(Ed’s Note: The following condensation is from The Tao of Warren Buffett, written by Mary Buffett and David Clark and available for sale at Amazon and bookstores nationwide. I am always impressed by what Warren Buffett has to say and am doing this condensation to help promote their book. Mary Buffett is an author and lecturer on investing and David Clark is a recognized expert on Buffettology.)
On Investing: Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.
(Ed’s Note: The great secret to getting rich is getting your money to compound for you, and the larger sum of money you start with, the faster it will compound. No less of a genius than Albert Einstein said that compound interest is the most powerful force in the universe.)
On Investing: I made my first investment at age 11. I was wasting my life up until then.
(Ed’s Note: The first lesson of investing is patience. Start early and sit on your investment until it has time to hatch, it may take 20 or 30 years to hatch, but if you are in the right investment you will do very well. Do not keep moving your money into and out of different investments—all that does is make your broker rich at your expense.)
On Investing: Never be afraid to ask too much when selling offer too little when buying.
(Ed’s Note: How much you get from a sale or how much you have to pay when making a purchase determines whether you make or lose money and how rich you ultimately become.)
On Investing: You cannot make a good deal with a bad person.
(Ed’s Note: If you cannot trust them now, you will not be able to trust them later, so why trust them at all? The most important trait any person has is integrity. People with integrity are predisposed to perform; people without integrity are predisposed not to perform. It is best not to get the two confused.)
On Investing: The great personal fortunes in this country were not built on a portfolio of 50 companies. They were built by someone who identified one wonderful business.
(Ed’s Note: The key to Warren Buffett’s success is that he has been able to identify exactly what the economic characteristics of
a wonderful business are—a business that has a durable competitive advantage that owns
a piece of the consumer’s mind.)
On Investing: It is impossible to unsign a contract, so do all your thinking before you sign.
(Ed’s Note: Before signing a contract, imagine all the things that could go wrong, because they often do go wrong.)
On Investing: It is easier to stay out of trouble than it is to get out of trouble.
(Ed’s Note: To stay out of trouble, just do
the right thing at the right time. To get out of trouble, you need a lot of money and a lot of legal talent, and even then, you may end up serving a lot of time.)
On Investing: You should invest like a Catholic—for life.
(Ed’s Note: You should view an investment decision from the perspective that you will never be able to undo it. In 1973 Buffett put $11 million into the Washington Post Company. The first 33 years he held the investment,
it increased in value to $1.5 billion.)
On Investing: Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.
(Ed’s Note: Buffett thinks it strange that successful and intelligent businesspeople will take investment advice from stockbrokers too poor to take their own advice. If their advice
is so great, why aren’t they rich? Could it be because stockbrokers make their money charging you commissions on the investment transactions they advise you to take?).
On Investing: Happiness does not buy you money.
(Ed’s Note: Buffett never confuses being rich with happiness. When asked by some college students to define success, he said it is being loved by the people you hope love you.)
On Investing: It takes 20 years to build a reputation and 5 minutes to lose it. If you think about that, you will do things differently.
(Ed’s Note: Buffett says that Berkshire can afford to lose money, even lots of money, but it can’t afford to lose reputation, even a shred of reputation, and in the long run, Berkshire will have whatever reputation it deserves.)
On Investing: The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.
(Ed’s Note: The stock market is there to make you rich if you know what you are doing. But if you do not know what you are doing, it will show no mercy in making you poor.)
On Investing: I do not try to jump over 7-foot bars; I look around for 1-foot bars that I can step over.
(Ed’s Note: Buffett looks for the sure thing—companies with products that don’t have to change, businesses that he knows will still be around in 20 years, selling now at a low price that would make business sense even if he were buying the whole company. In many cases Berkshire Hathaway (the company Buffett built) can afford to buy the whole company and has done it, including GEICO Insurance, Burlington Northern Santa Fe (BNSF) Railroad, Dairy Queen, Fruit of the Loon, Helzberg Diamonds, Long & Foster, Duracell and Pampered Chef among others.)
On Investing: The chains of habit are too light to be felt until they are too heavy to be broken.
(Ed’s Note: Bad business habits do not become apparent until it is too late, such as cost cutting after your business is in trouble, which should have been done long before you even got to the doorstep of danger.)
On Investing: It is not necessary to do extraordinary things to get extraordinary results.
(Ed’s Note: Buffett is shooting for a 20% annual rate of return, not a 200% annual rate of return. Invest $10,000 for 20 years at 20% a year and you end up with $3.8 million; hold it for 30 years and you end up with $23.7 million.)
On Investing: You should look at stocks as small pieces of a business.
(Ed’s Note: Sometimes when people invest, they forget that they are buying a fractional interest in a business. Buffett multiplies the stock price by the number of shares outstanding, then asks himself whether this would be a good deal or a bad deal if he were buying the whole business. If the price is too rich to be buying the whole business, then it is too rich to be buying even a single share.)
