Buffett Stock Quotes

If you aren't thinking about owning a stock for ten years, don't even think about owning it for ten minutes.

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

Sail the main course in a simple sturdy craft. Keep her well stocked with short stories and long laughs. Go fast enough to get there but slow enough to see. Moderation seems to be the key.

Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.

The stock market is a device for transferring money from the impatient to the patient.

The attitude of our managers vividly contrasts with that of the young man who married a tycoon's only child, a decidedly homely and dull lass. Relieved, the father called in his new son- in-law after the wedding and began to discuss the future: Son, you're the boy I always wanted and never had. Here's a stock certificate for 50% of the company. You're my equal partner from now on.' Thanks, dad.' Now, what would you like to run? How about sales?' I'm afraid I couldn't sell water to a man crawling in the Sahara.' Well then, how about heading human relations?' I really don't care for people.' No problem, we have lots of other spots in the business. What would you like to do?' Actually, nothing appeals to me. Why don't you just buy me out?

If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.

Here is an all-too-brief summary of Buffett’s approach: He looks for what he calls “franchise” companies with strong consumer brands, easily understandable businesses, robust financial health, and near-monopolies in their markets, like H & R Block, Gillette, and the Washington Post Co. Buffett likes to snap up a stock when a scandal, big loss, or other bad news passes over it like a storm cloud—as when he bought Coca-Cola soon after its disastrous rollout of “New Coke” and the market crash of 1987. He also wants to see managers who set and meet realistic goals; build their businesses from within rather than through acquisition; allocate capital wisely; and do not pay themselves hundred-million-dollar jackpots of stock options. Buffett insists on steady and sustainable growth in earnings, so the company will be worth more in the future than it is today.

Buffett has said that the stock market is designed to transfer money “from the active to the patient.

Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood 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 those standards-so when you see one that qualifies, you should buy a meaningful amount of stock.

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

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

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.

There are certain things that cannot be adequately explained to a virgin either by words or pictures.

1. A stock must be managed by vigilant leaders. 2. A stock must have long-term prospects. 3. A stock must be stable and understandable. 4. A stock must be undervalued.

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.

Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market. “If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors.

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.

Number one rule of Wall Street: Nobody - I don't care if you're Warren Buffett or Jimmy Buffett - Nobody knows if the stock's going to go up, down, sideways, or in fucking circles, least of all stockbrokers. It's all a Fugazzi. You know what a Fugazzi is?

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.

You have to understand accounting and you have to understand the nuances of accounting. It's the language of business and it's an imperfect language, but unless you are willing to put in the effort to learn accounting - how to read and interpret financial statements - you really shouldn't select stocks yourself. - Warren Buffett

If the price of a particular stock is going up, we assume good things are happening; if the price starts to go down, we assume something bad is happening, and we act accordingly. It’s a poor mental habit, and it is exacerbated by another: evaluating price performance over very short periods of time. Not only are we depending solely on the wrong thing (price), Buffett would say, but we’re looking at it too often and we’re too quick to jump when we don’t like what we see. This double-barreled foolishness—this price-based, short-term mentality—is a flawed way of thinking, and it shows up at every level in our business. It is what prompts some people to check stock quotes every day, sometimes every hour.

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.

On 3 timeless ideas for investing Benjamin Graham, three fundamentally basic ideas: 1. You should look at stocks as part of ownership of a business. 2. You should look at market fluctuations in terms of his "Mr. Market" example & make them your friend rather than your enemy by essentially profiting from folly rather participating in it, & finally, 3. The 3 most important words in investing are "margin of safety" - ...always building a 15,000 pound bridge if you're going to be driving 10,000 pound truck across it...

gold standard,” which the United States had dropped in 1933. Ever since, the Treasury had been printing money freely to finance first the New Deal and now the war. Howard feared that someday the United States might wind up like Germany in the 1920s, when people had to cart wheelbarrows of money down the street to buy a head of cabbage—the direct result of Germany being forced to deplete its gold stock to pay reparations after World War I.1 The economic chaos that resulted was one of the major factors that had led to Hitler.

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.

One example of a high-tech company that submits to a Graham type of analysis is Amazon.com. Though it does business exclusively on the Web, Amazon is essentially a retailer, and it may be evaluated in the same way as Wal-Mart, Sears, and so forth. The question, as always, is, does the business provide an adequate margin of safety at a given market price. For much of Amazon’s short life, the stock was wildly overpriced. But when the dot-com bubble burst, its securities collapsed. Buffett himself bought Amazon’s deeply discounted bonds after the crash, when there was much fearful talk that Amazon was headed for bankruptcy. The bonds subsequently rose to par, and Buffett made a killing.

