“Nothing sedates rationality like large doses of effortless money.” Warren Buffett quote.
One day in May in a hotel in Omaha, the second richest man in America (at the time) was holding a Q&A session with members of the press. He and Charlie Munger, the vice-chairman of Berkshire Hathaway, had been answering questions for over an hour, when a security guard scurried up to the platform. Visibly shaken, the man delivered an urgent message which Warren Buffett then shared the message with the assembled crowd. A tornado had been sighted and headed their way. The hotel was advising that everyone take shelter. Buffett then informed the crowd that he intended to keep on taking questions until no one had anything more to ask or the whole building blew away.
This illustrates the fearless nature of Warren Buffett. It is how he has amassed his enormous wealth. He isn’t easily swayed by rumors and hearsay. When he sets a course, he keeps the course. When everyone else is panicking, he keeps his wits about him. When everyone else is fleeing in panic, he evaluates the situation. He coldly calculates and decides his next move. More often than not, when others are selling in a panic, Buffett is buying their shares at a discount.
Warren Buffett is a rational man who isn’t swayed by emotions like panic or fear. He’s also well versed in the evils of effortless money.
Effortless money goes by many names, but one of the most common is Venture Capital. There are even television shows where struggling entrepreneurs pitch their business ideas to seasoned business people, hoping to secure their own large dose of effortless money.
If you’ve ever watched one of those shows, you’ll notice that the wealthy business men and women who have cash to invest always seem to be looking for something deeper. Start up businesses are rarely profitable, so these investors are looking for something beyond profit to guide their investment decisions. Kevin O’Leary is an investor who appears on one of these shows. Forbes asked this question: “The first question usually asked is how profitable the business is. Would you invest in a company that wasn’t making money but had a good concept? What else do you look for besides revenue?”
There are two fundamental truths to investing in start-ups: The first is that cash flow is king. A good concept is a necessity to succeeding in the business world, but the real test isn’t in fancy projections – it’s in the cold hard cash from real sales. Money never lies. The second is that people are everything. Success is a must, but, I prefer managers who have also been bitten at least once by the sting of failure – so that when they see their scars from that failure, they respect it and they fear it.
Cash flow is king. The secret to unleashing the windfall of large doses of effortless money is to first master the art of running your business frugally. When you run your business frugally, you improve cash flow.
When you know how to run your business frugally, well – then you’ll be able to keep you wits about you – Warren Buffett style – if you are ever able to tap into a large doses of effortless money.