Question: What advice would you give to new investors?
Warren Buffett: I think you should read everything you can. In my case, by the age of 10, I’d read every book in the Omaha public library about investing, some twice. You need to fill your mind with various competing thoughts and decide which make sense. Then you have to jump in the water – take a small amount of money and do it yourself. Investing on paper is like reading a romance novel vs. doing something else. [Laughter] You’ll soon find out whether you like it. The earlier you start, the better.
At age 19, I read a book [The Intelligent Investor] and what I’m doing today, at age 76, is running things through the same thought process I learned from the book I read at 19.
I remain big on reading everything in sight. And when you get the opportunity to meet someone like Lorimer Davidson, as I did, jump at it. I probably learned more in that four hours than in almost any course in college or business school.
Munger: Sandy Gottesman, a Berkshire director, runs a large, successful investment firm. Notice his employment practices. When he interviews someone, he asks: “What do you own and why do you own it?” If you’re not interested enough to own something, then he’d tell you to find something else to do.
Buffett: Charlie and I have made money in a lot of different ways, some of which we didn’t anticipate 30-40 years ago. You can’t have a defined roadmap, but you can have a reservoir of thinking, looking at markets in different places, different securities, etc. The key is that we knew what we didn’t know. We just kept looking. We knew during the Long Term Capital Management crisis that there would be a lot of opportunities, so we just had to read and think eight to ten hours a day. We needed a reservoir of experience. We won’t spot every one, though – we’ve missed all kinds of things.
But you need something in the way you’re programmed so you don’t lose a lot of money. Our best ideas haven’t done better than others’ best ideas, but we’ve lost less. We’ve never gone two steps forward and then one step back – maybe just a fraction of a step back.
Munger: And of course the place to look when you’re young is the inefficient markets. You shouldn’t be trying to guess if one drug company is going to have a better pipeline than another.
Buffett: You should do well in games with few other players. The RTC [Resolution Trust Corporation] was a great example of a chance to make a lot of money. Here was a seller [government bureaucrats] with hundreds of billions of dollars of real estate and no money in the game, who wanted to wrap up quickly, while many buyers had no money and had been burned.
There won’t be any scarcity of opportunity in your life, although there will be times when you feel that way.
Source: BRK Annual Meeting 2007 Tilson Notes
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- Don’t worry too much about your mistakes
- Don’t learn too much from your mistakes:
- Don’t become Mark Twain’s cat that never sat again on a stove after being burned
- BUT…never be willing to play a “fatal” game
- Don’t confuse social progress with the chance to make money – look at airlines and autos for examples
- Law degree is not essential, but good if you think it will help in your specific career
- Learning to think like a lawyer is a valuable trait
- Allocate even more of your day to reading than he does
- Read lots of K’s and Q’s – there are no good substitutes for these – Read every page
- Ask business managers the following question: “If you could buy the stock of one of your competitors, which one would you buy? If you could short, which one would you short?”
- Always read source (primary) data rather than secondary data
- If you are interested in one company, get reports for competitors. “You must act like you are actually going into that business, and if you were, you’d want to know what your competitors were doing.”
Source: Buffett Vanderbilt Notes, Jan 2005
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[Re: Ongoing Learning]
I haven’t been continually learning the basic principles [of sound investing], which are still Ben Graham’s. They were affected in a significant way by Charlie and Phil Fisher in terms of looking at better businesses. And I’ve learned more about how businesses operate over time.
You need an intellectual framework, which you can get mostly from The Intelligent Investor. Then, think about businesses you can get your mind around if you really work at it. Then, you will do well if you have the right temperament.
[CM: I’ve watched Warren for decades. Warren has learned a lot. He can pooh pooh investing in PetroChina, but he’s learned, which has allowed him to [expand his circle of competence so he could invest in something like PetroChina.
If you don’t keep learning, other people will pass you by.
Temperament alone won’t do it – you need a lot of curiosity for a long, long time.]
Source: BRK Annual Meeting 2004 Tilson Notes
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It’s hard for individual investors to successfully pick stocks or time the market. The best investment you can make is in your own abilities. Anything you can do to develop your own abilities or business is likely to be more productive than investing in foreign currencies.
If you own your own business in America [and you run it well, you’ll do OK].
When I was seven years old, I first took an interest in stocks. My dad was in the business, so I’d go with him to the office and I saw interesting things. [When I was a little older,] I went to the library and read every book on markets and investing.
When I was 11, I bought my first stock – three shares. I was following charts. When I was 19, I read The Intelligent Investor and it changed my whole framework.
My advice is to read a lot. There are no secrets in the business that only the priesthood knows. It’s all right there.
It requires qualities of temperament way more than qualities of intellect.
Once you have a 125 IQ, much more doesn’t matter. Look for opportunities that fit your framework. Try to learn every day, but you can’t act every day. It’s important to enjoy the game, just as it is to enjoy bridge or baseball [if you’re going to play those games seriously].
Source: BRK Annual Meeting 2005 Tilson Notes
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Ben Graham said you’re neither right nor wrong if you’re investing with the crowd – you’re right if your facts and reasoning are right. Once you have the facts, you have to think about what they mean. You don’t take a survey.
You should focus on what’s important and knowable. There are many things that are important but now knowable, like [whether there will be] a nuclear attack tomorrow. You can’t focus on those.
As Ben Graham said in chapter 8 of The Intelligent Investor: The market is there to serve you, not instruct you. If it does something silly, it gives you a chance to do something. It just sets prices. If it doesn’t give you an opportunity, go play bridge and come back the next day. And the nice thing is that the prices will be different.
During the Long-Term Capital Management crisis, we were getting calls on Sunday from people. By the way, you can make a lot of money on calls on Sunday – that means things are really screwed up. Just make sure you’re the callee and not the caller.
At that time, there was [an unprecedented] 30 basis point spread between on- versus off-the-run 30-year Treasuries. All you have to do [in such situations] is make sure you can play out your hand under all circumstances. If you can and you have the right facts – and you let the market serve rather than instruct you – you can’t miss.
Munger: I’d say some of you probably can miss. [Laughter]
Source: BRK Annual Meeting 2005 Tilson Notes
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Question: How would you recommend an individual investor who follows the Graham and Dodd philosophy to allocate their capital today?
Buffett: Well, it depends whether they are going to be an active investor. Graham distinguished between the defensive and the enterprising and that.
Advice for Active Investors
So if you are going to spend a lot of time on investment, you know I just advise looking at as many things as possible and you will find some bargains. And when you find them, you have to act. It doesn’t — it hasn’t changed at all since I was here in 1950, 1951. And it won’t change the rest of my life. You start turning pages. When I got out of school, I turned every page in Moody’s 10,000-some pages twice, looking for companies. And you have to find them yourself. The world isn’t going to tell you about great deals. You have to find them yourself. And that takes a fair amount of time.
Advice for Passive Investors
So if you are not going to do that, if you are just going to be a passive investor, then I just advise an index fund more consistently over a long period of time.
Opinion on Cash
The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Most of you don’t look like you are overburdened with cash anyway. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it.
Source: Buffett & Gates at ColumbiaBusinessSchool, November 12th 2009