Infographic: Inside Warren Buffett's Brain
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Inside Warren Buffett’s Brain

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What springs to mind when you think of legendary investor Warren Buffett?

For some, it’s his humble Omaha origins or his long-lasting obsession with Coca-Cola. For other people, it’s Buffett’s impeccable investing track record and extraordinary wealth that make a lasting impression.

While these are all legitimate connections to make with the Buffett name, perhaps he is most synonymous with the discipline of value investing – the style and mindset Buffett has made famous over the decades.

The Warren Buffett Series

Part 2: Inside Buffett’s Brain

Today’s infographic provides a deep dive into Warren Buffett’s brain, and it explains everything about his investing philosophy, along with the framework he uses to evaluate potential opportunities.

It’s the second part of the Warren Buffett Series, which we’ve done in partnership with finder.com, a personal finance site that helps people make better decisions – whether they want to jump on the cryptocurrency craze or follow Buffett’s more traditional path to financial success.

The Warren Buffet Series: The Early YearsInside Warren Buffett's BrainPart 3Warren Buffett's Biggest Wins and FailsBest Buffett Quotes

Inside Warren Buffett's Brain
Note: Stay tuned for future parts with our free mailing list.

Warren Buffett’s investment philosophy is well-known.

He famously focuses on the intrinsic value of companies, and he buys stocks when they are “on sale”. Buffett’s not afraid to accumulate big positions in companies he likes – and his favorite holding period is “forever”.

While this formula may seem simple on paper, it’s extremely nuanced and complex in practice.

How Does Buffett’s Brain Work?

Warren Buffett has said that he borrows 85% of his investing style from Benjamin Graham, and 15% from Phil Fisher.

Benjamin Graham:
The godfather of value investing gave Buffett a framework for finding undervalued assets and companies.

Phil Fisher:
The famous growth investor showed Buffett the importance of investing with good management teams.

According to writer Robert Hagstrom, Buffett applies these ideas by focusing on four key principles of investing:

1. Analyze a stock as a business
Have the priorities of a business owner and look the company from a long-term perspective.
Is it increasing its intrinsic value? Would you want to own the entire company?

2. Ensure a “margin of safety”
Buffett considers “margin of safety” the three most important words in investing.
In other words, does a company have more intrinsic value than book value?

3. Manage a focused portfolio
Concentrate on a few stocks that will provide above-average returns over time. Buffett suggests investors think of this as owning a “punch card” with just 20 investment choices that can be made over a lifetime.

4. Protect yourself from Mr. Market
Mr. Market can be speculative and emotional, and he should not be relied upon as a predictor of future prices.
Instead, take advantage of Mr. Market periodically, whenever there is a fire sale.

Buffett’s Investment Criteria

Here are 12 key factors Warren Buffett considers when looking at potential opportunities:

1. Simplicity
Is the business easy to understand?

2. Operating History
Has the business been around for a long time, with a consistent operating history?

3. Long-Term Prospects
Is there reason to believe that the business will be able to sustain success in the long-term?

4. Rational Decisions
Is management wise when it comes to reinvesting earnings or returning profits to shareholders as dividends?

5. Candidness
Does the management team admit mistakes? Are they honest with shareholders?

6. Resisting the “Institutional Imperative”
Can the company resist temptations created by institutional dynamics, such as imitating peer companies, or resist changes in direction?

7. Profit Margins
Does the company have high profit margins?

8. Return on Equity
What is the return on equity (ROE) of the business?

9. Owners Earnings
What is the company’s ability to generate cash for shareholders, who are the residual owners? This is technically defined as free cash flow to equity (FCFE).

10. One Dollar Premise
For every dollar retained from net income, does the company create at least one dollar of market value?

11. Intrinsic Value
What is the value of the future owners’ earnings, discounted back to the present?

12. Margin of Safety
What’s the chance you’ll lose money on the stock, in the long run, if you buy it at today’s price?

Or to sum all of these ideas up succinctly, here’s a quote from the man himself.

My strategy is to find a good business – and one that I can understand why it’s good – with a durable, competitive advantage, run by able and honest people, and available at a price that makes sense.

