Berkshire Hathaway Warren Buffett Quotes

If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants.

Culture, more than rule books, determines how an organization behaves.

But then it dawned on me that the opinion of someone who is always wrong has its own special utility to decision-makers.

stocks of companies selling commodity-like products should come with a warning label: “Competition may prove hazardous to human wealth.

On the Ideal Business - Buffett: “Something that costs a penny, sells for a dollar and is habit forming.

If your employees, including your CEO, wish to give to their alma maters or other institutions to which they feel a personal attachment, we believe they should use their own money, not yours.

Many shall be restored that now are fallen and many shall fall that are now in honor.

If investors only had to study the past, the richest people would be librarians.

After you have enough for daily life, all that matters is your health and those you love.

our experience with newly-minted MBAs has not been that great. Their academic records always look terrific and the candidates always know just what to say; but too often they are short on personal commitment to the company and general business savvy. It’s difficult to teach a new dog old tricks.

Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.

Charlie’s dictum: “All I want to know is where I’m going to die so I’ll never go there.

One of Buffett’s annual themes is the value of learning. He noted that life properly lived is learning, learning, learning all the time. He observed that being wrong is when he learns the most.

Talking to Time Magazine a few years back, Peter Drucker got to the heart of things: “I will tell you a secret: Dealmaking beats working. Dealmaking is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work . . . dealmaking is romantic, sexy. That’s why you have deals that make no sense.

Yet the industry asks for more money from investors every year. The idea is to find investments that give you money, not take it.

The right manager can have an absolutely huge impact. Find people with brains, energy and integrity,

(Don’t ask the barber whether you need a haircut.)

Value is what a business is worth. Price is what you have to pay to get it.

There is no tougher job in corporate America than running an airline: Despite the huge amounts of equity capital that have been injected into it, the industry, in aggregate, has posted a net loss since its birth after Kitty Hawk. Airline managers need brains, guts, and experience—and

Ben Franklin’s advice: “Keep your eyes wide open before marriage and half shut thereafter.

The danger of relying on historical statistics or formulas is that you end up betting on a 14-year-old horse with a great record but is now ready for the glue factory.

Munger claimed that it is because professors are so enamored by modern portfolio theory. For the man with a hammer, every problem looks like a nail.

Tom Murphy, CEO of Capital Cities/ABC and considered by Buffett to be the best business manager in the country, prays every day to be humble.

Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are.

Warren recommended doing what turns you on. Munger agreed, saying he’d never done anything really well that he didn’t like to do.

We’d buy great businesses with excellent management at a fair to bargain price and leave them alone.

Buffett continued, saying that MPT has no utility. It is elaborate with lots of little Greek letters to make you feel you are in the big leagues. The

Munger noted that high profits on capital often rely on information inefficiencies.

Buffett pointed out that when the investment tide goes out, you will see who has been swimming naked.

A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.

Buffett gave two criteria for evaluating the performance of management: 1) How well do they run the business? and 2) How well do they treat the owners?

Buffett noted that he likes to put a lot of money in things he feels strongly about. Diversification makes no sense for someone who knows what they are doing.

In insurance, as elsewhere, the reaction of weak managements to weak operations is often weak accounting. (“It’s difficult for an empty sack to stand upright.”)

Pascal’s observation seems apt: “It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.

Alas, my “fiddle playing” will not get me to Carnegie Hall — or even to a high school recital. Berkshire, on your behalf and mine, will send the Treasury $3.3 billion for tax on its 2003 income, a sum equaling 2½% of the total income tax paid by all U.S. corporations in fiscal 2003.

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. Though it’s seldom recognized, this is the exact approach

A CEO’s behavior has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking.

There are essentially five things public corporations can do with a dollar earned: reinvest in the business, acquire other businesses or assets, pay down debt, pay dividends, and/or buy in shares. Deciding

In modern portfolio theory, beta is used as a measure of the volatility and, thus, the risk of an investment. However, Buffett sees the use of beta as nonsense, emphatically stating, “Volatility is no measure of risk to us.

Buffett also noted that book value is seldom meaningful in analyzing the value of a business. Book value simply records what was put into the business. The key to calculating value is determining what will come out of the business.

From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required.

occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. As

good quality corporate bonds yielding 10% or better with great call protection.

automatically compound. If you need cash, you can sell stock and pay capital gains tax at a lower rate than a dividend would be taxed.

