Albert Einstein may or may not have remarked about compound interest being the eighth wonder of the world but there is one investor who has used it to lollapalooza effect. His name: Warren Edward Buffett. Like most things that he talks about, compound interest is easy to understand but hard to execute where it is most needed — to multiply one’s net worth. Financial stupidity like self-pity is self-compounding and hence while investing in a stock one needs to get it right off the bat. The hallmark of Buffett’s investment style is that it has predictability as its centerpiece. It divides the world between ‘knowables’ and ‘unknowables’, and he focuses only on the ‘knowables’. Gordon Gekko’s line, “I don’t throw darts at a board. I bet on sure things” does come to mind except that Gekko was alluding to being in the know about what others are doing and Buffett is about knowing what he is doing.
“Buffett’s success is a result of his evolution from a price-primary investor to a quality business accumulator. He likes businesses that do not consume a lot of capital and have a durable competitive advantage. His gift is quantifying quality — be it in companies or people,” says Pat Dorsey, founder, Dorsey Asset Management. Given that he started investing at the age of 11, Buffett’s understanding of everything under the sun has also only compounded over the years. Other than the company that he is micro-scoping, interest rates are the only external factor that he pays heed to. Now, the most critical part of investing is to determine a company’s ability to earn a superior return on capital over a sustained period of time. This is what Buffett and his partner Charlie Munger call economic moat.
“We buy barriers. Building them is tough… if you’re buying something at a huge discount to its replacement value and it is hard to replace, you have a big advantage. One competitor is enough to ruin a business runni