Buffett's Wisdom (Of Permanent Value) Part II

Here is Part II of my small collection of words of wisdom from the legendary investor Warren Buffett.

Enjoy!

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Buffett as an admirer of the British economist and invester John Maynard Keynes:

Keynes essentially said don't try and figure out what the market is doing. Figure out business you understand, and concentrate. Diversification is protection against ignorance, but if you don't feel ignorant, the need for it goes down drastically.

(Forbes, Oct 19, 1993)

Picking the right business for a long term holding. If you're going to have a Catholic marriage, you'd better do it right.

(Omaha World-Herald, October 28, 1993)

Risk is not knowing what you're doing.

(Omaha World-Herald, Oct 28th 1993)

I would think very hard about getting into a business with fundamentally good economics. I would think of buying from people I can trust. And I'd think about the price I'd pay. But I wouldn't think about the price to the exclusion of the first two.

And that is essentially, is what we're trying to do at Berkshire. And if I did that, would I think about whether I could buy it cheaper on Monday rather than on Friday or would I think about the January effect or other nonsense?

(Omaha World-Herald, Oct 28, 1993)

Communication investments:

I don't like business where the technology are changing fast. Basically, I don't think I'm a great one for seeing the future when the future looks way different than the present. Generally, anything that is subject to a lot of change and technology, I tend to be critical of rather than excited by.

(Omaha World-Herald, Oct 28, 1993)

Diversification is a hedge against ignorance.

(Widely quoted)

Diversification:

The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as "the possibility of loss or injury."

Academics, however, like to define investment "risk" differently, averring that it is the relative volatility of a stock or portfolio of stocks - that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the "beta" of a stock - its relative volatility in the past - and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.

(1993 Annual Report)

There's a huge difference between the business that grows and requires lots of capital to do so and the business that grows and doesn't require capital.

(Annual meeting 1994)

Thinking for yourself:

"You have to think for yourself. It always amazes me how high-IQ people mindlessly imitate. I never get good idea talking to other people."

(US News & World Report, June 20, 1994)

A good business:

Look for the durability of the franchise. The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.

(US World & News Report, June 20, 1994)

Compound interest is a little bit like rolling a snowball down a hill. You can start with a small snowball and if it rolls down a hill long enough (and my hill is now 53 years long - that's when I bought my first stock), and the snow is mildly sticky, you'll have a real snowball at the end.

(Talk to University of Nebraska students, Oct 10, 1994)

The professional in almost any field achieve a result which is significantly above what the layman in aggregate achieves. It's not true in money management.

(New York Society of Security Analysts, December 6, 1994)

The basic ideas of investing are to look at stocks as businesses, use market fluctuations to your advantage and seek a margin of safety. "That's what Ben Graham taught us... A hundred years from now they will still be the cornerstones of investing."

(New York Society of Security Analysts, December 6, 1994)

We just try to buy businesses with good to superb underlying economics, run by honest and able people and buy them at sensible prices. That's all I'm trying to do.

(New York Society of Security Analysts, December 6, 1994)

When you find a really good business run by first-class people, chances are a price that looks high isn't high.

(London Indendent, Feb 19, 1995)

I'd be a bum on the street with a tin cup if the market is efficient.

(Fortune, April 3, 1995)

We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?

(1994 Annual Report)

You don't have to make money back the same way you lost it.

(Annual meeting in 1995)

A stock doesn't know who owns it. You may have all of those feelings and emotions as the stock goes up or down, but the stock doesn't give a damn.

(Annual meeting in 1995)

We like stocks that generate high returns on invested capital where there is a strong likelyhood that it will continue to do so. For example, the last time we bought Coca-Cola, it was selling at about 23 times earnings. Using our purchase price and today's earnings, that makes it about five times earnings. It's really the interaction of capital employed, the return on that capital, and future capital generated versus the purchase price today.

(Annual meeting in 1995)

There are certain kinds of businesses where you have to be smart once and the kind that you have to stay smart every day to defend it. Retailing is one of them. If you find a retailing concept that catches on, you have to defend it every day.

(Annual meeting in 1995)

I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections but we care very much about, and look very deeply at track records. If a company has a lousy track record, but a bright future, we will miss the opportunity.

(Annual meeting in 1995)

If you have to choose between a terrific management and a terrific business, choose the terrific business.

(Annual meeting in 1995)

Chains of habit are too light to be felt until they are too heavy to be broken.

(PBS TV program produced by Univeristy of North Carolina, 1995)

If you find three wonderful businesses in your life, you'll get very rich.

(Annual meeting in 1996)

You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.

For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.

Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.

(Berkshire's Owner's Mannual, June, 1996)

With enough inside information and a million dollars, you can go broke in a year.

(Widely quoted)

I would not want you to panic and sell your Berkshire stock upon hearing that some large catastrophe had cost us a significant amount. If you would tend to react that way, you should not own Berkshire shares now, just as you should entirely avoid owning stocks if a crashing market would lead you to panic and sell.

(1996 Annual Report)

Inactivity [in investing] strikes us as intelligent behavior.

(1996 Annual Report)

If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.

(1996 Annual Report)


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to be continued....