I just finished reading Warren Buffett’s 2014 annual report.
As usual, the letter contains TONS of great advice–not limited to investing, but applicable to entrepreneurship and life overall.
Though I’m not as big into investing as I once was, I continue to follow Buffett’s writing to this day. There are several reasons for this: 1, his writing is fantastic; 2, his ideas often apply beyond the world of investing, to other areas of entrepreneurship; 3, his outlook on life in general is worth emulating. Of these 3 points, the last is probably the most important… To quote the cowboy from Mulholland Drive, “a man’s attitude in life determines how his life will turn out.”
Often, it pays to look at a successful person’s life philosophy as much as their specific business advice.
Without further ado, the three major takeaways I took from Warren Buffett’s 2014 letter to investors.
#1: Think Long Term
For anyone who knows Buffett, this will be a familiar theme.
Buffett has always been known as a long term investor. In an industry that’s usually defined by hype and hyper-activity, Buffett prefers to sit back and wait for good things to happen. In this past year’s letter, Buffett offered an interesting variation on this classic theme of his. Writing about one of the most famous transactions in the history of his career–the purchase of Berkshire Hathaway from Seabury Stanton–Buffett wrote:
“Buying the stock at that price was like picking up a discarded cigar butt that had one puff remaining in it. Though the stub might be ugly and soggy, the puff would be free. Once that momentary pleasure was enjoyed, however, no more could be expected.”
What he meant was that even though he got a good deal, he made the wrong decision, because he could have gotten a better one. By making an investment that would have continued to pay him off in the long term, Buffett would have made more than he would have by buying Berkshire.
It’s a lesson that’s worth thinking about for all of us. Often, we tend to look at windfall moments in our business as good moments. But often, if we’d been willing to wait just a little longer, we could have made a far greater long term profit. The lesson here is to not measure the value of what you do by how quick, cheap and easy you get it–but by the long term profit you will be able to get out of it.
Think about the way you currently do business. Do you spend all your time chasing deals that will assure a profit next week, or do you invest in opportunities that will pay off MASSIVELY in the coming years? The answer to that question will determine how your career and business will turn out, to a very large extent.
#2: Cut Out The Middleman
In another part of Buffett’s letter, he discusses the problem with conglomerates.
“Conglomerate” is basically another word for a holding company; a business that owns many smaller businesses. The conglomerate form is widely disparaged on Wall Street, owing to the fact that when one company owns another one, the total tax burden tends to multiply.
According to Buffett, it’s almost always best to own an asset directly instead of through a middleman.
It might seems strange to apply this lesson to entrepreneurship (as opposed to finance), but a quick look reveals that it’s very much applicable.
Think about all the “middle men” you do business with. Contractors who contract other contractors, salespeople of various kinds who take a cut from your deals, etc. The more of this you cut out, the more profit you’ll realize from everything you do–just like a company that refuses to become a conglomerate.
#3: Keep It Lean
Last but not least, Buffett places a lot of emphasis on “keeping it lean.” In one section of his letter he points out that his company, which does over $100 billion in annual sales, has:
- No management consultants.
- No human resources department.
- No public relations department.
- No investor relations department.
- No strategy department.
- And no acquisitions department.
Keep in mind that all of these departments are a mainstay of virtually every fortune 500 company, and you’ll understand where Buffett is coming from.
In business as in life, it’s common to want to keep up with the Joneses. The same way you often feel compelled to keep up with your friend’s car, house, job and vacations, a huge corporation often feels compelled to compete with its competitors in terms of having impressive-sounding consultants and departments.
And the same thing probably goes on in your own business.
Have you ever bought an expensive software suite because it seemed like ‘everyone’ in your niche owned it? Have you ever hired staff not because you need them, but because you think it makes you business look more ‘official’? Have you ever bought an office when you could have easily continued to work at home?
These are the kinds of questionable investments that slowly add bloat and bureaucracy to a business.
When it comes to business, there’s almost no greater authority than Warren Buffett. Though he’s mainly known as an investor, he actually has a wide-ranging intelligence, with fantastic insights for entrepreneurs, marketers, lawyers and accountants.
Whether you take all of the points mentioned in this article to heart or not, one thing is clear:
Warren Buffett’s annual letters are essential reading for any serious entrepreneur.
Wit, wisdom and great advice in one place, there’s hardly any source of insights for entrepreneurs that can compare.