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Picking a partner

Buffett often draws parallels between personal and business relationships. He and his long-term business partner, Charlie Munger, talked often about how rarely they argued.

“I always say, the best way to get a good spouse is to deserve one. And the best way to get a good partner is to be a good partner yourself,” Munger said at a Daily Journal Corp annual meeting in 2017.

The Buffett-Munger partnership endured for 60 years, and Buffett has been a married man for 70 years of his life. His perspective on long-term relationships is definitely backed up by plenty of experience.

His advice about choosing a partner with “low expectations” is perhaps easy to misinterpret. Buffett isn’t suggesting that people settle for less when it comes to business or life partners — quite the opposite. Instead, he’s advocating for setting clear expectations early in any relationship to help it endure the test of time.

This pragmatic approach is at the foundation of many business partnerships that power the Berkshire Hathaway conglomerate. Buffett’s investment vehicle has spent over $167 billion acquiring 63 companies over the past century, according to company tracking tool Tracxn. Each acquisition is a delicate balance of expectations on both sides.

“I want my partners to be on the low side on expectations coming in,” Buffett said in his 2001 speech. “Because I want the marriage to last. It’s a financial marriage when they join me at Berkshire and I don’t want them to think I’m going to do things I’m not going to do.”

This philosophy is also reflected in his investment strategy.

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Setting expectations

Buffett’s investment success has often been attributed to his risk-averse approach. The famous investor seeks out attractive deals on high-value assets and seeks to acquire them for less than they’re worth. His mentor, Benjamin Graham, trained him to acquire assets with a margin of safety — a buffer on an asset’s fair market value to account for any unpleasant surprises or errors.

In the 1980s, Buffett explained this philosophy with a bridge analogy. "When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing," he wrote in a 1984 paper.

A margin of safety is simply a rule of thumb for low expectations. By tempering your outlook on a company’s future earnings while estimating its intrinsic value, you could minimize the risk of unpleasant surprises.

If sales and earnings drop immediately after you purchase a stock, the margin of safety puts a potential floor on your losses because your cost basis is already low. However, if the company meets or surpasses your expectations your performance could be greatly enhanced.

This is the guiding principle that helped Buffett acquire Apple shares when the stock was trading at a forward price-to-earnings ratio of 9.5 in 2016.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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