Part I to Part III links:
Buffett's Wisdom (Of Permanent Value) Part I
Buffett's Wisdom (Of Permanent Value) Part II
Buffett's Wisdom (Of Permanent Value) Part III
Enjoy!
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"I don't read economic forecasts. I don't read the funny papers."
(Warren Buffett)
"The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
(Annual Meeting 1999)
"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
(BusinessWeek Interview, June 25 1999)
The key to investing is not accessing how much an industry is going to affect the society, or how much it will grow, but rather determining the competitive advantage of any given company, and above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to the investor.
(Warren Buffett)
We think diversification, as practiced generally, makes very little sense for anyone who knows what they're doing. Diversification serves as protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There's nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses.
But if you know how to value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably because there aren't that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money into #30 or #35 on your list of attractiveness just strikes Charlie and me as madness.
-Warren Buffett (1996 Annual Meeting)
What Is “Cigar Butt” Investing?
If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit.
Warren Buffett 1989
"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices.
"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value."
--Warren Buffett, 1996 Berkshire Hathaway Shareholder Letter
Modern Portfolio Theory
We have "professional" investors, those who manage many billions, to thank for most of this turmoil. Instead of focusing on what businesses will do in the years ahead, many prestigious money managers now focus on what they expect other money managers to do in the days ahead.
(1987 Chairman's Letter)
We try to price, rather than time, purchases.
(1994 Chairman’s Letter)
The strategy we've adopted precludes our following standard diversification dogma.
(1993 Chairman’s Letter)
It has no utility. It will tell you how to do average. But I think almost anybody can figure out how to do average in the fifth grade. It's just not that difficult. Modern portfolio theory is elaborate. There are lots of little Greek letters and all kinds of things to make you think you're in the big leagues. But there is no value added.
(1996 Annual Meeting)
He has two concrete rules for all who seek riches:
Rule No.1. Never lose money.
Rule No.2 Never forget Rule No.1.
- Of Permanent Value
I need to remind you about the definition of "investing," which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow.
(Fortune, Dec 10 2001)
"The wise ones [investors] bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple."
(Warren Buffett)
We think the best way to minimize risk is to think.
(Annual meeting 2004)
The key is to have a “money mind,” which is not IQ, and then you have to have the right temperament. If you can’t control yourself, you’re going to have disasters. Charlie and I have seen it. The whole world in the late 1990s went a little mad in terms of investments. How could that happen? Don’t people learn? What we learn from history is that people don't learn from history,"
(Annual meeting 2004)
On missed investment opportunities (ie Walmarts) :
If every shot was a hole in one it wouldn't make the game very interesting. You have to hit balls in the woods a few times.
(Annual meeting 2004)
If we were to do it over again, we’d do it pretty much the same way. The world hasn’t changed that much. We’d read everything in sight about businesses and industries we think we’d understand. And, working with far less capital, our investment universe would be far broader than it is currently.
There’s nothing different, in my view, about analyzing securities today vs. 50 years ago.
(Annual meeting 2004)
If you think you’ll see an opportunity every week, you’re going to lose a lot of money.
(Annual meeting 2004)
If you pay way too much for a business, you’ll get a poor return on what you paid, even if the return on tangible equity is very good.
(Annual meeting 2004)
The most dramatic way we protect ourselves is we don’t use leverage. We believe almost anything can happen in financial markets. The only way smart people can get clobbered is [if they use] leverage. If you can hold them [the positions you own during a crisis], then you’re OK. But even smart people can get clobbered with leverage – it’s the one thing that can prevent you from playing out your hand.
(Annual meeting 2004)
Thinking About Growth Rates When Estimating Valuation
When the [long-term] growth rate is higher than the discount rate, then [mathematically]
the value is infinity. This is the St. Petersburg Paradox, written about by Durant 30 years ago.
Some managements think this [that the value of their company is infinite]. It gets very dangerous to assume high growth rates to infinity – that’s where people get into a lot of trouble. The idea of projecting extremely high growth rates for a long period of time has cost investors an awful lot of money. Go look at top companies 50 years ago: how many have grown at 10% for a long time? And [those that have grown] 15% is very rarified.
Charlie and I are rarely willing to project high growth rates. Maybe we’re wrong sometimes and that costs us, but we like to be conservative.
(Annual meeting 2004)
"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices.
"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value."
--Warren Buffett, 1996 Berkshire Hathaway Shareholder Letter
"If you want to succeed, it's common sense to study success."
- annual letter 2004
Investors should remember that excitement and expenses are their enemies, and if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.-- annual letter 2004
If you could pick 10% of one person in this room to own or 'go long' for the next 30 years, who would it be? It wouldn't be the person with the highest IQ; it wouldn't be the star athlete; you would look for certain other qualities… And if you had to pick one person to 'short' for the next 30 years, who would it be? Now ask yourself why you have made those selections. If you've considered these questions properly, the person you've gone long is probably someone who is honest, courageous, and dependable; the person you've shorted is probably someone who is egotistical and likes to take the credit. The point is that success is mostly dependent upon elective qualities, not anything with which you are born. You can choose to be dependable or not. And it's not easy to change, so choose correctly now. Bertrand Russell once said, "The chains of habit are too light to be felt until they're too heavy to be broken." So ask yourself, "Who do I want to be?" At the end of this process you should determine that the person you want to buy is yourself. You all are holding winning tickets.
(Warren Buffett)
Q: When you consider an acquisition, what are the first things you look for in a management team?
A: Well, what do you look for in a girl? Seriously, you look for the logical things - passion, an interest in running the business, honesty. Such as, do they love the business, or do they love the money? This is the first filter. I mean real passion; Mrs. B ran Nebraska Furniture Mart until she died at the age of 103 - that's passion. If temperament is the most important personal asset in managing money, in business, it's passion. Secondarily, if you've been doing it a while, you get to know how to do it. But obviously no management team is perfect, so you're often stuck making a judgment call. You don't want to wait forever to find the perfect team. Incidentally, a friend of mine spent twenty years looking for the perfect woman; unfortunately, when he found her he discovered that she was looking for the perfect man.
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To get rich, you find businesses with durable competitive advantage and you don't overpay for them.
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There is no shame in making a mistake. Despite a great deal of research and analysis, I make plenty of them -- and so does every other investor -- because the future is inherently unpredictable. But there is shame in refusing to acknowledge a mistake and rectifying it.
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