So instead of copying, understand why they made the decisions they did. Then apply those insights to your own decisions and your own position.

The key to calculating value is determining what will come out of the business.

Every year Buffett explains that he wants Berkshire to have great long-term shareholders and that splitting the stock would only work against that.

What matters most to him are micro factors, as opposed to the macro factors that so often get all the attention. He loves to know all the details of a business.

We set no volume goals in our insurance business generally—and certainly not in reinsurance—as virtually any volume can be achieved if profitability standards are ignored.

the single biggest outcome of the Internet has been little understood: buyers are the winners.

Buffett quoted Marshall Fields: “We waste half of the money we spend on advertising . . . the problem is we just don’t know which half.” From

Being able to think and invest very long term and not worry about current earnings or Wall Street analysts can be a major competitive advantage in certain businesses. Acquire

Buffett observed that they do have filters. A key one is whether they have a good idea of how the business is going to do over the next five or 10 years.

the real key is to be able to figure out what the average profitability of the business will be over the long term and how strong the business moat may be. Buffett’s

One ratio that Buffett is known to track is the total market cap to GDP. Recently, it was at 125%, which is a level approached in 1999 during the Internet bubble. Another

with others, are likely to experience such a year.

While investors and managers must place their feet in the future, their memories and nervous systems often remain plugged into the past. 

Munger concluded, “If a thing is not worth doing at all, it’s not worth doing well.

Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.

Our capital is underutilized now, but that will happen periodically. It’s a painful condition to be in — but not as painful as doing something stupid. (I speak from experience.)

Of course, a business with terrific economics can be a bad investment if the purchase price is excessive.

The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.

One of the lessons your management has learned—and, unfortunately, sometimes re-learned—is the importance of being in businesses where tailwinds prevail rather than headwinds.

With imports exceeding exports, the world is doing the savings for us. China, with a much higher savings rate, will grow faster than us, and it probably needs to do so.

Buffett chimed in that running a budget deficit of 10% of GDP is not sustainable.

Both Buffett and Munger are betting on higher, and maybe a lot higher inflation in the years to come.

In thinking about markets, it is important to remember that markets are there to serve you, not instruct you.

For his successor, Buffett emphasized that proven capital allocation abilities would be the key.

It is much easier to pick the relative strength of Coca-Cola than it is to pick a winner in software.

Buffett concluded that you can learn a lot about the durability of the economics of a business by observing price behavior.

Diversification is a protection against ignorance, a confession that you do not know the businesses you own.

one key element of a wonderful business: the cost structure.

The moat represents a barrier to competition and could be low production costs, a trademark, or an advantage of scale or technology.

The valuation picture is very much affected by our zero-based interest rate structure. Clearly, stocks are worth far more when government bonds yield 1% than when they yield 5%.

Yet he knew that stocks would be better than bonds or cash over the long run.

Buffett emphasized that the ability to generate cash and reinvest is critical. He noted that it is the ability to generate cash that gives Berkshire its value.

Buffett believes that real risk comes from the nature of certain kinds of businesses, by the simple economics of the business and from not knowing what you’re doing.

The idea of finding talented people to do what they do best is one of Buffett’s driving principles.

Our basic principle is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun. p217

Buffett’s formula for happiness is simple: “Do what I like with people I like.” He noted that he learned early in life that his favorite employer was himself. It avoids aggravation.

With artificial intelligence, Buffett observed that more change will be coming. Almost certainly it will cause less employment in certain areas while being good for society overall.

Instead, he takes those coupons from his low-return bond and—if inclined to reinvest—looks for the highest return with safety currently available.  Good money is not thrown after bad.

Buffett chimed in that most buybacks are done at any price, which makes no sense. Very rarely do you see metrics to govern the prices paid. Buybacks above intrinsic value destroy value.

At their best, conglomerates enable the tax efficient transfer of cash from businesses that cannot use the money intelligently to those that can. Berkshire is a very rational conglomerate.

Buffett wanted to make sure that Nebraska got their sales tax. He was adamant about making sure that Berkshire paid—not more taxes than it had to, but the taxes that it was responsible for.

All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks.

At the same time, he held firm that it doesn’t serve to make decisions in anger. He quoted Berkshire board member Tom Murphy: “You can always tell a man to go to hell tomorrow if it’s such a good idea.

When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.

Buffett believed the rating agencies are good businesses: there are few competitors, they affect a large segment of the economy and they don’t require much capital (though they are still very much attackable).

