Warren Buffett Speaks about Investing by Janet Lowe


         All the passages below are taken from the book, “Warren Buffett Speaks” by Janet Lowe. It was published in 1997.


About Investing


Warren Buffett employs investment principles that he describes as "simple, old, and few." Many of Buffett's methods evolve from his personality and character. Others he has learned from teachers and experience. Like all good students, he uses his training as a foundation. In time, he stacked the bricks far higher than his best teachers.



"Rule No. 1: Never lose money.

  Rule No. 2: Never forget Rule No. 1.”


Buffett returns again and again to Ben Graham:


"I consider there to be three basic ideas, ideas that if they are really ground into your intellectual framework, I don't see how you could help but do reasonably well in stocks. None of them are complicated. None of them take mathematical talent or anything of the sort. (Graham) said you should look at stocks as small pieces of the business. Look at (market) fluctuations as your friend rather than your enemy---profit from folly rather than participate in it. And in (the last chapter of The Intelligent Investor, he said the three most important words of investing: `margin of safety. ' I think those ideas, 100 years from now, will still be regarded as the three cornerstones of sound investing'




Buffett summarizes Graham this way:


"When proper temperament joins with proper intellectual framework, then you get rational behavior."


Buffett is not concerned about his principles going stale:


"If principles can become dated, they're not principles."





"The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. Either way, she is `taxed' in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax, but doesn't seem to notice that 5 percent inflation is the economic equivalent."




"If you feel you can dance in and out of securities in a way that defeats the inflation tax, I could like to be your broker---but not your partner."




Buffett explains why he holds stocks even in times of high inflation: "Partly it's habit. Partly, it's just that stocks mean business, and owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation---at least they are if you buy in at appropriate prices.”




Buffett has a few ideas on how to control inflation:


"I could eliminate inflation or reduce it very easily, if you had a constitutional amendment that said that no congressman or senator was eligible for reelection in a year in which the CPI increased more than over 3 percent."





Buffett was 19 years old and a senior at the University of Nebraska when he read Graham's classic The Intelligent Investor. He likens the experience to that of "Paul on the road to Damascus," and one in which he learned the philosophy of "buying $1 for 40 cents."

Before reading the book, Buffett says, "I went the whole gamut. I collected charts and I read all the technical stuff. I listened to tips. And then I picked up Graham's The Intelligent Investor. That was like seeing the light.”

"I don't want to sound like a religious fanatic or anything, but it really did get me."



"Prior to that, I had been investing with my glands instead of my head.”





Warren Buffett first became acquainted with Graham when he read his book, The Intelligent Investor. He met his hero in person in 1950 when Buffett enrolled in graduate school at Columbia University: "Next to my dad, Ben Graham had more impact certainly on my business life than any individual," Buffett says.

Graham, he explained, was more interested in the intellectual challenge of investing than in building a fortune. That, along with vast intellectual curiosity, generosity, and a wry sense of humor, made Graham unique.

Graham and Buffett had much in common. Articulate and witty, Graham enjoyed a wide circle of friends. The chief similarity is a peculiar (to the rest of us) disinterest in lots of money. Shortly after Buffett joined Graham's firm, Graham told him: "Money won't make any difference to you and me. We won't change. Only our wives will live better."

When Buffett graduated from Columbia in 1951, Graham suggested that he postpone his career in investments until the overheated market took a rest. During that year, the Dow Jones Industrial Average hit 250. Until then, the DJIA had traded at below 200 in every year since its inception.

"I had about 10 thousand bucks," Buffett said. "If I'd taken (the) advice, I'd probably still have about 10 thousand bucks."

It was an uncharacteristic suggestion, since Graham had built a career warning against market timing. Graham retired in 1956, apparently weary of working and no longer interested in stocks.


NOTE: Buffett ended up with much more money than Graham. When Graham died in 1976 at age 82, he left an estate of around $3 million.




"(Graham) wasn't about brilliant investments and he wasn't about fads or fashion. He was about sound investing, and I think sound investing can make you very wealthy if you're not in too big of a hurry. And it never makes you poor, which is better.”




It baffles us how many people know of Ben Graham, but so few follow. We tell our principles freely and write about them extensively in our annual reports. They are easy to learn. They should be easy to follow. But the only thing anyone wants to know is, `what are you buying today?' Like Graham, we are widely recognized but least followed."




"Most of us, when we get our ideas about investing, we guard them jealously and don't talk about them until we've bought the last share that we can afford. Then we start shouting. Ben was something else on that. He regularly taught at Columbia or the New York Institute of Finance. He never taught a class without current examples, and he was perfectly willing to share what other people thought of as secrets. It is sort of the ultimate act of generosity when you go out and teach someone something that is actually going to be harmful to your own commercial well-being, and I saw Ben do that." Buffett laughed and added, "That is a part of Ben I didn't carry forward."


NOTE: Buffett does not reveal his purchases until required to do so by the Securities and Exchange Commission, or long after the fact when explaining Berkshire Hathaway's performance to investors. Generally, Berkshire does not announce investments of under $600 million.




Here are some typical Graham observations on investing and the markets:

"Pascal said that `the heart has reasons that reason doesn't understand. For ‘heart' read Wall Street.




Though Graham, like Buffett, had an innate love for math, he warned against any investor who bases investments on overly impressive charts, graphs, or formulas: "Even when the underlying motive of a purchaser of a security is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense."




Graham often reminded investors that they own the companies in which they invest, and as owners, should not let themselves be bullied by management: "I want to say a word about disgruntled shareholders. In my humble opinion, not enough of them are disgruntled. And one of the great troubles with Wall Street is that it cannot distinguish between a mere trouble maker or ‘strike suitor' in corporate affairs and a stockholder with a legitimate complaint which deserves attention from his management and from his shareholders.”




Despite his admiration for Graham, Buffett departs in several notable ways: "Ben Graham wanted everything to be a quantitative bargain. I want it to be a quantitative bargain in terms of future streams of cash. My guess is the last big time to do it Ben's way was in '73 or '74, when you could have done it quite easily"




"I'm willing to pay more for a good business and for good management than I would 20 years ago. Ben tended to look at the statistics alone. I've looked more and more at the intangibles."




William Ruane, founder of the highly successful Sequoia Fund met Warren Buffett when both attended Graham's seminar at Columbia. Together, he says, Graham and Buffett paint a complete picture of how to invest:      


"(Graham) wrote what we call the Bible, and Warren's thinking updated it. Warren wrote the New Testament."




In his later years, Graham told Buffett that every day he hoped to do "something foolish, something creative, and something generous." Graham said he usually was able to get the first one accomplished before breakfast.




When Graham was in his late 70s and laid ill in a San Diego hospital, he asked Buffett to help him revise The Intelligent Investor for a new edition. Buffett agreed, but later Graham recovered and proceeded on his own. Graham seemed not to like the modifications Buffett proposed. What were those changes? Not many, Buffett said: "I wanted to talk a little more about inflation and about how the investor should analyze businesses. But I was not going to change the ten commandments at all."




Graham's theories are seldom included in college curriculums today because, according to Buffett: "It's not difficult enough. So, instead, something is taught that is difficult but not useful. The business schools reward complex behavior more than simple behavior, but simple behavior is more effective."




Buffett hears from investors all over the world who share his admiration for Benjamin Graham: "He was true north on a lot of people's compass," Buffett says.

What did Graham have to say about Buffett?

Graham told Del Mar, California investor Charles Brandes, "Warren has done very well."





Buffett rails against investment theories such as efficient market hypothesis, beta, and other concepts taught today at the major universities. They rely, he believes, too heavily on abstract theory and not enough on common sense:


"I’d be a bum on the street with a tin cup if the markets were always efficient.”




"Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn't do any good to look at the cards."




"It has been helpful to me to have tens of thousands (of students) turned out of business schools taught that it didn't do any good to think."




"Current finance classes can help you do average."




Buffett's partner Charlie Munger, when asked about modern portfolio theory, instantly replied "Twaddle!" He added that the concepts are "a type of dementia I can't even classify."




As for "asset allocation" to the future highest and best-performing industrial group, Buffett also passes:


"For me, it's what's available at the time. We're not interested in categories per se. We're interested in value."





Mr. Market was a character invented by Graham to illuminate his students' minds regarding market behavior. The stock market should be viewed as an emotionally disturbed business partner, Graham said. This partner, Mr. Market, shows up each day offering a price at which he will buy your share of the business or sell you his share. No matter how wild his offer is or how often you reject it, Mr. Market returns with a new offer the next day and each day thereafter. Buffett says the moral of the story is this: Mr. Market is your servant, not your guide.




In March 1989, as the stock market soared, Buffett wrote:


We hare no idea how long the excesses will last, nor do we know what will change the attitudes of the government, lender and buyer that fuel them. But we know that the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”




"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”




How can an investor be sure that the price of a stock that is undervalued by the market eventually will rise?


"When I worked for Graham-Newman; I asked Ben Graham, who then was my boss, about that. He just shrugged and replied that the market always eventually does. He was right: in the short run, (the market is) a voting machine; in the long run, it's a weighing machine.''




