Tag Archives: Warren Buffett

Warren Buffett and Berkshire-Hathaway’s Annual Letter

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“For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.” ~ Warren Buffett

Berkshire’s goal is simple: “To own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen,” writes Warren Buffett, legendary Chairman and CEO of Berkshire-Hathaway.

At Berkshire, they “particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure,” writes Buffett.

Be patient when you find a wonderful business

“When you find a truly wonderful business, stick with it,” Buffett writes. “Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.”

Never risk permanent loss of capital

The stock market is becoming more and more like a casino, offering daily temptations to ignore a long-term investment strategy and quickly turn over holdings when “feverish activity” brings all number of uninformed or ill-intentioned actors out of the woodwork.

He writes: “At such times, whatever foolishness can be marketed will be vigorously marketed — not by everyone but always by someone.”

The late Charlie Munger, Buffett’s long-time friend and business partner, argued that there were two types of individuals who buy shares in the stock market: investors and speculators. The investors tend to be disciplined, hard-working, and thoughtful when buying assets. But the speculators are those who seek nothing more than a quick buck without care for the intrinsic value of the underlying business they’re buying.

He notes do not fall for the marketing of the foolishness, or the scene could turn ugly, and the average investor may walk away “bewildered, poorer, and sometimes vengeful.”

Number One Rule

“One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been — and will be — rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes,” states Buffett.

The final statement from Warren Buffett as stated in Berkshire Hathaway’s Annual letter to shareholders:

“Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced. This ability is one we will not relinquish. When economic upsets occur, as they will, Berkshire’s goal will be to function as an asset to the country – just as it was in a very minor way in 2008-9 – and to help extinguish the financial fire rather than to be among the many companies that, inadvertently or otherwise, ignited the conflagration,” commented Buffett.

Source:  https://www.berkshirehathaway.com/letters/2023ltr.pdf

Buffet’s Owner’s Earnings

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Owner earnings (OE) is a valuation method detailed by Warren Buffett in Berkshire Hathaway’s annual report in 1986. He stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, minus any reinvestment of earnings.

Owners’ earnings, also known as cash flow for owners, remains one of the more accurate measures of how much money we can make from an investment and helps calculate intrinsic value.

The formula for owners’ earnings is as follows:

OE = Net income + Non-cash charges – Maintenance Capex +/- Changes in working capital Where the below:

  • Non-cash = depreciation, amortization, impairment + other charges
  • Maintenance Capex = Cash a company spends to maintain normal biz operations.
  • Changes in working capital = adding the items under “Change in operating assets and liabilities” from the CF statement.

We will use a combination of cash flow statements to find the numbers.

To simplify some of this maintenance, the capex is an imprecise number that Buffett didn’t define precisely.

Many suggest different calculation methods; we will use the CF number to simplify.

Using $MSFT as our guinea pig for the year ending 2022. Below are the numbers taken from the financials:

  • Net income = $72,738
  • Non-cash = $16,260
  • Capex = ($23,866)
  • Changes in working capital = $446

Plugging in the numbers for $MSFT, we get:

Owners Earnings = $72,738+$16,260-$23,866+$446 = $65,578

Per share = $65,578 / 7,496 = 8.74

When compared to current P/FCF equals 8.70

Use these criteria to eliminate 95% of stocks:

Revenue growth 12%
Shares outstanding <2%
Net debt to FCF below 5x
Free cash flow growth +15%
Return on Invested capital +15%
Earnings per share growth +15%

12 companies that qualify:

 

Berkshire-Hathaway Stock

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  • Berkshire Hathaway has beaten the S&P 500 going back 20 years.
  • The company is built to endure the most challenging market environments.

The “Oracle of Omaha” Warren Buffett is a legendary billionaire investor and one of the world’s wealthiest people. While his start at a very early age helped him build a fortune, Buffett hasn’t lost his investing touch.

Since becoming CEO in 1965, the Oracle of Omaha has overseen a greater than 4,400,000% return in his company’s Class A shares (BRK.A). This works out to a nearly 20% annualized return over 58 years.

Additionally, Berkshire Hathaway has outperformed the S&P 500 index over the past 20 years. Had you invested $10,000 in Berkshire Hathaway in 2003, you would have more than $71,000 today to the S&P 500’s $62,200.

Buffett, and his investing lieutenants, Ted Weschler and Todd Combs, are huge fans of businesses that regularly buy back their stock and increase Berkshire Hathaway’s ownership stake without him or his investment team having to lift a finger.

