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Warren Buffett: What are Investment Basics?

In our daily routine of looking at investments – Returns, Liquidity, Volatility, and Predictability matters. People might be wondering about this approach but there is nothing wrong with it, instead, those who successfully employed and get much of this right are better than 99% investors in the whole market. Due to our busy daily schedule, we only look at what investments are instead of looking at a deeper meaning of what they are.

Though, some investors tend to step back and think more about it. Here what Warren Buffett wrote in the letter to his shareholders. He speaks about the stories of two small investments he made (according to him- Small). Both investments he made were totally unusual than his other investments. One was a farm near to the place he lives i.e., in rural Nebraska and the second one was a retail property more of a mini-mall with no of shops in downtown New York City in 1986. Both of the investments were made when the business outlook didn’t seem fine.

So, did Buffett, applied his “Returns, Liquidity, Volatility and Predictability” formula? No!!!. Here how he judged the sales. About the farm, he said: “I have no idea about the operations of a farm but I do have a son who just loves farming. Thanks to him I learned about the number of soybeans and corn the farm could produce and what would be the operating expenses for such production. From these basic estimates, he evaluated what the normal return would be with consideration of no extra knowledge and intelligence about the ups and downs of his investment. He applied the same logic with New York retail property as well. Incomes from both of his investment would increase in the decades to come. However the gains won’t be astonishing but these two investments would be solid and satisfactory for his life following his children and grandchildren, Buffett said.

The point he is trying to explain is very simple, you don’t need to be an expert to make an investment to achieve satisfactory returns from your investment. But if you are not then you need to pay some attention to your limitations. Focus on the future productivity of the asset you are investing in. If you are not able to make at least a rough estimate then just forget about it and move on.

Although, the key is not here what other investors are paying for the asset or what they would be in the future. The basic logic behind any investment is what it actually does not what it costs or may costs. But Buffett is not that much fundamentalist in his letter to the shareholders about the logic of paying for any investment. Instead, you should focus on speculating the possible change in the price of the inspected purchase(assets). There is nothing wrong with that. I do and unable to speculate successfully and I am also very skeptical to those who claim of continuous success in speculating.

Buffett did not consider the past value of the assets or the macro outlook of the experts on the economy or any of the dozens factor resulting in affecting investment. He only thought about the productivity of the two assets and its everlasting productivity and the purchase price which made the assets of a good future productivity value.

This illustration is just one face of it, resembling investments in equities in India especially in the current pandemic. Though, the principle holds both upsides and downsides more strongly. So, Do You, Yourself see the logic behind the evaluations of the Investment.

If your answer is “Yes“. Then it would be an investment otherwise it would count into something you should avoid.

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