He recommended realism in defining one’s circle of competence and discipline to stay within the circle. He added that it helps to insulate yourself from popular opinions. You’re better off sitting and thinking.6 Coping

Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.

Buffett reminded folks that to buy a stock is to buy part ownership of a business. Don’t get hung up on daily price quotes. Instead, think about business performance and what you would pay for the business, just as you would a farm.

As Munger put it, “Basically, we’re a hedgehog that knows one big thing. If you generate float at 3% per annum and buy businesses that earn 13% per annum with the proceeds of that float, we have figured out that’s a pretty good position to be in.

He said he doesn’t really care whether they’re buying into raw-material-intensive businesses, people-intensive businesses or capital-intensive businesses. The key is to understand a company’s costs and why it’s got a sustainable edge against its competitors.

Buffett believes that real risk comes from the nature of certain kinds of businesses, by the simple economics of the business and from not knowing what you’re doing. If you understand the economics and you know the people, then you’re not taking much risk. For

At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years (reproduced at the end of this letter) and call me when they wish. And their wishes do differ: There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A “hire well, manage little” code suits both them and me.

The Great Bubble ended on March 10, 2000 (though we didn’t realize that fact until some months later). On that day, the NASDAQ (recently 1,731) hit its all-time high of 5,132. That same day, Berkshire shares traded at $40,800, their lowest price since mid-1997.

When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.

The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.

The accountants' job is to record, not to evaluate. The evaluation job falls to investors and managers. Accounting numbers, of course, are the language of business and are of enormous help to anyone evaluating the worth of a business and tracking its progress. Charlie and I would be lost without these numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it. p198

Munger shared that it helps to have a passionate interest in knowing why things are happening. That cast of mind over a long time, he asserted, will improve its ability to cope with reality. Those that don’t ask why are destined for failure, even those with very high IQs.

Productive assets such as farms, real estate and, yes, business ownership produce wealth — lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees.

financial markets will become divorced from reality — you can count on that. More Jimmy Lings will appear. They will look and sound authoritative. The press will hang on their every word. Bankers will fight for their business. What they are saying will recently have “worked.” Their early followers will be feeling very clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is ---zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.

Buffett also shared some of his classic bits of wisdom about growing wealth. Spend less than what you make. Know and stay within your circle of competence. The only businesses that matter are the ones you put your money in. Keep learning over time. Don’t lose. Insist on a margin of safety.

As a value investor, your ideal situation is to find a company increasing its intrinsic value. Ideally, the company would be one with a declining stock price, thus creating an even better bargain as time unfolds. No one has employed these principles more effectively than Buffett and Munger.

The most common cause of low prices is pessimism—some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.

The best protection against inflation, according to Buffett, is your own earning power. If you constantly increase your earning power, you’ll be sure to get your share of the economic pie. The next best thing is to own wonderful businesses, especially those that have low capital requirements.

Buffett explained that buying a business is much like buying a bond with no maturity and with a blank coupon. You must write in the coupon, and the accuracy of that coupon is the essence of intelligent investing. If you cannot guess the coupon with any accuracy, then do not invest in the business.

We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price. 1977

Warren Buffett, the legendary investor and one of the wealthiest men in the world, has used exactly the attributes we’ve explored in this chapter—intellectual persistence, prudent thinking, and the ability to see and act on warning signs—to make billions of dollars for himself and the shareholders in his company, Berkshire Hathaway. Buffett is known for thinking carefully when those around him lose their heads. “Success in investing doesn’t correlate with IQ,” he has said. “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.

Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and 1980s, dismissively calling powerful facts that refuted it “anomalies.” (I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.)

Warren Buffett, chairman of Berkshire Hathaway and investor of legendary repute: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Nevertheless, their dishonesty upset Buffett. They were trying to chisel him out of 12.5 cents per share. So Buffett went the other way and started buying increasingly more shares of Berkshire until he took control. He then booted out the guy who had tried to chisel him out. In 1964, Warren Buffett took control of that small New England textile firm, and it became his new base for making investments.

We do not follow the common practice of talking one-on-one with large institutional investors or analysts, treating them instead as we do all other shareholders. There is no one more important to us than the shareholder of limited means who trusts us with a substantial portion of his or her savings. As I run the company day-to-day — and as I write this letter — that is the shareholder whose image is in my mind.

