The SnowBall: Warren Buffett and the Business of Life Summary & Book Review

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 In 2007 he became the richest man in the world for the first time, Warren Buffett complete focus on investing can't be over looked Warren Buffett always tried to save a dollar in order to grow his capital faster Warren Buffett is not interested in real estate , art , cars, or any other token of wealth Warren Buffett still lives in the same house he lived in 50 years ago this is a blog post presenting the top 5 take ways of the snowball Warren Buffett and the business of life written by Alice shroder.

1. Power of compounding income

Imagine that you started a new job during your first day you work for eight hours and at the end of the day your manager gives you a $100 bucks the next day you go back and you get ready for another eight hours of labor after 7 hours and 50 minutes your manager goes over to you and gives $100 bucks and asks you to leave for the day

On day three the manager gives you $100 bucks after 7 hours and 40 minutes on day 7 after your manager gives $100 dollars after only 7 hours and then you ask your manager what's is this all about why do you keep earning the same amount but with less effort your manager simply gives you the following explaination because you worked yesterday this example shows you the power of compounding income money comes easier and easier the more you have of it Warren Buffett understood  importance of the power of compounding income at an early age his discovered a miracle of money that works for it's owner Warren Buffett use the power of compounding income to his advantage in forming his first investment partner ship Buffett associates the deal was that Warren Buffett would get 50% of the above a 4% gain but pay he would pay 25% of the downside to his partners by turning his company Berkshire Hathaway into an insurance company Warren Buffett has been using compounding to his advantage for many years now you see insurance premiums are always payed before the actual claims come which gives Warren Buffett plenty of time to compound the money before the pay out according to the saying if someone dropped a dollar the average billionaire would not pick it up because the money gained from doing so is less than what he earns during search a time frame Warren Buffett on the other hand would pick it up and state this is the start of my next of my next billion dollars the the power of compounding Compounding interest is probably the most powerful Wonder that you can access in order to become a millionaire and succeed in your investing. Use it to your advantage

2. Be Very skeptical of new paradigms

New paradigm it's like new sex there is just isn't any such thing In 1999 just before the dotcom bubble bust people spoke about a new paradigm when referring to the stock market many investors expected returns averaging about 20% per year and they thought that Warren Buffett was crazy who did not want to buy the highpt up internet stocks Warren Buffett was very skeptical and explained that there are only three cases in which high valuations like this ones could be motivated

1. Interest rates remain low and will continue to go lower
2.The share of the economy that goes to investors in other words the government
3.The economy starts to grow faster

Warren Buffett said that the market is a voting machine between 1964 & 1981 the Dow Jones industrial average stood still at the same time the economy grow five fold. So why would investors pay for something that generators five times the money Well simply because they thought that the rules of the game had changed in 1964 and they paid a high for thinking so 

Hard mentality makes it easier said than done to be skeptical when we enter into the bubble like valuations it's simpler to go through life as the echo but only until the other guy plays a wrong note you are neither right nor wrong because people are agree with you. You are  right because your facts and reasoning are right during during the times of wacky valuations it helps to be guided by an inner scorecard rather than an outer scorecard 

Consider this would you rather be the world greatest lover but have everyone think that you are the world's worst lover or would you rather be the world's worst lover but have everyone think that you're the world's greatest?
If you would pick the previous option rather than the later one you are guided by an inner scorecard which is very helpful in resisting to participate in the madness that the market sometimes displays

 3. Stay within your circle of competence

According to the story: A man was able to corner the market of shoe buttons a very small and niched market but he had all of  it. Once he accomplished this he imagined himself himself as the expert of basically everything! While among his friends he always knew best. Whether they were discussing relationships love making health or any other topic for that matter, Because of his expertise in one area he thought he was a master of everything Warren Buffett and Charlie Munger his right hand man referred to this as the shoe button complex Buffett attributes much of his success to the fact that he was able to avoid this and instead stay with his circle of competence money, business and his own life for instance Buffett could have pursued his grandfather's dream of becoming a an author but didn't luckily perhaps with the field of investing this is especially important Buffett explained it like this "We will not go into a business where technology which is over my head is crucial to the investment decision" I know about as much about semiconductors or integrated circuits as I do of the mating habits of the "chrzaszcz" you are investing in a business not stock. Remember this well and see to it that you understand what kind of company you are actually buying this could mean that you want to focus on industries aligned with your education for example a medical student might want to invest in health care and pharmaceutical stocks while an electrical engineer might want to focus on the energy sector this could also mean that you want to invest more of your money in your domestic market or companies exposed to your domestic as you understand the business environment there better

