Warren Buffett’s secrets – 10 Ways to Get Rich

Since the new authorized biography of Warren Buffett, The Snowball by Alice Schroeder, will come out soon (9/29). We should expect to see more Buffett’s articles showing up in the media in the near future, which is good for me . The book’s name “Snowball” is from the following quote:

“Life is like a snowball. The important thing is finding wet snow and a really long hill.” – Warren Buffett

Warren Buffett probably didn’t pick these 10 tips himself but it’s always good to know more about this living legend.

Content below is directly copied from the source: 10 Ways to Get Rich – Parade Magazine.

1. Reinvest your profits

When you first make money, you may be tempted to spend it. Don’t. Instead, reinvest the profits. Buffett learned this early on. In high school, he and a pal bought a pinball machine to put in a barbershop. With the money they earned, they bought more machines until they had eight in different shops. When the friends sold the venture, Buffett used the proceeds to buy stocks and to start another small business. By age 26, he’d amassed $174,000—or $1.4 million in today’s money. Even a small sum can turn into great wealth.

2. Be willing to be different

Don’t base your decisions upon what everyone is saying or doing. When Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. He worked in Omaha, not on Wall Street, and he refused to tell his partners where he was putting their money. People predicted that he’d fail, but when he closed his partnership 14 years later, it was worth more than $100 million. Instead of following the crowd, he looked for undervalued investments and ended up vastly beating the market average every single year. To Buffett, the average is just that—what everybody else is doing. To be above average, you need to measure yourself by what he calls the Inner Scorecard, judging yourself by your own standards and not the world’s.

3. Never suck your thumb

Gather in advance any information you need to make a decision, and ask a friend or relative to make sure that you stick to a deadline. Buffett prides himself on swiftly making up his mind and acting on it. He calls any unnecessary sitting and thinking “thumb-sucking.” When people offer him a business or an investment, he says, “I won’t talk unless they bring me a price.” He gives them an answer on the spot.

4. Spell out the deal before you start

Your bargaining leverage is always greatest before you begin a job—that’s when you have something to offer that the other party wants. Buffett learned this lesson the hard way as a kid, when his grandfather Ernest hired him and a friend to dig out the family grocery store after a blizzard. The boys spent five hours shoveling until they could barely straighten their frozen hands. Afterward, his grandfather gave the pair less than 90 cents to split. Buffett was horrified that he performed such backbreaking work only to earn pennies an hour. Always nail down the specifics of a deal in advance—even with your friends and relatives.

5. Watch small expenses

Buffett invests in businesses run by managers who obsess over the tiniest costs. He once acquired a company whose owner counted the sheets in rolls of 500-sheet toilet paper to see if he was being cheated (he was). He also admired a friend who painted only the side of his office building that faced the road. Exercising vigilance over every expense can make your profits—and your paycheck—go much further.

6. Limit what you borrow

Living on credit cards and loans won’t make you rich. Buffett has never borrowed a significant amount—not to invest, not for a mortgage. He has gotten many heartrending letters from people who thought their borrowing was manageable but became overwhelmed by debt. His advice: Negotiate with creditors to pay what you can. Then, when you’re debt-free, work on saving some money that you can use to invest.

7. Be persistent

With tenacity and ingenuity, you can win against a more established competitor. Buffett acquired the Nebraska Furniture Mart in 1983 because he liked the way its founder, Rose Blumkin, did business. A Russian immigrant, she built the mart from a pawnshop into the largest furniture store in North America. Her strategy was to undersell the big shots, and she was a merciless negotiator. To Buffett, Rose embodied the unwavering courage that makes a winner out of an underdog.

8. Know when to quit

Once, when Buffett was a teen, he went to the racetrack. He bet on a race and lost. To recoup his funds, he bet on another race. He lost again, leaving him with close to nothing. He felt sick—he had squandered nearly a week’s earnings. Buffett never repeated that mistake. Know when to walk away from a loss, and don’t let anxiety fool you into trying again.

9. Assess the risks

In 1995, the employer of Buffett’s son, Howie, was accused by the FBI of price-fixing. Buffett advised Howie to imagine the worst- and best-case scenarios if he stayed with the company. His son quickly realized that the risks of staying far outweighed any potential gains, and he quit the next day. Asking yourself “and then what?” can help you see all of the possible consequences when you’re struggling to make a decision—and can guide you to the smartest choice.

10. Know what success really means

Despite his wealth, Buffett does not measure success by dollars. In 2006, he pledged to give away almost his entire fortune to charities, primarily the Bill and Melinda Gates Foundation. He’s adamant about not funding monuments to himself—no Warren Buffett buildings or halls. “I know people who have a lot of money,” he says, “and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. When you get to my age, you’ll measure your success in life by how many of the people you want to have love you actually do love you. That’s the ultimate test of how you’ve lived your life.”