While reading, you may wonder, If Berkshire got out of the market, shouldn’t I do the same? or If Berkshire bought it, should I buy it too? Buffett and Munger are clear in their advice—people should learn from them and model their advice rather than copy their behavior. The main reason is this: Unless you find yourself in the enviable position that Berkshire operates in, you would do well not to copy its moves.

I do wish, however, that Ms. Olson would give me some credit for the progress I’ve already made. In 1944, I filed my first 1040, reporting my income as a thirteen-year-old newspaper carrier. The return covered three pages. After I claimed the appropriate business deductions, such as $35 for a bicycle, my tax bill was $7. I sent my check to the Treasury and it — without comment — promptly cashed it. We lived in peace.

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

But we will never allow Berkshire to become some monolith that is overrun with committees, budget presentations and multiple layers of management. Instead, we plan to operate as a collection of separately-managed medium-sized and large businesses, most of whose decision-making occurs at the operating level. Charlie and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and setting their compensation.

In a fascinating digression, Buffett noted that “the fact that you are being obsoleted does not mean you should go into the successor business.” As an example, he explained that if you were a person of vision in the passenger train business in 1930, you might have seen the coming of the airplane. But the answer was not to get into the airline business, which is a terrible business. The answer was to get out of the passenger business altogether.

Year-to-year variances, however, cannot consistently be in our favor. Even if our partially-owned businesses continue to perform well in an economic sense, there will be years when they perform poorly in the market. At such times our net worth could shrink significantly. We will not be distressed by such a shrinkage; if the businesses continue to look attractive and we have cash available, we simply will add to our holdings at even more favorable prices.

Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained. By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a long- term investment in common stocks. At that time, even a 1% annual rate of inflation between 2012 and 2017 would have decreased the purchasing-power of the government bond

If you've thought that investment advisors were hired to invest, you may be bewildered by this technique. After buying a farm, would a rational owner next order his real estate agent to start selling off pieces of it whenever a neighboring property was sold at a lower price? Or would you sell your house to whatever bidder was available at 9:31 on some morning merely because at 9:30 a similar house sold for less than it would have brought on the previous day? p213

The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage.  As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed.  Such a supply-excess condition appears likely to prevail most of the time in the textile industry, and our expectations are for profits of relatively modest amounts in relation to capital.

In a revealing aside, Buffett admitted that years ago he was terrified of public speaking. He got physically ill at the thought. He said he even signed up for a $100 Dale Carnegie course but cancelled the check when he got home. Later, he did a communication course in Omaha. Doing it with others in the same boat helped him to “get outside of himself.” He’s very glad he did it, noting that effective communication is under taught, and recommended that many could benefit by forcing themselves to learn public speaking at an early age.

We prefer: large purchases (at least $5 million of after-tax  earnings), demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations), businesses earning good returns on equity while employing little or no debt, management in place (we can’t supply it), simple businesses (if there’s lots of technology, we won’t understand it), 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).

Charles Munger, right-hand adviser to Warren Buffett, the richest man on the planet, is known for his unparalleled clear thinking and near-failure-proof track record. How did he refine his thinking to help build a $3 trillion business in Berkshire Hathaway? The answer is “mental models,” or analytical rules-of-thumb4 pulled from disciplines outside of investing, ranging from physics to evolutionary biology. Eighty to 90 models have helped Charles Munger develop, in Warren Buffett’s words, “the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence.

Over the years, Charlie and I have seen all sorts of bad corporate behavior, both accounting and operational, induced by the desire of management to meet Wall Street expectations. What starts as an “innocent” fudge in order to not disappoint “the Street” — say, trade-loading at quarter-end, turning a blind eye to rising insurance losses, or drawing down a “cookie-jar” reserve — can become the first step toward full-fledged fraud. Playing with the numbers “just this once” may well be the CEO’s intent; it’s seldom the end result. And if it’s okay for the boss to cheat a little, it’s easy for subordinates to rationalize similar behavior.

During 1983 our book value increased from $737.43 per share to $975.83 per share, or by 32%. We never take the one-year figure very seriously. After all, why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off? Instead, we recommend not less than a five-year test as a rough yardstick of economic performance. Red lights should start flashing if the five-year average annual gain falls much below the return on equity earned over the period by American industry in aggregate. (Watch out for our explanation if that occurs as Goethe observed, “When ideas fail, words come in very handy.")

