What is an asset? What does it mean to be wealthy?

What is an asset?

THE question, “What is an asset?” seems like an absurdly simple question. But if you understand the answer to that simple question, and act on it, you have started down the path that leads to riches. Few people become rich, so clearly then, few people understand the answer to this question. Let’s have a closer look.

The Oxford English Dictionarydefines an asset as “a useful or valuable thing or person; [or as] property owned by a person or company.” This is the strict dictionary definition of the word ‘asset’. However, if I use this definition of ‘asset’ when deciding how to spend my money then I am likely to make mistakes. That is, I am likely to make decisions that I would not have made had I really understood what an asset is.

Using the Oxford dictionary definition of ‘asset’, I could be mistaken for thinking that my Mercedes that I have parked out the front is an asset. I own it, it is very useful and it is definitely valuable. This satisfies the dictionary definition of an asset. In addition, the bank will usually be willing to count my Mercedes as an asset when I ask for a personal loan.

In Rich Dad Poor Dad, Robert Kiyosaki makes the insightful point that, “what defines an asset is not words but numbers”. Let’s consider the numbers relating to my Mercedes. Every month I have a series of expenses that I incur because I own my Mercedes. My expenses might include: fuel $400, on-road maintenance costs $50, and insurance $200. So, every month my Mercedes costs me $650 in expenses. This doesn’t sound much like an asset.

According to Robert Kiyosaki, an asset is “something that puts money in my pocket every month.” By this definition, my Mercedes is not an asset but a liability. It costs me $650 each and every month, and that’s not including depreciation.

But, what about my house, is that an asset? The conventional wisdom is that you’re house is an asset, and the bank will certainly let you count it as an asset when you ask to borrow money. Let’s apply Kiyosaki’s definition to see whether a house is an asset. Every month you might have to pay: property taxes $200, loans $3000, utilities $200, and maintenance $100. In this example, your house costs you $3,500 each and every month. This doesn’t sound much like an asset.

It is true that, unlike my Mercedes, houses usually appreciate in value. However, there are three problems with this:

  1. Property does not always appreciate in value. The recent sub-prime mortgage crisis in the United States has taught us all that lesson, if we didn’t know it already;
  2. Tying up all of your money in your house comes at a high opportunity cost. So, while the value of your house may be rising and you are managing to pay off your mortgage, you may be unable to take advantage of great opportunities that are presented to you. “I would, but I have to make mortgage payments”;
  3. Your home does not put money in your pocket every month. The only time that you can obtain money from your house is when you sell it. For one reason or another, people are often reluctant to sell their homes. This fact remains true even when people are in tight financial circumstances.

The kind of assets that I’m talking about come in various forms, five examples include:

  1. Businesses that do not require your presence. If you need to be there to run the business it is a job and not a business;
  2. Stocks;
  3. Bonds;
  4. Income-generating real estate; and
  5. Royalties from intellectual property such as books or music.

Once you understand the difference between assets and liabilities, it is a good idea to concentrate your efforts on only buying income-generating assets. This is the path to wealth and riches.

What does it mean to be wealthy?

If the main game is to become wealthy, it would pay to stop for a second and consider what it would mean to be wealthy.

I am inclined to accept the definition of wealth that Kiyosaki puts forward, borrowed from Buckminster Fuller.

Wealth is a person’s ability to survive so many number of days forward into the future if they were to stop working today. So, I have become wealthy when my income each month, which is generated from my assets, fully covers my monthly expenses. If I want to increase my monthly expenses, I must increase my cash flow obtained from my assets in order to maintain my wealth.

To say that someone is wealthy, then, is to say nothing about whether that person is rich. I can be wealthy without being rich.

How much income do I need each month, generated from my assets, before I can consider myself rich? The answer to that question is up to you. The definition of ‘rich’ is in the eye of the beholder.

The consulting case interview: 10 tips for a successful performance

THIS is the first of a series of posts looking at the consulting case interview. Below, I provide ten insightful tips that will help you achieve success in your case interview. The information below is from my own thoughts and by reference to Vault Guide to the Case Interview.