Stock buybacks can have a positive fundamental impact on a company. For a company with steady or growing net income, buybacks have the ability to increase earnings per share over time. This should help a company’s stock look even more attractive to fundamentally focused value seekers.

References:

  1. https://www.fool.com/premium/coverage/investing/2023/09/27/if-you-invested-10000-in-berkshire-hathaway-in-200/
  2. https://www.msn.com/en-us/money/topstocks/warren-buffett-is-selling-shares-of-this-high-yield-dividend-stock-and-likely-buying-shares-of-his-favorite-stock-no-not-apple/ar-AA1hkkk9

Warren Buffett’s top 10 rules for success

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Billionaire investor Warren Buffett, “Oracle of Omaha, has a set of rules, principles and philosophies when it comes to making a decision, investing, managing the business and also building success in life. And his success principles can be summarized with the top 10 rules below.

“Don’t be afraid to give up the good to go for the great.” – John D. Rockefeller.

  1. Find Your Passion. Almost every successful person agrees that finding and following your passion is something important if you want to produce an amazing result in life. There is no guarantee that you will be able to find your passion in your first job, but you have to keep digging until you find it. Steve Jobs once gave a commencement speech at Stanford University and said: “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” The only way you can produce outstanding work is through passion. Without passion, you will do things with the half-hearted approach and there is no way you can become the best this way. Thus, find your passion, do what you love and you will be able to produce amazing success in life when you do.
  2. Hire Well. If you want to be a billionaire, there is no way you can go about it all by yourself, you need to have a great team. And to have a great team, you must learn to hire well. Always remember that you cannot succeed alone in this world. You need other people’s help to bring you the success you want. And your people will be your greatest assets. According to Buffett, he emphasizes on 3 qualities when he hires, and they are, integrity, intelligence, and energy. Buffett also said that out of those 3 qualities, integrity comes first. He also jokingly said that you do not want to hire someone who has no integrity but has a lot of intelligence and energy. Integrity comes first. Without integrity, other qualities do not matter much
  3. Don’t Care What Others Think. It is important not to care what others think. And this is extremely important because you do not want to take into consideration what other people have to say, because you will be influenced and will never be able to hold onto your investing principles. If you was to listen to what others said, he will become like most people, living an average life. When it comes to achieving the success you want and living your dreams, there will be people telling you that achieving what you want is impossible and simply suggest you get a real job. Never listen to the naysayer. You have to follow your heart and do what you think is right. Circle of Competence” is what he has used as a way to focus his investment on only operating in areas he knew best. The concept basically explains that every one of us has developed useful knowledge on certain areas, and what we need to do is to operate in these areas that we are good at. When you care too much about what others think and say about you, you will restrict your own freedom and it will prevent you from living your best life according to your own terms.
  4. Read, Read, Read – The more you read, the smarter you will get and the more knowledge you will gain. When you become more knowledgeable, you will be able to make a better decision that will lead you to the success you want. Highly successful people are great readers and you have to adopt the same habit. Commit to reading every single day. If you find that you are busy and do not have much time to read, start small and read for 15 minutes a day. If possible, go for more. Read at least an hour a day. You can wake up earlier and make time for reading or you can make good use of your commuting time for reading. You need to be a lifelong learner and when reality changes, you need to change and adjust you strategy.
  5. Have A Margin of Safety – The concept of “margin of safety” is easy to understand, and requires great discipline and patience.  Buffett uses the metaphor of driving across a bridge to explain this concept. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. You have a margin of safety of 20,000 pounds. And when it comes to investing, you will never buy a business worth $50 million for $60 million. You will buy the business worth $50 million at a price below that to ensure there is a margin of safety. This concept is essential in the principle of value investing. It helps investors make better and wiser decisions before jumping into buying a stock. When an opportunity is presented, evaluate using the margin of safety concept before you decide.
  6. Have A Competitive Advantage – Buffett said that capitalism is all about somebody coming in and trying to take the castle. And what you need for your castle is a moat to protect your castle from your enemies. In the business world, your business needs to have a durable competitive advantage to survive for the long term. Today, the competition is tough and people can copy exactly what you do and produce the same product and put you out of business. This is why having a competitive advantage to protect your business like a moat protecting a castle is important. Buffett said that he will invest in businesses that have a competitive advantage because he wants to make sure that the business will still be around after years down the road.
  7. Schedule Your Personality – Build your business around your personality. In order to succeed in what you do; you must find your pace and your sweet spot so that you will enjoy your work and perform at your best. Buffett loves reading and he chooses to read to improve his knowledge, and then he acts as the strategist and manages his business from backstage. He organizes his business according to his personality. If you love drinking a cup of coffee before you start your work, do it. Organize your workspace according to your own taste, that will make you more productive. The key is to play to your strength and personality so that you can become the best at what you do.
  8. Always Be Competing – Buffett believes that one of the most common business killers is complacency. When people fall into their comfort zone and fail to improve their competitiveness, their businesses will eventually fail or be taken over by the competitor. And to stay ahead of the game, you must always be competing. Every business has problems in every industry. The key to making a business thrive is its ability to compete and stand out from the rest. And this is why you invest in a business that continues to thrive because you are always competing. Therefore, never rest on your laurels, keep competing, keep improving and innovating in your business.
  9. Model Success – There is no way you can succeed alone in this world. If you want to achieve great success in life, you need others. and, you must model other successful people, or better yet, get yourself a mentor. Take a look in the sports industry, every outstanding and professional athlete has a coach. Tiger Woods has a coach. Michael Jordan has a coach. You need a coach to guide you on the journey to success. Your coach can also remind you of your goals and inspire you to do your best. In business, having a mentor is said to be one of the most important keys to success. Success leaves clues and what you need to do to produce a great result is to model the success of others. Learn and study from others, and then learn, grow and improve yourself to become better.
  10. Give Unconditional Love – Finally, the most powerful force in this world is unconditional love. And everyone who wants to achieve success in life gives unconditional love.
  11. Bonus: Power of Compounding – “The power of compounding your money inside a successful business for a long time is nearly unmatched in capitalism.”