Thinking, Fast and Slow by Daniel Kahneman The Four Pillars of Investing by William Bernstein The Little Book of Common Sense Investing by John Bogle The Little Book of Behavioral Investing by James Montier Stocks for the Long Run by Jeremy Siegel The Warren Buffett Portfolio by Robert Hagstrom Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe Investing: The Last Liberal Art by Robert Hagstrom Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin Devil Take the Hindmost by Edward Chancellor The Most Important Thing by Howard Marks All About Asset Allocation by Rick Ferri Winning the Loser's Game by Charles Ellis

Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value—and even thought, itself—were of no importance in investment activities. (We are enormously indebted to those academics: what could be more advantageous in an intellectual contest—whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?)

Basically, Graham breaks the art of investing down into two simple variables – price and value. Value is what a business is worth. Price is what you have to pay to get it. Given the stock market’s manic-depressive behavior, numerous occasions arise where a business’ market price is distinctly out of line with its true business value. In such instances, an investor may be able to purchase a dollar of value for just 50 cents. Note that there is no mention here of interest rates, economic forecasts, technical charts, market cycles, etc. The only issues are price and value. I should also note that Graham emphasizes a large margin of safety. The strategy is not to buy a dollar of value for 97 cents. Rather, the gap should be dramatic so as to absorb the effects of miscalculation and worse-than-average luck.

Since I entered the business world, conglomerates have enjoyed several periods of extreme popularity, the silliest of which occurred in the late 1960s. The drill for conglomerate CEOs then was simple: By personality, promotion or dubious accounting — and often by all three — these managers drove a fledgling conglomerate’s stock to, say, 20 times earnings and then issued shares as fast as possible to acquire another business selling at ten-or-so times earnings. They immediately applied “pooling” accounting to the acquisition, which — with not a dime’s worth of change in the underlying businesses — automatically increased per-share earnings, and used the rise as proof of managerial genius. They next explained to investors that this sort of talent justified the maintenance, or even the enhancement, of the acquirer’s p/e multiple. And, finally, they promised to endlessly repeat this procedure and thereby create ever-increasing per-share earnings.

Buffett declared the best inflation hedge is a company with a wonderful product that requires little capital to grow. As a test, he invited each of us to look at our own earning ability. In inflation, your compensation can go up without any additional investment. As a business example, Buffett noted that when See’s Candy was purchased in 1971, it had the revenues of $25 million and sold 16 million pounds of candy annually with $9 million in tangible assets. Today, See’s sells $300 million of candy with $40 million of tangible assets. Berkshire needed to invest only $31 million to generate a more than 10-fold increase in revenues. In aggregate, Buffett noted that Berkshire has earned $1.5 billion in profits at See’s over the years. See’s inventory turns fast, has no receivables and has little fixed investment – a perfect inflation hedge. Buffett allowed that if you have tons of receivables and inventory, that’s a lousy business in inflation. The railroad and MidAmerican Energy both have these undesirable characteristics, but that is offset by their utility to the economy and subsequent allowable returns. Buffett rued that there simply aren’t enough “See’s Candys” to buy. Buffett added that being an investor has made him a better businessman and that being a businessman has made him a better investor.(125) Munger noted that they didn’t always know this inflation-business element, which shows how continuous learning is so important.

GEICO’s advertising budget soon exceeded the ad spend of the rest of the auto insurance industry combined.

Seriously, he noted the importance of a good mental attitude, to love what you do and to do it with other people who love what they do. He said he feels blessed in so many ways, especially with great partners and great managers.

For one, focus on intrinsic value growth, not reported earnings. Again, it’s not what the numbers are but what they mean that matters.

Instead, this is a three-decade, year-by-year analysis of history unfolding. You will be able to view Buffett and Munger’s decision-making process from a unique vantage point.

Over the last three decades, Buffett has consistently sought to own either all or part of good businesses for a fair to bargain price. The results have been awe-inspiring.

Buffett said he pays no attention to economic outlooks. His decisions are based simply on intrinsic business values.

Michaelis prefers the earnings power approach. If a company earns very high returns year after year, he explained, then, ultimately, those will be the shareholders’ returns as well.

Always remember that when you are buying a stock, you are really buying part ownership of a business.

He simply finds decades-long records of excellent performance. Then he seeks to retain them in a way that maintains their enthusiasm for the work.

Buffett opined that “a chief risk officer is an employee that makes you feel good while you do dumb things.