1. Practice, practice, practice

Preparation is important for three main reasons:

  1. The interview process is extremely competitive. You are unlikely to succeed without a lot of practice;
  2. Case problems are indicative of the type of work that you will have to do as a consultant. So, your ability to answer case problems indicates your readiness to start work as a consultant; and
  3. Your preparedness for the interview is an indicator of your motivation and passion to be a consultant. If you can’t be bothered to prepare, then you don’t want the job badly enough.

2. Take notes

You should take notes when the interviewer is giving you the facts of the problem question.  Remember to bring a notepad and pen to the interview because the benefit of writing things down is that:

  • It helps ensure that you don’t need to ask the same question twice;
  • It helps you to structure your thoughts; and
  • It allows you a moment to pause and think before addressing the question.

3. Don’t make assumptions

Your interviewer will most likely leave information out when giving you the facts. You should not assume facts that have not been given to you. The interviewer has more than likely drawn the business case from the interviewer’s experience of a real world business problem. In answering a business case problem, you should assume the persona of a consultant trying to learn about an assignment. For example, you should ask if the company, or another company in the industry, has encountered a similar business problem, and what they did about it. Although your interviewer may not release that information, the interviewer will be impressed that you asked these sensible questions.

4. Ask questions

Your interviewer expects you to ask questions in order to obtain an accurate picture of the relevant facts in the case. For example, if you don’t know the first thing about the automobile market, ask how much it costs to manufacture an engine. If you are asked to estimate the demand for hamburgers in Sydney, feel free to ask how many people live in Sydney and the surrounding areas. Your interviewer is likely to direct your line of questioning to a specific area, but you must always be ready to control the conversation in case the interviewer does not direct your reasoning.

5. Engage in active listening

It is not wise to stick religiously to asking a list of pre-prepared questions. Listen to the information that you have received and the answers you get to your initial questions and how this affects your understanding of the problem. What is unclear and what do you still not know? Make sure you respond to the information you receive and incorporate it into your analysis.

6. Maintain direct eye contact

Eye contact is important because it demonstrates confidence and authority. As a consultant you will have to meet with upper management and boards of directors regarding matters that you have been briefed on only hours before. The case interview is a practice for the real thing.

7. Take your time

It’s okay to take a minute to collect your thoughts. However, it’s probably not such a good idea to leave the interviewer hanging for 5+ minutes while you ponder the deeper aspects of the problem. In short, it is more important to give a well thought out and structured response than to respond immediately.

8. Clearly structure your answer

Clearly structure your answer by identifying to the interviewer the analysis framework you are going to use and the structure of your answer. For example, “firstly I will consider X, secondly I will consider Y, and finally I will make a recommendation.” A large part of a consultant’s job is to explain complex ideas clearly and succinctly. By structuring your answer, this will help you to structure your thoughts and may alert you to factors that you would have otherwise failed to consider. Providing a clear structure will impress your interviewers by avoiding the impression that you “made it up as you went along”. I will consider the main analysis frameworks that you might be able to use in a later post.

9. Think out loud

The business case is an opportunity to show the interviewer how you think. As you analyse the elements of the business case, be sure that you talk out loud and explain your reasoning. This is the only way the interviewer can assess your performance.

10. Summarise your conclusions

You have limited time in your case interview to make your point. It is important to be able to briefly summarise the conclusion you have come to based on your analysis of the facts and to make a recommendation.

#1 McKinsey – an overview of the top four consulting firms 2008

APPLYING for a job as a consultant can be a difficult and daunting task. Consulting jobs are highly sought after and the competition is intense. The process of polishing your resume, writing applications and preparing for case interviews can be exhausting and time consuming. Over and above the time actually spent in interviews, each consulting firm you apply for will require hours of research and preparation. Before you set out along that long are arduous path, it is probably a good idea to know who the top consulting firms are and understand a little bit about them. This will help you to focus your effort.