On Investing: My idea of a group decision is to look in the mirror.
(Ed’s Note: Buffett does not seek affirmation
of his ideas from others, his ideas are almost always opposite of what the herd is thinking and doing. To make big money in the investment world you need to think independently; to think independently you need to be comfortable standing alone against the world.)
On Investing: You should invest in a business that even a fool can run, because someday a fool will.
(Ed’s Note: Some businesses have great underlying economics, some do not. Invest in the former and not the latter, because companies with great underlying economics are hard to damage. Some companies have great underlying economics, like Coca-Cola, Budweiser, Wal-Mart, Wrigley’s, The Hershey Company and H&R Block.)
On Investing: With each investment you make, you should have the courage and the conviction to place at least 10% of your net worth in that stock.
(Ed’s Note: Conviction is based on what you know will happen; faith is based on what you hope will happen.)
On Investing: Money, to some extent, sometimes lets you be in more interesting environments. But it can’t change how many people love you or how healthy you are.
(Ed’s Note: Buffett believes that a country prospers better if society is a meritocracy, with people earning what they get. In other words, no free lunches, you work for what you get based on your own merit—the use of your talent, expertise, work ethic and experience.)
On Investing: Anything that cannot go on forever will end.
(Ed’s Note: Most businesses that are doing well now will, at some future point, do poorly. Things do change—it is only a matter of time. Buggy whips and video players were once great businesses, but not today. Play attention to the businesses you invest in.)
On Investing: 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.
(Ed’s Note: There are great businesses with great underlying economics, and businesses with poor inherent economics. No matter how brilliantly a mediocre business is run, its poor inherent economics will keep it forever anchored to poor results.)
On Investing: Accounting is the language of business.
(Ed’s Note: Accounting will teach you how to read a company’s financial statement. If you cannot read the scorecard, you cannot keep score, which means you cannot tell the
winners from the losers.)
On Investing: Turnarounds seldom turn.
(Ed’s Note: A business with poor underlying economics selling at what seems like bargain prices are no bargain at all—poor businesses remain poor businesses regardless of what you pay for them. When you find a business with great underlying economics at a bargain price, do not hesitate to buy in and hold your stake for the long run.)
On Investing: If a business does well, the stock eventually follows.
(Ed’s Note: Buffett is betting that if the underlying business does well over a long period of time, the stock price will increase to reflect the underlying increase in the value of the company. Always remember why the dot.com boom became the dot.com bust—the Internet stocks dropped like a rock off a 20-story building when they failed to make money over the long run. Buffett was smart enough to not take the lure of Internet stocks as their prices rose through the roof in a bull market. Basically, a lot of young kids got angel investors to put up millions in a concept, really sold nothing, made no money and had no prospect of making money, and then the kids took out millions for themselves and let the Internet company fold when the economy turned and the market caught them with their pants down. The investors, of course, lost millions in this fiasco. The underlying business economics of many Internet start-ups were terrible; they were selling dreams and living
a dream until the nightmare arrived.)
On Investing: Managing your career is like investing—the danger of difficulty does not count. You can save yourself money and pain by getting on the right train.
(Ed’s Note: If you work for a company with poor long-term economics, you will never do well as the company will never do well. Choose a company with great long-term economics, and as the profit of the company increases, so will your salary and opportunities increase.)
On Investing: The reaction of weak management to weak operations is often weak accounting.
(Ed’s Note: When the business has lousy economics, and the management lacks integrity, it will support corrupt accounting to reflect earnings that do not exist. Just think Enron.)
On Investing: There is a huge difference between the business that grows and requires lots of capital to do so, and the business that grows and doesn’t require capital.
(Ed’s Note: This advice from Buffett is the basis of his buy-and-hold-forever strategy—if your stock buy is a business that requires lots of capital to grow, your stock is never going to grow in value. All of the capital that is spent to remain competitive is capital you do not have to expand operations, buy back stock or buy new businesses that do not require lots of capital to grow.)
On Investing: In a difficult business, no sooner is one problem solved than another surfaces—never is there just one cockroach in the kitchen.
(Ed’s Note: Poor profit margins and poor earnings mean a constant battle with costs and, when you add competition, you are going nowhere, constantly beset with money problems.
On Investing: You can always juice sales by going down-market, but it’s hard to go back upmarket.
(Ed’s Note: Certain products own a piece of your mind—they are brand name products that you think of when you have a particular need.
If a manufacturer, in the name of increasing profits, decreases the quality of these quality, brand-name products, the manufacturer takes
a huge risk of losing its ownership of the consumer’s mind. Just think of what happened to Coca-Cola when it tried to change the original formula; it was a terrible mistake in marketing, fortunately, Coke recovered by going back to what had been working well
for decades.)
On Investing: When a chief executive officer is encouraged by his advisers to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It’s not
a push he needs.