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.

From peak to trough (June 1998 through March 2000), Warren Buffett's Berkshire Hathaway fell 51% in value! During this time, I estimated that Buffett's net worth fell by more than $10 billion. How much Berkshire did Buffett sell? How much Cisco did he buy? Zero point zero. Not tempted by tech stocks, Buffett remained committed to value investing, and it paid off.1 One of the keys to successfully managing your money is to accept, like Buffett did, that there will be times when your style is out of favor or when your portfolio hits a rough patch. It's when you start to reach for opportunities that you can do serious damage to your financial well‐being.

Highly profitable stocks only beat the market if Buffett’s moat protects the profits. Without the moat, highly profitable stocks will get beaten up by the competition. Mean reversion acts on profits to drag down winners and push up losers. Investors should use some common sense and natural skepticism about profit charts that march all the way to heaven.

But it is the long-term merits of the index fund—broad diversification, weightings paralleling those of the stocks that comprise the market, minimal portfolio turnover, and low cost—that commend it to wise investors. Consider these words from perhaps the wisest investor of all, Warren E. Buffett, from the 1996 Annual Report of Berkshire Hathaway Corporation: 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.

You can gain great insights about investing from a careful study of Buffett’s Generals. He was constantly appraising the value of as many stocks as he could find, looking for the ones where he felt he had a reasonable ability to understand the business and come up with an estimate for its worth. With a prodigious memory and many years of intense study, he built up an expansive memory bank full of these appraisals and opinions on a huge number of companies. Then, when Mr. Market offered one at a sufficiently attractive discount to its appraised value, he bought it; he often concentrated heavily in a handful of the most attractive ones. Good valuation work and proper temperament have always been the two keys pillars of his success as an investor. Buffett

Businesses are nothing more than purchasing stocks, and providing loans is nothing more than purchasing bonds.

The course of the stock market will determine, to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on what should happen, not when it should happen.”7 This

The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. At the one extreme, the analyst exclusively oriented to qualitative factors would say, “Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price will take care of itself.” On the other hand, the quantitative spokesman would say, “Buy at the right price and the company (and stock) will take care of itself.” As is so often the pleasant result in the securities world, money can be made with either approach. And, of course, any analyst combines the two to some extent—his classification in either school would depend on the relative weight he assigns to the various factors and not to his consideration of one group of factors to the exclusion of the other group. Interestingly enough, although I consider myself to be primarily in the quantitative school (and as I write this no one has come back from recess—I may be the only one left in the class), the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a “high-probability insight.” This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side—the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions. As

a declining Dow gives us our chance to shine and pile up the percentage advantages which, coupled with only an average performance during advancing markets, will give us quite satisfactory long-term results. Our target is an approximately ½% decline for each 1% decline in the Dow and if achieved, means we have a considerably more conservative vehicle for investment in stocks than practically any alternative.8 Buffett

At age forty-seven, Warren had already accomplished everything he had ever imagined he could want. He was worth $72 million. He ran a company that was worth $135 million.41 His newspaper had won the two highest prizes in journalism. He was one of the most important men in Omaha and increasingly prominent at a national level. He was serving on the boards of the largest local bank, the Washington Post, and a number of other companies. He had been CEO of three companies and had bought and sold successfully more stocks than most people could name in a lifetime. Most of his original partners were now enormously rich. All he wanted was to keep on making money for the thrill of it without changing anything else about his life. He

CBS spent much of the 1960s and 1970s taking the enormous cash flow generated by its network and broadcast operations and funding an aggressive acquisition program that led it into entirely new fields, including the purchase of a toy business and the New York Yankees baseball team. CBS issued stock to fund some of these acquisitions, built a landmark office building in midtown Manhattan at enormous expense, developed a corporate structure with forty-two presidents and vice presidents, and generally displayed what Buffett’s partner, Charlie Munger, calls “a prosperity-blinded indifference to unnecessary costs.”1

Warren Buffett invests according to four simple principles. Vigilant leadership Long-term prospects Stock stability Buy at attractive prices. One of the greatest strengths of Warren Buffett is his ability to make things simple. As you can see above, his principles are straightforward and easy to remember. As you navigate your way through this book, always keep these four principles at the forefront of your mind. Ensuring that all four are met at all times is paramount to anything else.

