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Rain Falls Down

Peter Kozodoy logo Posted Tuesday April 21st, 2020 Rain Falls Down

During my quarter-life crisis, I decided I was a stupid person and needed more education. So, in alignment with my self-image of being an overachiever, I applied to the same business school Warren Buffett went to, and was fortunate enough to get a spot.

Buffett famously learned his value investing technique from his professor, Benjamin Graham, at Columbia Business School, and by far and away the value investing class was the best one I took.

Leading up to that value investing course, I took a bevy of classes in high finance, learning how to discount cash flows, develop intrinsic value per share, run sophisticated capex/depreciation models, and create complex valuations of companies large and small.

However, on the first day of what I'll call "The Buffett Course," the professor taught us one simple lesson he insisted was more important than any other technique we had learned up to that point.

The lesson: Rain Falls Down.

He asked us, "what do you think this means?," to which we responded with a variety of complex metaphors. Maybe it meant that stocks always go down when the sentiment on Wall St is negative? Maybe it means that many organizations are sensitive to the weather?

No. All wrong.

All the professor meant was this: Rain falls down. That's a truth of our world that we cannot deny. Our entire civilization is built around this truth; we have roofs over our heads, gutters, drainage systems and umbrellas.

We can try as hard as we want to deny this truth, but in the end, we'd be silly to live our lives any other way...because rain falls down.

Now, what does this have to do with investing like Warren Buffett? It turns out, everything. You see, Buffett isn't a magician. He doesn't use sophisticated models to pinpoint the exact right company that will return him 20% year over year. Instead, he makes most investment decisions in about 15 minutes, and he does it by assessing the truth instead of considering what everyone else thinks or believes at the time.

See, Buffett only buys stocks and companies that are undervalued. He does this by waiting until the market gives him an opportunity; in other words, he waits until everyone else tricks themselves into believing that rain actually falls up, and Buffett swoops in and takes advantage of this temporary mania to invest.

You might think people are generally rational, but in fact they're anything but. Even the most well-paid leaders of our time make huge mistakes because they believe something that simply isn't true. Think of Blockbuster, which refused to believe that people would stream video online, even though the truth was evident with more than enough time for Blockbuster to adapt before Netflix put it out of business.

These truths are all around us. It's up to us to see them. If you want to achieve what Buffett has, look for these inconsistencies everywhere in your life -- places where everyone believes something that simply isn't true. Those are your biggest opportunities, if you can just summon the courage to remember that rain falls down, even if everyone around you thinks otherwise.