Warren Buffett is regarded by many investors as the greatest financial mind of the 20th century. Buffett took complete control over holding company Berkshire Hathaway in 1965 and the company has flourished ever since. The S&P 500 has seen an annual increase of about 9.75 percent (including reinvested dividends) since 1965; however, over the same time frame, Berkshire Hathaway has increased by about 20 percent annually.
The compounding growth of the annualized returns is staggering. $10,000 invested in an S&P index fund in 1965 would be worth about $1.3 million today, while the same investment made in Berkshire Hathaway at the same time would be worth about $88 million.
Though Buffett is undoubtedly a legendary investor, his principles extend far beyond where to allocate capital. Let us explore some of Buffett's most notable business principles and how you can apply them to your own practice.
"Someone is sitting in the shade today because someone planted a tree a long time ago."
With this quote, Buffett is highlighting that in order to reap future rewards, one must see more than what is directly in front of him or her. This can apply to a multitude of your firm’s business operations. Chief among these, though, is recognizing industry shifts and planning accordingly.
Most notably, this has been prevalent in how the financial services industry has responded to increased pressure from the Department of Labor in maintaining a fiduciary standard when giving advice to clients. By adopting a strategy early on and maintaining compliance, advisors are able to sit in the metaphorical shade of the seeds they had planted long ago.
"It is not necessary to do extraordinary things to get extraordinary results."
In 2008, Buffett entered a wager with investment manager Ted Seides to compare the returns between hedge funds and low-cost index funds over a nine-year period. In 2016, the S&P index fund in which Buffett invested had returned 85.4 percent. Conversely, the best-performing fund of the five hedge funds selected by Seides only returned 62.8 percent. In this instance, Buffett’s quote rings true.
In your business practice, it is not always necessary to take extraordinary, expensive, or drastic measures to solidify your book of business. Occasionally, more straightforward and earnest efforts can make a world of difference. Maintaining consistent communication with clients, as well as providing transparency with a detailed financial plan, can produce strong returns.
"I just sit in my office and read all day."
Continuing to hone skills and knowledge throughout life is a way to constantly reinforce, or revolutionize, your skill set. Buffett has said that he spends about 80 percent of his day reading. By gathering a large amount of information, Buffett has continued to stay current on trends in economics, finance, and investing.
Though it will be difficult, if not impossible, to devote 80 percent of your day to reading, it is important that you are current on trends within the financial planning industry. This will help you stay informed on what advisors are focusing on, what clients are expecting, and how regulatory shifts may affect your business operations.
"Price is what you pay; value is what you get."
Buffett stressed the importance of paying the right price in your investments, even commenting that it is more advantageous to “buy a wonderful company at a fair price than a fair company at a wonderful price.”
The value your business gets when working with technology vendors goes far beyond just the price you pay for the service. The flexibility of being able to cater to any and all client needs and the ability to remain compliant with the DOL rule are absolutely vital to a utilizing technology to power your firm’s business operations.
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