Buffett says it’s a political phenomena, not an economic one. As long as politicians lack self-restraint, they will print a lot of money at some point. Though it is probably two years or more down the road, Buffett sees “substantial inflation” and “rates we’ve never seen before.

knowing your limitations and the limitations of your information seems to be the key. Or as Keynes said, “I would rather be vaguely right than precisely wrong.

Value investing is looking for a “mispriced gamble.

It taught him about the power of brands and the virtues of companies that don’t require a lot of capital to grow. Selling chocolate doesn’t require a lot of innovation.

We hope that by the time you’ve finished this book, these principles will be engrained in your consciousness. We hope that your investment decisions will take on a quality and depth that give you a serious competitive edge.

Buffett noted that such a person would need a “money mind.” Even someone with an IQ of 140 can have a very different mind where they do poorly at investing. It takes a money mind to think well about money and investing.

Buffett noted that, when the world is fearful, people have a hard time believing things will get better. Berkshire has no such trouble.

While intelligence is helpful, Buffett and Munger asserted that having the proper temperament was far more critical.

Buffett concluded, “This is not something that causes me to salivate.

Buffett quoted Emerson, “The power that resides within you is new in nature.

Munger observed that it’s a problem to prevent success and wealth from creating your demise. General Motors was the most successful company in the world at one time and then became a victim of its success with large unionization and very tough competition eventually wiping out the shareholders.

Being able to think and invest very long term and not worry about current earnings or Wall Street analysts can be a major competitive advantage in certain businesses.

As Buffett summed up, “If investors only had to study the past, the richest people would be librarians.

The Ultimate Inflation Hedge What can we do then to mitigate the effects of inflation? The same thing that Buffett and Munger would do if there were no inflation. We’d buy great businesses with excellent management at a fair to bargain price and leave them alone. While inflation is still undesirable, well-run businesses that employ relatively little capital, that throw off lots of cash and that have pricing flexibility will cope well with inflation.

Or as Keynes said, “I would rather be vaguely right than precisely wrong.

Bill Gates understood this well. When Microsoft was a young company, he said he “came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll even if we didn’t get any payments coming in.” Warren Buffett expressed a similar idea when he told Berkshire Hathaway shareholders in 2008: “I have pledged—to you, the rating agencies and myself—to always run Berkshire with more than ample cash ... When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.

Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.

At our annual meetings, someone usually asks “What happens to this place if you get hit by a truck?” I’m glad they are still asking the question in this form. It won’t be too long before the query becomes: “What happens to this place if you don’t get hit by a truck?” —Warren E. Buffett, Berkshire Hathaway Annual Letter to Shareholders, 19931

concluded, quoting Bertrand Russell, “Most men would rather die than think. Many have.

To understand a concept or idea better Students new to economics sometimes struggle to grasp the concept of the marginal propensity to consume (abbreviated as MPC). MPC is the proportion of additional disposable income (income after taxes and transfers) that an individual consumes. Even harder to understand is what a specific numerical value for MPC implies. In such situations, it helps to go to extreme cases to gain some intuitive feel for what the numbers mean. In this case, since the MPC is a proportion, the two extremes are 0 and 1. An MPC of 0 means that if an individual received an extra $100 of income, she would spend none of it. Think of Warren Buffett. He already has plenty of money to consume what he wants. If Berkshire Hathaway were to pay him an extra $100, he would not change his consumption. At the other extreme, an MPC of 1 means that if an individual received an extra $100 of disposable income, he would spend it all. Think of someone in extreme poverty. An extra $100 could go immediately to satisfy his basic needs. These extreme cases can help ground our understanding of MPC.[2]

A by-product of our managerial style is the ability it gives us to easily expand Berkshire’s activities. We’ve read management treatises that specify exactly how many people should report to any one executive, but they make little sense to us. When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap. Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handle.

At Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he's own 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: "If you remove just a few of Berkshire's top investments, its long-term track record is pretty average.

In Berkshire Hathaway’s 2007 letter to shareholders,2 Warren Buffett explains that the kind of companies he likes to invest in are ‘companies that have a) a business we understand; b) favourable long-term economics; c) able and trustworthy management; and d) a sensible price tag. A truly great business must have an enduring “moat” that protects excellent returns on invested capital.

