Editor’s note: This article was first published in April 2013. Calling Buffett the best investor in the world today, and the mentions of Zara, Uniqlo and successful clothing franchises, reflect that time.
Until now, whenever we’ve talked about Warren Buffett, it has been to discuss his investing guidelines and advice, since we take it for granted that Warren Buffett is the best investor in the world today. But by the same token, and given that Buffett doesn’t buy shares but businesses, applying his investing principles to the world of entrepreneurship would give us the key to success in business. Warren Buffett is probably a better businessman than shareholder, since Berkshire Hathaway is his main business.
1. You must understand the business
When Warren Buffett advises us on investing, he always tells us: “don’t invest in a company whose business you don’t understand”. If we apply that to business, it becomes obvious why so many entrepreneurs fail. Some business owners have gone into a particular type of business because they’ve heard it is very profitable. For example, it’s true that a clothing business can be very profitable, and we have the case of Zara, Uniqlo or new clothing franchises that are doing well, but if you as a business owner don’t understand fashion, you will hardly get further than the entrepreneurs who do understand the textile sector. You must understand the business. (Read: How to know which business to start)
2. Management is vital
Running a business takes three qualities: integrity, intelligence and energy, but if the first one fails, the other two are worthless. Setting up a company is very simple, but if the company doesn’t grow, it dies, and the only way to make it grow is with good management. When investing in companies, Warren Buffett doesn’t just look at the accounts but also at the company’s management, because the accounts tell you what the company did over the quarter or year, while the management tells you what it could achieve in the future. As Donald Trump said: “Always work with the best”. A company needs motivated, creative people.
See also: Warren Buffett’s letter to shareholders: 3 tips for stock investors
3. Think long term
Buffett invests for the long term, and as a businessman he does exactly the same. We recently covered the Amazon CEO’s letter to shareholders, in which he pointed out that the problem with companies is that they think about short-term profits instead of sacrificing part of those short-term profits to gain competitiveness and profitability in the long run. In fact, it isn’t advisable to go into business looking for a way to make quick money in the short term. Businesses like that tend to fail quickly. A company is like a building: you need to lay solid foundations before you can add more floors.
4. Be smart about choosing your partners
It’s better to surround yourself with people who are smarter than you. The only explanation for why some companies manage to become billion-dollar corporations in a very short time is the choice of partners, or of the companies they team up with, merge with or acquire. Choose a partner you can trust, someone with the same integrity as you: honest, ambitious, visionary and with a positive mindset. (Read: Tips for choosing a business partner)
Further reading
