stock market acts in an erratic way; stock prices up high one day, down the next, is because of the various people who are investing in these stocks.
Greed and fear are continually pulling and pushing stock prices
Driving them up, plummeting them down.
Sometimes the price of a stock is priced far below what the true value of that stock is actually worth. Other times stocks are trading for many times multiple of earnings making them often overpriced.
The way Warren Buffett became a billionaire, along with the many other billionaire value investors, was to accurately determine the real value of a stock.
Buying a stock at a discount to it’s true value and then waiting for the market to price the stock at the real increased value. Netting a tidy profit to the investor.
Warren Buffett learned value investing from Benjamin Graham who is known as the “father of value investing”.
Buffett learned, “price is what you pay and value is what you get”.
And just because you are paying a low price for a stock, doesn’t mean the value matches it.
In fact there have been hundreds of investments that Warren Buffett has made where he has bought at very low stock prices compared to the true value of the stock.
For example when he bought into The Coca-Cola company he paid just $2.45 per share.
And the price for a share of Coke stock today, is trading above $40.
So you can begin to understand how this works and this strategy of value investing is exactly how Buffett made his fortune.