THE FOLLOWING DAY, the Apple share price fell 10 percent and the company lost $75 billion in value. The single-day decline was Apple’s biggest in six years and sank its valuation to a level it had not seen since February 2017. It shook the U.S. economy. The company had become one of the most widely held institutional stocks, included in mutual funds, index funds, and 401(k)s. Thanks in part to Warren Buffett and Berkshire Hathaway, everyone from grandmothers in Florida to autoworkers in the Midwest had an interest in Apple’s business. They all suffered.

But being short something where your loss is unlimited is quite different than being long something that you’ve already paid for. And it’s tempting. You see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued. I mean there — it’s the nature of securities markets to occasionally promote various things to the sky, so that securities will frequently sell for 5 or 10 times what they’re worth, and they will very, very seldom sell for 20 percent or 10 percent of what they’re worth. So, therefore, you see these much greater discrepancies between price and value on the overvaluation side. So you might think it’s easier to make money on short selling. And all I can say is, it hasn’t been for me. I don’t think it’s been for Charlie. It is a very, very tough business because of the fact that you face unlimited losses, and because of the fact that people that have overvalued stocks — very overvalued stocks — are frequently on some scale between promoter and crook. And that’s why they get there. And once there — And they also know how to use that very valuation to bootstrap value into the business, because if you have a stock that’s selling at 100 that’s worth 10, obviously it’s to your interest to go out and issue a whole lot of shares. And if you do that, when you get all through, the value can be 50. In fact, there’s a lot of chain letter-type stock promotions that are sort of based on the implicit assumption that the management will keep doing that. And if they do it once and build it to 50 by issuing a lot of shares at 100 when it’s worth 10, now the value is 50 and people say, “Well, these guys are so good at that. Let’s pay 200 for it or 300,” and then they could do it again and so on. It’s not usually that — quite that clear in their minds. But that’s the basic principle underlying a lot of stock promotions. And if you get caught up in one of those that is successful, you know, you can run out of money before the promoter runs out of ideas. In the end, they almost always work. I mean, I would say that, of the things that we have felt like shorting over the years, the batting average is very high in terms of eventual — that they would work out very well eventually if you held them through. But it is very painful and it’s — in my experience, it was a whole lot easier to make money on the long side.

Vigilant leadership Long-term prospects Stock stability Buy at attractive prices.

the difference between interest rates creates a disparity between price and value. This disparity is where an investor makes money—especially in the stock market

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers — for a time — expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.

Successful long-term investors like Warren Buffett know that bear markets are buying opportunities.

Along with his Company A and Company B teaching method, Graham used to talk about Class 1 and Class 2 truths. Class 1 truths were absolutes. Class 2 truths became truths by conviction. If enough people thought a company’s stock was worth X, it became worth X until enough people thought otherwise. Yet that did not affect the stock’s intrinsic value—which was a Class 1 truth.

Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down.

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.

Warren Buffett is one of the most successful investors of the 20th century and a self-described “value investor.” He aims to buy stocks at a discount (below intrinsic value), so that even with a worst-case scenario, he can do well. This discount is referred to as the “margin of safety,” and it’s the bedrock principle of some of the brightest minds in the investing world (e.g., Seth Klarman). It doesn’t guarantee a good investment, but it allows room for error.

it's rather interesting because one of the greatest economists of the world is a substantial shareholder in Berkshire Hathaway and has been from the very early days after Buffett was in control. His textbook always taught that the stock market was perfectly efficient and that nobody could beat it.But his own money went into Berkshire and made him wealthy. So, like Pascal in his famous wager, he hedged his bet.The iron rule of life is that only twenty percent of the people can be in the top fifth Is the stock market so efficient that people can't beat it? Well, the efficient market theory is obviously roughly right-meaning that markets are quite efficient and it's quite hard for anybody to beat the market by significant margins as a stock picker by just being intelligent and working in a disciplined way.Indeed, the average result has to be the average result. By definition, everybody can't beat the market.