Long-term competitive advantage in a stable industry is what we seek in a business’. On the subject of For how long should an investor hold the shares they buy, Warren Buffett, in 1988’s Berkshire Hathaway’s letters to shareholders stated, ‘When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.

you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his... Mr. Market has another endearing characteristic: He doesn't mind being ignored. p 209

Despite the overriding importance of inflation in the investment equation, we will not punish you further with another full recital of our views; inflation itself will be punishment enough. (Copies of previous discussions are available for masochists.) But, because of the unrelenting destruction of currency values, our corporate efforts will continue to do a much better job of filling your wallet than of filling your stomach.

WHO’s budget is highly earmarked, it is “driven by what [she calls] donor interests.”126 According to McGoey, “According to its charter, the WHO is meant to be accountable to member governments. The Gates Foundation, on the other hand, is accountable to no one other than its three trustees: Bill, Melinda, and Berkshire Hathaway CEO Warren Buffett.

How the record has been achieved is crucial, as is the manager’s understanding of — and sensitivity to — risk (which in no way should be measured by beta, the choice of too many academics).

You might think that institutions, with their large staffs of highly-paid and experienced investment professionals, would be a force for stability and reason in financial markets. They are not:

Beware of geeks bearing formulas.” —Warren Buffett, CEO of Berkshire Hathaway

It’s easy to overlook what I consider to be the critical lesson of the Mrs. B saga: at 93, Omaha based Board Chairmen have yet to reach their peak. Please file this fact away to consult before you mark your ballot at the 2024 annual meeting of Berkshire.

when accounting appears confusing, avoid the company.

Berkshire Hathaway Public Holdings April 4, 2012 Company Holding Value Stake The Coca-Cola Company (KO) $14.69 billion 8.8% International Business Machines (IBM) $13.17 billion 5.4% Wells Fargo (WFC) $12.99 billion 13.0% American Express (AXP) $8.69 billion 2.8% Proctor & Gamble $5.16 billion 2.8% Kraft Foods $3.32 billion 4.9% Wal-Mart Stores $2.36 billion 1.1% ConocoPhillips $2.22 billion 2.3% U.S. Bancorp $2.16 billion 2.3% Johnson & Johnson $1.90 billion 1.1% Moody’s Corp $1.20 billion 12.8% DIRECTV $995 million 2.9% Washington Post Co. $645 million 22.4% M&T Bank Corp $465 million 4.3% Costco Wholesale Corp $386 million 1.0% Visa Inc. $341 million 0.35% Intel Corp. $321 million 0.23% CVS Caremark $315 million 0.55% USG Corp $283 million 16.2% General Dynamics $281 million 1.1% DaVita Inc. $233 million 2.9% Dollar General $210 million 1.3% Torchmark $208 million 4.2% MasterCard Inc. $174 million 0.3% Verisk Analytics $162 million 1.9% General Electric $153 million 0.07% Sanofi SA $153 million 0.15% Liberty Media $149 million 1.4% United Parcel Service $114 million 0.15% GlaxoSmithKline $68 million 0.06% Bank of New York Mellon $43 million 0.15% Ingersoll Rand $26 million 0.2% Gannett $26 million 0.73% Source: CNBC, Warren Buffet Watch.

Graham Newman reports years ago. “Coat-tailing” was the term.

As long as politicians lack self-restraint, they will print a lot of money at some point.

Buffett said he pays no attention to economic outlooks. His decisions are based simply on intrinsic business values. Interestingly,

Everyone talks about the big money made in realestate, but they forget to talk about the big money lost in real estate.” Foreign

Buffett also reaffirmed that they like John Gutfreund, Chairman of Salomon Brothers, very much. Munger (whose favorite expression seemed to be, “It’s one tough business.”) made one of his only enthusiastic comments of the day: “Salomon is deep in talent—the ultimate meritocracy—and with that talent may do very well over time.” It appears to me that Salomon Brothers, which is selling below book value, may be an excellent long-term core holding. On

rather than worry about economic projections, these brilliant investors focus on finding good businesses at bargain prices within our resilient economy. On

To a question about what books to read, Munger replied that he is a biography nut and heartily recommended biographies as a way to “make friends among the eminent dead.” Buffett quipped, “And they don’t talk back.” Munger

Buffett added that there is a big difference between identifying a growth industry and minting money. He noted that AT&T’s return on equity over the years has been poor. Change has hurt the company more than it has helped. Similarly,

average college student has the same standard of living as he does. Same food. No important difference in clothes, cars, TVs.