– Warren Buffett

Other Notes

Part 3 of the Warren Buffett Series will be released in late February 2018.

Credits: This infographic would not be possible without the great biographies done by Roger Lowenstein (Buffett: The Making of an American Capitalist) and Alice Schroeder (The Snowball), as well as numerous other sources cataloging Buffett’s life online.

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Interest Rate Hikes vs. Inflation Rate, by Country

Inflation rates are reaching multi-decade highs in some countries. How aggressive have central banks been with interest rate hikes?

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Interest Rate Hikes vs. Inflation Rate, by Country

Imagine today’s high inflation like a car speeding down a hill. In order to slow it down, you need to hit the brakes. In this case, the “brakes” are interest rate hikes intended to slow spending. However, some central banks are hitting the brakes faster than others.

This graphic uses data from central banks and government websites to show how policy interest rates and inflation rates have changed since the start of the year. It was inspired by a chart created by Macrobond.

How Do Interest Rate Hikes Combat Inflation?

To understand how interest rates influence inflation, we need to understand how inflation works. Inflation is the result of too much money chasing too few goods. Over the last several months, this has occurred amid a surge in demand and supply chain disruptions worsened by Russia’s invasion of Ukraine.

In an effort to combat inflation, central banks will raise their policy rate. This is the rate they charge commercial banks for loans or pay commercial banks for deposits. Commercial banks pass on a portion of these higher rates to their customers, which reduces the purchasing power of businesses and consumers. For example, it becomes more expensive to borrow money for a house or car.

Ultimately, interest rate hikes act to slow spending and encourage saving. This motivates companies to increase prices at a slower rate, or lower prices, to stimulate demand.

Rising Interest Rates and Inflation

With inflation rates hitting multi-decade highs in some countries, many central banks have announced interest rate hikes. Below, we show how the inflation rate and policy interest rate have changed for select countries and regions since January 2022. The jurisdictions are ordered from highest to lowest current inflation rate.

JurisdictionJan 2022 InflationMay 2022 InflationJan 2022 Policy RateJun 2022 Policy Rate
UK5.50%9.10%0.25%1.25%
U.S.7.50%8.60%0.00%-0.25%1.50%-1.75%
Euro Area5.10%8.10%0.00%0.00%
Canada5.10%7.70%0.25%1.50%
Sweden3.90%7.20%0.00%0.25%
New Zealand5.90%6.90%0.75%2.00%
Norway3.20%5.70%0.50%1.25%
Australia3.50%5.10%0.10%0.85%
Switzerland1.60%2.90%-0.75%-0.25%
Japan0.50%2.50%-0.10%-0.10%

The Euro area has 3 policy rates; the data above represents the main refinancing operations rate. Inflation data is as of May 2022 except for New Zealand and Australia, where the latest quarterly data is as of March 2022.

The U.S. Federal Reserve has been the most aggressive with its interest rate hikes. It has raised its policy rate by 1.5% since January, with half of that increase occurring at the June 2022 meeting. Jerome Powell, the Federal Reserve chair, said the committee would like to “do a little more front-end loading” to bring policy rates to normal levels. The action comes as the U.S. faces its highest inflation rate in 40 years.

On the other hand, the European Union is experiencing inflation of 8.1% but has not yet raised its policy rate. The European Central Bank has, however, provided clear forward guidance. It intends to raise rates by 0.25% in July, by a possibly larger increment in September, and with gradual but sustained increases thereafter. Clear forward guidance is intended to help people make spending and investment decisions, and avoid surprises that could disrupt markets.

Pacing Interest Rate Hikes

Raising interest rates is a fine balancing act. If central banks raise rates too quickly, it’s like slamming the brakes on that car speeding downhill: the economy could come to a standstill. This occurred in the U.S. in the 1980’s when the Federal Reserve, led by Chair Paul Volcker, raised the policy rate to 20%. The economy went into a recession, though the aggressive monetary policy did eventually tame double digit inflation.

However, if rates are raised too slowly, inflation could gather enough momentum that it becomes difficult to stop. The longer high price increases linger, the more future inflation expectations build. This can result in people buying more in anticipation of prices rising further, perpetuating high demand.