(Ed’s Note: It is often easier for a CEO to buy
a new set of problems than it is to try to fix an old set. Hundreds of companies have gone under from expanding too quickly when they had no financial foundation to do so.)
On Investing: You don’t have to make money back the same way you lost it.
(Ed’s Note: When you buy a low-quality business selling at a high price, you will lose money on your investment. When you have a losing stock, don’t wait for your luck to change. With stocks, your investment is about only two factors—the quality of the company and the price you pay for its shares in relation to that quality. Cut your losses and make a better investment choice.)
On Investing: I look for a business in which
I think I can predict what they’re going to look like 10 to 15 years down the road.
Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.
(Ed’s Note: Consistent products equal consistent earnings. If the product doesn’t have to change, you can reap all the benefits of not having to spend money on research and development, nor do you have to fall victim to the ups and downs of fashion. For examples, think beer, soda pop and candy.)
On Investing: Someone is sitting in the shade today because someone planted a tree a long time ago.
(Ed’s Note: If not for the hard work of Warren’s mentor Benjamin Graham in developing the concept of value investing, Warren might never have gotten out from behind the counter at his grandfather’s grocery store.)
On Investing: With enough inside information and a million dollars, you can go broke in a year.
(Ed’s Note: Realize that by the time inside information gets to you, everyone else has heard it and traded on it. Realize also that trading on inside information is against the law. Famed 1920s investment great Bernard Baruch was famous for selling out a stock position as soon as someone gave him a hot tip on it; he died a very, very rich man.)
On Investing: Read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them.
(Ed’s Note: Buffett took Ben Graham’s “buy at a low price to get a margin of safety” and combined it with Phil Fisher’s “buy the highest-quality company and hold it forever” and ended up with “ buy high-quality companies at low prices in relation to their value and then hold them for a long, long time.)
On Investing: I am a better investor because
I am a businessman, and a better businessman because I am an investor.
(E’s Note: To be great at investing you need
to be like the businessman and know a good business from a bad one, and when you go to buy a business, you need to be like the smart investor and know whether it is selling cheap
or it is overpriced.)
On Investing: If principles become dated, they’re no longer principles.
(Ed’s Note: Buffett woke up one morning and discovered that the investment principles he had learned from his teacher Ben Graham were no longer useful. Buffett changed his investing strategy to suit the change in the world of investing—he adopted a philosophy of investing in exceptional companies that had a durable competitive advantage, as long as they were selling at reasonable prices, and then let the rising waters of time and earnings lift the price of the stock.
On Investing: You pay a very high price in the stock market for a cheery consensus.
(Ed’s Note: If everyone agrees with you that
a particular stock is the next Microsoft, you are going to have to pay a steep price, which leaves little upside and lots of downside.)
On Investing: If calculus and algebra were required to be a great investor, I’d have to go back to delivering newspapers.
(Ed’s Note: The math skills you need to be great investor are addition, subtraction, multiplication, division, and the ability to
rapidly calculate percentages and probability.)
On Investing: 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.
(Ed’s Note: On Wall Street the dominant investment strategy is based on imitating what the herd is doing—it is easier to sell you something popular as opposed to something that is unpopular. Buffett is not trying to sell anyone investments—he is trying to get rich
off investments.)
On Investing: The smarter the journalists are, the better off society is.
(Ed’s Note: Buffett has always subscribed to the idea that the better the teacher, the smarter the student body. Thus, the smarter the journalists, the smarter the society. The only people who don’t want a smarter society are liars, thieves and politicians who are trying to hide something.)
On Investing: You want to learn from experience, but you want to learn from other people’s experience when you can.
(Ed’s Note: Experience is the best teacher, but it can be expensive if you are learning from your own mistakes. It is better to learn from the mistakes of others. Buffett studies failure stories to learn why people failed; most business schools teach only success stories. Who do you think has become more successful: Buffett or business college professors?)
On Investing: It’s hard to teach a young dog old tricks.
(Ed’s Note: Buffett has found that the
business acumen that comes with age is next to impossible to teach to young managers. In Buffett’s world, 65 is just getting started—age and experience can be far greater virtues than youth and enthusiasm when it comes to making money the old-fashioned way.)
On Investing: In looking for someone to
hire, you look for three qualities: integrity, intelligence and energy. But the most important is integrity, because if you don’t have that, the other two qualities, intelligence and energy, are going to kill you.
(Ed’s Note: People without integrity are not honest, and they will find lots of clever ways to make all your money theirs.)
On Investing: Can you really explain to a fish what it is like to walk on land? One day on land is worth a 1,000 years talking about it, and one day running a business has exactly the same kind of value.
(Ed’s Note: Dealing with real manufacturing problems and getting and keeping real customers is what separates the academics from the managerial real world.)
On Investing: It’s only when the tide goes out that you learn who’s been swimming naked.