"The fact that people will be full of greed, fear, or folly is predictable. The sequence is not predictable."




"The market, like the Lord, helps those who help themselves."





"Charlie and I never have an opinion on the market because it wouldn't he any good and it might interfere with the opinions we have that are good."




"You can't get rich with a weather vane."




"The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses."




"If we find a company we like, the level of the market will not really impact our decisions. We will decide company by company. We spend essentially no time thinking about macroeconomics factors. In other words, if somebody handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or interest rates or whatever it might be for the next two years, we would not pay any attention to it. We simply try to focus on business that we think we understand and where we like the price and management. If we see anything that relates to what's going to happen in Congress we don't even read it. We just don't think it's helpful to have a view on the matters.”




"(John Maynard) Keynes essentially said, don't try and figure out what the market is doing. Figure out a business you understand, and concentrate."




"For some reason, people take their cues from price action rather than from values.  What doesn’t work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up."




"The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."





Though he cannot anticipate market movements, there are times when it is obvious that stock prices in general are too high or too low. The clue is that there are either very few undervalued stocks to buy (the market is in the stratosphere), or there are so many good buys an investor can't take advantage of them all (the market is bottoming). In 1973, stocks were high-priced.


"I felt like an oversexed guy on a desert island. I (didn't) find anything to buy”


In 1974, Buffett's condition didn't change, but his location (like the market) did. He told a reporter:


"I feel like an oversexed guy in a harem. This is the time to start investing."




In the spring of 1987, Buffett was asked about the corporate jet he'd purchased, and announced in tiny print in Berkshire's annual report:


"I'd rather buy a good stock than a good jet, but there's nothing that we can see buying even if it went down 10 percent."


He was then asked when the market would decline: "We haven't the faintest idea."

Buffett and the world soon found out. On October, 19, 1987, the Dow Jones Industrial Average fell 507 points in a single day. Before the market correction was over, the Dow lost nearly one-third of its value. In time, the market recovered and surpassed its previous highs.




At times Buffett finds no attractive investments:


"Currently liking neither stocks nor bonds, I find myself the polar opposite of Mae West as she declared, "I only like two kinds of men: foreign and domestic."




Buffett says he likes to buy stocks when the "bears are giving them away."





"Price is what you pay. Value is what you get."




When Berkshire acquired Central States Indemnity Co. of Omaha in 1992, William M. Kizer, Sr. described the negotiations this way: "The price he quoted us was that he buys companies for 10 times (annual) earnings. I suggested, `Well, last year we made $10 million, so if my multiplication is right, that's $100 million,' and I gulped. And he said `Okay.' And I said `$125 million?' He said, `You're too late.'





Intrinsic value is a critical and at the same time an elusive concept:


"There is no formula to figure (intrinsic value) out. You have to know the business (whose stock you are considering buying).




"Valuing a business is part art and part science.




"It doesn't have to be rock bottom to buy it. It has to be selling for less than you think the value of the business is, and it has to be run by honest and able people. But if you can buy into a business for less than it's worth today and you're confident of the management, and you buy into a group of businesses like that, you're going to make money."




Don't worry about value investors snapping up all the bargains:


"I have seen no trend toward value investing in the 35 years I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult.”





"Berkshire buys when the lemming are heading the other way.”



Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.”




"You don t need to he a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guv with a 130 1Q. Rationality is essential.”




"Happily, there's more than one way to get to financial heaven.”





A Gentle Discourse between Walter Schloss and Warren Buffett:

A zealous student of Ben Graham at Columbia, Warren Buffett went to New Jersey for an annual meeting of a company in which Graham owned shares. Walter Schloss, who worked at Graham-Newman Co. also was there. They struck up a conversation, went to lunch, and have been friends ever since. Schloss later left the Graham firm and went into business for himself. Buffett spotlighted Schloss's remarkable investment record in his now famous essay, "The Super Investors of Graham and Doddsville."

Through 39 years, thick and thin, Schloss has delivered a compound annual gain of just over 20 percent, compared to a Standard & Poors Industrials advance of just under 10 percent. Schloss keeps fund expenses at a minimum and forgoes management fees in years his funds make no gains. "I don't think I should get paid if I do a lousy job," Schloss says.

"I think Walter's operational style should be a lesson for us all (one Charlie has already mastered). In effect, Walter is running an office for a year on what it costs Berkshire to start the engines on The Indefensible," Buffett said.

The following is a condensed version of affectionate bantering between Buffett and Schloss at Benjamin Graham's 100th birthday memorial at the New York Society of Security Analysts. Buffett explained that Graham felt it was sort of cheating to use any tool, such as meetings with top management, that are not available to individual investors.

Buffett: I was inclined to cheat, but Walter has been more of a purist on that. Over the years, he's got some investment record, I'll tell you that!

Schloss: I really don't like talking to management. Stocks really are easier to deal with. They don't argue with you. They don't have emotional problems. You don't have to hold their hand. Now Warren is an unusual guy because he's not only a good analyst, he's a good salesman, and he's a very good judge of people. That's an unusual combination. If I were to (acquire) somebody with a business, I'm sure he would quit the very next day. I would misjudge his character or something---or I wouldn't understand that he really didn't like the business and really wanted to sell it and get out. Warren's people knock themselves out after he buys the business, so that's an unusual trait.

Schloss (later in the discussion): I own a lot of stocks. Warren doesn't like that, but I can't help it. You have to do what's comfortable for you, even if it's not as profitable as what Warren does. There's only one Warren. (Because Schloss owns so many stocks) the risk of any one is not that great. I try to buy securities that are undervalued based on assets more than earnings. I do a better job on assets than earnings because earnings have a way of changing.

Buffett (later in the conversation, not ready to give up on this): Walter has owned hundreds and hundreds and hundreds of securities. I call it the used-cigar-butt approach. You find these well-smoked, down-to-the-nub cigars, but they're free. You pick them up and get one free puff out of them. Anything is a buy at a price. Lately, Walter says that he has to buy an occasional new cigar. But he gets it on sale.

Schloss on another occasion said of Buffett: "There's never been anything like him ... the continued growth will be very hard. Maybe he'll merge it (Berkshire) with Canada."





Earnings, or a promise of future earnings, give stocks their value:


“We like stocks that generate high returns on invested capital where there is a strong likelihood that it will continue to do so. For example, the last tine we bought Coca-Cola, it was selling at about 23 times earnings. Using our purchase price and today’s earnings, that makes it about 5 times earnings. It’s really the interaction of capital employed, the return on that capital and future capital generated versus the purchase price today.”




"If' the business does well, the stock eventually follows."




Buffett explains that buying the stock of companies with strong earnings is a hedge against inflation:

"An irony of inflation-induced financial requirements is that the highly profitable companies---generally the best credits---require relatively little debt capital. But the laggards in profitability never can get enough. Lenders understand this problem much better than they did a decade ago---and are correspondingly less willing to let capital-hungry, low-profitability enterprises leverage themselves to the sky."




One fiscal quarter does not an earnings trend make, as Buffett noted while discussing the direction of Salomon Inc.'s business:

“As long as we can make an annual 15 percent return on equity, I don't worry about one quarter's results.





"Pension fund managers continue to make investment decisions with their eyes firmly fixed on the rear-view, mirror. This general fight-the-last-war approach has proven costly in the past and will likely prove equally costly this time around.”



"Of course, the investor of today does not profit from yesterday’s growth."





"I put heavy weight on certainty ... if you do that, the whole idea of a risk factor doesn't make any sense to me. You don't do it where you take a significant risk. But it's not risky to buy securities at a fraction of what they're worth.”




Buffett often uses The Washington Post as an example of a risk-free investment. In 1973, the market price for the Post was $80 million and the company had no debt: "If you asked anyone in the business what (the Post's) properties were worth, they'd have said $400 million or something like that. You could have an auction in the middle of the Atlantic Ocean at 2:00 in the morning and you would have had people show up and bid that much for them. And it was being run by honest and able people who all had a significant part of their net worth in the business. It was ungodly safe. It wouldn't have bothered me to put my whole net worth in it. Not in the least."


"Risk comes from not knowing what you are doing."





"The propensity to gamble is always increased by a large prize versus a small entry fee, no matter how poor the true odds may be. That's why Las Vegas casinos advertise big jackpots and why state lotteries headline big prizes."




Some of the futures markets' products are nothing more than gambling games with a big skim for the casino owners: "And the more the activity, the greater the cost to the public and the greater the amount of money that will be left behind by them to be spread among the brokerage industry."




If you are drawn to the casino, watch what you drink:


"You're dealing with a lot of silly people in the marketplace; it's like a great big casino, and everyone else is boozing. If you can stick with Pepsi (these days he might say Coca-Cola), you should be okay."




