Warren Buffett is a legendary American investor and philanthropist, widely regarded as one of the most successful investors of all time. He built his fortune through disciplined value investing and long-term ownership of high-quality companies. Buffett’s story is a masterclass in patience, rationality, and the power of compounding.

Many people think of Warren Buffett as a statistical anomaly, so you might be surprised to find out what he attributes his success to. It isn’t intelligence or an advantageous start. It isn’t a supernatural insight into the market. Distilled into the simplest terms, it’s just following sound business practices and putting in the time – both of which can be taught.

In this Blink, we’ll get into Buffett’s background and the early lessons that set him on the path to investment success. Then we’ll discuss the influential figures and decisions in his life. After that, we’ll outline his basic business tenets, the psychology of finance, and the importance of rational thinking.

Start

When he was eleven years old, Warren Buffett made his first investment. He’d saved $120 from entrepreneurial endeavours, such as selling soda and peanuts. So he studied the price charts and confidently made his purchase. But, as it often happens, the stocks dipped, losing value immediately. When they rose again to slightly above what he paid, Buffett panicked and sold at a profit of $5. Shortly after that, the stock value skyrocketed.

He’d learned two tough lessons: He would never again obsess over what he paid for a stock. And he would never sell for anything less than a substantial profit.

After that, everything Warren Buffett touched seemed to turn to gold. Not that he didn’t work for it – he graduated from college and then fought for a position at Graham-Newman Corporation, where he got his real education in trading. Then, at the age of 25, he started his first limited liability partnership with a $100 investment and the simple goal of beating the Dow Jones by 10 per cent a year. He ended up beating it by 22 per cent – and, over 12 years, grew his investment to $25 million.

In 1965, four years before ending the partnership, Buffett bought Berkshire Hathaway, which had begun in 1889 as a cotton manufacturer. As the textile part of the business was slowly dying, Buffett made a decision that would shape the rest of his life. In 1967, he bought up the outstanding stock in two decently healthy firms: National Indemnity Company and National Fire & Marine Insurance Company. It was a dramatic departure from textiles—and it took Berkshire Hathaway from $2.9 million in securities to $5.4 million in just two years. This decision set the company on course to become the investing giant it is today.

From his first limited liability investment of $100, Warren Buffett is now worth over $100 billion. Many people consider him to be a systemic anomaly. There’s a long-accepted school of thought in the investor world called the Efficient Market Hypothesis that says you can’t beat the market. And Buffett himself says he won the genetic lottery, having the right skills at the right time to flourish.

That said, the rest of this Blink will explore Buffett’s ability to beat the market not by chance, but with skill.

Education

In 1921, a grandmother in Los Angeles opened a candy shop in her neighbourhood. Her name was Mary See, and See’s Candies became a multigenerational, multimillion-dollar company. It survived some of the most challenging times for a small business, including the Great Depression and sugar rationing during World War II. The company survived because it was just that good. Quality took them the distance. So, when Grandmother See’s heirs were ready to sell in 1971, they did so for $25 million to Berkshire Hathaway.

To understand the point of this story, we have to go back and talk about the many influences in Warren Buffett’s life.

The first was Benjamin Graham, author of Security Analysis and The Intelligent Investor. In 1926, Graham partnered with Jerome Newman to form the company that would employ Buffett when he graduated from college. In investing, Graham had one simple rule: don’t lose. He leveraged his attention to research and detail to identify two key factors in a good investment: First, look for companies selling for less than two-thirds of their value. And second, make sure the stocks have a low price-to-earnings ratio. Buffett became a student of this approach all the way up to the point that he bought See’s Candies.

The second influential person in Buffett’s education was Philip Fisher. Fisher started an investment counselling firm shortly after the stock market crash, with two assumptions: First, investors would definitely be looking for advice. And second, they’d have time on their hands to talk. Fisher delved into the research to determine what it takes to identify a good investment, and he developed a philosophy quite different from Graham’s. Rather than purchasing a bargain, he believed in buying quality.

One way Fisher influenced Buffett was through his longtime friend and unofficial investment partner, Charlie Munger. Charlie started as a lawyer dabbling in investments. After creating a partnership similar to the one Buffett began, and reaping similar rewards, he left law and focused on investments. He bought Blue Chip Stamps, which later merged with Berkshire Hathaway – at which point Charlie became Vice Chairman. Buying See’s Candies was Charlie’s idea, and it was based on Fisher’s philosophies. See’s wasn’t selling for less than its value, meaning it wasn’t a bargain, but the quality was there.

Buffett was reluctant to veer from his tried-and-true Graham investment methods, but he allowed himself to be talked into it. Ten years after the $25 million purchase of See’s, he was offered $125 million to sell it. He passed, and Berkshire Hathaway still holds See’s Candies to this day.

What to buy?

So how does Warren Buffett decide what businesses to buy? Over the decades, he has developed twelve tenets – or checkpoints – to determine whether he’s willing to invest.

First, there are the three basic business characteristics. Warren Buffett has long been a believer in investing only within one’s own knowledge. In other words, he believes you should know the businesses you’re buying. The companies should be simple and easy to understand, have a consistent operating history, and offer a favourable long-term outlook.

Next are the three qualities he looks for in management. Evaluating management isn’t as simple as evaluating a business. There are some metrics you can use as indicators, but there is also just a lot of interviewing and having conversations. Fisher called this the “scuttlebutt” process, and it involves gathering anecdotal information through the corporate grapevine. First, Buffett looks for managers who take care of their finances rationally – that is, in a way that Buffett approves of. Second, he looks for leaders who are candid and honest with their shareholders. Third, he seeks management that resists the urge to go along with the crowd, even when it means admitting mistakes or changing courses.