The final rule for success by Warren Buffett has a lot to do with your personality and beliefs. Being a philanthropist, Buffett believes in helping society and giving back to the world. This could be the reason why he has been so successful. He is always looking to help and to give, rather than to take. When you operate in a giving and grateful mindset, you will put your customers first, and this is what makes a business enterprise thrive

Source:  https://www.thewisdompost.com/billionaires/warren-buffett/warren-buffetts-top-10-rules-success/1575

Cryptocurrencies – Nonproductive Assets

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Do not Invest in nonproductive assets like cryptocurrencies, says Warren Buffett, Chairman and CEO, Berkshire-Hathaway.

“Anytime you buy an asset that can’t do anything, produce anything, you’re simply betting on whether somebody else will pay more for [the Greater Fool Theory], again, an asset that can’t do anything…

“I would bet on good-producing businesses to outperform something that doesn’t do anything over any period of time.” ~ Warren Buffett

— 2011 BERKSHIRE ANNUAL MEETING

“Cryptocurrencies basically have no value and they don’t produce anything. They don’t reproduce, they can’t mail you a check, they can’t do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem. In terms of value: zero…I don’t have any cryptocurrency and I never will.”

— 2020 CNBC Squawk Box interview.

“It draws in a lot of charlatans who are trying to create various sorts of exchanges or whatever it may be. It’s something where people who are of less than stellar character see an opportunity to clip people who are trying to get rich because their neighbor’s getting rich buying this stuff that neither one of them understands. It will come to a bad ending.”

— 2018 shareholder meeting (and four years before FTX and Sam Bankman-Fried alleged fraud)

Lessons of Warren Buffett

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An understanding of the investing lessons of Warren Buffett.

1. Value investing works. Buy bargains which involve buying assets at a price below the asset’s intrinsic value. Value investing takes time, focus, discipline and patient, and is a hard process to implement and follow. It requires a lot of work to determine the fair value of a particular business. If investors could predict the future directions of the stock market, they would certainly not choose to be value investors. But no one can accurately forecast future prices. Value investing is a safe and successful strategy in all investing environments. The biggest obstacle for a value investor is to remain disciplined and patient in every circumstance the market and life might throw at him. Most people quit value investing and long- term investing for this exact reason: because they lack the discipline and cannot sit through periods of poor performance.

2. Quality matters, in businesses and in people. Better quality businesses are more likely to grow and compound cash flow; low quality businesses often erode and even superior managers, who are difficult to identify, attract, and retain, may not be enough to save them. Always partner with highly capable managers whose interests are aligned with yours.

3. There is no need to overly diversify. Invest like you have a single, lifetime “punch card” with only 20 punches, so make each one count. Look broadly for opportunity, which can be found globally and in unexpected industries and structures.

4. Consistency, discipline and patience are crucial. Most investors are their own worst enemies. Endurance and long-term perspective enables compounding.

