Here’s What Warren Buffett’s Mentor Said About Investing
Even Warren Buffett has a mentor.
Benjamin Graham was an American investor and economist and the author of one of the most famous financial books of all time: The Intelligent Investor.
The Oracle of Omaha said about Graham and his famous financial book:
I got a bedrock of investment philosophy that really hasn’t changed ever since I read the book…It was Ben’s ideas that sent me down the right path.
Whether you’re an entrepreneur, an investor or otherwise, Graham’s lessons will help you find financial success faster.
“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” – Benjamin Graham
In the book, Graham proposes the existence of two kinds of investors: enterprising and defensive.
An enterprising investor is prepared to take on more risk to grow what he or she has.
A defensive investor wants to protect what he or she has at all costs.
The trick is knowing what kind of investor you are based on your personality type and aptitude for risk.
For example, you might be able to tackle marketing, copywriting, advertising, customer service, product development and more by yourself, but should you?
It’s highly unlikely you possess the skills to do all of these activities at a high level.
Assuming you understand your strengths and weaknesses, focus on what you excel at or love doing. Then work toward either outsourcing or delegating what you can afford.
Manage Your Risk
“Successful investing is about managing risk, not avoiding it.” – Benjamin Graham
Let’s say you decide on investing 10 grand of your personal finances into your new business. It’s a risky investment decision.
A competitor could release a better and more affordable version of your product or service—and put you out of business.
A change to the Google search algorithm could cut your website traffic and your leads in half.
An annoyed customer could post a negative review about your product or service, dissuading other people from buying from you.
It’s enough to make you sprout a few grey hairs.
So before you invest more time and money in your business, consider how you can manage your risk.
Could you diversify by offering more than one product or service? Would paid search traffic help you manage the risks that come with relying purely on SEO? When can you draw down on that 10 grand and reduce your potential for painful losses?
Remove Emotion From The Equation
“The investor’s chief problem—and even his worst enemy—is likely to be himself.” – Benjamin Graham
If you’re spending the early morning hours and your free time at night and the weekends building a side business, it’s hard to separate emotion from practical decisions.
However, Graham commands you to exercise self-discipline! Find a way to step back from your investments of time and money before reaching a decision about your business or finances.
Perhaps you could hire a business coach who can help you reach a painful conclusion about a product or service. After all, he or she isn’t invested in your ideas or your success.
Or could you set aside five hours a week for customer interviews so you can understand what they’re struggling with, rather than what you want to sell them?
Seek Out A Margin Of Safety
Graham first posed this investment concept before Warren Buffett stepped in to explain it,
You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.
It’s your job to avoid overpaying for any investments in your business, no matter how exciting. Figure out what something is worth and the minimum you can pay. This gap gives you more margin to fail if the investment or purchase doesn’t pan out.
For example, spending all your profits on a Facebook ad campaign that you hope will convert is an invitation for disaster.
Similarly, expecting a single client’s contract to keep the lights on is an invitation for sleepless nights; what will you do if they leave?
Rebellions might be built on hope, but businesses aren’t! Instead, consider your capacity for failure at the start of any new business project.
Even though Graham published his book in 1949, it focuses on timeless principles rather than dateable tactics.
Just ask Warren Buffett, who has built a legacy by applying what his mentor advocated.
Even if you’re not concerned with stocks, shares and options like Buffett, you can still apply many of Graham’s principles to investments and decisions about your business.