(Ed’s Note: Creative accounting can get you into a lot to trouble, as Enron found out. When the tide went out, Enron was naked and exposed, proving that it is much easier to stay out of trouble than it is get out of trouble.)
On Investing: When ideas fail, words come in very handy.
(Ed’s Note: This is Buffett quoting Goethe, and what he means is when the CEO of a company makes a terrible decision that results in a terrible result for the company and its stockholders, the CEO conjure up a great excuse to justify his or her stupidity, or,
more correctly, incompetence.)
On Investing: The really good business manager doesn’t wake up in the morning and say, “This is the day that I am going to cut costs,” any more than he wakes up and decides to practice breathing.
(Ed’s Note: If you read that a company is instigating a cost-cutting program, then you know that management has been slacking in keeping costs low from the start.)
On Investing: Wouldn’t it be great if we could buy love for $1 million. But the only way to be loved is to be lovable. You always get back more than you give away. If you don’t give any, you won’t get any. There’s nobody I know who commands the love of others who doesn’t feel like a success. And I can’t imagine people who aren’t loved feel very successful.
(Ed’s Note: Buffett’s love and respect for his managers is so strong that he trusts them completely with the businesses they run. He gives them complete control over them, which promotes a strong sense of responsibility.)
On Investing: We enjoy the process far more than the proceeds, though I have learned to live with those also.
(Ed’s Note: People who are passionate about their jobs will come to rule their trade or profession because they love the process more than the money. The funny thing about passion is that money usually follows it.)
On Investing: If you hit a hole in one on every hole, you wouldn’t play golf for very long.
(Ed’s Note: A job with challenges keeps things interesting, creates high self-esteem, promotes creativity, and attracts the highest-quality people.)
On Investing: There comes a time when you ought to start doing what you want. Take a job that you love. You will jump out of bed in the morning. I think you are out of your mind if you keep taking jobs that you don’t like because you think that it will look good on your resume. Isn’t that a little like saving up sex for your old age?
(Ed’s Note: People who love what they are doing are the ones who rise to the top of their fields and end up making the most money.)
On Investing: A friend of mine spent 20 years looking for the perfect woman; unfortunately, when he found her, he discovered that she was looking for the perfect man.
(Ed’s Note: Business relationships are just like personal relationships-they are best started by showing an interest in the other person, and in finding out what that person’s needs are, because ultimately we are selling to those needs.)
On Investing: Never ask a barber if you need a haircut.
(Ed’s Note: Ask an adviser if there is a problem and he will find a problem-even if there isn’t one. People who are paid to fix problems will always find problems because if there isn’t a problem, there is nothing to fix.)
On Investing: Forecasts usually tell us more of the forecaster than of the forecast.
(Ed’s Note: Wall Street makes its money off your moving around your money from one investment to another, so, naturally, Wall Street forecasters, also known as analysts, are going to find lots of reasons for you to do just that, move from one investment to another. The problem is that all this activity has nothing to do with making you rich.)
On Investing: A public-opinion poll is no substitute for thought.
(Ed’s Note: It is easy to buy stocks that everyone else is buying, but you will pay a higher price for your feeling of safety in buying a popular stock. When you buy an unpopular stock with good underlying economics, you will pay a lower price for that same feeling of safety, and you will make far more money on your investment.)
On Investing: The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.
(Ed’s Note: The simplest explanation is usually the best explanation. The problem with this idea is that priests of any profession need complexity to keep the laity from performing their priestly magic. If you understood the investment process, there would be no need for investment analysts and advisers, nor would we need mutual funds or any of the other priests of the “profession”. The so-called priests of Wall Street are preaching short-term investment strategies, which, in truth, are completely geared for making the adviser, and not the advisee, rich.)
On Investing: There seems to be some perverse human characteristic that likes to make easy things difficult.
(Ed’s Note: Every profession is ultimately a conspiracy against the laity. Only when something is made difficult to understand is there a need for experts, who can charge high fees for having figured it all out. Their scheme is simple-they are going to get rich off making you rich. But no one ever asks why, if they are so smart, do they need other people’s money to get rich? As Woody Allen once said, “A stockbroker is someone who invests other people’s money until it’s all gone.”)
On Investing: Recommending something to be held for 30 years is a level of self-sacrifice you’ll rarely see in a monastery,
let alone a brokerage house.
(Ed’s Note: Your stockbroker would starve to death before he would adopt Buffett’s strategy of buy and hold. Stockbrokers make all their money on the commissions they receive by getting you into and out of stocks.)
On Investing: 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.
(Ed’s Note: Buffett says that you only have to make a few right decisions to end up rich, and that if you are getting more than one brilliant investment idea a year, you are probably deluding yourself.)
On Investing: Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.
(Ed’s Note: If your investment advisor recommends broad diversification, he is really telling you that he doesn’t know what his is doing and he wants to protect you from this ignorance.)