5. Risk is not the same as volatility; risk results from overpaying or overestimating a company’s prospects. Prices fluctuate more than value; price volatility can drive opportunity. Sacrifice some upside as necessary to protect on the downside.

6. Unprecedented events (or Black Swan events) occur with some regularity, so be prepared.

7. You can make some investment mistakes and still thrive.

8. Holding cash in the absence of opportunity makes sense.

9. Favor substance over form. It doesn’t matter if an investment is public or private, fractional or full ownership, or in debt, preferred shares, or common equity.

10. Candor is essential. It’s important to acknowledge mistakes, act decisively, and learn from them. Good writing clarifies your own thinking and that of your fellow shareholders.

11. To the extent possible, find and retain like-minded shareholders (and for investment managers, investors) to liberate yourself from short-term performance pressures.

12. Do what you love, and you’ll never work a day in your life.

13. “The first rule of investing is to not lose money, the second rule is to never forget the first one,” states Warren Buffett. Loss avoidance must be the cornerstone of your investment philosophy. Investors should not stick to bonds or avoid risks at all, but rather that “an investment portfolio should not be exposed to losses of principal capital over five to ten years”, according to Klarman. This, concentrating on avoiding big losses is the safest way to ensure a profitable investing outcome.

14. Ignore Market Price Fluctuations which are completely unrelated to the value of the investment or asset. When the stock’s market price goes down, the investment may be seen as riskier regardless of its fundamentals. But that’s not risk. Investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate market volatility.

15. Avoid Leverage At All Costs.

References:

  1. https://hollandadvisors.co.uk/wp-content/uploads/2021/03/what-ive-learned-from-warren-buffett-seth-klarman.pdf
  2. https://medium.datadriveninvestor.com/how-seth-klarman-achieved-a-20-annual-return-for-30-years-8cd0f39da208

Warren Buffett’s Investing Top Four

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“Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.” ~ Warren Buffett, Chairman and CEO, Berkshire Hathaway

Warren Buffett’s philosophy is simple. Buy with a “margin of safety” undervalued companies with strong fundamentals and balance sheet, and then wait. It’s possibly the most boring way to invest in the world. But it’s effective.

For Warren Buffett, deciding what stocks to buy is “simple but not necessarily easy,” according to CNBC Warren Buffett Guide to Investing.

In his Berkshire Hathaway 1977 annual letter to shareholders, he listed four attributes he wanted to see when investing, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock.

1. “One that we can understand…”

When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future.

He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them. At the 2000 annual meeting, a skeptical shareholder told Buffett he couldn’t imagine him not understanding something. Buffett responded, “Oh, we understand the product. We understand what it does for people. We just don’t know the economics of it 10 years from now.”

2. “With favorable long-term prospects …”

Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.”

“Every business that we look at we think of as an economic castle… And you want the capitalistic system to work in a way that millions of people are out there with capital thinking about ways to take your castle away from you, and appropriate it for their own use. And then the question is, what kind of a moat do you have around that castle that protects it?”

— 2000 BERKSHIRE ANNUAL MEETING

A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.

3. “Operated by honest and competent people …”

“Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something.

And it’s just a lot easier to operate with people that are candid.

“And we like people who are smart, you know.

I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING

The quality of the business itself, however, takes precedence.

“The really great business is one that doesn’t require good management. I mean, that is a terrific business. And the poor business is one that can only succeed, or even survive, with great management.” — 1996 BERKSHIRE ANNUAL MEETING

4. “Available at a very attractive price.”

“The key to [Benjamin] Graham’s approach to investing is not thinking of stocks as stocks or part of a stock market. Stocks are part of a business. People in this room (Berkshire shareholders) own a piece of a business. If the business does well, they’re going to do all right as long as they don’t pay way too much to join into that business. — 1997 BERKSHIRE ANNUAL MEETING

Buffett’s goal is to buy with a “margin of safety” or when the market price is below a company’s “intrinsic value.” Buffett has said that the margin of safety is the “most important concept in investing.”

“The three most important words in investing are margin of safety…” ~ Warren Buffett

“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.

“And we’re not perfect at estimating that, obviously.

“But that’s what an investment or a business is all about. You put money in, and you take money out.

“Aesop said, ‘A bird in the hand is worth two in the bush.’ Now, he said that around 600 B.C. or something like that, but that hasn’t been improved on very much by the business professors now.” — 2014 BERKSHIRE ANNUAL MEETING

References:

  1. https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2022/03/22/bwp22links.pdf

Focus, Discipline and Patience are Wealth Building Super Powers!

