How Warren Buffett’s Analogy Can Transform Your Investing Perspective

I have been writing an investment column for Wise Bread and so have been studying investors and their techniques more than usual. Naturally, billionaire investor Warren Buffett is someone who I have studied.

Buffett is a value investor. But unlike the average person who spots and snaps up bargains and waits until they rise in value, he often acquires enough stock to take over a company (aka a controlling interest), fixes the company’s problems, and improves the company’s performance so that its inherent value and its stock price increases. He buys many companies through his investment firm, Berkshire Hathaway, which is publicly traded (that is, you and I can buy stock in his firm).

In his annual letters to stockholders, he often gives advice on his investing perspective.

Many people, including me, found one of his recent quotes intriguing and helpful in transforming or clarifying a healthy view of investing. First, let me affirm that I know when I purchase a stock or a mutual fund with stocks that I am buying a portion of the company or companies. It’s just that my part of the company is so small and my role as owner so tiny that I tend to look at how that piece of the action affects me directly through dividends or its rise (or fall) in stock price, not its impact on the economy.

When I read Buffett’s take on gold and alternatives to this investment, I felt that I had a renewed and clearer perspective on what it means to own a piece of American business. One of the best and most complete articles on this topic was published in Base Hit Investing: Buffett on Farmland + ExxonMobil vs. Gold. The article quotes a Berkshire Hathaway shareholder letter in which Buffett compares two piles:

  1. the first is all the gold in the world, which can fit inside a baseball stadium
  2. the second is all the farmland in America plus 16 ExxonMobils plus one trillion dollars.

He notes that the valuation for these piles is the same (or it was when he wrote the letter in 2011), then poses the question of which pile is more attractive to the investor.

Now, whether you love gold or hate oil, as a business person, what makes the most sense to own or acquire? The answer is the second pile, which will be productive and make money for you plus give you plenty of cash.

I think what gave me a new outlook is the shift away from placing value on a portion of a static asset to the idea that buying stock means purchasing a part of a productive asset that will serve me and others in the community in the future.

What about you? Does this analogy change your perspective? Are there any famous investor quotes that have transformed your view of investing?