On Investing: Wall Street makes its money on activity. You make your money on inactivity.
(Ed’s Note: For you to make money in the stock market, you need to buy a great company at a fair price or below and hold it for a long time-thereby letting the company’s retained earnings build up its underlying value.)
On Investing: Why not invest your assets in the companies you really like? As Mae West said, ”Too much of a good thing can be wonderful.”
(Ed’s Note: Buffett Is very careful about investing in a company, but when he does, he watches it like a hawk.) On Investing: You only have to do a very few things right in your life so long as you don’t do too many things wrong. (Ed’s Note: Buffett decided early on that it would be impossible for him to make hundreds of right investment decisions, so he decided to only invest in the businesses that he was absolutely sure of and then bet heavily on them. Buffett owes 90% of his wealth to just 10 stock decisions. Buffett’s net worth was $88.9 billion as of December 2019. Buffett is called The Oracle of Omaha, he lives in Nebraska. He runs Berkshire Hathaway, which owns more than 60 companies. The advent of the COVID-19 Pandemic in 2020 cut into his wealth but he is invested in stocks, not perishable fruit, much of his wealth will return following the recovery. The stock market is like a yo-yo, it goes up and down depending upon the economy and the confidence of individuals and institutional investors in the economy.)
On Investing: If you let yourself be undisciplined on the small things, you will probably be undisciplined on the large things as well.
(Ed’s Note: Discipline is the key to success in the investment game – just as it is a key to success in much of life. Buffett so believes in a disciplined approach that he has turned down a $2 golf bet because the odds were against him. His holdings are currently worth $47 billion.)
On Investing: There is nothing like writing to force you to think and get your thoughts straight.
(Ed’s Note: Buffett says if you can’t write it, you haven’t really thought about it. Writing about something makes you think about it, and thinking about where to invest your money is a good thing, which is why writing about it is even a better thing.)
On Investing: The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.
(Ed’s Note: Prudence in making investment decisions can save you from folly and make you rich.)
On Investing: I’ve never swung at a ball while it’s still in the pitcher’s glove.
(Ed’s Note: Buffett reads, learns, retains and applies everything he is interested in, including baseball. After reading Ted Williams’ book on The Science of Hitting, he considered what Ted said about hitting-to become a great hitter you have to keep yourself from swinging at bad pitches, what you are looking for is the perfect pitch to hit. Buffett took it as an analogy to investing: To be a great investor he only had to wait for the right opportunity. And while Williams only had 3 strikes to deal with, Buffett could wait days, months or years for the perfect investment opportunity. Buffett: A very smart investor.)
On Investing: Imagine that you had a car and that was the only car you’d have for your entire lifetime. Of course, you’d care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body. Prepare them for life, care for them. You can enhance your mind over time. A person’s main asset is themselves, so preserve and enhance yourself.
(Ed’s Note: Buffett sees his mind and body as a business asset, so he guards it very carefully.)
On Investing: I buy expensive suits. They just look cheap on me.
(Ed’s Note: Buffett is cheap because he knows the value of compounding interest. He made billions, but he was famous for driving around Omaha in an old Volkswagen Beetle. Compounding at 20% a year, $25,000 would come to $958,439 after 20 years, and to Warren that was just way too much to pay for a car. No wonder the guy is a billionaire and one of the richest people on the planet.)
On Investing: In the search for companies to acquire, we adopt the same attitude one might find appropriate in looking for a spouse. It pays to be active, interested, and open-minded, but it does not pay to be in a hurry.
(Ed’s Note: Invest like you should look for a spouse, very carefully, knowing that marriage should be a lifetime deal–you hang onto a great investment forever.)
On Investing: When proper temperament joins up with the proper intellectual framework, then you get rational behavior.
(Ed’s Note: Buffett says the best temperament for good investing is to be greedy when others are scared, and scared when others are greedy. When coupled with an investment philosophy that focuses on businesses with superior long-term economics working in their favor, you have a winner almost every time.)
On Investing: The fact that people are full of greed, fear, or folly is predictable. The sequence is not predictable.
(Ed’s Note: Buffett says avoid the greed and let fear and folly create the opportunity. That is the way of the intelligent investor.)
On Investing: A stock does not know that you own it.
(Ed’s Note: When you humanize a stock (an inanimate object) your emotional thought replaces your rational thought. When it is time to sell, you don’t want to hesitate because you “love” the stock. And, when the stock decreases in value, there is no reason to be mad at it – it doesn’t know you own it.)
On Investing: When you combine ignorance and borrowed money, the consequences can get interesting.
(Ed’s Note: Ignorance will blind you from folly. Can you believe that a group no one ever heard of called Long-Term Capital was able to borrow $100 billion (not million, but billion) to invest in derivatives and then blew the entire $100 billion on investing in derivatives. This act of ignorance combined with borrowed money almost brought down the country’s entire financial system. The only question left is: Were the people who loaned the money, or the people who borrowed the money and then blew the money, the biggest idiots?)