In 2008, the Vault Guide ranked the top 50 most prestigious consulting firms in the world. I have provided an overview of the top four firms, ranked as follows

  1. McKinsey & Company
  2. Boston Consulting Group
  3. Bain & Company
  4. Booz Allen Hamilton

All of these firms have significant global operations and have a strong presence in Sydney. All the information here was obtained from the Vault Guide to the Top 50 Management and Strategy Consulting Firms, 2009 Edition (Vault Career Library), Wikipedia and the respective firm websites.

1. McKinsey & Company

Organisation type

Private company

Headquarters

New York, New York, USA

Key people

Ian Davis, Managing Director

Size

7,500 consultants (13,000 employees) in 90 offices across 51 countries

Revenue

$4.37 billion (2007, Forbes estimate).

Mission

To help clients make distinctive, lasting, and substantial improvements in their performance and to build a great firm that is able to attract, develop, excite, and retain exceptional people.

Operational structure

Although being a private company, McKinsey operates under a decentralised partnership structure.

McKinsey organises its business into six functional practices and 18 industry practices. Functional practices include business technology office, corporate finance, marketing and sales, operations, organisation and strategy.

Clients

McKinsey works internationally in a broad range of industries with large private sector institutions, governments and other non-profit institutions.

Culture

The core guiding principle at McKinsey & Company is professionalism.

Maintaining client confidence is very important. McKinsey does not trumpet the names of its clients or highlight its major engagements.

Career development is intensely feedback oriented.

McKinsey operates under a practice of “up or out,” in which consultants must advance in their consulting careers within a time frame, or else leave the company.

The firm has an endemic ‘long hours’ culture.

Consultants are often required to travel to work with a client in another city.

Publications

Periodicals: McKinsey Quarterly (published six times a year); McKinsey on IT; and McKinsey on Finance.

Books:
– The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise
– Creative Destruction: Why Companies That Are Built to Last Underperform the Market–And How to Successfully Transform Them
– The War for Talent
– In Search of Excellence: Lessons from America’s Best-Run Companies (Collins Business Essentials)

Brief history

1926 Firm founded in Chicago by Prof. James McKinsey

1933 Marvin Bower joined the firm in 1933 and served as managing director from 1950 to 1967. He is widely credited with being the founder of professional management consulting. Bower established many of McKinsey’s guiding principles.

1959 London office opens

1990 McKinsey Global Institute established

2001 The McKinsey Institute on the Non-profit Sector launched

2003 Shanghai office opens

Nota bene

Vault consulting firm rankings:

· Ranked most prestigious consulting firm in the world in 2008 for the last five years running; and

· Ranked best energy consulting and financial consulting firm in 2007.

The firm serves three of the world’s five largest companies and two-thirds of the Fortune 1000.

Jeff Skilling, the now disgraced ex-CEO of Enron, was a former McKinsey consultant. Enron received strategy advice from McKinsey.

Careers information

Associates and analysts with at least one year of McKinsey experience can apply to the firm’s Community Fellows program, working exclusively on non-profit projects for 6 to 9 months.

McKinsey places heavy emphasis on the use of the case interview in order to assess your capabilities and potential in four main areas.

1. Problem solving,

2. Achievement,

3. personal impact, and

4. leadership.

Website

http://www.mckinsey.com/

#2 BCG – an overview of the top four consulting firms 2008

 

  1. McKinsey & Company
  2. Boston Consulting Group
  3. Bain & Company
  4. Booz Allen Hamilton

2. Boston Consulting Group

Organisation type

Private Company

Headquarters

Boston, Massachusetts, USA

Key people

Hans-Paul Burkner, President and CEO

Size

3,900 consultants (2007) in 66 offices across 38 countries

Revenue

$1.8 billion (2006, Vault)

Expertise

Business strategy

Mission

BCG is committed to:

· Creating competitive advantage through unique solutions

· Building capabilities and mobilizing organizations

· Driving sustainable impact

· Providing unparalleled opportunities for personal growth

· Succeeding together with passion and trust

Operational structure

BCG divides its services into functions including branding, consumer goods, corporate finance and strategy, e-commerce, globalisation, health care, industrial goods, information technology, innovation, intellectual property, marketing and sales, operations, organisation, post-merger integration and strategy.