 4. Use the margin of safety

Let's pretend that you're a construction engineer you've been assigned with task to build a bridge. The bridge is a very complex one especially the calculations regarding the carrying capacity you've been told that the trucks passing your bridge sometimes will weigh as much as 40 tons will you build a bridge so that your calculations say that it supports 40 tons or 60 tons if you picked 41 this could be a possible scenario you made a small mistake in your calculations so your bridge could only carry 38 tons in reality. 

Now this really heavy truck tries to drive across it not so nice eh? Sure, this could happen if you try to build one which supports 60 tons as well but the risk is reduced let's face it our estimations when trying to predict the future of a stock or often wrong therefore we need plenty of room for error a margin of safety if you think that a stock is worth $50 you don't buy it if it also costs $50 in the market in this situation you might want to wait until the stock costs $40 instead assuming that you still think it's value remains the same at that point of course Warren Buffett understood this early thanks to his teachers Benjamin Graham and David Dodd the margin of safety helps so that your profits from goods decisions are not wiped out by the losses of your errors. A certain category of stocks that fulfills the margin of safety which Buffett liked to invest in during his early career are the so called cigar butts 

These are cheap and unloved companies they aren't the best ones but they're often good for one more puff Buffett learned this approach from Graham as well he looked for companies that will be worth more than debt than the current price of the stock meaning that if the assets of the company was sold and it closed the shareholders would earn a profit for such a company the operating business is essentially free Buffett never abandoned this approach of a margin of safety this is also why he could stay ahead during many of the most speculative bubbles in market if he couldn't find companies that fulfilled his criteria he stayed in cash he didn't join the herd when it was heading for the slaughter that is the peak of a bull market

5. Invest where there's a toll bridge

Graham had tuaght Buffett to be true value investor and focus on cheap and disliked stocks in 1959 when Buffett met Charlie Munger for the first time this would partly change Munger was more focused on the competitive advantage of a firm over time the idea with the toll bridge is that once the initial investment is made ie building the bridge the tolls can be increased in a monopoly like fashion because there's no other simple way of receiving a similar solution for the customer ie getting to the other side of the bridge.

 At one point Buffett and  Munger actually owned 24% of a bridge which connected Detroit and Windsor with such a business you could be stranded on a deserted island for years with having to worry about your investments Buffett summarized it in this statement its far better to buy a wonderful company at a fair price than a fair company at  a wonderful price let's look at examples of toll bridges 


Coca-Cola has through it's brand secured profits for Many years ahead even if someone would manage to create a better tasting soft drink than Coke they need to spend billions in advertising to a threat

Network effects

All social media platforms are great examples here YouTube and Facebook become more and more valuable for each individual user the more users there are on the platform it wouldn't be so fun on blogger without any content creators right there fore a new entrant in the market which by definition must be small in the beginning can't deliver the same value and therefore never gets a chance to grow.


When customers face high switching costs changing from company A's product to competing company B's product company A tends to be a good investment such an example is the Enterprise software company sap it's products take significant time effort and money to learn so once you understand them you don't want to start all over by switching to the product of another company

High set up costs 

If it takes a significant amount of money just to serve the first customer competitors usually hesitate before entering the market railroads and electrical grids are great examples settings up a second rail or a second grid next to the already existing one is a game of very very high stakes.

Warren Buffett surely seems like a smart guy right Now follow his advice so that you all can become great value investors as well! Also thanks for reading 

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