Marshall Weinberg of the brokerage firm of Gruntal & Co. tells about going to lunch with Buffett in Manhattan: "He had an exceptional ham-and-cheese sandwich. A few days later, we were going out again. He said, 'Let's go back to that restaurant.' I said, `But we were just there.' He said, `Precisely. Why take a risk with another place? We know exactly what we're going to get."' "That," says Weinberg, "is what Warren looks for in stocks too. He only invests in companies where the odds are great that they will not disappoint."




"People would rather be promised a (presumably) winning lottery ticket next week than an opportunity to get rich slowly."




Gambling in the market is treacherous for investors, and it has a negative effect on the national economy:


"We do not need more people gambling on the nonessential instruments identified with the stock market in the country, nor brokers who encourage them to do so. What we need are investors and advisers who look at the long-term prospects for an enterprise and invest accordingly. We need the intelligent commitment of investment capital, not leveraged market wagers. The propensity to operate in the intelligent, prosocial sectors of capital markets is deterred, not enhanced, by an active and exciting casino operating in somewhat the same arena, utilizing somewhat similar language, and serviced by the same workforce.”





"Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”





"It's only when the tide goes out that you learn who’s been swimming naked.”





Buffett calls borrowed money a dagger tied to a company's steering wheel pointed straight at its heart:


"You will someday hit a pothole."




Charlie Munger also has an opinion on debt: "Warren and I are chicken about buying stocks on margin. There's always a slight chance of catastrophe when you own securities pledged to others. The ideal is to borrow in a way no temporary thing can disturb you.”




Buffett also says the U.S trade deficit is a dangerously accruing debt that is secured by US assets:


"Our riches are our curse in our attempts to attain a trade balance. If we were less well-of, commercial realities would constrain our trade deficit. Because we are rich, however, we can continue to trade earning properties for consumable trinkets. We are much like a wealthy farm family that annually sells acreage so that it can sustain a lifestyle unwarranted by its current output. Until the plantation is gone, it’s all pleasure and no pain. In the end, however, the family will have traded the life of an owner for the life of a tenant farmer.”




Buffett suggests a solution to the trade problem: a system of issuing import certificates when a certain value of goods is exported, whereby it would be necessary to have a certificate to import that same value of goods into the United States. The exporter could sell or trade his or her certificates to an importer. A buy-sell-or-barter system for the certificates would evolve, and imports and exports would always be of equal value. Buffett put forth his scheme in an op-ed piece in The Washington Post in 1987. Perhaps because the proposal would increase import prices and reduce U.S. consumption of foreign goods (getting a grip on our national impulse to consume more than we produce), there was no stampede to adopt Buffett's plan.





Authors who have written about Buffett's investment style tell how he measures the stream of cash that the company generates today and into the future, then, using a reasonable interest rate, discounts the cash flow back to the present. Is it possible that Buffett just clicks the calculations off in his head? Maybe. There seems to be no paper trail:

"Warren talks about these discounted cash flows ... I've never seen him do one," Munger huffed.

"It's true," replied Buffett. “If (the value of a company) doesn't just scream out at you, it's too close."





"Because my mother isn't here tonight, I'll even confess to you that I have been an arbitrageur." Buffett said at a business seminar. Buffett learned arbitrage during his early days at Graham-Newman. In its pure form, arbitrage is buying at a low price in one market and selling at a high price in another. Buffett uses arbitrage when one company announces the acquisition of another company at a price higher than the current market quote:


"We look at the arbitrage deal, once something is announced. We look at what they've announced, what we think it will be worth, what we will have to pay, how long we're going to be in. We try to calculate the probability it will go through. That is the calculation: the name (of the companies involved) doesn't make much difference."





“In investment, there’s no such thing as a called strike. You can stand there at the plate and the pitcher can throw a ball right down the middle, and if it’s General Motors at 47, and you don’t know enough to decide on General Motors at 47, you let it go right on by and no one’s going to call a strike. The only way you can have a strike is to swing and miss.”




I've never swung at a ball while it's still in the pitcher's glove," Buffett said on another occasion.''




"You do things when the opportunities come along. I've had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get as idea next week, I’ll do something. If not, I won’t do a damn thing.”




"You could be somewhere where the mail was delayed three weeks and do just fine investing.”





Munger says that coming from Omaha, Buffett absorbed the attitude of a self-reliant pioneer: "Buffett believes successful investment is intrinsically independent in nature."




How much attention does Buffett pay to the recommendation of brokers?


“Never ask the barber if you need a haircut.”




As for stock market forecasters:


“Forecasts usually tell us more of the forecaster than the future.”




A constant stream of people ask Buffett to invest in their ideas. He replies:


“With my idea and your money, we’ll do okay.”




When asked why he bought $139 million of Washington Public Power Supply System (WPSS, also known as WHOOPS) junk bonds in 1983 and 1984 when ratings indicated they were a high risk:


“I don't make judgments based on ratings. If we wanted Moody’s and Standard & Poor’s to run our money, we’d give it to them.”


NOTE: The bonds, which did not default, offered a fixed 16.3 percent tax-free yield, resulting in a $22.7 million annual return.




Buffett and Munger make a committee of two, and at times even Charlie seems extraneous:


“My idea of a group decision is to look in the mirror.”




“If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do.” 




Especially don't listen to a computer:


"'The more instruments that are designed, the smarter the players have to be.”




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




If thinking for yourself becomes too difficult, Buffett borrows a suggestion from Goethe:


"When ideas fail, words come in very handy."





Buffett's suggestion to the independent investor is:


"You should have a knowledge of how business operates and the language of business (accounting), some enthusiasm for the subject, and qualities of temperament which may be more important than IQ points. These will enable you to think independently and to avoid various forms of mass hysteria that infect the investment markets from time to time."




Understanding the fundamentals of accounting is a form of self-defense:


"When managers want to get across the facts of the business to you, it can be done within the rules of accounting. Unfortunately, when they want to play games, at least in some industries, it can also be done within the rules of accounting. If you can't recognize the differences, you shouldn't be in the equity-picking business. "





"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."




"Full-time professionals in other fields, let's say dentists, bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers. "




"Wall Street likes to characterize the proliferation of frenzied financial games as a sophisticated, prosocial activity, facilitating the fine-tuning of a complex economy. But the truth is otherwise: Short-term transactions frequently act as an invisible foot, kicking society in the shins."




Options traders are a favorite Buffett target:


"It has always been a fantasy of mine that a boatload of 25 brokers would be shipwrecked and struggle to an island from which there could be no rescue. Faced with developing an economy that would maximize their consumption and pleasure, would they, I wonder, assign 20 of their number to produce food, clothing, shelter, etc., while setting five to trading options endlessly on the future output of the 20?"




"To many on Wall Street, both companies and stocks are seen only as raw materials for trades."




Charlie Munger says he agrees with John Maynard Keynes, who called investment management a "low calling."

"Warren and I are a little different in that we actually run businesses and allocate capital to them. Keynes atoned for his `sins' by making money for his college and serving his nation. I do my outside activities to atone, and Warren uses his investment success to be a great teacher. And we love to make money for the people who trusted us early on, when we were young and poor."





"Investment must be rational; if you can't understand it, don't do it."




Asked about the use of derivatives as an investment vehicle, Buffett said that the danger is twofold: derivatives are seldom well understood by investors and they tend to involve heavy leverage:


"When you combine ignorance and borrowed money, the consequences can get interesting."




"I want to be able to explain my mistakes. This means I do only the things I completely understand.”




Berkshire owned four million shares of General Foods Corporation, and in October 1985, captured profits of $332 million when the company was sold to Philip Morris Co. General Foods owns familiar brand names like Tang, Jell-O and Kool-Aid:

"I can understand Kool-Aid," Buffett said.





What goes for individual stocks also goes for stock markets. Though Buffett says he will look anywhere to find a good business, he usually shops domestically:



We love the kinds of companies that can do well in international markets, obviously, particularly where they’re largely untapped. Would we buy Coca-Cola if instead of being domiciled in Atlanta it was domiciled in London or Amsterdam or someplace? The answer is just a tiny notch less. Because there might be nuances of corporate governance factors or tax factors or attitudes toward capitalists or anything else that I might not understand quite as well, even in England, as I might in the United States.”




"It's hard enough to understand the peculiarities and complexities of the culture in which you’ve been raised, much less a variety of others. Anyway, most of our shareholders have to pay their bills in US, dollars."




Additionally, the US. equity market is huge:


"If I can't make money in a $5 trillion market, it may be a little bit of wishful thinking to think that all I have to do is get a few thousand miles away and I’ll start showing my stuff.”





Here's how:


“Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management, and limited exposure to hard times."





"I would take one industry at a time and develop some expertise in half a dozen. I would not take the conventional wisdom now about any industries as meaning a damn thing. I would try to think it through.

"If were looking at an insurance company or a paper company, I would put myself in the frame of mind that I had just inherited that company, and it was the only asset my family was ever going to own.

"What would I do with it? What am I thinking about? What am I worried about? Who are my competitors? Who are my customers? Go out and talk to them. Find out the strengths and weaknesses of this particular company versus other ones.

"If you've done that, you may understand the business better than the management."




