Warren Buffett is not just a great investor; he is also a great manager. Entrepreneurs can learn a lot from Buffett’s management principles. Mary Buffett’s book Warren Buffett’s Management Secrets: Proven Tools for Personal and Business Success is a great gift for managers who want to follow Buffett’s management principles.
Here are some of the things I learned from Mary’s book:
#1 Mistakes
Everyone makes mistakes, and Warren is no different.
Warren learns from his mistakes but doesn’t dwell on them. He believes it’s a waste of time and energy to dwell on them. Buffett believes that all the money is there to be made in the future, not the past. And it’s best to leave mistakes in the past.
This has been a fabulous lesson for me. I no longer dwell on my mistakes; I learn from them and move on. It’s quite liberating.
#2 Locus of Control
We come across two kinds of people. The first kind are driven externally. They blame everyone, from situations to people, for anything that goes wrong. They blame everyone but themselves.
The second kind of people own up to their mistakes. Their mistakes are their own. They don’t blame anyone but themselves. Being the second kind is essential. If you hear yourself blaming other people, circumstances, or situations for your miseries, maybe it’s time to STOP.
#3 Choosing the Right Business
Warren believes every business has certain economics that works for or against the business.
He likes three types of businesses. The ones that offer:
1. A unique product
2. A unique service
3. Low-cost buyer
He loves businesses that are less capital intensive, so business owners have money to pay bonuses and reinvest in the growth of the business.
He thinks certain businesses are lousy to get into because they are very capital intensive and require capital to grow.
He also likes companies that own a part of the consumer’s mind, brand name businesses like Coca Cola. Although Coca Cola is just caffeine and soda, it means happiness to the consumer.
In one of his videos, he talks about See’s Candy. He says, “If you give these candies to your girlfriend and she kisses you, then the company owns a part of your brain.” Branding is quite essential to Warren.
He also likes companies whose business models don’t change over time like Coca Cola and Wrigley’s chewing gum.
#4 Tried and Tested
Warren Buffett likes to follow tried and tested formulas.
There are many similar businesses (competitors) in your industry that are already successful. It’s easy to emulate already successful businesses.
He gives us an example of Nebraska Furniture Mart. Discount furniture was nothing new. A concept that was popular in Russia was replicated in America.
#5 Debt
“The roads of business are riddled with potholes; a plan that requires dodging them all is a plan for disaster.” – Warren Buffett
Warren likes to stay away from debt.
A lot of companies are tempted by leverage (debt).
It is easy for a company to increase its earnings just by taking on debt.
For example, if a company has an income of $1 million, and it takes on a debt of $10 million to buy an asset that generates another $3 million in revenues, after paying out a 12% interest, the company makes an additional $1.8 million in profit. That’s more than double its earnings. Warren says most managers who borrow money are gambling that they won’t hit an economic obstacle anytime in the future. When that happens, and income drops dramatically, debt can put significant stress on a business.
On the other hand, if the business does not have debt, they can scale back operations and still stay in the game.
“Leverage is very tempting and always leads to trouble.” – Warren Buffett
Warren does not believe in personal debt either.
He says,
“You can’t borrow money at 18 or 20 percent and come out ahead. I can’t. I’d go broke. So stay away from debt as much as possible. When you get an amount for a reasonable down payment, you find a home you like, buy it. But don’t do it till you can handle it. And take on obligations you can handle, avoid the others.”
We all seem to be in an EMI generation. Almost everything, from refrigerators to television sets are bought on debt. Time to change that.
Warren’s advice is to play safe and avoid any unnecessary obligations.
He says,
“If we buy things we don’t need. We’ll eventually have no money for things we need.”
He bought his first home for $34,000, and he still lives in it today.
Whether a car or a home, buy one when you are ready and can comfortably afford the EMI payments. Once paid off, keep it forever. Resist the temptation to go for a bigger house, a better car, or to match up with the Joneses.
Keep your expenses low, save money, and you are on your way to becoming rich.
Other Things
# The Meaning of Focus
There’s a little story about goals that Warren Buffet shared with one of his employees. James clear talks about it in his article here. The summary of the article is below.
Warren got one of his employees to write down his top 25 goals. He then asked him to circle his top 5. And eliminate the other 20.
That is focus.
Both Buffett and Gates believe in focus. So did Steve Jobs.
Steve Jobs said, “We are not just proud of all the things we did. We are also proud of the thousands of innovations we didn’t do.”
Focus is not just putting your time and attention to all the things that are truly important to you. It is also about eliminating all the ones that are unimportant.
We only have so much time, the only way to manage this time is by saying no to a lot of things.
“The difference between successful people and very successful people is that very successful people say no to almost everything.” – Warren Buffett
# Decisions
Buffett spends most of his time thinking and reading. He avoids making impulsive decisions.
When I studied Entrepreneurship while in college, I came from the school of thought that we needed to make quick decisions. Now, I realize that when you make quick or impulsive decisions, there is a tendency to make mistakes. So take your time and make an informed choice.
Remember, focus on the things that are truly important to you, and say no to the rest of them.
Other things successful people do.
They don’t overwork.
When I was younger, I thought the secret to success was working longer and harder. I have now realized that working long hours can burn you out. And once you are burned out, the road to recovery can be long.
Rest and relaxation are important. It’s better to work for 5 hours in a better state of mind than work 16 hours at half capacity.
Stay away from negative people
Negative people can drain all your time and energy, whereas people who are invested in their growth and self-improvement can have a profound impact on your life.
Summary
#1 Learn from your mistakes. But don’t dwell on them.
#2 Don’t play victim. Own up to your mistakes. Your mistakes are your own, learn from them and move on.
#3 Choose a business that is less capital intensive
#4 Stick to the tried and tested
#5 Stay away from debt
#6 Say ‘NO’ to things that are not important. Stick to fewer goals, and don’t get distracted by unimportant things.
#7 Avoid making impulsive decisions
#8 Stay away from negative people
Buy Mary Buffett’s book Warren Buffett’s Management Secrets: Proven Tools for Personal and Business Success, click here