PART 2. ACHIEVING ADEQUATE RATE OF INVESTMENT RETURN
“I have been involved in investing for 20 years and been working as a banker for the last 15 of these. I have not seen any person who has become wealthy by depositing in bank. Also, I do not know anyone who has become rich with salaried work. Maybe some managers of very big companies, but they also tend to invest their available money. No one has become rich just from salary. One could become wealthy by working, but the job should be the one having brought enormous fame – footballer, tennis player, famous singer, lawyer. When looking at successful people who have become really wealthy, these are mainly either entrepreneurs or investors. Both are investors in their own way, as they both own shares.”
Warren Buffett (Berkshire Hathaway), the person among top 3 of the world’s richest people, is one of the most legendary investors. His investment philosophy has brought tens of thousands of people to investing. The value of property of Mr Buffett exceeds 72.7 billion dollars. The top two wealthiest entrepreneurs before Buffett are Bill Gates and Carlos Slim.
Warren Buffett was born on 30 August 1930, having started investing in 1956. This was a very long time ago. The phenomenon of Buffett lies in that he has achieved approximately 25% as the average rate of investment return of his investments within more than half a century.
Seems unlikely? Surely it is not easy, but by learning to invest and creating the successful investment philosophy, the double digit annual rate of investment return is also possible.
What about entrepreneurs?
Well, the two biggest information technology giants Microsoft and Oracle issued their shares at the stock exchange in 1986. Since that time these two companies have increased the value of property of their owners 300 and 500 times.
The entrepreneurs are risk takers by their nature. In some sense they oppose classical investors who do not want to lose money. The entrepreneurs are also investors, as they fund their company with their own money with the aim to increase it by business and gaining profit.
It is said that more than 60% of the starting companies fail. This means that the starting companies are very likely to lose their investment. Some companies are very successful and enable also others to be a part of it. They issue their shares at the stock exchange and enable the investors to buy these shares. If the company succeeds, its value per share increases. But it could go vice versa.
We, investors, are not entrepreneurs. We do not sell and exchange anything. Our aim is to keep our money safe, instead of losing it, we expect to achieve acceptable rate of investment return for that. Thus, our task is to be convinced whether we believe the entrepreneur and whether this company established by him/her is a going concern for long term and increases the property of owners.
Warren Buffett is the greatest investor in the world. He has been able to invest his money in the companies so that it would mainly increase. 25% annual rate of return indicates that he has been able to avoid major losses. I disclose a secret to you – there are many investors with high rate of investment return. For example, Seth Klarman (Baupost Group), Carl Icahn (Icahn Enterprises, IEP), Bill Ackman (Pershing Square Capital Management), Joel Greenblatt, Peter Lynch, Walter Schloss etc.
One should proceed from the knowledge that the average annual rate of investment return of stock markets is 12% which is achievable for everyone, also for you.