Updated on 7th September 2016 – Will announce the winner today.
My lord (Warren Buffett) is celebrating his 86th birthday. Cheers!
So to celebrate the occasion, I am giving away ONE new book – ‘The Snowball’ to the winner of this dead simple giveaway.
The book is one of my favorites. It talks about various aspects of Buffett’s life – many of which were earlier unknown to most people. So if you are a Buffett fan and still haven’t read this book, this is your chance.
00:00 Hrs on 30th August to 23:59 Hrs on 6th September
How to Win?
Do either or all of these 3 things:
1 – Leave a comment at the end of this post (‘Happy birthday Warren’ or anything you want)
OR / AND
2 – Leave a comment on this Facebook post, like it and share it with your friends.
OR / AND
3 – Leave a comment on this Twitter status – and Follow & Retweet.
Warren Buffett is inspirational. Not because he is rich. And not even because he is the greatest investor ever. But because he knows how to simplify things and prioritize using simple tools.
I was reading an article hereby Scott Dinsmore, where he shares a small story about Warren Buffett’s pilot. In this story, Warren highlights a very useful Rule of 5/25 – or you might call it Rule of 25-5 (whatever you want). Basically, it is a productivity strategy that can be used to determine priorities and desires in life. End result of doing a simple 5/25 exercise is that you will have a razor-sharp focus on your prioritized goals.
Sounds boring? I promise you it is not.
Just read the story about Buffett and his pilot first…
Few years ago, Warren went up to his pilot (supposedly named Steve) and jokingly remarked –
“The fact that you’re still working for me, tells me I’m not doing my job. You should be out going after more of your goals and dreams.”
Warren then asked Steve to list the top 25 things he wanted to do in the next few years or even his lifetime.
“Just jot down anything that comes to your mind – that is important to you and which isn’t currently a part of your life.”
Once Steve completed his list, Warren then asked him to review each item and circle the top five that were most important to him – the ones he wanted more than anything.
Steve was hesitant because to him they were all massively important. After all, that’s why he wrote them down.
But Warren insisted that he could only pick five. This would have effectively divided 25 goals into two lists.
So Steve spent some time with his list and after some deliberation, made five circles.
“Are you sure these are the absolute highest priority for you?” – Warren asked.
Steve was confident about his prioritization.
Warren now asked Steve when he planned to get to work on these top-5 and what his approach would be exactly.
“Warren, these are the most important things in my life right now. I’m going to get to work on them right away. I’ll start tomorrow. Actually, no I’ll start tonight.”
Steve went on to explain his plan, who he would enlist to help him and by when all these items would get done.
Now, once the Top 5 planning session was over, Warren asked
“But what about these other 20 things on your list that you didn’t circle? What is your plan for completing those?”
Steve replied confidently,
“Well the top five are my primary focus but the other twenty come in at a close second. They are still important so I’ll work on those intermittently as I see fit as I’m getting through my top 5. They are not as urgent but I still plan to give them dedicated effort.”
To Steve’s surprise, Warren responded sternly,
No. You’ve got it wrong. Everything you didn’t circle just became your Avoid-At-All-Cost-List. No matter what, these things get no attention from you until you’ve succeeded with your top 5.
So that was the end of the story…
Wasn’t Warren’s response surprising?
I think it was. But if you think about it for sometime, it makes a lot of sense…
Having 25 (or even more) goals simultaneously can weigh you down. If you try to address all of them at once, all you will end up doing would be nothing. There is no doubt that all 25 goals would be important for you. But having all of them in your head (in form of periodic task list) adds immense burden and takes up a lot of energy. It can overwhelm you and drain you out.
And haven’t we experienced this in our own lives?
When there is a lot to do, we get overwhelmed. Our productivity goes down. And we are unable to do more important tasks well.
Without priorities, almost nothing gets done. And when you prioritize, you can actually begin your task of achieving the prioritized goal.
I think we should thank Mr. Buffett for giving us this two list strategy for making goal prioritization so simple. Ofcourse its not easy, but its simple enough that people like you and me can atleast do this exercise once.