"Our principles are valid when applied to technology stocks, but we don't know how to do it. If we are going to lose your money, we want to be able to get up here next year and explain how we did it. I'm sure Bill Gates would apply the same principles. He understands technology the way I understand Coca-Cola or Gillette. I'm sure he looks for a margin of safety. I'm sure he would approach it like he was owning a business and not just a stock. So our principles can work for any technology. We just aren't the ones to do it. If we can't find things within our circle of competence, we won't expand the circle. We'll wait.”




“Anybody who tells you they can value, you know, all the stocks in Value Line, and on the board, must have a very inflated idea of their own ability because its not that easy. But if you spend your time focusing on some industries, you'll learn a lot about valuation."




Staying within his circle of competence means that Buffett will miss certain good investments simply because he didn't have the skill or knowledge to evaluate the companies involved:


"I missed the play in cellular because cellular is outside of my circle of competence."


"The most important thing in terms of your circle of competence is not how large the area of it is, but how well you've defined the perimeter. If you know where the edges are, you're way better off than somebody that's got one that's five times as large but they get very fuzzy about the edges."




A circle of competence can serve over a lifetime. In 1995, Berkshire acquired the 49 percent of GEICO it didn't already own. Buffett became interested in GEICO when he discovered that his professor, Ben Graham, was its chairman:


"When I was 20, I invested well over half of my net worth in GEICO."




When asked why he invested in insurance, a notoriously roller-coaster business: "Sometimes it's a good business---and that's not very often---and sometimes it's a terrible business."

It depends on how the risk is managed:


"I can go into an emergency ward and write life insurance if you let me charge enough of a premium."


NOTE: Buffett is known for his skill at investing insurance float, the money that has been collected in premiums but not yet paid out in claims.





How does Buffett determine the value of a business?


"Do a lot of reading."


"I read annual reports of the company I’m looking at and I read the annual reports of the competitors---that is the main source of material."




When he first took an interest in GEICO, this is what Buffett did: "I read a lot. I was over at the library ... I started with Bests' (insurance rating service) looking at a lot of companies, reading some books about it, reading annual reports, talking to (insurance specialists), talking to managements when I could."




Don't blame yourself, Buffett says, if you don't understand everything:


"It's not impossible to write (an accounting) footnote explaining deferred acquisition costs in life insurance or whatever you want to do. You can write it so you can understand it. If it's written so you can't understand it, I'm very suspicious. I won't invest in a company if I can't understand the footnote, because I know they don't want me to understand it. "





Washington Post reporter Bob Woodward (of Watergate fame) once asked Buffett how he analyzed stocks:


"Investing is reporting. I told him to imagine he had been assigned an in-depth article about his own paper. He'd ask a lot of questions and dig up a lot of facts. He'd know The Washington Post. And that's all there is to it."




Buffett's research takes curious turns. He once sat behind the cash register at Ross's, his favorite Omaha steakhouse, counting how many customers used American Express cards. Sometimes the research doesn't even seem like research:


"I remember I went to see Mary Poppins at a theater on Broadway at 45th at about 2:00 in the afternoon. I had a little attache case and everything. I got up to this woman at the ticket booth and said, `I've got a kid around here someplace.' I was going to see if this (movie) could be run over and over again in the future."





When a friend suggested Buffett try his hand at real estate, he replied:


"Why should I buy real estate when the stock market is so easy?”




"(Value Investing) ideas seem so simple and commonplace. It seems like a waste to go to school and get a PhD in economics. It's a little like spending eight years in divinity school and having someone tell you the ten commandments are all that matter."




When asked how he and Munger perform "due diligence" on companies they buy, Buffett said:


"If you have to go through too much investigation, something is wrong.”




Charlie said they were once subpoenaed for their staff papers on an acquisition: "There weren't any papers. There wasn't any staff," Munger said.




In 1986. Berkshire Hathaway ran a newspaper advertisement seeking companies to buy. It read:


"We use no staff and we don't need to discuss your company with consultants, investment bankers, commercial bankers, etc. You will deal only with Charles Munger, vice chairman of Berkshire, and with me."




“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."




"You don't need a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."




"Talking at business schools, I always say (students) would be better off if, when they got out of school, they got a ticket with 20 punches on it. And every time they make an investment decision it uses up a punch. You'll never use up all 20 punches if you save them for the great ideas."


NOTE: Forbes columnist Mark Hulbert ran some numbers and determined that if you remove Buffett's 15 best decisions from the hundreds of others, his long-term performance would be mediocre.




Charlie Munger says this about the simplicity theory: "If you believe what Warren says, you could teach the whole (portfolio management) course in a couple of weeks."





At the beginning of a Berkshire Hathaway annual meeting several years ago, Buffett tapped the microphone to see if it was on. "Testing ... one million ... two million ... three million.""'


"I made a study back when I ran an investment partnership of all our larger investments versus the smaller investments. The larger investments always did better than the smaller investments. There is a threshold of examination and criticism and knowledge that has to be overcome or reached in making a big decision that you can get sloppy about on small decisions. Somebody says `I bought a hundred shares of this or that because I heard about it at a party the other night.' Well there is that tendency with small decisions to think you can do it for not very good reasons."




"I can't be involved in 50 or 75 things. That's a Noah's Ark way of investing---you end up with a zoo that way. I like to put meaningful amounts of money in a few things."




When describing the types of companies Berkshire likes to buy:


"We're looking for 747s, not model airplanes."


"I’m like a basketball coach," Buffett explained. "I go out on the street and look for seven-footers. If some guy comes up to me and says, 'I'm five-six, but you ought to see me handle the ball,' I'm not interested."




Large or small, the company must perform:


"I'd rather have a $10 million business making 15 percent than a $100 million business making 5 percent."





The Berkshire Hathaway advertisement for possible acquisitions that ran in The Wall Street Journal constituted a virtual checklist for value investors:

"Here's what we are looking for," the ad read:


1. Large purchases (at least $10 million of after-tax earnings, and preferably much more).


NOTE: Individual investors can ignore the first one. It is there because small purchases can't make a blip on Berkshire's bottom line. The fact that individual investors can profit from smaller investments is an advantage, since it gives a much wider range of stocks from which to choose.


2. Demonstrated consistent earning power (future projections are of little interest to us, nor are "turnaround" situations).


3. Businesses earning good returns on equity while employing little or no debt.


4. Management in place (we can't supply it).


NOTE: A subtle way of saying good management in place.


5. Simple businesses (if there's a lot of technology, we won’t understand it).


6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price Is unknown).


NOTE: Luckily for small investors, Mr. Market shows up every workday with an offering price.




Each year in Berkshire Hathaway's annual report, Buffett publishes a similar list of traits of a business that would interest him. Occasionally the list is cast aside. It is, he savs, ". .. a lot like selecting a wife. You can thoughtfully establish certain qualities you'd like her to have, then all of a sudden, you meet someone and you do it."





Buffett says that because he never studied calculus he's forced to agree with those who say that higher math skill is not needed for successful investing:


"If calculus were required, I'd have to go back to delivering papers. I've never seen any need for algebra. Essentially, you're trying to figure out the value of a business. It's true that you have to divide by the number of shares outstanding, so division is required. If you were going out to buy a farm or an apartment house or a dry cleaning establishment, I really don't think you'd have to take someone along to do calculus. Whether you made the right purchase or not would depend on the future earning ability of that enterprise, and then relating that to the price you are being asked for the asset."




"Read Ben Graham and Phil Fisher, read annual reports, but don't do equations with Greek letters in them."




If higher math is unimportant in selecting stocks, why are academic and professional journals dense with quantitative analysis? Buffett replied:


"Every priesthood does it. How could you be on top if no one is on the bottom."




Buffett’s mathless philosophy did not come naturally. He developed it after he'd tried everything else:


"I used to chart all kinds of stocks, the more numbers the better."




As a teenager Buffett was fascinated by technical information. This interest led to the publication of Buffett's first article. He was 17:


"There was an item (in Barron's) saying that if we would send along a description of how we used their statistical material they would publish some of them and pay $5. I wrote up something about how I used odd-lot figures. That $5 was the only money I ever made using statistics."





"Whenever I read about some company undertaking a cost-cutting program, I know it's not a company that really knows what costs are all about. Spurts don't work in this area. The really good manager does not wake up in the morning and say, ‘This is the day I'm going to cut costs,' any more than he wakes up and decides to practice breathing."




Berkshire Hathaway owns about 7 percent of the stock of San Francisco-based Wells Fargo. News reached Munger that Wells Fargo CEO Carl Reichardt discovered one of his executives wanted to buy a Christmas tree for the office. Reichardt told him to buy it with his own money.

"When we heard that," said Munger, "we bought more stock."




For Buffett, frugality begins at home. At the 1996 Berkshire annual meeting, he observed:

"Your board has collectively lost 100 pounds in the last year. They must have been trying to live on their director's fees."