Do not approach the market unless you are willing to think about stocks, first and always, as part-ownership interests in businesses. Be prepared to diligently study the businesses you own, as well as the companies you compete against, with the idea that no one will know more about your business than you do. Do not even start a focus portfolio unless you are willing to invest a minimum of five years (10 years would even be better). Never leverage your focus portfolio. An unleveraged focus portfolio will help you reach your goals fast enough. Remember, an unexpected margin call on our capital will likely wreck a well-tuned portfolio. Accept the need to acquire the right temperament and personality to become a focus investor.

Warren Buffett, the most-admired person in the investing industry has at times had a miserable family life—partly his own doing, the collateral damage of a life where picking stocks was the highest priority.

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.

All this research, says Buffett, really points you back to one central issue: “My first question, and the last question, would be, ‘Do I understand the business?’ And by understand it, I mean have a reasonably good idea of what it will look like in five or ten years from an economic standpoint.” If you aren’t comfortable answering that basic question, you shouldn’t buy the stock.

Essays of Warren Buffett: Lessons for Corporate America. “Growth

In the conclusion to his letter to the Post’s owner, Buffett therefore laid out his recommendations: Either stay the course with a bunch of big, mainstream professional fund managers and accept that the newspaper’s pension fund would likely do slightly worse than the market; find smaller, specialized investment managers who were more likely to be able to beat the market; or simply build a broad, diversified portfolio of stocks that mirrored the entire market. Buffett obliquely noted that “several funds have been established fairly recently to duplicate the averages, quite explicitly embodying the principle that no management is cheaper, and slightly better than average paid management after transaction costs.

Buffett’s 1952 memo on Cleveland Worsted Mills mentioned that the stock traded below net current asset value and had “several well-equipped mills.”98 He thought the company had ample earnings to cover the dividend, a view supported by the summary financials found in Table 1. The company paid $8.00 a share out to shareholders, and the last year the company earned below this figure was 1945.99 The income and return on capital figures were a little concerning. Like Marshall-Wells in the first chapter, Cleveland Worsted Mills was coming off the post-World War II highs and falling back to earth, earning a respectable but not extraordinary return on invested capital in 1951. Worsted was a commodity product, with shortages the sole reason for the company’s previously rising income and returns on capital. As the market normalized, the company was unlikely to earn above-average returns on capital in the future.

One of the stocks Munger persuaded Buffett to buy was British Columbia Power. Munger, who had just started running his own partnership in 1962, thought the opportunity was such an extraordinary risk-reward that he not only put his entire partnership into the company but also used a credit line from the Pacific Stock Exchange to leverage his position.181 While Buffett certainly liked the stock as well, he didn’t go as far as his impatient friend—the investment accounted for 11.2% of the Buffett Partnership at the end of 1962, its second-largest position behind Dempster Mill Manufacturing Company.182

I went to an annual meeting of Cleveland’s Worst Mill, and I flew all the way to Cleveland. I got there about five minutes late, and the meeting had been adjourned. And here I was, this kid from Omaha, twenty-two years old, with my own money in the stock. The chairman said, “Sorry, too late.” But then their sales agent, who was on the board of directors, actually took pity on me, and so he got me off on the side and talked to me and answered some questions.102

Buffett’s thinking was simple: He bought the stock because it sold for less than its net cash. Union Street Railway was a tiny company, selling for a $643,000 market capitalization and an enterprise value of negative $327,000. Discussing his rationale, he said: It had a hundred sixteen buses and a little amusement park at one time. I started buying the stock because they had eight hundred thousand dollars in treasury bonds, a couple of hundred thousand in cash, and outstanding bus tickets of ninety-six thousand dollars. Call it a million dollars, about sixty bucks a share. When I started buying it, the stock was selling around thirty or thirty-five bucks a share.128

But the company had some additional items besides the net cash. Buffett noted the outstanding tickets. All sold—but unused—tickets were a liability; they were a form of deferred revenue. The company had received the cash, but the tickets were not yet redeemed. The value of this liability remained unchanged from 1952 to 1953, suggesting the tickets were very unlikely to be utilized. Plus, since the marginal cost of an additional passenger was zero, no cash expenditure would be incurred even if a passenger used the ticket. Therefore, it was appropriate to treat the cash as ‘earned’ and to write the liability down to zero, adding another $1.61 of value. Then there were the long-term assets. While the property and equipment might be worth less than their value on the company’s books, special deposits and insurance trusts had real value that would likely be released over time. These two items would add another $53.72 of value. With the stock trading below net cash, these assets were all gravy.