BCG has a strong presence in Asia.

Clients

BCG draws most of its clients from the 500 largest corporations worldwide, as well as working with smaller companies, non-profit organisations and government agencies.

Culture

BCG supports openness and diversity of opinion. It has a non-hierarchical structure where junior consultants are given responsibility and have access to partners.

BCG reportedly has a friendly and cooperative culture.

BCG has a reputation as a high travel firm.

BCG reportedly has a good work life balance and is less interested in hours spent in the office than it is on results produced.

It appears that BCG does has an “up or out” policy.

 

Recent publications

2006Treasure Hunt: Inside the Mind of the New Consumer’ by Michael Silverstein

2006 The Boston Consulting Group on Strategy: Classic Concepts and New Perspectives

2005The Forgotten Half of Change: Achieving Greater Creativity through Changes in Perception’ by Luc de Brabandere .

2004 Hardball: Are You Playing to Play or Playing to Win’ by George Stalk

Brief history

1963 founded by Bruce Henderson. Henderson left Arthur D. Little to accept the challenge from the CEO of the Boston Safe Deposit and Trust Company to start a consulting arm for the bank.

1965 Henderson pioneered Business Strategy as a special area of expertise for BCG.

1966 BCG developed their first breakthrough concept, the Experience Curve. The concept stipulates that unit costs characteristically go down over time as experience increases. This concept helped in the understanding of the role that market share plays in establishing competitive advantage.

1966 BCG becomes the first Western strategy consulting firm in Japan.

1968 BCG developed the growth share matrix, which is simple conceptual framework for resource allocation within a firm. .

1975 BCG stock is sold to its employees through an employee stock ownership plan as a means of purchasing the company from The Boston Company. This was one of America’s first ESOPs. The buyout of all shares was completed in 1979.

1988 George Stalk wrote “Time: The Next Source of Competitive Advantage”, from which academic and business communities embraced the concept of time based competition.

1990 BCG opens the Sydney, Melbourne and Auckland offices.

1998 Creation of the Strategy Institute to research and foster discussion on innovation.

Nota bene

Awards:

2008 Ranked 2nd most prestigious consulting firm in the Vault consulting firm rankings.

2008. Ranked 11th overall, and 1st among smaller companies, in Fortune Magazine‘s 2008 “100 Best US Companies to Work For” survey, based on strong employee development, a supportive culture, and progressive benefits.

2007. Named best large consulting firm in Australia in BRW magazine’s annual Client Choice Awards.

Careers information

Consultants can expect to be involved in pro bono work. Recent projects have included, developing a comprehensive environmental plan for eastern Germany and designing a five year strategy for the World Wildlife Fund.

BCG places heavy emphasis on the use of the case interview and looks for a combination of curiosity and competence.

Website

http://www.bcg.com/

#3 Bain – an overview of the top four consulting firms 2008

  1. McKinsey & Company
  2. Boston Consulting Group
  3. Bain & Company
  4. Booz Allen Hamilton

3. Bain & Company

Organisation type

Private company

Headquarters

Boston, Massachusetts, USA

Key people

Steve Ellis, Managing Director. A Stanford MBA, Ellis co-founded Focus, Inc., a Silicon Valley consulting firm, before coming on board at Bain.

Orit Gadiesh, Chairman of the Board

Size

3,700 employees in 38 offices across 25 countries

Revenue

$US1.3 billion (2006)

Expertise

The first consultancy of its kind to establish a private equity practice. Bain & Company is well-known for offering services like due diligence, IPO preparation, portfolio profit improvement and revenue enhancement geared toward leveraged buyout and venture capital firms.

One of Bain’s areas of expertise is the luxury sector.

Slogan

Helping make companies more valuable

Mission

To help companies achieve sustainable results.

Guiding principles

Bain measures its success by the results of its clients. It distinguishes itself from competitors like BCG and McKinsey with its notion of results-oriented consultancy. Bain pioneered the idea of aligning its incentives with its clients’ results and occasionally taking equity in lieu of fees.