Buffett wrote the introduction to Alan C. (Ace) Green-berg's book, Memos from the Chairman in which a fictional character, Haimchinkel Malintz Anaynikal, goaded Bear Stearns employees not to waste resources:

"Haimchinkel is my kind of guy---cheap, smart, opinionated. I just wish I'd met him earlier in life, when, in the foolishness of my youth, I used to discard paper clips. But it's never too late, and I now slavishly follow and preach his principles," wrote Buffett.




The quest for quality and the need for frugality need not cancel each other out, as Buffett noted when talking about programming at ABC:


"The funny thing is, better shows don't cost that much more than lousy shows."




Sports shows also could be aired for less money:


"My guess is that the quality of football would be identical if we'd been paying 20 percent less for the football rights. It's Just that all the football players would be earning a little less money. Ty Cobb played for $20.000 a year. In the end, if there's 20 percent less money available for sports programming, it will largely come out of the players."




Buffett also applies thriftiness to his own financial affairs. He and Capital Cities/ABC chairman Thomas Murphy had walk-on parts for the ABC television soap opera, All My Children, with soap queen Susan Lucci in 1993. They were each paid about $300 for their performances:

When handed his check Murphy said, "I'm going to frame this." Buffett said, "I'm going to frame the stub.”





Buffett says a growth rate of 15 percent per year is realistic, though not always easy for him to achieve:


"If we are to have a 15 percent gain, we have to make $400 million (a year) before tax, or $300 million net, which is about a million a day---and I’m spending today here.”


NOTE: In fact, he usually does achieve it; in some y ears, Buffett nearly doubles his goal.





Don't take the performance of your stock personally. After all:


“A stock doesn't know you owned it.”




Buffett has good reason for his interest in entertainment and leisure-oriented businesses:


"The market will pay you better to entertain than to educate. "


Case in Point: Berkshire's World Book encyclopedia has difficulty delivering the same stellar returns that the Disney Company achieves.




When Buffett is asked at Berkshire annual meetings why he doesn't split the company’s high-priced shares, people murmur to one another, "Here comes the pizza story."

The question, Buffett says, reminds him of a diner who asks the pizza maker to cut his pie into four slices rather than eight, since he "couldn't possibly eat eight."





Every year in Berkshire Hathaway's annual report, and again at the shareholder's meeting, Buffett warns investors not to expect too much of Berkshire's performance:


1985: "I can guarantee we will not do as well as in the past." Buffett told shareholders at the annual meeting. "I still think we may be able to do better than American industry as a whole."


In the preceding year, Berkshire's gain was a weak 13.6 percent, compared to a 22 percent average annual increase in the previous 20 years. In 1986, Berkshire chalked up a 48.2 percent gain.


1992: Charlie Monger told Business Week: "Size at a certain point gets to be an anchor, which drags you down. We always knew that it would."  Berkshire's share price rose 20.3 percent in 1992.


1995: At Berkshire Hathaway's annual meeting, Buffett cautioned: "The future performance of Berkshire Hathaway won't come close to matching the performance of the past." He explained that "a fat wallet, however, is the enemy of superior results." And anyhow; "we don't have to keep getting rich at the same rate."'


1996: Berkshire's shares traded as high as $38,000. By mid-1996, the shares had retreated to $32,000.





“Anything that can't go on forever will end."




When he first started as a professional investor, Buffett says small-size investments made sense and he found a lot of stocks to buy. The economies of scale have now changed:


"I was over-stimulated in the early days. I'm under-stimulated now."




When asked what he thought of the wave of U.S. corporate downsizing, Buffett noted that American industry has always tried to do more with less. Change is unavoidable, but:


"It's no fun being a horse when the tractor comes along, or the blacksmith when the car comes along."


Turn the question backward, says Charlie Munger: "Name a business that has been ruined by downsizing. I can't name one. Name a company that has been ruined by bloat. I can name dozens."




Buffett agrees that it is sometimes wise to look at problems from the opposite direction:


"It's like singing country western songs backward. That way you get your home back, your auto back, your wife back, and so forth ..."




Nevertheless, Buffett and Munger like industries in which change is limited, or at least manageable: "Take chewing gum for example," Buffett says. "Folks chew the same way today that they did 20 years ago. Nobody's come up with a new technique for that."





When asked why he abandoned some value investing principles, Buffett replied:


“As we work with larger sums of money, it simply is not possible to stay with those subworking capital types of situations. It requires learning more about what's going to produce steady and increasing flows of cash in the future---if you are working with small sums of money, you don't even have to work that hard. We (at Graham-Newman) used to have a one-page sheet where you put down all the numbers on a company, and if it met certain tests of book value, working capital, and earnings, you bought it. It was that simple."




Buffett did not abruptly abandon the teachings of Graham and his co-author David Dodd:


"I evolved I didn't go from ape to human or human to ape in a nice even manner.”





During the 1990s, Berkshire Hathaway's share price rode on the wings of a soaring market, finally peaking at just over $38,000 in March 1996 (shares traded for $8,550 in mid-1989). Despite the dizzying climb, Warren Buffett stood firm on his refusal to split shares, a step that would make it easier for new investors to buy and existing investors to sell. He said he didn't want Berkshire in the hands of speculators, and the most effective deterrent he could think of was a steep share price. Buffett signed birthday cards with the line, "May you live until Berkshire shares split."

Buffett held true to his word, but within a few weeks of the 1996 price peak, outside events compelled him to create the moral equivalent of a split. That spring Buffett announced he would issue B shares or secondary common shares of Berkshire Hathaway stock. The new shares were issued at one-thirtieth the price of the existing, or A shares. The only features that make B shares secondary are the lack of voting rights and the fact that B shareholders are ineligible for Berkshire's charitable giving program. Voting rights are unimportant since Buffett and Munger have enough shares to outvote all other holders. And who in his or her right mind would vote against Buffett and Munger anyway?

The advantage to A shareholders is that they can convert to 30 B shares at any time, no matter what the prices of the two shares are. B shareholders, however, are not allowed to convert to A shares, even if holders own 30 of them.

Buffett expects that arbitrage action between the two types of shareholders will keep the A and B share prices in perpetual 1-to-30 balance.

What made Buffett modify his plans was a scheme by several investment firms to create unit trusts from a pool composed entirely of Berkshire shares. Investors would buy the bite-size portions of Berkshire for $1,000 per unit and pay annual fees, plus up-front commissions of as much as 5 percent. Investors could hold the units until a 10-year maturity date or trade them on the New York Stock Exchange like any other security. The unit trusts were to be marketed to small investors hoping to participate in the remarkable gains enjoyed by those who discovered Berkshire Hathaway early on.

Speculation is speculation, even if it is once removed, in Buffett's view. "We do not want people to come in and think it's a hot stock and it will be a lot higher in a year.”

Or, more specifically: "There are people who think it (Berkshire's phenomenal share price growth) can happen again from this kind of base, and it's mathematically impossible," Buffett said. "'We don't want to appeal subliminally to people who harbor these hopes."

Critics said Buffett's controlling nature caused his reaction. Others said he was just being consistent. Buffett always said he wanted dedicated shareholders. "It gets down to attracting the highest-grade share holder we can get.”

In a letter of protest to Five Sigma Investment Partners of Bala Cynwyd, Pennsylvania, one of the firms that proposed such a unit trust, Charlie Munger wrote: "Your trust ... would entice many small investors into an investment unsuitable for them and overwhelmingly likely to leave large numbers feeling disappointed and abused."

Munger added: "Berkshire's stock price is now risky because (of) dramatic appreciation ... since 1992 at a rate far higher than any increase in the stock's intrinsic value .... If he were asked by a friend or family member whether he advised a new purchase of Berkshire shares at the current price, Mr. Buffett would answer, `No." Munger said he feared aggressive sales efforts would act like "gasoline poured on a fire." When it appeared that Five Sigma would not back off, war broke out. Buffett announced the B share offering. "Berkshire intends to provide a direct, low-cost means of investment in Berkshire so superior to the investments offered by the unit trust promoters that their products will be rendered unmarketable," the prospectus for the shares read.

To discourage brokers from hyping the new stock, Berkshire arranged the offering through Salomon. The commission was purposely set low, giving little incentive to brokers to push investors into the initial public offering. Additionally, Buffett said the company would issue as many shares as the public wanted, thus minimizing the first-week price spike caused by a limited supply and a high demand.

On the front page of the prospectus, Buffett repeated Munger's message to Five Sigma: "Management does not believe that the company's stock is undervalued."

At the 1996 annual meeting, a shareholder asked about Berkshires's shares being overvalued. Buffett replied that he had not said the shares were overvalued. He said they were "not undervalued." There's a distinction, Buffett insisted, obviously rankled that the subtlety had been missed by journalists and investors alike.

The distinction seemed fuzzy to many in the investment world. "There are a lot of questions legitimately as to why he's doing this," said Derek Sasveld, a consultant at Ibbotson Associates Inc., a Chicago stock research and consulting firm. "It doesn't seem to be a completely logical situation."

