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Lesson #1: Be Honest With Yourself

Article Overview: “I was wired at birth to allocate capital and lucky enough to have people around me early on – my parents and teachers and Susie [his late wife] – who helped me make the most of it,” said Buffett.

Lesson #1: Be Honest With Yourself

“I was wired at birth to allocate capital and lucky enough to have people around me early on – my parents and teachers and Susie [his late wife] – who helped me make the most of it,” said Buffett.

From day one, Buffett knew what he wanted to do with his life. He started his investment business in 1956 when “seven people wanted me to invest their money for them.” Although he admits to not having a plan at the time, he knew enough to recognize that he could not go it alone. At an early stage, Buffett began evaluating his own strengths and weaknesses and creating an appropriate business plan.

“Risk comes from not knowing what you’re doing,” says Buffett. And so, he set out to understand everything about both himself and the business he was venturing into before making a move. Buffett knows how he likes to run his business. He dislikes technology and is most likely the only billionaire in America to not own a computer or even have an email address. He cannot stand bureaucracy and inefficiency, and thus runs his company with just under 20 employees at its Omaha headquarters.

Despite his self-confidence, Buffett was never so arrogant as to believe he could invest in any company he wanted. “There are all kinds of businesses that Charlie [Vice Chairman] and I don't understand, but that doesn't cause us to stay up at night,” says Buffett. “It just means we go on to the next one…Never invest in a business you cannot understand.”

Buffett believes that if you are honest with yourself about your strengths and weaknesses, your likes and dislikes, and your amount of knowledge, however difficult it may be, the rewards will be far greater. “I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital,” he says.

It is this honesty that has led Buffett down one of the most successful paths in history. He knew what he was good at and refused to cross that line even on the advice of others. Buffet would often cite one of Abraham Lincoln’s favourite riddles to make this point: “How many legs does a dog have if you call his tail a leg? The answer: Four, because calling a tail a leg does not make it a leg.”

Buffett recognized that unnecessary risk could be avoided. He examined every decision in detail before making a move, asking himself if he fully understood what he was getting into. “You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be,” he says. “And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it.”

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Article Tags: billionaire, buffett, bureaucracy, business plan, inefficiency, investment business, likes and dislikes, logic, money, parents and teachers, profits, rewards, risk, self confidence, strengths and weaknesses, susie, vice chairman



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