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Warren Buffett MBA Talk | Part 2: Smart Choices

"To risk something that is important to you for something that is not important to you is foolish."


Part two of this MBA talk focuses on making the right decisions. He talks about his involvement in the Long Term Capital Management incident and how the very intelligent, high IQ guys running this hedge fund, made bad, risky decisions that ultimately led to a huge failure. He used this as an example of how high IQ is not needed to be successful and also one needs to truly understand the risks one takes and if it is worth it. These are some of his comments from this clip.

 To risk something that is important to you for something that is not important to you is foolish. To make money they [partners in LTCM] did not have and didn't need, they risked what they did have and did need.

If you handed me a gun with one thousand chambers, or one million chambers in it and there was a bullet in one chamber. Then you said put it up to your temple and asked how much do you want to be paid to pull it once. I am not going to pull it. You can name any sum you want, but it does not do anything for me on the upside, and I think the downside is fairly clear.

History does not tell you the probabilities of future financial things happening.

The beta does not tell you a damn thing about the risk of the stock.

Sigmas do not tell you about the risk of a company going bankrupt either.

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In this part of the lecture, he really emphasizes making the right decisions. It is totally unnecessary to take risks, especially when you risk things that are important to you for things you do not need. I see how this can be included in my investment philosophy. If you assumed that the money you are investing is not yours, but belong to shareholders, think if you would purchase a particular company. More importantly, think if the money was yours and you did not want to risk losing anything, consider how careful you should look at the investments. Buffett's rules should apply always:
1. Don't lose money,
2. Don't forget rule number 1.

Choose investments with minimal downside and a lot of upside. Very simple strategy. The same philosophy applies to your choices in life. Do you agree?








Related Posts
Warren Buffett MBA Talk | Part 1: Integrity
Warren Buffett MBA Talk | Part 2: Smart Choices
Warren Buffett MBA Talk | Part 3: Choosing Businesses
Warren Buffett MBA Talk | Part 4: Share of Mind
Warren Buffett MBA Talk | Part 5: Circle of Competence
Warren Buffett MBA Talk | Part 6: Macroeconomic Factors
Warren Buffett MBA Talk | Part 7: Inactivity & Dividends
Warren Buffett MBA Talk | Part 8: Diversification
Warren Buffett MBA Talk | Part 9: Market Cap
Warren Buffett MBA Talk | Part 10: Ovarian Lottery

Comments

1 Response to "Warren Buffett MBA Talk | Part 2: Smart Choices"

D said... December 30, 2008 at 5:41 PM

I like this video-particularly towards the ending. DO WHAT YOU LIKE!

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