William LeFevre, senior market analyst at Ehrenkrantz King Nussbaum Inc. in New York, suspected Buffett's territory had been invaded. "His credibility is as high as it gets, and he doesn't want somebody making a buck off the name of Warren Buffett."

Others, however, saw the structure of the vehicle, rather than the intrinsic value of the stock, as the source of Buffett's problem. At the 1996 annual meeting, Buffett described the unit trusts as "a high commission product with substantial annual fees."

"Mr. Buffett has always been a champion of shareholder rights and he doesn't like the fact that to buy into the unit investment trusts is not as economically feasible as buying the common stock," said James Mulvey, an analyst at Dresdner Securities USA Inc.

With the Baby B's, as investors called them, the same deal could be had with only the payment of a broker's commission.

Barron's columnist Alan Abelson dismissed the "not undervalued" statement---plus prospectus disclaimers that the company's intrinsic value could continue to grow at past rates---as mere pandering to regulators. "To Warren Buffett we say, truth wounds, cynicism kills---think on what ye have wrought and repent! There's still time to revise that prospectus. A small phrase---‘just kidding!---inserted on the front page right below those caveats will do the trick.

Others, however, thought Buffett might have been understating the overvaluation problem. Stock market columnist Malcolm Berko ran a brief analysis of Berkshire for his readers, describing it as a closed-end mutual fund. Berko estimated that Berkshire (both A and B) was selling at a massive premium over its net asset value (NAV). Berko estimated the NAV of Berkshire A shares at $15,000. "So, in my opinion, you gotta be dumber than a bag of ball-peen hammers to pay a $21,000 premium over NAV to own BRKA," Berko wrote.

This debate over the value of Berkshire's share price had an impact on the stock. The A shares quickly receded from a high of $38,000 back to the $33,000 range. The B shares were issued at $1,110. There was a price hop shortly after the offering, but the shares settled in at just over $1,000 within a few weeks.

The Berkshire B stock sold like ice in Arizona despite Buffett's frank---though somewhat perplexing---disclosure as to the intrinsic value of Berkshire Hathaway. At first, the company said it would issue 100,000 shares, but that number was increased four times. Ultimately, more than 517,500 were issued, doubling Berkshire's shareholder base to 80,000 individuals. There is no word as to what Buffett will do with the approximately $600 million collected or on where the 1997 annual meeting will be held now that shareholder base has expanded. At the last meeting before the offering, shareholders split the seams of the Holiday Inn Convention Center, Omaha's largest hall.





Buffett confesses to dozens of investment errors, including buying Berkshire Hathaway, a New England textile mill. The lagging textile business was finally closed down, but tile corporate structure and name was retained as an investment vehicle. Investor Irving Kahn, who has known Buffett since his student days, observed, "Even a man with Warren's talents slips.''




Buffett takes his lumps with good humor:


"Of course some of you probably wonder why we are now buying Capital Cities at $172.50 per share given that this author, in a characteristic burst of brilliance, sold Berkshire's holdings in the same company at $43 per share in 1978-80. Anticipating your question, I spew a lot of time working on a snappy answer that would reconcile these acts.

A little more time please.”




“I’ve repressed my memory of the earlier sale of Cap Cities stock”




Buffett occasionally gives bum advice: "My only role with The Washington Post 's sale of cellular phone properties was to recommend against the original purchase of the properties at one-fifth the price they sold for. And that's the last time they asked me. They didn't pay attention to me the first time and they didn't ask the second time.




Buffett says his mistakes of omission are more bothersome than errors of commission: "The mistakes you don't see in our case are way bigger than the mistakes that you see. We owned 5 percent of the Walt Disney Company in 1966. The whole Disney Company was selling for $80 million in 1966, debt free: $4 million bought us 5 percent of the company. They spent $17 million on the Pirates (of the Caribbean) ride in 1966. Here was a company selling at less than five times rides, and they had lots of rides. I mean, that is cheap."


NOTE: Buffett invested in Walt Disney in 1966 at a split-adjusted price of 31 cents per share. Thirty years later, when Berkshire Hathaway acquired 20 million shares in Disney in its merger with Cap Cities/ABC, the shares were trading at $65. Buffett sold his 31cent shares at 48 cents.


"Oh, well. It's nice to be back," Buffett said.





In 1995, Buffett took a $268.5 million write-off for 75 percent of his $385 million investment in USAir. The shares' 9.25 percent dividend had not been paid since September 1994. In the spring of 1996, Buffett was searching for a buyer for the convertible preferred stock: "That was a senior security. It was a mistake, but it wasn't a common equity we picked as a wonderful business. There aren't that many wonderful businesses in the world."




The USAir problem brought home another point to Buffett:


"Frankly, no airline is going to be a wonderful business."




Buffett explained in a speech in North Carolina why airlines are not an investor's friend: "The interesting thing of course is that if you go back to the time---and we're in the right state for that---from Kitty Hawk, net, the airline transport business in the United States has made no money. Just think if you'd been down there at Kitty Hawk and you'd seen this guy go up, and all of a sudden this vision hits you that tens of millions of people would be doing this all over the world someday. It would bring us all closer together and everything. You'd think, my god, this is something to be in on. Despite putting in billions and billions and billions of dollars, the net return to owners for the entire airline industry, if you'd owned it all, and you'd put up all this money, is less than zero. If there had been a capitalist down there, the guy should have shot down Wilbur. One small step for mankind and one huge step back for capitalism."




Buffett attribute his USAir purchase to temporary insanity. How will he fend off a future attack?


So now I have this 800 number, and if I ever have the urge to buy an airline stock, I dial this number and I say my name is Warren and I’m an airoholic. Then this guy talks me down on the other end.”




Marshall Lewis of the investment firm Blunt, Ellis & Loewi offer these words of comfort following the USAir write-down: Buffett still walks on water. He just splashes a little bit.”


NOTE: In July 1996, USAir reported its best quarterly profit ever. The airline said it would again make a dividend payment to Berkshire Hathaway and other owners of preferred shares.





Buffett says he made one of his worst decisions at age 21 when he put 20 percent of his net worth in a gasoline station. Over the years, he figures, the error cost him about $800 million in lost economic opportunity.

The first step to recovery is to stop doing the wrong thing:


“It's an old principle. You don't have to make it back the way you lost it.”




Berkshire does not pay dividends to investors. They thus avoid double taxation, and with no effort on their part, continually reinvest their earnings. The exception was a 10-cent dividend Buffett paid to his partnership in 1967. Of that, he says: “I must have been in the bathroom at that time.”


NOTE: Buffett says that if the time comes when he believes shareholders can find more lucrative ways to invest than Berkshire can, he will pay a dividend.




The Salomon government bond scandal taught Buffett a lesson that he might have preferred to skip:


“You won’t believe this---because I don't look that dumb---but I volunteered for the job of interim chairman. It's not what I want to be doing, but it will be what I will be doing until it gets done properly.”




A battalion of lawyers filing suits against Salomon helped focus Buffett"s attention:


"I may be the American Bar Association's Man of the Year before the Year is over.”




Buffett compared the year he spent in New York helping Salomon Brothers get back on its feet to war: "You do it because you have to, but you're not looking for another one."




Before the Salomon incident occurred, Buffett was asked why he made biting remarks about the banking industry, when Berkshire held a big stake in Salomon, Buffett replied:


"Why are we vocal critics of the investment banking business when we have a $700 million investment in Salomon? I guess atonement is probably the answer.”





Buffett's favorite way of describing intrinsic value and margin of safety implies that he has spent much time studying the Walt Disney Company, a storybook scenario if there ever was one. His favorite companies, Buffett says, are like:


"Wonderful castles, surrounded by deep, dangerous moats where the leader inside is an honest and decent person. Preferably, the castle gets its strength from the genius inside; the moat is permanent and acts as a powerful deterrent to those considering an attack; and inside, the leader makes gold but doesn't keep it all for himself. Roughly translated, we like great companies with dominant positions, whose franchise is hard to duplicate and has tremendous staying power or some permanence to it."




"You need a moat in business to protect you from the guy who is going to come along and offer it (your product) for a penny cheaper.”


(For more on moats, see "Appreciate Franchise Value" and "Respect Pricing Power.")




Buffett performed a real-world analysis on his favorite storybook stock back in 1969:


"When I buy a stock, I think of it in terms of buying a whole company, just as if I were buying the store down the street. If I were buying the store, I'd want to know all about it. I mean, look at what Walt Disney was worth on the stock market in the first half of 1966. The price per share was $53 and this didn't look especially cheap, but on that basis you could buy the whole company for $80 million when Snow White, Swiss Family Robinson, and some other cartoons, which had been written off the books, were worth that much (by themselves); and then (in addition), you had Disneyland and Walt Disney, a genius, as a partner. "




Following the 1996 merger of Cap Cities/ABC with Disney, Berkshire again held a strong position in Disney:


"Owning Snow White (the movie) is like owning an oil field. You pump it out and sell it and then it seeps back in again. "


NOTE: Disney finds it can re-issue Snow White every seven years.