On Investing: Of the 7 deadly sins, envy is the silliest, because if you have it, you don’t feel better. You feel worse. I’ve had some good times with gluttony…we won’t go into lust.
(Ed’s Note: The happiest rich people are those who love the business life that goes with making money, and haven’t the least interest in other people’s wealth.)
On Investing: The most important thing to do if you find yourself in a hole is to stop digging.
(Ed’s Note: If you find you’re in a bad investment, the worst thing you can do is continue to throw money at it. You should cut your losses before you have nothing. Even Buffett can make mistakes-in the early eighties he invested heavily in the aluminum industry, and got out when he realized his mistake, thereby reducing his losses.)
On Investing: If at first you do succeed, quit trying.
(Ed’s Note: Buffett finds a good investment, buys and then sits on the investment. It is better to rest on your merits than sell for a modest profit and go looking for another company. Buffett sits because he wants to allow his good investment to let the stock price grow with the company’s earnings. Hint: If the company is debt-ridden and not enjoying a positive, growing cash flow, it is not a good investment.)
On Investing: I buy stocks when the lemmings are headed the other way.
(Ed’s Note: Here is what Buffett did when no one wanted these stocks: Buffett bought into Disney in the 1966 bear market, he bought into the Washington Post Company in the 1973 bear market, he bought into General Foods in the 1981 bear market, he bought into Coca-Cola in the 1987 bear market, and he bought into Wells Fargo in the 1990 bear market. Buffett bought when prices were low and everyone else was desperate to sell.)
On Investing: We don’t go into companies with the thought of effecting a lot of changes. That doesn’t work any better in investments than it does in marriages.
(Ed’s Note: Buffett believes that, in most cases, the underlying economics of the business will remain constant regardless
of the manager in charge. In essence, a great business will produce great results regardless of who is in charge.)
On Investing: Risk comes from not knowing what you are doing.
(Ed’s Note: Buffett says, “I never buy anything unless I can fill out on a piece of paper my reasons why. I may be wrong, but I would know the answer to ‘I’m paying $32 billion today for Coca-Cola Company because … ‘. Questions compel us to think, but answers tell us whether to act.)
On Investing: The only time to buy these is on a day with no “y” in it.
(Ed’s Note: Buffett is talking about IPOs (initial public offerings). He figures the investment banker doing the selling has already fully priced the issue. There is no chance that an investor is going to get a bargain price; hence Buffett has never invested in IPOs.)
On Investing: We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private.
(Ed’s Note: A CEO who is honest with the public about his mistakes is more likely to learn from them. When the CEO is always trying to blame someone or something for his mistakes, he will probably lie to himself about other important things, and will most certainly never be honest with the shareholders, especially in matters involving accounting. Buffett says that managers who always promise to “make the numbers” will be tempted to make up the numbers.)
On Investing: That which is not worth doing at all is not worth doing well.
(Ed’s Note: Many people spend years working hard for businesses with poor inherent economics, which means the prospects for making money are equally poor. Why learn to be good at a business that has inherent poor economics and is never going to make you any money?)
On Investing: A good managerial record is far more a function of what business boat you get into than it is of how effectively you row. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
(Ed’s Note: When you get out of school, get a jump on the pack and go to work for a company that has great underlying economics, for no matter what your level of ambition, the great economics of the business will always make you look good and pay you more.)
On Investing: We never look back. We just figure there is so much to look forward to that there is no sense thinking of what we might have done. It just doesn’t make any difference. You can only live life forward.
(Ed’s Note: Buffett does not have much use for regrets in life, business or investments. If you make 100 decisions and 10 turn out bad, you could end up obsessing over your mistakes and neglect the new decisions that have to be made. In the investment game, you will make countless errors of omission, none of which will hurt you.)
On Investing: I want to be able to explain my mistakes. This means I do only the things
I completely understand.
(Ed’s Note: If you do not understand what you are doing, then why are you doing it? The proper investment approach is not intuitive-it is rational mixed with the right temperament. If you want to be able to explain what you did right, and why you did it in the first place.)
On Investing: If you don’t make mistakes, you can’t make decisions.
(Ed’s Note: Some people can make decisions and some people can’t. The ones who can will lead, and the ones who can’t will follow. A CEO can make mistakes as long as he also makes a lot of money.)
On Investing: Investment must be rational;
if you don’t understand it, don’t do it.
(Ed’s Note: This could be Buffett’s greatest key to his success. For example, he never invested in high technology companies because he did not understand what they do. When the dot.com boom became the dot.com bust, Buffett’s investors lost nothing. Buffett was then cash rich to take advantage of the recovery and run up in the following bull market.)
On Investing: If they need help to manage the enterprise, we are probably both in trouble.
