Oftentimes, the best way to do something is to copy someone who does it really well.
I’m sure you’ve come across this lesson at school or at work. I’m not advocating cheating. I’m not saying that you should lean over and check out your friend or classmate’s answers in the middle of a test.
Instead, I’m talking about something broader. I’m talking about paying attention to their habits, looking at what they consider before they make a decision and otherwise learning from how they do things.
You see, in life, there are two ways to do something. You can do something the easy way or you can do things the hard way. Believe it or not, most people insist on doing things the hard way. They feel that there’s really no other option except to do things in the most painful, protracted and excruciating way. Not surprisingly, most people fail to live up to their fullest potential. They have all these dreams, they have all these goals but, at the end of the day, they don’t even come close, and a lot of this can be traced to the fact that they have decided, at some level or other, to do things the hard way.
Well, whether you like it or not, copying someone is all about doing things the easy way. This is called reverse engineering. Now, this advice can apply to all areas of your life whether you’re trying to be more attractive to people, whether you’re trying to be more persuasive when closing a sale or you’re trying to be a better student. Why reinvent the wheel? Why start from scratch?
You don’t have to start from square one. You can just look at what’s happening to somebody else who you know is able to achieve the kind of success you want to achieve and do what they’re doing. Are you with me? Well, this is the key to investing the easy way. Look for winners. Look for investors who are tried and proven winners.
When it comes to the dog-eat-dog world of finance and investing, there is no bigger investment genius than Mr. Warren Buffet. A native of Omaha, NE, Warren Buffet is legendary. Seriously. I mean that in the most profound sense of the word. He’s a guy who turned very little money into a huge amount of money. In fact, we’re talking about thousands of percent in returns. If you think about it, a lot of the top-notch, fast-rising or “gold-plated” mutual fund managers out there would be happy with a 300% or a 500% return over their lifetime.
Not so Mr. Warren Buffet. We’re talking about thousands of percent. You basically invest a few hundred bucks with this guy, and you walk away a multimillionaire. That’s how intense he is. I mean, we’re talking beast mode, you know. We’re talking turning very little money into a huge amount of money, and the best part? He makes it look so easy. If you don’t believe me, just look at the value of his holding company Berkshire Hathaway.
The shares of this company have become the benchmark of value investing. Throughout the years, Warren Buffet would buy up small companies using Berkshire Hathaway, and he would add these companies to the Berkshire Hathaway corporate form. As these companies perform and rake in the profits, Berkshire Hathaway’s share prices continue to explode.
He just basically leaves everybody in the dust, and he makes it looks so easy. It’s as if every move he makes is a foregone conclusion. You know that his winners far outstrip his losers. What gives? How does he do it?
Well, here’s where it gets crazy. If you want to know how to invest in stocks like Warren Buffet, you have to know what he does. He doesn’t tour companies. He doesn’t pull people aside and tell them, “Hey, can you give me the inside scoop on your company?” or “What are your secrets plans?” or “What is your next big move going to be?” He doesn’t do any of that. In fact, he doesn’t even have any direct contact with the company before he basically decides to buy it.
What does he do? Well, he just reads the company’s balance sheets and annual reports. Yes, those same boring annual reports that you get if you’re a shareholder of a company. That’s the stuff he reads. You’re probably reduced to tears when you’re reading that stuff. You probably would prefer to be reading something else, but that’s what he gets off on. That’s the only kind of information he needs to make a solid call time and time again.
He reads these annual reports to figure out which companies are attractive, then he would read public financial filings by these companies, and then he makes his move. Pretty straightforward. It seems like it’s as easy as 1-2-3, but there’s a lot going on there. The underlying assumption and the way he sizes up companies and decides which company to pick up and which company to leave behind is the concept of value.
This is where things get really confusing to a lot of people. Most people playing the stock market game focus on current value. They look at a company and see whether the market has priced that company accurately and if it hasn’t and there’s still room to move, they will buy that company. Otherwise, few people would think of paying a premium for that company. In their minds, the company is maxed out. It has already reached the ceiling of its possible present value, and this is where people get it wrong.
Warren Buffet buys based on value. That’s true. However, there is a difference between the revealed value and market value. These are not always the same. You have to understand that the stock market functions on information gaps. That’s how people make money.
Conversely, there is such a thing as forecasted or long-term information gaps. What if I told you that a company is priced at $100 per share is going to be worth $500 per share 20 years from now? Would you buy that company?
Well, it depends on your goals. Also, it depends on whether you trust me or not. Ultimately, it depends on whether you think it is worth hanging onto that company for that long assuming that what I’m telling you is true.
This is why a lot of people think that a lot of the companies currently in the market are just overpriced so they don’t even touch them. Instead, they are looking for companies that are fast-growing or companies that have stable room to move, but they’re overlooking one important factor.
Yes, you should buy overpriced companies if they will be worth more in the future. This is Warren Buffet’s mindset. It’s not unusual for Warren Buffet to step into a company even though a lot of people are saying that it’s priced out. A lot of people and these are intelligent market analysts, are saying that these companies have reached their full investment potential at least in the short term. He doesn’t care.
Warren Buffet still comes in and buys what would seem like an overpriced company. Why? He looks at the industry the company is in. He pays attention to whether the industry is growing or not. He also makes certain guesses as to what that particular industry’s long-term size would be. He also looks at the company’s position in the industry. Putting all these together as well as the numbers contained in the public filings of those companies, Warren Buffet decides whether to buy the company or not.
He focuses on buying the company, not trading on its stock. These are two totally different things. This is why even if he buys a company at a premium or at a top price, he still ends up coming out ahead. He still ends up making money. Why? He sees this company as being worth far more in the future. That’s how far ahead of the curve Mr. Warren Buffet is, and that’s why he is consistently one of the world’s richest men, and the good news is you can learn from him.
If you’re trying to figure out how to invest in stocks, focus on reverse engineering highly successful strategic investors like Mr. Warren Buffet. Make no mistake about it, it can be quite a bumpy road figuring out how to invest in stocks. However, by starting out your investing career by reverse engineering tried-and-proven successful investors, you can save quite a bit of time. You can also avoid unnecessary losses.
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