Buying Stocks On the Dip

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“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” ~Warren Buffett

Billionaire investor Warren Buffett added shares of companies during the market downturn. He has been acquiring stocks on the dip during the recent quarter’s market downturn and bulking up his stakes in oil companies such as Occidental Petroleum (OXY)

Buying a ‘Wonderful Company at a Fair Price’

The most important concept to appreciate when buying stocks is that price is what you pay for a stock, and value is what you get. Paying too high a price can decimate returns and increase your investing risk. 

To delve deeper, the value of a stock is relative to the number of earnings or cash flow the company will generate over its lifetime. In particular, this value is determined by discounting all future cash flows back to a present value, or intrinsic value.

Buffett has said that “it is much better to buy a wonderful business at a good price than a good business at a wonderful price”.

Buffett’s investing style has been buying stocks on sale priced below its intrinsic value. He has never been one that favors acquiring commodities, but higher inflation rates could have played a role, Thomas Hayes, chairman of Great Hill Capital in New York, commented.

“As for Buffett buying shares in OXY, I wouldn’t make too much on it,” Hayes said. “Historically, he has avoided investing in commodity stocks. Today he sees it as a hedge against inflation and a potential supply/demand imbalance.”

Inflation is the biggest strain on the economy. While the pace of inflation eased slightly during the month of April, investor sentiment towards the Fed’s pace of tightening remains mixed.

The fact that he is deploying his war chest of cash is a strong indication that he and his lieutenants believe that there are undervalued stocks out there,” he said. “This doesn’t mean he believes that the market is undervalued or will rebound in the near future, but that some companies are compelling buys. This is a good signal for value investors.”

Buffett’s energy investments demonstrate the 91-year old’s investing strategy of acquiring shares in companies that have low valuations and shareholder returns in the form of dividends and buybacks, Art Hogan, chief market strategist B Riley Financial, told TheStreet.

References:

  1. https://www.thestreet.com/investing/buffett-buying-stocks-on-the-dip

Warren Buffett Defines “True Success”

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“True success’ in business and life has nothing to do with money.

In an interview, legendary investor Warren Buffett offered his definition for “true success.”

“Well, I’ve said many times that, if you get to be 65 or 70 and later, and the people that you want to have love you actually do love you, you’re a success,” Buffett said in the Yahoo Finance interview.

Buffett doesn’t believe money or power or social status makes a person successful. “I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them,” said Buffett. “If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”

Buffett offers three pieces of advice for people looking to succeed in business and life.

  • Invest in yourself, and in particular, try to improve your communication skills. “If you can’t communicate to somebody, it’s like winking at a girl in the dark,” Buffett quipped.
  • Take care of your mind and body. “You get exactly one mind and one body in this world. And you can’t start taking care of it when you’re 50,” he said.
  • You should associate yourself with others who “are better than you are.” He added, “Basically, you’ll go in the direction of the people that you associate with. And you want to have the right heroes.”

Key takeaway — the amount you are loved — not your wealth or accomplishments — is the ultimate measure of success in life. “The problem with love is that it’s not for sale,” Buffett explains. “The only way to get love is to be lovable. It’s very irritating if you have a lot of money. You’d like to think you could write a check: I’ll buy a million dollars’ worth of love. But it doesn’t work that way. The more you give love away, the more you get.”

The most important lesson of a life well-lived, according to Buffett, has nothing to do with wealth and everything to do with the most powerful human emotion: love. 

“Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.

I know many people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them.

That’s the ultimate test of how you have lived your life. The trouble with love is that you can’t buy it. You can buy sex. You can buy testimonial dinners. But the only way to get love is to be lovable.

It’s very irritating if you have a lot of money. You’d like to think you could write a check: I’ll buy a million dollars’ worth of love. But it doesn’t work that way. The more you give love away, the more you get.” Warren Buffett, The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

References:

  1. https://money.yahoo.com/warren-buffett-definition-success-174700744.html
  2. https://selfmadesuccess.com/warren-buffett-success-quotes/
  3. https://app.landit.com/articles/buffets-5-step-process-for-prioritizing-true-success
  4. https://www.cnbc.com/2019/02/13/billionaire-warren-buffett-says-this-is-the-only-measure-of-success-that-matters.html‬
  5. https://www.inc.com/marcel-schwantes/warren-buffett-says-it-doesnt-matter-how-rich-you-are-without-this-1-thing-your-life-is-a-disaster.html