Loading...

Happy Holidays

I would like to wish the readers of Buffettucation the happiest of holidays. I wish you all much love, prosperity and happiness during this season of giving and caring.

Happy Holidays!!! HappyHolidays

Warren Buffett MBA Talk | Part 10: Ovarian Lottery

"Do something you enjoy all your life and be associated with people you love"

Warren Buffett concludes this talk with the most important story that he refers to as the Ovarian Lottery. I believe this to be a great way to look at the society and your role in this world. I will do my best to transcribe the story so that it is clear and so that it impacts you as much as it did me. Enjoy.

The Ovarian Lottery


Twenty-four hours before you were born, a genie came to you.

 

Genie: "Herb, you look very promising and I have to design a world in which you are going to live and I have decided to allow you to design it because it is too difficult of a task. So you have 24 hours; you have to figure out what the social rule should be, the economic rule , the governmental rules and you are going to live under those. Your kids will live under them, and their kids will as well."

 

You: "I can design anything?"

 

Genie: "Yes, you can do it."

 

You: "There must be a catch."

 

Genie: "Well there is a catch. You don't know whether you are going to be born black or white, rich or poor, male or female, weak or able-bodied, bright or retarded. All you know is that you are going to take one ball out of a barrel that contains 5.8 billion. You are going to participate in what I call the Ovarian Lottery. You are going to get one ball out of there and that will be the most important thing to happen to you in your life because that will control whether you are born with an I.Q. of 130 or and I.Q. of 70. It's going to determine a whole lot. And you are going to go out in that world and have a ball. What kind of world do you want to design."

Buffett says:

This is a good way to look at social questions because not knowing which ball you are going to get, you will want one [a world] that produces a lot of goods and services because you're going to want people on balance to live with. You will want it to produce more and more so that your kids will live better than you and their kids better than your kids.

And you will want a system, if it produces lots of goods and services, it does not leave behind a person accidentally got the wrong ball and is not well wired for this particular system.

I'm ideally wired for this system. I fell into here. I came out and I have something that allows me to allocate capital. Nothing's so wonderful about that. If all of us were stranded on a desert island. We all landed there and were never going to get off, the most valuable person would be the one that could raise the most rice over time. Bill Gates said that if I had been born a few years ago, I would have been some animal's lunch. You can't run very fast, you can't climb trees, you can't do anything. I'd just be chewed up on the 1st day. You were lucky to be born today.

Here's the question to ask yourself. Here is this barrel of 5.8 billion balls. If you could put your ball back and then take out, at random, 100 other balls and you had to pick one of those, would you put your ball back in? Your answer is most likely no, because you are in the luckiest 1% of the world by just being here right now.

Out of those100 balls that you get out, roughly 5 of them would be American. 50% would be men and women, 50% would be intelligent.  So what you are saying is that you are in the top 1% of the world.

Investing Philosophy

In this final clip of the MBA talk, Warren Buffett endorses probably the best book ever written about investing; The Intelligent Investor by Benjamin Graham. He refers to the two most important chapters in the book that framed the foundations of his investment philosophy; Chapter 8 - discusses Mr. Market; how one should view the market as a bipolar, manic-depressive individual that gives you a good deal on one day, and a bad deal the next and is totally irrational; Chapter 20 - discusses the idea of 'Margin of Safety', that Buffett says are the three most important words in investing, and still applies today. As always, a great way to end this MBA talk series. If you are new to investing, this is probably the best book to start off with.

See Buffettucation Bookstore to the right for the list of books.

Life Philosophy

The Ovarian Lottery provides the greatest lessons one can learn from life on this planet; compassion for others, humility for one's gifts, and gratitude for the life one was given. I think it really speaks for itself. It reminds me of the famous quote by Mahatma Ghandi; "Be the change you want to see in the world". In a sense, let your ideas of how you think the world should be, be applicable to everyone. A fair and just world that supports others that have drawn the short straws in life, and supports those that strive to make the world a better place.

Now that we have completed the MBA talk, I hope you got to learn a little bit about Warren Buffett's investing and life philosophy, I hope this will get you interested in his work. Most importantly, I hope it is the beginning of a great investment career for you. Keep reading and keep learning.






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

Warren Buffett MBA Talk | Part 9: market cap

"It does not make any difference; large cap, small cap, giant cap, micro cap, medium cap. All that matters is that we understand the business, we like who is running it and it is selling at a price that is attractive."