Clients

Bain’s engagements are divided between small- and midsized companies, with roughly 40 percent of its engagements coming from this demographic. Bain also works with Fortune 500 and private equity clients.

Culture

BCG is purported to have a relatively high proportion of undergrads relative to BCG and McKinsey. Creating a more lively office culture.

Work/life balance seems to be important at Bain but is achieved on a six month time frame, rather than being balanced every week.

Bain’s results-oriented culture means that consultants can choose when the want to work and schedule free time for important events.

Bain appears not to require as much travelling as McKinsey and BCG. Consultants will go to a client when they need to collect data or to make a presentation.

Bain has a non-hierarchical and meritocratic system, people work in teams and are hired and promoted on merit.

Exposure to clients and top-level executives is purported to be given at an early stage.

Bain encourages consultants to work on a range of project types across a variety of industries in order to develop strong generalist skills before being tied down to one area of expertise.

Recent publications

2007Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth

2006The Ultimate Question: Driving Good Profits and True Growth’ by Fred Reichheld .

2004 Mastering the Merger: Four Critical Decisions That Make or Break the Deal by David Harding and Sam Rovit

Brief history

1973 Bill Bain and others left BCG to form Bain & Company

1984 Bain Capital, a successful venture capital firm was founded by Bain partners (including Massachusetts Governor Mitt Romney). Bain Capital has around $27 billion in assets under management. Bain Capital’s funds include private equity, venture capital, public equity and leveraged debt assets.

1985 Bain was incorporated in 1985 and over the course of two years the Employee Stock Ownership Plan was established.

2000 Bain founded a non-profit group called The Bridgespan Group, which offers fresh management strategy approaches for clients in the non-profit world, such as the Bill & Melinda Gates Foundation. Bain’s consultants rotate into Bridgespan from the parent consultancy for six-month rotations.

2006 Bain is a late comer to India, in 2006 it opened a full-fledged office in New Delhi

Nota bene

2008 Ranked 3rd most prestigious consulting firm by the Vault Guide.

2007 Ranked as the best firm to work for every year for the last five years by Consulting Magazine.

2007 Ranked as the best workplace in France by the Great Place to Work Institute

2007 Ranked as the best place to work in Europe and the UK by the Financial Times

Careers information

In a Financial Times interview, Bain partner Bill Neuenfeldt identifies the desired qualities in potential hires as “intelligence, integrity, passion and the ambition to make a difference”. Bain also looks for candidates with an enthusiasm for problem-solving and an analytical skill-set.

Bain has a tradition of pro bono work and aims to make a significant investment on important social issues.

Bain is purported to be just as selective as McKinsey and more selective than consultancies like Booz Allen, Monitor and A.T. Kearney.

Intelligence is important, but demonstrating energy and professionalism is also very important.

One consultant interviewed in the Vault Guide indicated that it is important to “make sure you have a compelling and customized story about why you want to be a consultant at Bain.”

Website

www.bain.com

#4 Booz Allen Hamilton – an overview of the top four consulting firms 2008

 

  1. McKinsey & Company
  2. Boston Consulting Group
  3. Bain & Company
  4. Booz Allen Hamilton

NOTE: In July 2008, Booz Allen Hamilton separated its two core businesses into two companies. Booz Allen Hamilton now provides U.S. government consulting, and Booz & Company provides commercial management consulting.

4. Booz Allen Hamilton

Organisation type

Private company

Headquarters

McLean, Virginia, USA

Key people

Dr. Ralph Shrader, Chairman and CEO

Other key people

Size

19,000 employees in 115 offices across six continents

Revenue

$4 billion (2006)

Expertise

Main expertise is strategy and technology consulting, in commercial and government sectors.

Mission

To deliver results that endure.

Operational structure

Firm’s services are broken into strategy and leadership, organization and change management, operations, innovation, sales and marketing, and information technology.

Clients

After WWI, Edwin Booz increasingly used his ties to Washington and the public sector, establishing a tradition of government service that continues at Booz Allen to the present.

