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As I went through my day today, I wondered what the thoughts of some of the greatest people of our times are. Since thought creates reality, what thoughts run through the minds of the richest people on the planet?

Luckily, we live in the age of Google and it took me a few minutes to get to a nice page with all of his articles:

As I read through them, one especially resonated with me: Here’s an excerpt:

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B.

And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic — no shower of money from outer space — that will enable them to extract wealth from their companies beyond that created by the companies themselves.

It really jives with my philosophy of investing in a company where value is created. After all, how can any business be worth more than its current assets plus the value it creates?

This is also as applicable to any job as any business (since jobs are basically just mini-businesses run by one person selling his services). For example, take a day trader, what value is he actually creating? Since everyone has access to the same information that he does, all he does with his trades is add liquidity to the market. And what value does the liquidity have? It allows some other guy to buy his 500 shares and go “Yay! I can easily buy a stock without paying a huge margin”. If this extra liquidity doesn’t exist, the stock buyer would simply go to the company in question and buy the stock shares. The market for trading stock would diminish, which is a good thing according to Buffet anyway. At best, this “value” is pretty questionable.

I think over the years, I have found a decent way of figuring out whether something you are doing is of value. This is also the primary reason I’d decided to stop playing poker as a secondary source of income, despite the fact that I was making $50-100k/year at it.

I can remember a few weekends where I’ve had a string of very bad luck while playing poker. After a week of playing straight, I discovered that I had lost a few thousand dollars. As I sat in a restaurant in the casino, I felt empty. Without the money, the experience had no meaning to me. Even with the money, the experience still felt somewhat empty. Then I knew. Despite whatever justifications I put on it, it simply didn’t feel right.

Here’s the simple test: After you do your job, are both you and your customers happier?

Human beings are designed to be happy when they feel wealthier and unhappy when they feel that wealth has been taken away from them. Therefore, if your job makes you happier and your customers happier over the long run, then you can tell that wealth has been created.

For poker as a “career”, it’s clear that this test is not passed. I am not happy when I lose money and my “customers” are not happy when they lose money (most of the time).

For a normal job, this criteria is generally satisfied. You are happier having a paycheck and your employer is happier having your work.

Anyhow, back to Buffet’s quote: The most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn.

So how do you get better investment returns? It’s simple: Make more wealth.

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One Response to “A Lesson From Warren Buffet On How To Invest”

  1. Yosako on August 2nd, 2009 7:22 am

    What is so negative in “not creating value” and taking money away from a “greater fool” when trading stocks? In stocks which don’t pay dividends, that’s what’s the game is about…Wall Street ain’t Disney, and by the way Disney sucks.