The Biggest Reason why Warren Buffet is a Winner

This morning, I came across an adaptation Warren Buffet's annual Letter to Berkshire Hathaway Shareholders. In case you are Martian, he happens to be the World's most successful Investor with a track record spanning over five decades. I happen to be a big fan for his common sense approach to investing, his down-to-earth lifestyle and lately his political views as President Obama's unofficial economic adviser. This 81-year old is showing no signs of slowing down.

Reading this letter  gives me insights to his way of thinking and is a free education for any aspiring investor. In this letter, Warren Buffet speaks of the folly of Beta. Beta is what Investment Gurus the world over use to quantify the risk involved in investing in a particular asset. Simply put, the higher the Beta, the higher the risk. Beta is part of the Capital Asset Pricing Model created and perfected by revered economists, three of whom received the the Nobel Prize for economics. The problem Warren Buffet has with Beta is the underlying assumption behind it chiefly, that assets with more volatile prices tend to be riskier than assets with less volatile prices. This makes Stocks appear more risky than Bonds. The little problem that no one appear to mention is that currencies to lose purchasing power over time. Thus, if your investment is currency based like Bonds are, you will suffer the inevitable loss of purchasing power due to the simple fact that  money supply increases over time. A stock represents a share of a business, an entity whose primary goal is to increase value for its shareholders. Thus, depending on price you buy the business at and its ability to increase its value( or as Warren Buffet puts it more elegantly,'the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power' ) you are more likely to get better returns over time than a bond investor.

This brings me to what, in my humble opinion, makes Warren Buffet successful: His independence of thought. He questions conventional wisdom, regardless of whom its from. Be it Nobel Laureates or your financial adviser. As long something passes his common sense test, it does not matter what the world thinks. As he puts it, so long as the man in the mirror is ok with it, then he's fine with it. 

You can get more of his letters to shareholders at http://www.berkshirehathaway.com/letters/letters.html . An adaptation of his latest letter by Forbes can be found here