Booz clients also include the world’s largest corporations and emerging growth companies from every industry sector and every country.

Culture

Client confidentiality is important at Booz Allen and the firm doesn’t typically publicise the names of clients.

The firm is said to have a very non-hierarchical open structure which fosters a culture of team work and cooperation.

Booz Allen consultants typically get heavy workloads and travel is a fairly regular thing. Consultants at Booz Allen would generally be out-of-town four days at a stretch, with Fridays back at the home office.

Promotions are up-or-out, you get promoted upwards or asked to leave.

Publications

Since 1995, the firm has published strategy+business, a magazine for business executives.

Brief history

1914 Founded in Chicago by Edwin G. Booz. Booz believed that companies would be more successful if they could call on someone outside their own organizations for expert advice. He is credited with being the founder of the management consulting profession.

1940 The firm was hired to help the US Secretary of the Navy with WWII preparations, marking the beginning of a longstanding relationship with the US Federal Government.

1950s The firm went global in the 1950s, with a contract in the Philippines and its first international office in Zurich.

1962 Firm changes its structure from a partnership to a privately held corporation.

1970 Booz Allen goes public with an initial offering of 500,000 shares at $24 per share.

1976 The partners took the firm private again through one of the first management buyouts to allow the firm to consider long-range investments that companies beholden to shareholders might not be able to make.

1982 Booz Allen Vice President Keith Oliver develops the concept for supply chain management working with the Dutch electronics giant Phillips.

2003 Booz Allen develops the Org DNA online self-assessment tool, enabling company leaders to better understand how the inherent traits of their organisations influence employee behaviour and affect company performance.

Nota bene

Notable intellectual contributions include the OrgDNA framework, the PERT management technique, and the product lifecycle theory.

2008 Ranked 4th most prestigious consulting firm in the world by the Vault Guide.

2007. The firm has been recognized one of the 100 Best Companies for Working Mothers by Working Mother magazine for seven straight years to 2007

2007. The firm has been recognised as one of Fortune magazine’s 100 Best Companies to Work for two years running in 2007

Careers information

There is a strong emphasis on case interviews.

Website

www.boozallen.com

Warren Buffett on long term value investing

BACK IN 1998, Warren Buffett gave an inspirational talk to a group of MBA students at the University of Florida, College of Business. In the speech, Buffett gives his perspective on investing, in which he outlines the need to understand the underlying economics of the businesses that you invest in, and the need to stick to disciplined principles of business evaluation without being swayed by passing investment fads.

Here are 15 of the most interesting and insightful points made by Buffett in his speech about successful long term investing, as follows:

1. Return on equity is key

Return on equity is fundamental. In general, there is no point to investing, just because of the availability of cheap financing, if a business has a low return on equity. It’s hard to earn much as an investor when the business you’re in doesn’t earn very much money. Buffett elaborates that when he started out as an investor he would sometimes purchase very ordinary stocks at prices way below the value of working capital. This is what Buffett calls the ‘Cigar Butt’ approach to investing. You look around for a cigar butt (i.e. really cheap company), you find one that is old and soggy. You get one free puff out of it, and then you throw it away and try to find another one. If you’re looking for a free puff then this approach to investing works, but these are very low return businesses. By investing in a wonderful business with a high return on equity then, even if you initially pay a little too much, you’ll do well if you stay in for a long time.

2. Ownership of a stock is partownership of a business

Ownership of a stock is part ownership of a business.  With that in mind, the investors should not pay attention to the day to day stock fluctuations.

3. Invest in businesses that you understand

As Buffer jokes, this significantly narrows down the number of companies that he has to look at. You need to look for a simple business which is easy to understand, and which has honest and able management. Buffett says that this lets him understand where a company is going to be in ten years time. If he can’t see where the company will be in ten years, he won’t buy it. Buffett says that “investing is putting out money now, to be sure of getting more money back later at an appropriate rate. To do that you need to understand the business.” Buffett says that he wouldn’t invest money in a new internet business because he doesn’t understand that business and couldn’t say where it would be in ten years time. In his early years he would conduct extensive industry research. For example, by asking every CEO in an industry “if you could buy the stock of one other company in the industry, which one would it be and why?”

