You can learn a lot about business by paying attention to one of the richest people in the world, Warren Buffett.
Even if your business doesn’t involve investing in anyone else’s, Buffett’s philosophy has many practical applications.
An article in the Wall Street Journal illustrates how Buffett, also known as The Oracle of Omaha, leverages three of the most powerful weapons in an investor’s arsenal: Cash, emotion and information.
In a letter written in 2010, Buffett mentions that cash equips his company, Berkshire Hathaway, “both financially and emotionally to play offense while others scramble for survival.” This is exactly the same with businesses, small ones in particular, when it comes to thriving, rather than just surviving, during lean times.
The number one thing to understand about business is that a company doesn’t fail because they don’t make a profit. They don’t fail because the economy goes bad, the quality of their products or services is poor or their customers stop buying from them. They fail because they don’t have cash. Yet it seems many small business owners insist on proving this rule for themselves by completely mismanaging their money.
The mismanagement usually starts small by co-mingling personal and business expenses, or choosing not to deposit cash sales in the bank, or failing to track the company’s financial performance at all. Instead, owners just hope they’re making money.
Over time, as their companies begin to enjoy a little success, some owners get a little bolder. They start writing off personal expenses as business expenses, figuring they’ve earned this privilege (and hoping they won’t get audited.)
Before long, this turns into spending money on things that bring absolutely no value to their customers or to their companies. Then, when markets get soft or business slows down, they don’t have the cash to sustain their companies through the tough times, much less capitalize on the weaknesses of their less disciplined competitors.
What does Buffett do? He manages his cash. This enables him to take advantage of bargains when they present themselves. It allows him to take more risks, knowing he has the cash to lose and can recover quickly if things don’t turn out as planned. He doesn’t let a tall stack of cash affect him emotionally.
What would Buffett advise us to do? Hang on to our cash! Resist the urge to engage in binge purchases the moment you have a few extra bucks: The cars the toys, the trailer loads of equipment “just in case.” Manage your money to position your company financially so you can leverage a strong cash position during slow times when your competitors are scrambling to survive.
In more than 45 years of owning businesses, I’ve never seen the economic pendulum stop swinging. It’s always swinging, and it swings both ways. It’s the business owners and investors who are disciplined with their cash during the upswings who do the best during the down swings.
Some people think the secret to Warren Buffett’s success is that he’s unemotional when it comes to investing in companies. This is not the case, according to the same Wall Street Journal article. Instead, Buffett is inversely emotional: Alarmed by other people’s greed and ready to capitalize on their fears. Emotion is the second of three powerful weapons in Buffett’s investment arsenal.
“One of the hardest things for most investors is to sit and watch other people make money,” says Howard Marks, who has known Buffett for years. Entrepreneurs are notorious for this, especially when it comes to competitors. Not only do they resent competitors who are making money, but they equate others’ successes with losing.
Money by itself doesn’t have emotion. It’s neutral. We bring the emotion with our own feelings and beliefs about money, even if they aren’t based on sound reasoning.
What does Buffett do when it comes to investments? He evaluates his decisions critically rather than emotionally. He asks himself whether the investment makes sense long term, with or without a tall stack of cash.
What would Buffett advise us to do? The same thing! Approach business decisions with a critical eye to the long-term impact on our businesses, regardless of whether the decisions involve equipment purchases, geographic expansion or service diversification. It doesn’t matter. Making business decisions when we’re emotionally worked up can cause us to make the wrong ones — ones that we often regret later.
Buffett’s third weapon in his investment arsenal is information. Years ago, Buffett turned himself into an information hub by developing a network of contacts that overflowed with great ideas. “Warren has the ability to figure out which things are important in a whole narrative and to ignore everything else,” Marks commented. “He’s also extraordinarily good at knowing what he’s good at and what he’s not and staying away from the latter.”
Does this mean you should never venture beyond the things you’re currently doing? Absolutely not. It means don’t overreach for the sole purpose of having more. It means play to your own strengths.
What does Buffett do? He starts by doing his homework before making a decision. He researches companies he knows nothing about before investing in them.
What would Buffett advise us to do? Get to know ourselves and our businesses. Figure out what we are especially good at doing. Then determine whether there are trends taking place in the industry on which we can capitalize based on those strengths.
Develop your own network of experts and opinion leaders by getting out of your office and attending conventions or seminars where you can keep your knowledge updated and pick the brains of other business owners.
We would do well to consider the investment strategies one of the richest men in the world uses when we consider our own companies.
Who knows, our businesses might do so well that one day we find ourselves trading business with Warren Buffett.
Chuck Violand is the founder and principal of Violand Management Associates (VMA), the largest consulting company in the restoration and cleaning industries. Violand is a recognized industry leader for advising entrepreneurs on the unique challenges they face both personally and professionally. Through VMA, he works with business owners and companies to develop their people and their profits. Violand is the president of the Restoration Industry Association (RIA). To reach him, visit violand.com or call (800)360-3513.