And then there's Mickey Mouse:


"The nice thing about the mouse is that he doesn't have an agent. You own the mouse. He's Yours."





"You should invest in a business that even a fool can run, because someday a fool will."



"In any business, there are going to be all kinds of factors that happen next week, next month, next year, and so forth. But the really important thing is to be in the right business. The classic case is Coca Cola, which went public in 1919. They initially sold stock at $40 a share. The next year, it went down to $19. Sugar prices had changed pretty dramatically after World War I. So you could have lost half of your money one year later if you'd bought the stock when it first came public; but if you owned that share today---and had reinvested all of your dividends---it would be worth about S1.8 million. We have had depressions. We have had wars. Sugar prices have gone up and down. A million things have happened. How much more fruitful is it for us to think about whether the product is likely to sustain itself and its economics than to try to be questioning whether to jump in or out of the stock? "




"Let's say you were going away for 10 years and you wanted to make one investment and you know, everything you know now, and you couldn't change it while, you're gone. What would you think about?

"I came up with anything in terms of certainty, where I knew the market was going to continue to grow, where I knew the leader was going to continue to be the leader---I mean worldwide---and where I knew there would be big unit growth, I just don't know anything like Coke."





"Charlie (Munger) made me focus on the merits of a great business with tremendously growing earning power, but only when you can be sure of it---not like Texas Instruments or Polaroid, where the earning power was hypothetical."





Buffett explained to General Foods President Philip Smith why he was buying the company's stock when nobody else was interested:


"You've got strong brand names, you're selling three times earnings when other food companies are selling at six to seven times earnings, and you're loaded with cash. If you don't know what to do with it, someone else will."




The definition of a great company is one that will be great for 25 or 30 years.



One reason for buying excellent companies (in addition to strong growth) is that once a purchase is made, the investor has only to sit back and trust the company's managers to do their jobs. In 1973, Buffett already owned a good-size chunk of Berkshire, plus a bank in Illinois, an Omaha weekly newspaper, interest in a half-dozen insurance companies, a trading stamp company, a chain of women’s clothing stores, and a candy company: Yet he told a reporter, with no boastfulness:


"I can almost do it with my hands in my pockets. I really live a pretty easy life.”




"I tell everybody who works for our company to do only two things to be successful. They are 1) think like an owner, and 2) tell us bad news right away. There is no reason to worry about the good news. "





"It's far better to own a portion of the Hope diamond than 100 percent of a rhinestone.”




 From his boyhood, when he published a tipsheet called "Stableboy Selections,” Buffett has shown an interest in horse racing:


"There are speed handicappers and class handicappers. The speed handicapper says you try and figure out how fast the horse can run. A class handicapper says, a $10,000 horse will beat a $6,000 horse. Graham says, ‘buy any stock cheap enough and it will work.’ That was the speed handicapper. And other people said, ‘Buy the best company, and it will work.’ That 's class handicapping.”


NOTE: Buffett began as a speed handicapper but progressed to class handicapping.




When asked what he thought of junk bonds:


“I think they’ll live up to their name.”





Buffett describes franchise value as a moat around the castle of business. He uses Gillette as an illustration:


"There are 20 to 21 billion razor blades used in the world a year. Thirty percent of those are Gillettes, but 60 percent by value are Gillettes. They have 90 percent market shares in some countries---in Scandinavia and Mexico. Now, when something has been around as long as shaving and you find a company that has both that kind of innovation, in terms of developing better razors all the time, plus the distribution power, and the position in people's minds.... You know, here's something you do every day---I hope you do it every day---for $20 bucks (per year) you get a terrific shaving experience. Now men are not inclined to shift around when they get that kind of situation."




"You go to bed feeling very comfortable just thinking about two and a half billion males with hair growing while you sleep. No one at Gillette has trouble sleeping.”




If you didn't grasp the concept of franchise value with Gillette, try it with Hershey bars:


"If (you go into a store and) they say ‘I don't have Hershey bar, but I have this unmarked chocolate bar that the owner of the place recommends,' if you’ll walk across the street to buy a Hershey bar or if you'll pay a nickel more for the (Hershey) bar than the unmarked bar or something like that, that s franchise value."




Or try the sweetheart test. There are times when a bargain price isn't the point:


“... you know this. They're not going to go home on Valentine's Day and say 'Here honey, here are two pounds of chocolates. I took the low bid.' It just doesn't work."




Coca-Cola has the strongest franchise value of any company on the planet:


"If you run across one good idea for a business in your lifetime, you're lucky: and fundamentally, this (Coca-Cola) is the best large business in the world. It has got the most powerful brand in the world. It sells for an extremely moderate price. It's universally liked---the per capita consumption goes up almost every year in almost every country. There is no other product like it."




"If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done.”




The moat of franchise power offers strong protection:


“A takeover (of Coca-Cola) would be like Pearl Harbor."




At least twice Buffett has acquired an interest in companies that faced serious financial difficulties, a condition that did not alter their franchise value:

“It was similar to American Express in late 1963 when the salad oil scandal hit it. It did not hurt the franchise of the travelers check or the credit card. It could have ruined the balance sheet of American Express but the answer of course was that American Express with no net worth was worth a tremendous amount of money.

"And GEICO with no net worth was worth a tremendous amount of money, too, except it might get closed up the next day because it had no net worth, but I was satisfied that the net worth would be there. The truth is, a lot of insurance companies for the ownership of it would have put up the net worth. We would have put it up."


NOTE: In 1976, GETCO hit rough water after growing so fast; the company outpaced its capabilities. It recovered after Buffett bought in.




Buffett has lost interest in certain franchises. He once was one of RJR Nabisco's (owners of Reynolds Tobacco) largest shareholders, but disposed of the shares in the early 1980s. Though he reportedly didn't object to Salomon Inc. making an RJR Nabisco investment in 1988, he declined to join. He is reported to have said:


"I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty."


NOTE: Buffett later said he was quoting another person as having said this, and meant the statement to be ironical.





A good business, Buffett explains, enjoys price flexibility. Pricing power is a kissing cousin to franchise value:


"If you own See's Candy, and you look in the mirror and say, "Mirror, mirror on the wall, how much do I charge for candy this fall.' And it says ‘more,' that s a good business."




In 1986, Buffett anticipated the problems that would soon beleaguer the television industry due to its weakness in pricing power:


"Essentially, TV had a lot of untapped pricing power many years ago, and they used it all up. They probably went a little beyond it. So the ability to price is not there to the same degree. I do not see galloping revenue gains beyond inflation in the network business; for years, they were getting it and they developed a way of life that was predicated upon it. And now you're seeing an adjustment."





Buffett learned early that insurance company profits are based on superior investing of the premiums that accumulate awaiting the payment of a claim. This float, from all of Berkshire Hathaway's insurance businesses, is around $6.5 billion, and GEICO, which is now wholly owned by Berkshire, has produced $3 billion of it. The excess money does not belong to Berkshire Hathaway, but can be used by it.

“It has been a big mistake (by some securities analysts) to think of the value of the Insurance operation as its book value alone, without regard to the value of the float," Buffett said.




Float exists in other businesses as well. "Blue Chip Stamp used to be that kind of a business until it disappeared one day. Where was it? In the closet? I don't know," Buffett said.


NOTE: Trading stamps were popular as a grocery shopping incentive in the 1950s and 1960s, but lost ground to coupons and other gimmicks. However, before Blue Chip disappeared, Buffett had made considerable profit investing the float.





Freddie Mac (the Federal Home Loan Mortgage Corp.), a quasi-public corporation, provides a secondary market for home mortgages. Freddie Mac and its sister agency, Fannie Mae (Federal National Mortgage Assn.) control 90 percent of this business. The industry is a duopoly:


"It's the next best thing to a monopoly.”




"Newspapers are a marvelous business. It's one of the few businesses that tend toward a natural, limited monopoly. Obviously, it competes with other advertising forms, but not with anything exactly like itself. Show me another business like that---there isn't one. "


NOTE: Buffett made the preceding comment in 1986. Because of fundamental changes in demographics, retailing, and a proliferation of competing advertising possibilities, Buffett has bumped newspapers down into a "good but not great" category.




During a circulation war between The Buffalo Evening News and the competing Courier-Express, the latter sued, accusing Buffett's newspaper of price fixing. A sore point was the rumor that Buffett had said owning a monopoly newspaper was like owning an unregulated toll bridge. When the comment came up in court, Buffett said:


"I have said in an inflationary world that a toll bridge would be a great thing to own if it was unregulated "


Why, asked the opposing attorney.


“Because you have laid out the capital costs. You build the bridge in old dollars and you don't have to keep replacing it."





"I always picture myself owning the whole place. And if management is following the same policy that I would follow if I owned the whole place, that's a management I like."




"The best CEOs love operating their companies and don't prefer going to Business Round Table meetings or playing golf at Augusta National. “




Buffett often says that because he's not an expert in candy sales, encyclopedia publishing, the uniform or shoe business (all of which Berkshire owns), he likes managers who are. Of H. H. Brown, shoe manufacturers and a major buyer of leather, Buffett says:


“When a single steer topples; they know it."