(Ed’s Note: Just because you are a great investor does not mean that you are a skilled business manager. Recognizing talent is different from having talent. A great investor has to be able to recognize talent-the way a football coach has to be able to recognize a great player. Buffett says his secret for growing a corporation through diverse acquisitions is to buy a good business, for a reasonable price, that already has competent management running it, then get out of the way and let them do their thing. Think about this: Though Berkshire has about 180,000 employees among the companies it has acquired outright, only 17 of these are at its headquarters in Omaha, Nebraska. Buffett essentially leaves his managers alone to run their businesses, putting them in charge of all operating decisions.)
On Investing: If we can’t find things within our circle of competence, we don’t expand the circle. We’ll wait.
(Ed’s Note: In 1967 he wrote to his investment partners telling them that he was returning their money since it was getting harder and harder to find investments that he understood and that were selling at attractive prices. He then stood on the sidelines until 1973, when the entire stock market collapsed and suddenly even the best companies were selling at bargain prices. In the investment game it pays to be stubborn and principled and patient in choosing a company to invest in.)
On Investing: Any business craving of the leader, however foolish, will be quickly supported by studies prepared by his troops. (Ed’s Note: If you make your living pleasing the boss, you will certainly please the boss by supporting his position, regardless of your true feelings. This is why Buffett looks in the mirror when he wants advice-it’s speedier, cheaper, and right or wrong, it always leads to the same brilliant decision. And if you cannot be your own boss at work, you should at least try to be your own boss in life.)
On Investing: In the business world, the rearview mirror is always clearer than the windshield.
(Ed’s Note: In the business world hindsight is always perfect. But the future is always hidden in a rapidly changing environment. It is hard to tell where you are going if you cannot see the road ahead. This is why Buffett stays with the tired-and-true products. He can see where they are going to be in 15 years. Do you think we are going to stop buying car insurance, or stop drinking Coke, or stop chewing Wrigley’s gum?)
On Investing: I’m very suspect of the person who is very good at one business-it also could be a good athlete or a good entertainer-who starts thinking they should tell the world how to behave on everything. For us to think that just because we made a lot of money, we’re going to be better at giving advice on every subject-well, it’s just crazy.
(Ed’s Note: Just think of loud-mouthed, outspoken Hollywood actors who know exactly how everyone should live and think, especially regarding politics and religion. It is the obnoxious folly of the rich to assume that money makes you intelligent.)
On Investing: It won’t be the economy that will do in investors; it will be investors themselves.
(Ed’s Note: Investors get caught up emotionally in investing instead of looking at it rationally as buying a fractional interest in businesses. They will be undone by their shortsighted quest for quick profits blinding them from the long-term economics of the business.)
On Investing: For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
(Ed’s Note: Buffett believes that how much you pay determines the amount of value you get-pay too much and you get little value; the less you pay, the more value you get. If a business earns $10 million a year and you pay $100 million to buy it, you get far more value than
if you had paid $150 million for the same business and opportunity. The secret to the game is to always pay less and get more.)
On Investing: That which goes up doesn’t necessarily have to come down.
(Ed’s Note: Berkshire Hathaway’s stock price rose from $19 a share in 1965 to $95,000 a share in 2006. A company with an expanding intrinsic value-like Berkshire Hathaway-can find itself with a stock price that keeps rising and rising and rising.)
On Investing: The key is that the stock market basically just sets prices, so it exists to serve you, not instruct you.
(Ed’s Note: Buffet sees the stock market as a place where shares of companies are valued on their short-term economic prospects, which creates lots of price gyrations over the short term, which means prices often get out of line with the long-term realities of the business. As a rule the stock market tends to overvalue stocks.)
On Investing: At the beginning, prices are driven by fundamentals, and at some point, speculation drives them. It’s that old story: What the wise man does in the beginning, the fool does in the end.
(Ed’s Note: A wise man buys when the fundamentals are in his favor; that way he has a margin of safety as to how low prices can go. Time is also the friend of fundamentals in that all prices eventually correct themselves to reflect the fundamental long-term economic value of the business as measured by what
it will earn.)
On Investing: The smartest side to take in a bidding war is the losing side.
(Ed’s Note: A bidding war means that the price is going higher and higher, as both sides battle it out, which means the return on the investment shrinks lower and lower. The higher the price goes, the less of a good deal it becomes, and if the price gets too high, it can become a really bad deal. The fact is, no one ever got rich by paying too much for something.)
On Investing: A pin lies in wait for every bubble, and when the two eventually meet,
a new wave of Investors learn some very old lessons.
(Ed’s Note: A speculative frenzy occurs when the general public goes wild for stocks. It happens big-time about once every 30 years, usually with the advent of new technology-such as with radio, airplanes, autos, computers, biotech and the Internet. Buffett has missed every speculative bull market since he began investing 45 years ago; he views speculation as paying high prices for future earnings that might never appear, and, in most cases, did not appear. Hence, the most recent example
of the Internet boom being followed by the Internet bust-too many of the companies being invested in were not making money, the investors were just lulled into believing that they would make money without the underlying economics to support a very faulty assumption.)