And if you have doubts whether this 5/25 technique proposed by Warren Buffett works or not, then given Buffett’s success, I think he has an excellent understanding of how to spend his time efficiently. So we better listen to him. 🙂
And if you think about it carefully, it’s pretty easy to get rid of wasteful (material) things and habits. For example, one might have a habit of waking up late. I think its not that difficult to get rid of this habit if one is convinced about the benefits. Isn’t it?
Weren’t we able to rise up early in our childhood during exam times for mugging up lessons, revisions, etc.?
I am continuously trying to get rid of my habit of sleeping late (because of which I don’t feel like waking up early). But lets leave that discussion for some other day. 🙂 (By the way, I highly recommend reading this amazing post on benefits of waking up early by Leo Babauta of Zen Habits).
But coming back to 5/25 Rule, its easy (in theory) to list down 25 things, choose 5 important ones and then just forget about the remaining 20 ones. But it’s very difficult to implement this in reality. I read a few more very relevant lines in this context here, which I quote in next few paragraphs…
It is hard to prevent using your time on things that are easy to rationalize, but that have little payoff. The tasks that have the greatest likelihood of derailing your progress are the ones you care about, but that aren’t truly important.
Every behavior has a cost. Even neutral behaviors aren’t really neutral. They take up time, energy, and space that could be put towards better behaviors or more important tasks.
This is why Buffett’s strategy is particularly brilliant. Items 6 through 25 on your list are things you care about. They are important to you. It is very easy to justify spending your time on them. But when you compare them to your top 5 goals, these items are distractions.
Spending time on secondary priorities is the reason you have 20 half-finished projects instead of 5 completed ones. Eliminate ruthlessly. Force yourself to focus.
The most dangerous distractions are the ones you love, but that don’t love you back.
And an intended or (in many cases) unintended side effect of minimalism and ruthless elimination of non-essentials is specialization. And specialization works. As Charlie Munger (Buffett’s investing partner) says,
“Just as animals flourish in niches, people who specialize in some narrow niche can do very well.”
So if you simply do what everybody else is doing (which is not focusing on few things), you will end up achieving what everybody else achieves – which is nothing. Mimicking the herd invites regression to the mean. Nothing else.
I know what you are thinking. All this is fine. But I don’t have the time to do it right now. I will do it someday. And that someday never comes. Infact, Tim Ferris has said that someday is a disease. And that is so true!
So don’t fall ill with Someday now. Take help of Warren Buffett’s 5/25 Rule and the 4-Step Prioritization Process.
1 – Make a list of 25 things you want to do in life.
2 – Identify the top 5 (encircle in your list of 25)
3 – Start working on the top 5
4 – Never think about the other 20 unless you are through with top 5
Now I am pretty sure that this alone won’t make you a millionaire or billionaire like Warren Buffett.
But doing this exercise will sort out your priorities. Eliminating the non-essential goals of life is one of the best ways to make your life easier and less stressful.
So I am off to make my own list of 5/25 and prioritize like Warren Buffett.
Imagine a situation where you are allowed to make just 20 investments in your whole life. Tough… Isn’t it? Would you like to find yourself in such a situation? To be frank, it would be a very uncomfortable and stressful situation and I would personally ‘not want’ to be in such a situation. But fact is that when we are investing in a particular company’s shares, we should ‘assume’ ourselves to be in such a situation. To know why, read on…
Mr. Buffett once said,
“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
Only 20 Investments To Make | What Will You Do?
Just think of it in this way. You are just allowed to make 20 decisions in rest of your life. Now what will you do? You would ofcourse pick and choose your ‘decisive-situations’ carefully and would take a decision only when you are more than 100% sure.