"Our conclusion is that, with few exceptions, when management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact."




"I like a business that, when it's not managed at all, still makes lots of money. That's my kind of business."





“Any business craving of the leader, however foolish, will be quickly supported by .... studies prepared by his troops.”




"If you have mediocrity and you have a bunch of friends on the board, it's certainly not the kind of test you put a football team through. If the coach of a football team puts 11 lousy guys out on the field, he loses his job. The board never loses their job because they’ve got a mediocre CEO. So, you've got none of that self-cleansing type of operation that works with all the other jobs."





When a company's own shares are trading at less than intrinsic value, Buffett says one of the best investments the company can make is to buy back its own shares. Does this mean he will acquire Berkshire shares if the price falls below intrinsic value?

"That would make sense and I would do it, but only if Berkshire is cheaper than other stocks I'm interested in at the time."





"Diversification is a protection against ignorance. (It) makes very little sense for those who know what they're doing."




“A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you don't need to own very many of them."



Buffett quotes Broadway impresario Billy Rose in explaining the difficulties of over-diversification: "If you have a harem of 40 women, you never get to know any of them very well."





Buffett so deplores short-term trading that he has suggested a 100-percent tax on profits made on stock held for less than one year.




"Charlie and I expect to hold our stock for a very long time. In fact, you may see us up here when (we're so old that) neither of us knows who the other guy is.”



"We like to buy business. We don't like to sell, and we expect the relationships to last a lifetime.”




"Most of our large stock positions are going to be held for many years, and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by the prospective near-term earnings when purchasing small pieces of a company, i.e., marketable common stocks.




Not only does Buffett invest for the long haul, he hopes Berkshire Hathaway shareholders will keep their shares as long as possible:


“If I had a club, or if I (were) preaching at a church, I would not measure my success by how frequent the turnover of the congregation was or (what) the club membership would be. I would really like the idea that nobody wanted to leave their seats so that there wouldn’t be a seat available for anybody else."




A corporate acquisition can be thought of this way:


"It's a little like a romance for a while. You spend some time with them, and you know, you have your first date. And then, finally, the big moment comes. The next day, do you want to start thinking about if somebody offers me 2X for this or 3X, for this, would I sell it?”




Buffett says he's a "Rip Van Winkle" investor:


"My favorite time frame for holding a stock is forever “





"Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever."



Or, Buffett says, you can follow Will Rogers. Rogers said to study the markets carefully before buying a stock; then:


"When the stock doubles, sell it."


What if the stock doesn't double?


"If it doesn't double, don't buy it."





One of the qualities that makes Buffett, his friends, and his colleagues unique is their attitude regarding their responsibility to others with whom they share the earth.





"Large gains in real capital, invested in modern production facilities, are required to produce large gains in economic well-being. Great labor availability, great consumer wants, and great government promises will lead to nothing but great frustration without continuous creation and employment of expensive new capital assets throughout industry. That's an equation understood by Russians as well as Rockefellers. And it's one that has been applied with stunning success in West Germany and Japan. High capital-accumulation rates have enabled those countries to achieve gains in living standards at rates far exceeding ours, even though we have enjoyed much the superior position in energy."




Although some investors profit, leveraged buyouts aren't always good for society. For one thing, substituting debt for equity reduces taxes the company pays, which finance social programs.


"Now when you read about Bootie Pickens and Jimmy Goldsmith and the crew, they talk about creating value for shareholders. They aren't creating value; they are transferring it from society to shareholders. That may be a good or bad thing but it isn't creating value---its not like Ford developing the car or Kay Kroc figuring out how to deliver hamburgers better than anyone else .... In the last few years ... one (company) after another has been transformed by people who have understood this game. That means that every citizen owes a touch more of what is needed to pay for all the goods and services that the government provides.''





Other people make equally valuable contributions to the safety, health, happiness, and well-being of society, but earn less than he does. Buffett says:


“This society provides me with enormous rewards for what I bring to this society.”



"I personally think that society is responsible for a very significant percentage of what I’ve earned. If you stick me down in the middle of Bangladesh or Peru or someplace, you'll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling 30 years later. I work in a market system that happens to reward what I do very well---disproportionately well.  Mike Tyson, too. If you can knock a guy out in 10 seconds and earn $10 million for it, this world will pay a lot for that. If you can bat .360, the world will pay a lot for that. If you're a marvelous teacher, this world won't pay a lot for it. If you are a terrific nurse, this world will not pay a lot for it. Now am I going to try to come up with some comparable worth system that somehow (re)distributes that. No, I don't think you can do that. But I do think that when you're treated enormously well by this market system, where in effect the market system showers the ability to buy goods and services on you because of some peculiar talent---maybe your adenoids are a certain way, so you can sing and everybody will pay you enormous sums to be on television or whatever---I think society has a big claim on that."




"I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that l can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that, though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die.”




Buffett offered another example of how “claim checks" work, in an eulogy he wrote for Omaha real estate developer Peter Kiewit (Buffett admired Kiewit because he saved his claim checks, leaving much of his $200 million estate to charity):

"In essence, one who spends less than he earns is accumulating `claim checks' for future use. At some later date, he may reverse the procedure and consume more than he earns by cashing some of the accumulated claim checks. Or he may pass them on to others---either during his lifetime by gifts, or upon his death by bequest.

(William Randolph) Hearst, for example, used up many of his claim checks in building and maintaining San Simeon. Just as the pharaohs did when building pyramids, Hearst commanded massive amounts of labor and material away from other societal purposes in order to satisfy his personal consumption desires.

"An army of servants catering to his personal whims---such as the employee in San Luis Obispo who spent much of a lifetime hauling ice daily to the bears in the private zoo---was unavailable to produce other goods and services useful to society in general."




Buffett's friend Bill Gates says he expects to run Microsoft until about 2007, then promises to focus on how to give his fortune away. Buffett expects that Gates will return some claim check to society:


“He will spend time, at some point, thinking about the impact his philanthropy can have. He is too imaginative to just do conventional gifts."





Though the Buffetts will leave the largest charitable foundation in the world when they die, critics complain that he doesn't contribute enough to good causes while he is living. Buffett did please the community by investing $125 million in the Omaha Royals in 1991 to keep the AAA baseball team from leaving town. (Some people view this as an investment, but former owner of the San Diego Padres Joan Kroc says a baseball club is more like a hobby for most owners.) Buffett also established the Alice Buffett Outstanding Teacher Awards in Omaha, named for his Aunt Alice, who was a local teacher. While the substantial cash awards may inspire better teaching, Buffett says the grants are "more a way of saying thanks than a prod." Teachers get the money to spend as they wish with no strings attached.

He adds:


"The public school teacher is probably the most under-compensated and under-appreciated person in the public arena."




"The public school system is the most important institution in our democracy. But as important as it is, it is just as fragile. When we have as an outstanding system like Omaha’s, we should do everything we can to help it.”


Note: One reason the Buffetts are criticized for not making enough donations is because their giving is targeted and done quietly. Susan Buffett who is president of the Buffett Foundation says. "Our foundation is focused on population (problems), and my other giving is very personal."





When explaining that Berkshire paid federal taxes of $390 million in 1993. Buffett said:


“Charlie and I have absolutely no complaints about these taxes. We work in a market-based economy that rewards our efforts far more bountifully than it does the efforts of others whose output is of equal or greater benefit to society. Taxation should, and does, partially redress this inequity. But we remain extraordinarily well treated.”




Buffett has written that a 100 percent tax on profits from the sale of a security that is held for less than a year---applied to everyone, including institutional investors---would make the United States more competitive. By forcing investors to hold their shares longer, the industry would be more stable.


"We talk a lot about competing in a world economy against foreign decision makers who operate with a business horizon of decades. Why not try pushing our own horizon out at least a year?”




As often is the case, Munger's position is similar to Buffett’s, except that it reflects his Republican leanings. Munger explains: "I like a certain amount of social intervention (taxes, laws, etc.) that takes some of the inequity out of capitalism, but I abhor any system that allows rewarding fakes."

For example, 'Munger says he dislikes worker's compensation for job-related injuries and disabilities because it is difficult to sort out the bogus claims."





Publishers, bookstore owners, investors, fans, and imitators have long awaited a book that Buffett himself will write. Buffett says he has been discussing the project with a co-author---Fortune editor and writer Carol J. Loomis since 1973.

"The big hang-up---aside from a normal heavy dose of procrastination---is that if I ever do a book, I want it to be useful." he wrote in a 1989 letter to me. "This means good ideas---and ideas that have not already been presented. My most important ideas are straight from Ben Graham, and he stated them far better than I ever could.

If the book is to be biographical, I believe I should wait a while. I am enough of an optimist to hope that the most interesting chapters are yet to come."

Though Buffett seems as health and energetic as ever, there is some indication that Warren and Carol are indeed at work on the book. I, for one, can hardly wait to read more of the wise and witty words of Warren Buffett.