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According to a report released by the China Internet Network Information Center (CNNIC), the number of internet users in China has reached 253 million by the end of June 2008. It’s almost the same as the whole US population (~304 million). The scary part is that 253 million is only 19.1% of the whole China population. If you look at the Internet penetration rate of other countries, like United States (72.3%), Japan (73.8%), South Korea (70.7%) and Hong Kong (69.5%), it is obvious that China has enormous growth potential for their Internet market. Imagine China’s Internet penetration rate increases to 70% – that is 910 million of Internet users, almost 4 times the current Internet market in the US.

While these numbers seem to be very promising, the Internet business environment in China is actually a bit complicated because there are significant differences between the US and China markets. Let’s look at the China market now.

Demographic structure

Compare to the US, the net population in China is very young – 68.6% of the web users are under 30 years old, while 70% are above 30 in the United States. Currently, the ratio of male to female is 57%:43%, closely related to the real China population. Based on the data from China State Statistics Bureau, the education level of male is higher than that of female but the gap is gradually being narrowed.

In terms of education level, 62.8% of them have high school or secondary school education and only 30% have Junior college or Bachelor’s degree. Not surprisingly, students is the largest group in the net population (30%) and more than half of the internet users (55%) are single.

How about income? 74% of the net users in China earns less than RMB 2,000 per month. That is US$292, an annual income of US$3,504.

After seeing these facts, I believe US Internet companies understand that in order to succeed in China, they need to adopt a totally different business model there. Needless to say, if you simply plan to translate your site to Chinese language and think you will have the same success in the US, it’s not possible for you to compete against the local leaders.

Internet Access

While most Chinese surf the web at home (74.1%), Internet cafes have become an important places for Internet access in recent years. More than 39% of the users have accessed the net at Internet cafes and most of them are youngsters with a high school and below education.

Unlike the US, mobile phone is a popular surfing equipment in China. Because of convenience, around 76 million people (~30% of total net population) have chosen to access the web through mobile phones. This number is expected to increase rapidly because 41% of the Chinese population, >530 million people, are already using mobile phones everyday. Despite the high cost, desktop PC still has the leading position among all equipments. Home is still the main place for users to get online. In addition, 87% of them have used desktop computers with broadband internet connection (China is the world’s No.1 broadband market).

Current Business Models

Below are the top online applications in China today:

1. Online Music
2. Instant Message
3. Online Video
4. Online News
5. Search Engine
6. Internet Games
7. E-mail

As we can see from this data, the China’s internet market focuses a lot on entertainment rather than the main applications in the western markets – information research, online shopping and e-mail communication. Currently, only 119 million Chinese are using e-mail, with the an application rate of 56.5%. In contrast, the e-mail application rate in the US is 91% and 82.1% in South Korea.

According to the report, the e-mail application rate in China is actually co-related to the education level. The higher the education level, the higher the email application rate is. For example, users with postgraduate and above education have a 94.2% rate. People with lower education mainly use instant messaging to communicate.

Because of this unique characteristic, virtual goods and micro-transactions have become the major money making products for internet companies in China. In the US, online advertising is the big revenue driver for businesses. However, because online shopping is not popular, the web advertising market in China is very small compared to US and Japan.

For example, in 2007, Tencent, the largest internet company in China with market capital of US$14.5B, had a revenue of $523 million and $224 million in operating profits. Online advertising only makes up 13% of their revenue. 87% comes from micro-transactions for digital goods, online games and mobile services. This special business model gives Tencent a huge operating margin (43%). In comparison, Yahoo’s operating margin is 10.4% and Google is around 30%.

In the online gaming areas, many games are designed on a “Free-To-Play” model. Players can access the free game at no cost, but need to pay for virtual products and services within the game.

Below is an interesting analysis I got it from TrendsSpotting.com. We can see the revenue breakdown of most of the major online companies in China.

The Reality in the Wild Wild West

So after all this positive data, does it mean that the China Internet market will easily become 4 times bigger than the US market in the near future? With the current US Internet market size, Americans have already produced huge corporations, like Google (Market Cap:$146B), Amazon.com ($34B), eBay ($32B), Yahoo ($27B)…etc. So China will produce corporations much bigger than those in the near future? Unfortunately, it is not as easy as the numbers suggest. China web companies still have to overcome several local obstacles in order to succeed in this competitive environment.

First of all, the unfavorable urban-rural ratio. There are 767 million people living in the China rural area now. That is 57.7% of the total population. Among the net population, 25% of the internet users are living in rural areas, which means they are probably earning a lot less than RMB 2,000 (US$ 292) per month because people in villages usually have lower education level and lower income. This will be a great challenge faced by companies who want to develop the e-commerce and online advertising market in China.