This clip briefly talks about the prospects of large caps versus small caps. As the quote indicates above, Warren Buffett stated that they pay no attention to the market cap of the company with regards to one cap outperforming the other. It makes no difference. When they look at businesses, they ask three (3) questions:

1. Do we understand the business?
2. Do we like the people running it?
3. Is it selling at a price that is attractive?

As you can see, this is consistent with his basic investment philosophy.

"The cap does not make a difference; it is the certainty of the business that counts."

 

Investment Philosophy

I thought it best to reiterate the basic principles upon which Warren Buffett's philosophy lies. Given the current conditions of the economy, we cannot hear the basics enough to keep us focused.
 
1. Buy a business you understand.
2. Buy a business with favorable long-term prospects.
3. Buy a business operated by honest and competent people.
4. Buy a business available at a very attractive price.

As another one of my favorite investers, Bruce Berkowitz, said "Ignore the crowd"; this is what we should do in this environment. We know that the market is driven by sentiment and emotions, therefore stick to your underlying philosophy and do not pay attention to the noise in the market. Like the ocean when the water is rough, it is difficult to see through clouded by sand; but when the water settles and the calm is restored, only then can you see things clearly. Focus on the business; ignore the extraneous details.

Life Philosophy

It was interesting how what I am about to write came about. I could not think of a way to relate this to life, but I know there is always a way. So I took a break and now the idea came through me. Have faith. You know how normally we have faith in our beliefs once everything is going well for us, but as soon as we encounter difficult times, we are tested. Why are we tested? Well, it is during those times we are the most vulnerable and there exists a high possibility of us changing or relinquishing our belief systems. Just as this very volatile market condition or challenging economic environment has impacted most of the investors out there, we are affected in life just the same. The message I deliver is when the times get tough, this is when you should focus even more on what you believe in, because ultimately, when the dust clears, your firm understanding will get you through and all those that panicked would have missed the opportunity.






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

Warren Buffett MBA Talk | Part 8: Diversification

"Wide diversification is only required when investors do not understand what they are doing."

In this clip, Warren Buffett talks mainly about diversification, therefore I will concentrate the content just on this topic. He also talks about the businesses of Proctor and Gamble and Coca-Cola and why they are great businesses.

Nevertheless, his response to the question on diversification was two-fold.

1. If you are not a professional investor and your goal is not to manage money so that you get a significantly better return than the world, then 98-99% of the people who invest should diversify. This is the only case where he firmly agrees with diversification. These type of investors should consider indexing.

2. However, if you want to bring intensity to the game; to make a decision and start evaluating businesses, then diversification is a bad idea. If you really know businesses, you shouldn't own more than six of them. Going into a seventh idea rather than adding to your best idea rarely makes sense.

"Diversification is insurance against ones own ignorance."

Investing Philosophy

In an effort to stick to the simplicity of this idea, I will not dwell too much on it. I think it is self explanatory. If you are a sophisticated investor, then diversification may not be necessary. However, if you are not, you should diversify. The idea of diversification to minimize risk is what MBA students are taught in universities. Any finance course will tell you that unsystematic risk is reduced after owning about 15 stocks or so in a portfolio. However, this is dependent on your definition of risk. If you truly understand a business, then this whole philosophy of risk changes. You buy great businesses you understand with great economics, management at a very attractive price; what risk would there be? If you think volatility; well that only offers the opportunity to buy more at attractive prices.

"In the short run, the stock market is a voting machine, but in the long run, it is a weighing machine."

Life Philosophy

What does his philosophy on diversification teach us? I think it says that if you are absolutely certain about something, you should not fear putting a lot into it. For example, if I have studied a company, done all that I can to  really understand the business, believe in the management, love the future economics of the company, then why should I hesitate to invest greatly in it. The returns will ultimately come. Consequently, if you truly believe in something, then give it your all, do not be afraid of risks or do not be tempted by what others may be doing, put your all in your best idea, in what you truly want to do with your life, and that is when you will be rewarded. If things do not work out the way you like, then at least you know that you did your best with it and that should be enough. Think about this greatly, diversification is almost another way of saying 'fear of failure or defeat'. Put your effort in what you truly want out of life, and chances are high that your desires will be fulfilled; you will see the returns. It just may not happen when you expect it to, but I assure you, it will happen in due time.

Check my blog posting on Napoleon Hill on The Power of the Mind.






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

FOLLOW ME ON TWITTER

Sponsored Links

Recommended Readings