Warren Buffett began his investing career early, buying his first stock before he was a teenager. By the time he was in his 20s, he founded Buffett Associates and was on his way to becoming a billionaire.
It’s a success story for the ages, and the self-made Oracle of Omaha is now one of the world’s richest men, with a net worth of more than $74 billion, according to Forbes. Buffett’s success boils down to some fundamental philosophies and rules that he has followed closely over the years.
However, even Warren Buffett's stock portfolio can contain a few clunkers. Buffett is disciplined and methodical, but he has occasionally thrown caution to the wind and strayed from his principles.
The results occasionally have been disastrous, but not always. If you want to get rich, read on to see seven of Buffett’s core investing rules — and what happened when he broke them.
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Always consult trusted advisers
In 1959, Buffett met Charlie Munger, setting the stage for one of the strongest business partnerships in history. Together, the pair built Berkshire Hathaway, among the most successful companies in the world. Buffett is CEO and chairman of the company, and Munger serves as vice chairman. Munger is a key ingredient in Buffett’s secret investing sauce, and no deal goes through without Munger’s seal of approval.
Well, no deal except for a few. Such rare Warren Buffett mistakes include Buffett’s fateful decision to purchase Energy Future Holdings. Buffett struck the agreement without Munger’s endorsement, and it cost Berkshire Hathaway a staggering $873 million.
“Most of you have never heard of Energy Future Holdings,” Buffett wrote to shareholders in 2014. “Consider yourselves lucky; I certainly wish I hadn’t."
Buffett admitted he made the investment without consulting Munger first. “About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie," Buffett wrote. "That was a big mistake.”
Energy Future Holdings later filed for bankruptcy in 2014, which Buffett predicted. In the process, the Oracle of Omaha learned an expensive lesson in what happens when he doesn't run things past his right-hand man. You, too, should try to find a trusted advisor on financial matters.
Cash is riskier than the stock market
Many people view stock market investing as risky. But one of the key Warren Buffett lessons is that the real risk often lies in keeping your money in cash. Buffett has stayed true to this rule, even saying "I hate cash" on CNBC.
So, if this is true, why is the Oracle of Omaha keeping nearly $100 billion in cash? Even for one of the world’s richest men, that’s a lot of green, leading to plenty of speculation about why he is breaking his own rule. Investors and Buffett fans wonder if there is a big deal — even a corporate takeover — on the horizon.
If a takeover is in the cards, $100 billion is enough to put giant corporations such as Nike or Costco at risk. For now, the billionaire has been mum about his stockpile of cash, insisting he’s just been keeping the cash until the right large-scale acquisition opportunity comes along.
Don't use undervalued stock to make a purchase
A huge part of Buffett’s success comes from retaining ownership of stock that is undervalued by the markets. He's not a fan of using such stock to purchase other companies.
"Under such circumstances, a marvelous business purchased at a fair sales price becomes a terrible buy. For gold valued as gold cannot be purchased intelligently through the utilization of gold — or even silver — valued as lead," he has said.
Buffett broke this rule when he acquired General Re to expand GEICO’s insurance operations. When Buffett purchased the company, he issued $21.7 billion in stock to pay for it. That might seem like a sweet deal for a company that is now a major part of Berkshire Hathaway’s insurance operation. However, the stock Buffett issued to General Re’s shareholders would now be worth $69.4 billion, according to a report in the Motley Fool. So, if Buffett had kept his Berkshire Hathaway shares and purchased General Re with cash instead, he’d be a lot richer.
See the rest of the story at Business Insider