4. Invest within your circle of competence

The nice thing about investing is you don’t need to learn anything very new. Buffett says that he learnt about Wrigley’s chewing gum 40 years ago, and still understands that industry today. As a result, you will develop a pool of knowledge about different industries that builds up over time. Interestingly, Buffett says that most of his deals get completed in a matter of hours. If you don’t know enough about a business instantly, you won’t know enough in a month or two.

5. Invest based on solid reasoning

If someone told you about a company at a cocktail party or the charts look good, that’s not good enough. Paying a little too much for a wonderful business, you’ll do well if you stay in for a long time. You buy a lousy business for a good price; you stay in for a long time you’ll get a lousy result. If you’re right about the business, you’ll make a lot of money.

6. Invest for the long term

Buffett recommends buying businesses that you would be happy to own forever. It may happen that you have to sell for one reason or another, but you should, at the time you buy, want to be buying a company that you’ll own forever.

7. Strong businesses need a durable competitive advantage

A strong business needs a durable competitive advantage. Buffett says that although he wants to understand the businesses he goes into, he doesn’t want a business that is easy. You want a business with a moat around it with a duke defending the castle. That moat might be low cost operations, quality of products, service, patents, real estate location, or share of mind (Buffett explains that thirty years ago, Kodak’s moat was as wide as Coke’s moat. Kodak had share of mind, forget about share of market. They had something in everybody’s mind that said, “Kodak is the best”).

8. Feel strongly about the products

You want a business that has products that are not price dependant. Disney and Coca-Cola have developed a favourable impression in the mind of consumers that allows these companies to charge more for their products and sell more of them than other companies in the same industry.

9. Don’t borrow money that you don’t need

Buffett says that he never borrows money. He loves his job and was doing the same thing when he had $10,000 and when making $1,000 was a big deal. He recommends taking a job that if you were independently wealthy you would take. “If you think you’re going to be a lot happier if you have 2X instead of X, then you’re probably making a mistake.”

10. You only have to get rich once

Risking what you have and need to get what you don’t have and don’t need is foolish. Buffett gives the example of Long Term Capital Management. This hedge fund was run by smart people, with extensive experience and with their own money invested. To make money they didn’t have and didn’t need, they risked money they did have and did need. Buffett says, “if you risk something that is important to you for something that is unimportant to you, that decision just doesn’t make sense.”

11. Be patient, think carefully and avoid over stimulation

Buffett says that, in his opinion, the best way to think about investments is to sit in a room and just think. The problem with being in a market environment is that you get the feeling that you have to do something everyday, you get over stimulated. You want to be away from any environment that stimulates activity. Get one good idea a year, and ride it to its full potential.

12. Professional investors should not diversify

Buffett believes that if you are not a professional investor, which is ninety nine percent of people, then you should extensively diversify your investments and not trade. However, once you decide that you are going to bring an intensity to the game and start evaluating businesses and bring the effort, intensity and time involved to get that job done, then Buffett believes that diversification is a terrible mistake. In his opinion, if you really know businesses then you shouldn’t own more than 6 of them. “Very few people have got rich on their seventh best idea.”

13. Business size is not the important consideration

When investing, business size is not the important consideration. Small, medium and large cap stocks can all represent good investment opportunities. It doesn’t matter about the size of the business; it’s the certainty of the returns that counts. The relevant questions are:

  1. Can we understand the business?
  2. Do we like the people running it?
  3. Does it sell for a price that is attractive?

14. Only worry about what is important and knowable

Anything that is unimportant or unknowable, you should forget about it. Buffett outlines that market predictions do not affect his investment decisions. “I have no idea where the market is going to go.”

15. Make investment mistakes

Buffett says that the mistakes that he has actively made have been far less costly than his mistakes of omission. He reflected that the times where he understood a business, saw an opportunity and sat on his hands and did nothing have cost him tens of billions of dollars.