Asked why he is on TV so much, Buffett responded that he likes having the electronic record, so there is no chance of him being misquoted or misunderstood. If he’s on Charlie Rose, he knows the record will be permanent and will be exactly what he said. —EXCERPT FROM OUR NOTES AT THE 2010 SHAREHOLDERS MEETING

Buffett returned to a concept he has brought up numerous times, relating that “if share of mind exists, the market will follow.” He

Munger opined that many corporations are run stupidly, forcing things down from headquarters, worrying about quarterly profits. For

With that focus on quality and discipline, NI has been profitable nearly every year, a record that Buffett claimed has left others in the dust. The key has been having incentives in place to get the right employee behavior. And for that, you must think the business through. Munger

Buffett asserted that the tendency to project out very high rates of growth has caused investors to lose tons of money. The “new economy” bubble was characterized by many such projections.4 Buffett

Buffett noted that investing is really all about laying out cash now to get more back later. Buffett

Munger noted the common error is not thinking through the consequences of the consequences.6

A SHAREHOLDER ONCE ASKED BUFFETT how he spent his days. Warren said he mostly read and talked on the telephone. "That's what I do. Charlie, what do you do?" "That [question] reminds me very much of a friend of mine in World War II in a group that had nothing to do," replied Munger. "A general once went up to my friend's boss, we'll call him Captain Glotz. He said, 'Captain Glotz, what do you do?' His boss said, 'Not a damn thing.' " "The General got madder and madder and turned to my friend and said, 'What do you do?' " "My friend said, 'I help Captain Glotz.' That's the best way to describe what I do at Berkshire.

A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.” Charles T. Munger Frequently overshadowed by Warren Buffett, his partner in the $300 billion Berkshire Hathaway holding company, Charlie Munger is a quiet, reclusive figure. Rarely making public appearances, the unostentatious billionaire spends most of his time as Buffett does: reading, thinking, and managing Berkshire Hathaway from his home in Southern California. Buffett and Munger have, over the course of their careers, amassed a multi-billion dollar empire with a brilliant-in-its-simplicity investment strategy: value investing.

humanity will always include a certain percentage of psychotics, megalomaniacs and religious fanatics. However, where the deranged few could do little more than throw rocks for centuries, modern technology has enormously increased our ability to inflict damage. He

systems work better when perceived as fair. Buffett launched into an intriguing thought problem he called “the ovarian lottery.” You are to be born in 24 hours. You are also to write all the rules that will govern the society in which you will live. However, you do not know if you will be born bright or retarded, black or white, male or female, rich or poor, able or disabled. How would you write the rules? Buffett

He got the idea to add a mental compound interest as well. So he decided he would sell himself the best hour of the day to improving his own mind, and the world could buy the rest of his time. He

The modern Berkshire Hathaway that he had created churned out new beads for the rosary almost like a clockwork. Buffett’s hunt for things to buy had become more ambitious, free of the cigar butts and lawsuits of the decades before. The great engine of compounding worked as a servant on his behalf, at exponential speed and under the gathering approval of a public gaze. The method was the same: estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work. Anyone could understand these simple ideas, but few could execute them. Even though Buffett made the process look effortless, the technique and discipline underlying it actually did involve an enormous amount of work for him and his employees. As

The Economics of Property-Casualty Insurance With the acquisition of General Re — and with GEICO’s business mushrooming — it becomes more important than ever that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most important of all, the long-term outlook for both of these factors. To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money. A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Errors of estimation, usually innocent but sometimes not, can be huge. The consequences of these miscalculations flow directly into earnings. An experienced observer can usually detect large-scale errors in reserving, but the general public can typically do no more than accept what's presented, and at times I have been amazed by the numbers that big-name auditors have implicitly blessed. As for Berkshire, Charlie and I attempt to be conservative in presenting its underwriting results to you, because we have found that virtually all surprises in insurance are unpleasant ones. The table that follows shows the float generated by Berkshire’s insurance operations since we entered the business 32 years ago. The data are for every fifth year and also the last, which includes General Re’s huge float. For the table we have calculated our float — which we generate in large amounts relative to our premium volume — by adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting agents balances, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance. (Got that?)

Year Average Float (in $ millions) 1967 17 1972 70 1977 139 1982 221 1987 1,267 1992 2,290 1997 7,093 1998 22,762 (yearend)