“There’s always a risk of going too far or not going far enough, and it’s going to be a very difficult judgment to make.” — Jerome Powell, U.S. Federal Reserve Chair

It’s worth noting that while central banks can influence demand through policy rates, this is only one side of the equation. Inflation is also being caused by supply chain issues, a problem that is more or less outside of the control of central banks.

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3 Insights From the FED’s Latest Economic Snapshot

Stay up to date on the U.S. economy with this infographic summarizing the most recent Federal Reserve data released.

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us economic snapshot

3 Insights From the Latest U.S. Economic Data

Each month, the Federal Reserve Bank of New York publishes monthly economic snapshots.

To make this report accessible to a wider audience, we’ve identified the three most important takeaways from the report and compiled them into one infographic.

1. Growth figures in Q2 will make or break a recession

Generally speaking, a recession begins when an economy exhibits two consecutive quarters of negative GDP growth. Because U.S. GDP shrank by -1.5% in Q1 2022 (January to March), a lot rests on the Q2 figure (April to June) which should be released on July 28th.

Referencing strong business activity and continued growth in consumer spending, economists predict that U.S. GDP will grow by +2.1% in Q2. This would mark a decisive reversal from Q1, and put an end to recessionary fears for the time being.

Unfortunately, inflation is the top financial concern for Americans, and this is dampening consumer confidence. Shown below, the consumer confidence index reflects the public’s short-term outlook for income, business, and labor conditions.

consumer price index 2005 to 2022

Falling consumer confidence suggests that more people will delay big purchases such as cars, major appliances, and vacations.

2. The COVID-era housing boom could be over

Housing markets have been riding high since the beginning of the COVID-19 pandemic, but this run is likely coming to an end. Here’s a summary of what’s happened since 2020:

  • Lockdowns in early 2020 created lots of pent-up demand for homes
  • Greater household savings and record-low mortgage rates pushed demand even further
  • Supply chain disruptions greatly increased the cost of materials like lumber
  • Construction of new homes couldn’t keep up, and housing supply fell to historic lows

Today, home prices are at record highs and the cost of borrowing is rapidly rising. For evidence, look no further than the 30-year fixed mortgage rate, which has doubled to more than 6% since the beginning of 2022.

Given these developments, the drop in the number of home sales could be a sign that many Americans are being priced out of the market.

3. Don’t expect groceries to become any cheaper

Inflation has been a hot topic this year, especially with gas prices reaching $5 a gallon. But there’s one category of goods that’s perhaps even more alarming: food.

The following table includes food inflation over the past three years, as the percent change over the past 12 months.

DateCPI Food Component (%)
2018-02-011.4%
2019-05-012.0%
2019-06-011.9%
2019-07-011.8%
2019-08-011.7%
2019-09-011.8%
2019-10-012.1%
2019-11-012.0%
2019-12-011.8%
2020-01-011.8%
2020-02-011.8%
2020-03-011.9%
2020-04-013.5%
2020-05-014.0%
2020-06-014.5%
2020-07-014.1%
2020-08-014.1%
2020-09-014.0%
2020-10-013.9%
2020-11-013.7%
2020-12-013.9%
2021-01-013.8%
2021-02-013.6%
2021-03-013.5%
2021-04-012.4%
2021-05-012.1%
2021-06-012.4%
2021-07-013.4%
2021-08-013.7%
2021-09-014.6%
2021-10-015.3%
2021-11-016.1%
2021-12-016.3%
2022-01-017.0%
2022-02-017.9%
2022-03-018.8%
2022-04-019.4%
2022-05-0110.1%

From this data, we can see that food inflation really picked up speed in April 2020, jumping to +3.5% from +1.9% in the previous month. This was due to supply chain disruptions and a sudden rebound in global demand.

Fast forward to today, and food inflation is running rampant at 10.1%. A contributing factor is the impending fertilizer shortage, which stems from the Ukraine war. As it turns out, Russia is not only a massive exporter of oil, but wheat and fertilizer as well.

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