Learn to invest with Buffett

Chapter 2

Chapter 1 begins with sharing Buffett's thought feast

Chapter 1 Section 1 Determine your own ability range
The most important thing about your scope is not how big it is, but how reasonable your boundaries are.

--Warren Buffett
Buffett has always adhered to the basic principle of sticking to the circle of competence under any pressure.He once said: "Our job is to focus on what we know, which is very, very important." No situation will drive him to make investment decisions outside the scope of his circle of competence.

The most important principle that Buffett put forward for investors in Berkshire's 1996 annual report is: "What investors really need is the ability to give correct evaluations to the companies they choose. Please pay special attention to the word 'selected'. You don’t need to be an expert in every company or many companies. You only need to be able to evaluate a few companies within your circle of competence. The size of the circle of competence is not important, what is important is You have to be very clear about your circle of competence.”

Buffett has firm control over Berkshire's fortunes and believes he can achieve the goals he has set for the company.This is because he has already established a range of abilities.He can carry out his capital management within this range.

It is within Buffett's ability to understand the laws that apply in the act of allocating capital.He has the aptitude to seize opportunities at any time.He is also able to pinpoint the source of his mistakes.In this way, if necessary, he can modify the laws by which he makes his decisions.And it's the extent of Buffett's ability that gives him a sense of control.This sense of control is what humans crave when faced with uncertainty.This sense of control is what most CEOs “discover” as they pursue their more conventional strategic plans.

Likewise, Buffett prefers to make his capital allocation decisions within what is significant and knowable.This is the hitting zone if you know how to play baseball.This is the strike zone where Buffett is willing to swing the bat and hit the pitch that is thrown at him.This metaphor condenses a world.In this world, Buffett can objectively evaluate the opportunities presented to him.The variables he considers in making decisions are so obvious that he can almost touch them, and in this case Buffett believes in them so much that he can essentially eliminate uncertainty.

To manage this state of awareness, Buffett uses the following criteria to measure his range of competence:
1. He determines what he knows by identifying the truth, the causes behind the truth, and their interrelationships.

2. He assures himself of what he knows by performing an inversion, for which he can seek to prove his previous conclusions wrong.

3. He examines what he knows by teasing out feedback from the consequences of his decisions.

Why did Buffett miss the huge investment appreciation opportunity of investing in technology stocks such as Microsoft and Cisco?It is also a good performance that he only invests within the scope of his ability.To that end, let's make an interesting comparison between Buffett and Gates:

Buffett's most successful investment is the long-term investment in century-old companies in traditional industries such as Coca-Cola, Gillette, and The Washington Post. The continuous growth of these "big Mac" companies has made Buffett the world's richest man.Unlike Buffett, who is the richest man in the world, the most successful investment of his good friend Bill Gates, the world's richest man, is a long-term investment in Microsoft, the company he founded.It is Microsoft, the "super overlord" of the emerging software industry, that makes Bill Gates the richest man in the world.

So why doesn't Buffett invest in Microsoft?At the same time, why didn't Bill Gates invest in Coca-Cola?The answer is because everyone has their own circle of competence.If Buffett invests in high-tech industries and Bill Gates invests in traditional industries, these two people who invest outside their best circle of competence may add two new millionaires to the world, but they will never be millionaires. billionaire.

In the world of trading, Buffett insists on doing what he knows and what he can do. He will not try to do what he cannot do. He knows he understands media, finance and consumer goods companies. Therefore, in the past few years Here, he concentrated his funds to invest in these areas.

Buffett agrees with Orson Scott Card's wise words: "Most victors emerge from quick exploitation of the folly's mistakes of the adversary, not from your own elaborate and brilliant planning."

The process by which Buffett developed his investment philosophy determined what types of investments he understood.This delineates the scope of his ability, and as long as he stays within it, he has a competitive advantage that allows him to outperform the market as a whole.

Buffett's competitive advantage is the ability to measure whether an investment has an ideal average profit expectation.As soon as he focuses on any other type of investment, his "measurement tool" will immediately fail.And as long as it cannot be measured, his ability to judge whether an investment is likely to be profitable is no different from that of ordinary investors.

Buffett did not deliberately occupy a specific "ecological" market territory.This is only naturally determined by his range of abilities. He knows what he knows and what he doesn't know like a mirror.

He has proven that if he stays within his reach, he can make easy money.There may indeed be a higher mountain beyond his reach, but he is not interested in that mountain.His proven investing style matches his personality.Doing anything else is like wearing a dress that doesn't fit, a designer that's too big or too small isn't as good as a cheap dress that fits you.

Buffett defines his competence by considering the following questions:

1. What am I interested in?

2. What do I understand now?
3. What am I willing to know and learn?
In investment, every successful investor should focus on a small number of investment objects and invest in what they are best at.Only within their own circle of competence can investors conduct a reasonable analysis of the company's sustainable competitive advantage and make a roughly accurate estimate of the company's value.

Also, only if every investor answers these three questions like Buffett, can you find your own investment territory and clearly realize your own shortcomings.And only in this way can you easily say "no" to "opportunities" that do not meet your investment criteria, stop losing money and start making money.

Investment motto:

For your circle of competence, the most important thing is not the size of the circle of competence, but how you can determine the boundary of the circle of competence.If you know where the boundaries of your circle of competence lie, you will be much richer than someone whose circle of competence is 5 times larger than yours but doesn't know where the boundaries lie.

(End of this chapter)