Now, this 20-punch approach is quite opposite of my personal approach of taking a balanced approach (using MFs, direct stocks and PPFs, RDs, etc). But the fact is that I am neither very confident of my stock picks as Mr. Buffett, nor do I consider myself to be capable enough to regularly beat Mr. Market. And hence I have modified my personal investment approach in accordance with my own limitations. But atleast in this post, lets keep my views aside and focus on how exactly can this 20-punch approach be helpful. 🙂
You might argue that even Mr. Buffett would have made more than 20 investments in his life. So how can he argue for just 20? Here we need to understand that 20 is just a number. It is basically a guide as to what one should do before making any investment. So just have a look at your portfolio. If you were allowed to make just 20 decisions going forward, how many of your current holdings would you keep? And if you own more than 20, which are the companies you would get rid off as soon as possible?
This small activity of thinking in 20-slot mode helps in valuing our each and every transaction a lot more than what we would have normally done. And that is the whole purpose of this approach. In realty there is no limitation to number of trades you can make. But just imagine how careful you would become if there were such limitations.
And here is how Mr. Buffett choses his stocks (atleast some of the times):
“It’s not because I calculate some precise P/E ratio or book value ratio, but because I have an idea of what the company will look like in five (or ten) years.”
What are your thoughts? Which companies would you chose if you were only allowed to make 20 transactions in rest of your life?
Oracle of Omaha, Warren Buffett has been in news lately for tipping his son Howard Buffett to be the new chairman of Berkshire Hathaway(source). By profession, Howard is a farmer. Company’s investment strategy would still be governed by the CEO and Board of Directors. But Warren Buffett’s son would serve as a Custodian of Company values rather than take part in regular day to day affairs.
So what makes Warren Buffett so special? On very first page of his famous and revered Annual Letters to Shareholders (2011, 2012), it is mentioned that from 1965-2010 (a period of 45 years), Berkshire has had a CAGR of 20.2% i.e. your money doubles every 4 years!
Can we earn 20% year on year for decades? I doubt that.
You are not Warren Buffett. Period.
Such superlative performance can have have the effect that average investors try to become the next Warren Buffett. But in doing so, they would be making a grave mistake. That’s because-
Most profits made by Berkshire come from owning entire companies, which an average investor is incapable of doing.
Though Buffett gives independence to individual companies’ management, he always keeps a tab on them to see that they don’t deviate from Berkshire’s simple but sacred principles. As far as an average investor is concerned, he doesn’t even meet any member of the company’s management.
Buffett owns the perfect business of insurance. This is equivalent of having a constant source of interest-free loans given to buy shares of other companies. Now who among us can boast of ownership of such a business?
Inspite of being famous for having a holding period of forever, Buffett occasionally sells stocks. Unlike us, he doesn’t require money for his basic needs. He sells when he does not see value in his investments or wants to fund more lucrative investments.
Unlike average investors, he has access to loads of insider information and has an army of people who can do comprehensive number crunching for him. This augments his investment decision making process.
Buffett is a fast and voracious reader. We can’t imagine an average investor to read Forbes, Wall Street Journal, Financial Times, New York Times, USA Today and Omaha World-Herald every single day of the year, decade after decade. (For Indian Investors, replace above names with Indian financial newspapers and publications). Even if a person does read a few good publications, the question arises whether he will he be able to utilize and interpret this information to his advantage?
An average investor does not get deals which are skewed heavily in his favor. Buffett got one hell of a deal from Goldman Sachs, where he was earning $500 million every year for doing simply nothing!!! And when Goldman Sachs decided to redeem the preferred stocks, Warren was the unhappiest person in the world as any normal person would hate to lose a free cash flow of $500 Million an year. Very recently, he entered solar energy via Topaz. An interesting article shows once again that why and how he lands up such delicious deals.
Warren Buffett had once said – “My wealth has comefrom a combination of living in America, some lucky genes, and compound interest”. Out of these three, only compound interest, is under our control.
So an average investor should focus more on buying good stocks and allowing compounding to show its magic. But instead, what he does is that he is constatnly on a lookout for stock tips and is looking to find the next multibagger. As a sensible investor, one should be prepared for opportunities which markets throws up every now and then. And when that opportunity comes, be prepared to take advantage of them.