On Investing: 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 5 years.
(Ed’s Note: Buffett buys on the assumption that he is buying into a business. The stock market sometimes allows him to do this at a cost below what the whole business would sell for to a private buyer. If you buy the right company at the right price, the only thing time does is increase the value of the business, which makes you richer and richer and richer as the stock price increases to reflect the underlying value of the business. The point is: If the stock market closed for 5 years, the underlying value of the business would still increase.)
On Investing: The stock market is a no-called strike game. You don’t have to swing at everything-you can wait for our pitch.
The problem when you’re a money manager is that your fans keep yelling: ”Swing, you bum!”
(Ed’s Note: Money managers are basically slaves to the quarterly and yearly figures.
If you want to make big money in the stock market, stay away from the professional fund managers and learn to use their shortsighted stock-trading gymnastics to take advantage of their long-term pricing mistakes.)
On Investing: What we learn from history is that people don’t learn from history.
(Ed’s Note: Those who ignore history are destined to repeat it. People make the same mistakes over and over and over in the stock market-they overpay for a business in the hope of making money on the short-term price movements of the company’s shares. If I didn’t know better, I would think that people are dumber than dog dirt, when in fact they are just plain stupid.)
On Investing: Look at stock market fluctuations as your friend rather than your enemy-profit from folly rather than participate in it.
(Ed’s Note: Fools rush in where angels fear to tread. In the 1973-1974 market crash, Buffett bought $10 million worth of Washington Post stock (it’s now worth $1.5+ billion); in the 1987 market crash, he bought $1 billion of Coca-Cola stock (it’s now worth $8+ billion); in the banking recession, he bought $400 million of Wells Fargo stock (it’s now worth $1.9+ billion.)
On Investing: Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mis-appraised.
(Ed’s Note: Great companies can make correctable mistakes. Buffett bought $45 million in GEICO stock when it was near insolvency because it was underpricing its products, a mistake that was correctable (his stock investment is now worth $2.3 billion).
On Investing: To many on Wall Street, both companies and stocks are seen only as raw materials for trades.
(Ed’s Note: Professional money managers do not see companies and stocks as businesses rather than bouncing numbers on a computer monitor screen. Buffett has to think about a burning theater. The only way to leave our seat in a burning financial market is to find someone to take your seat, which isn’t easy. However, this creates buying opportunities for those who know the long-term value of a business.)
On Investing: No matter how great the talent or effort, some things just take time: You can’t produce a baby in 1 month by getting 9 women pregnant.
(Ed’s Note: It takes time for business value to build up. Buffett waited 15 years for his initial investment of $45 million to turn into $2.3 billion. That equates to an annual return of 29%–just imagine getting a 29% on your investment for 15 straight years. That’s why Warren Buffett is Buffett and you are you, wishing you could be Warren Buffett. You will never be Warren Buffett because you do not have the patience even if you do pay the right price for your stock. (I am hoping you will get mad, and get smarter.)
On Investing: If past history was all there was to the game, the richest people would be librarians.
(Ed’s Note: Understanding business history is important to understanding what can happen, but it will not tell you what will happen and when it will happen. That takes some foresight on the part of the investor. Buffett tries to predict the future by staying with businesses that make products that do not change over time-think beer, candy, chewing gum, razor blades and auto insurance. When you buy into companies that are constantly having to change their products-like technology companies and auto companies-you cannot predict the future as· easily.)
On Investing: The investor of today does not profit from yesterday’s growth.
(Ed’s Note: When a company has a durable competitive advantage, the growth will be there. When you pay too much for a stock, you essentially reduce the amount of money you will make in the future, which reduces your annual rate of return.)
On Investing: As far as I am concerned, the stock market doesn’t exist. It is only there as a reference to see if anybody is offering to do anything foolish.
(Ed’s Note: Buffett became a multi-billionaire by acting on the short-sightedness of stock pickers from large mutual funds.)
On Investing: We believe that (giving) the name investors to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.
(Ed’s Note: Buying stocks on a quarter-point drop in interest rates, and a month later selling the same stock at a quarter-point rise in interest rates is not investing, it is speculating under the guise of investing.)
On Investing: We do not have, never have had, and never will have an opinion about where the stock market, interest rates, or business activity will be a year from now.
(Ed’s Note: The answer is to ignore the stock markets daily gyrations, and do this: Focus on determining the long-term economic value of the companies that have a durable competitive advantage and then determine where they are selling in relationship to that value.)
On Investing: Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, then they are simply jerks with
a billion dollars.
(Ed’s Note: Money only makes you more of what you already are. What is important is that good people should remain good people, whether they are rich or poor.)
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