Also, at this moment, every home Internet-connected PC is shared by 2.7 users in average. This means the Internet users may not be able to use the Internet whenever they want. So they are not maximizing the value of the Internet yet.

According to BBC, the whole China’s Internet economy has generated US$5.9 billion in revenue in 2007, while US companies pulled in US$21.2 billion just in online advertising revenue. Even though China companies have an unusual business model in virtual goods and micro-transaction, it seems most of the money are just going to the big local players in China now. Smaller local firms probably couldn’t get a big slice from the small US$5.9 billion market. Tencent alone is projected to earn around US$1 billion in 2008. And you still have other major sites, like Baidu, NetEase, Sina, Sohu, Alibaba…etc.

Another problem is the Great Firewall of China (GFW). Internet censorship in China is well known around the world. It is the government’s effort to neutralize critical online opinion. While I understand the purpose of this system, this will also limit the growth of the China Internet market. They even have virtual cops, JingJing and ChaCha, walk, bike or drive across your screen every 20 minutes to ask Internet users to stay away from illegal content and bad websites. I have to say this is actually a pretty innovative idea. Never heard something like this before.

Future Trend

Younger Target Customers: The Internet market in China is currently dominated by youngsters. Influenced by the one-child policy, local adolescents like to form virtual friendships using Instant Messaging. Their main purpose of getting online is to look for entertainment. This group of users tend to use more Bulletin boards and less emails, probably because IM and BBS are more suitable for leisure chats. So I suggest companies should develop a style and culture more like Disney or Facebook but not LinkedIn.

Learn from Asian Countries: Since teenagers like to consume trendy and branded goods, companies should keep up with the latest trend of the Internet Consumer market in countries, like Japan and South Korea. These three Asian countries have very similar culture and value. More importantly, the internet industry in Japan and South Korea is more well developed than China. China can definitely look up to them.

Mobile Internet Content: 41% of the whole population in China are mobile phone users. That is 533 million people!!! Downloading ring tones on cellphones is already very popular among users. For example, there was a popular ring tone generated over $10M in sales of download few years ago. More and more people will access the Internet through their cell phones. So Mobile Value-Added Services will be a very important business model in the future.

Innovative Technology: In the past, Chinese startups often liked to copy the Silicon Valley models. However, in order to be the major leaders on the Internet, Chinese companies have to be creative and to develop their own brands and new technology.

Open the Market: As the education level of local users increases, the Chinese government will have less control on the Internet. However, China’s Internet is still highly internally referential, with fewer than 6% of China’s websites linking to outside the country. Local firms still have a huge home court advantage at this moment. To improve the condition of the industry, users and businesses have to look beyond the local market for opportunities.

Payment System: A trusting online payment system, which can avoid fraud, can facilitate the growth of the local e-commerce market. However, there is still no ONE dominating payment system, like Paypal, has established in China yet.

Advertising Market: Although the China online ad market is still tiny, it has a YoY revenue increase of 72.5% in 2008. This area is expected to grow rapidly in the near future. Before that, web companies have to educate local businesses about the true value of online advertising because a lot of them still don’t understand the importance of this new digital media. With a healthy ad market, it will encourage people to start more online ventures, create competition and provide better services.

Affiliate Programs: Affiliate program has a crucial role in the US Internet ecosystem. Affiliate Marketing not only help businesses to generate sales lead but also find and retain new customers. Each affiliate partners is an extra sales person working for the advertisers on the Internet. Most importantly, the advertisers only have to pay for the marketing costs if they got additional revenue from these programs. Right now, the affiliate marketing industry in China is still not well developed yet.

Niche and Targeted Market: Since the market in China is so big, it is really hard to compete with the local leaders directly. Startups should focus on a smaller targeted market in the beginning. Wealthier cities with higher education level, like Beijing, Shanghai and Guangzhou, will be good starting points. After all, the net population in these three cities is more than 49 million people, which is already larger than the whole South Korea online market!

The China Internet has its own unique culture and characteristics. Companies have to adapt these differences to fit in and don’t try to ignore them. It is a very difficult task to accomplish but if your company can rise to the challenge, this will be a once-in-a-lifetime opportunity for you to be succeed in the biggest market in the future world.

Additional Resources

China Internet Network Information Center (CNNIC)

Virtual Goods: the next big business model (TechCrunch)

For Chinese IM Portal Tencent, The Money Is In Micro-Transactions (TechCrunch)

China’s Internet User Base Is Growing Faster Than Mobile (Seeking Alpha)