Then come the four financial decisions. Buffett isn’t interested in yearly results—he prefers to look at five-year averages. When reviewing a company’s finances, Buffett looks for a few specific things: returns on equity, or the comparison of operating earnings to shareholder equity; owner earnings, which are somewhat based on estimates but still considered closer to the whole story than cash flow; high profit margins; and increasing market value.

Finally, he considers two simple market factors. First of all, is the company a good value? This could mean that it’s being sold for less than its intrinsic value. Or it could mean that its value has significant long-term potential. Second, is the price good? The stock market price is what it is, but is it commensurate with the company’s value?

Warren Buffett’s ultimate goal is to buy good companies that are managed with integrity and have an upward trajectory with the potential for massive returns. His tenets have been developed over decades of investment experience.

But being a good investor takes more than business savvy. Next, we’ll talk about behavioural finance.

Mr Market

Imagine you own shares in a business with your partner, Mr Market. Fortunately, your business is economically stable and has a promising future outlook. But that doesn’t matter to Mr Market, because he’s prone to sudden shifts in temperament. Every day, Mr Market offers to buy your shares in the company. Some days, he’s in a great mood and sees the future as bright and sunny – on those days, he offers you a high price. Other days, he sees nothing but doom and gloom, so he offers you a low price. The good thing is, he makes the offer every day, no matter how much you reject him; you can’t hurt his feelings. The last thing to know about Mr Market is that you’re free to ignore him or accept his offer, but you absolutely should not submit to his influence.

This little analogy was created by Ben Graham, whom we discussed earlier. It’s designed to illustrate the importance of being psychologically prepared to invest. To be free of Mr Market’s emotional upheavals, a field of study called Behavioural Finance emerged. Students in this field have identified several psychological traps that lead investors to make poor decisions. Among them are simple concepts such as overconfidence, loss aversion, and the lemming effect —the tendency to follow the crowd.

Another psychological trap, slightly more complicated, is overreaction bias. This is the tendency to recognise a few unrelated events as a trend when, in fact, they aren’t. You can get into trouble buying or selling when you overreact to a set of circumstances that aren’t actually trends.

Mental accounting is another insidious trap. Say you find a five-dollar bill in your coat pocket at the start of winter. That’s bonus money. But last summer, it was something different. Maybe it was your lunch money. So, it feels like the money is on a different account now: your view has changed with the circumstances. You might be inclined to spend the five dollars for something luxurious instead of buying lunch – it’s bonus money, after all! The truth is, it’s just five dollars. Don’t let your emotions trick you into believing something belongs to a special account.

The last trap is called myopic loss aversion. This was developed by two researchers, Richard Thaler and Shlomo Benartzi, who discovered that holding an investment for longer makes it more attractive to the investor – but only if it isn’t evaluated frequently. In other words, don’t look at your stocks every day. This is a long game.

The fact is, most of the movement you see in the market is based on emotions, which are stronger than reason. To be a savvy investor, you have to be psychologically prepared to ride out those shifts. And that requires patience, which we’ll get into in the final section.

Patience and Rational

A study analysed the one-, three-, and five-year returns of S&P stocks over 43 years. The results showed that the proportion of stocks that doubled in one year was only 1.8 per cent on average. For the three-year report, it was 15.3 per cent. For the five-year report, 29.9 per cent had doubled.

The study aimed to determine whether significant returns are possible from long-term investments. And the answer is yes. But still, most stock market activity occurs in a reactive, short-term mindset. Obviously, this isn’t how Warren Buffett operates, and that’s what makes him so special. But why is he different?

Buffett is on record as saying his abilities have nothing to do with intelligence – and everything to do with patience and rationality. That’s a key distinction; rationality is not the same as intelligence.

In 2011, Daniel Kahneman wrote the best-selling book Thinking, Fast and Slow. It’s based on what psychologists have long referred to as System 1 and System 2 thinking. System 1 thinking is fast and requires relatively little effort. It’s based on your intuition and on-hand knowledge. If you see a stock you’re interested in and do some quick math to assess its trajectory, compare some numbers, and make a decision, you’re operating in System 1 – along with most stock market investors. System 2 thinking is slow and rational. It requires reflection and good judgment. To use System 2 thinking, you need self-control, which can often feel unpleasant. The payoff is too far away to be rewarding in the moment. Essentially, we’re talking about patience.

A Yale University professor named Shane Frederick did an experiment to illustrate this. He gathered some Ivy League students from various schools and asked them three math questions, ranging from simple to complex. But even the simple one required them to pause and think; if they jumped to the first answer, they’d get it wrong. Over half the students got the wrong answer. Frederick concluded that people aren’t used to System 2 thinking—and, worse, the System 2 part of the brain doesn’t do a good job of monitoring System 1 for errors.

One problem caused by failing to exercise patience and rational thinking is the phenomenon known as the mindware gap. This is when you miss information because you don’t have the patience to go through the critical steps of researching an investment.

If you were Warren Buffett, you might read the annual reports of the company you’re interested in, along with those of its competitors. But you wouldn’t stop there. Next, you’d run models to assess different growth rates. You’d go on to learn the company’s capital allocation strategy. You’d even start talking to people involved in the company as well as its competitors to get the “scuttlebutt,” as Fisher called it.

To attain Warren Buffett’s level of success, you have to live in System 2 thinking. It may be uncomfortable at first – but ultimately, it can lead to exceptional long-term yields.

Even someone as rich and powerful as Warren Buffett can come from humble beginnings. From his first investment at age eleven to his $100 investment in his limited partnership to the over $100 billion net worth of today, Warren Buffett played the game differently and accomplished the seemingly impossible. With sound business sense, psychological resilience, patience, and rational thinking, Buffett believes anyone can repeat his success.