Buffett’s thesis on Cleveland Worsted Mills was straightforward. The stock sold for below its net current asset value and at a bargain P/E multiple. The worsted manufacturer was consistently profitable and paid a fat dividend. By 1952, having graduated from Columbia and now an employee at Buffett-Falk, Buffett liked the stock enough to write a brief report on it, stating, “The $8 dividend provides a well-protected 7% yield on the current price of approximately $115.”86 The stock had been cheap for some time. Buffett, in fact, had held the stock in 1951, selling at a slight loss as he invested his capital in companies like GEICO and Timely Clothes. Ben Graham also liked the stock, having made the Cleveland firm a 1.5% position in the Graham-Newman fund and including the company in the 1951 edition of Security Analysis in a table titled “Six Common Stocks Undervalued in 1949,” along with Marshall-Wells.87

Greif had a quirk in its share structure that presented a valuation challenge. The company had two shares of stock, Class A and Class B, but only the A shares were publicly traded. The B shares were closely held and not exchange-traded. Like most companies with dual-class share structures, they had differing voting rights. Unlike most companies with dual-class share structures, the classes were entitled to differing dividend distributions and liquidation proceeds. The A shares—the class Buffett bought—had first rights to liquidation proceeds and dividends. Plus, the A shares were entitled to cumulative dividends while the B shares were not. The A shares would only gain voting rights if the company failed to pay the A’s entitled dividend for four quarters. However, the Class B shares received a higher split of additional dividends once the distribution exceeded a certain rate. This made calculating market capitalization figures difficult since there was no price readily available for the Class B shares.

Union Street Railway was a New Bedford, Massachusetts-based bus company. With the equity trading below the net cash on the company’s balance sheet, Union Street was a classic net-net when Buffett bought the stock. This was a small, thinly traded company with a market capitalization below $1 million. The small float meant acquiring stock required a bit of work and persistence by the young, enterprising investor. Like the other stocks discussed so far, it was cheap. But in contrast to the previous investments discussed in this book, this one was actually losing money at the time of Buffett’s purchase. Yet this stock would be a huge winner for Buffett, yielding him a dollar profit worth more than 4.5x the average household yearly income at the time. After accumulating a meaningful stake in the company, Buffett took a trip to Massachusetts to meet with the company’s president. While he did not run a proxy contest or take aggressive action to prompt a capital return, the company paid a substantial dividend shortly after his visit.109 Union Street Railway was an early lesson in how positive changes in capital allocation can lead to windfall profits.

Phil Carret, the money manager who bought the stock on Howard Buffett’s recommendation in 1946, owned it all the way to his passing at the age of 101 in 1998. Carret grew to admire Greif, calling it the best-managed company he knew of. Buffett would later call Carret a hero of his. Greif was a successful investment for Carret, as the stock went from a split-adjusted $0.68 when he bought it to $36.50 when he passed.

The balance sheet told a different story. Selling for $13.38 per share at the end of 1954—an $18.8 million market capitalization—P&R traded close to its net current asset value of $9.16 per share, a figure that included significant excess inventory. While this alone was not enough to make the stock cheap, P&R also had an off-balance-sheet asset known as culm banks, a waste material accumulated from anthracite mining which was thought to have value as a fuel source. Buffett believed this asset could be worth around $8 per share.150 The net current asset value and the culm banks combined were worth $17 a share, enough to give Buffett confidence that the stock was cheap. But, as Table 2 shows, the company also had substantial property, plant, and equipment. These fixed assets were almost certainly worth less than their carrying value, as the industry had deteriorated since the company last valued them when it emerged from bankruptcy in 1945. While it wasn’t clear what they were worth, they were certainly worth something. Finally, and ultimately most importantly, Ben Graham was on P&R’s board of directors, becoming a member after purchasing the stock in 1952. Buffett, who had discovered the stock on his own, would join Graham’s firm in 1954. While Graham had not taken any significant action as a board member by then, Buffett sensed that his professor, mentor, and now boss would eventually make something happen. As he later stated, “I was just a peon sitting in the outer office… I was not in the inner circle, but I was terribly interested, knowing something was going on.

So not only were the liabilities from Allied’s bankruptcy becoming defined, but the core business was not showing any signs of stress from the scandal. That left valuation. At his $40 per share purchase price, and in contrast to most of the stocks discussed in this book, American Express did not sell for an obvious bargain price. With a $178.4 million market capitalization and $124.1 million enterprise value, the stock sold for 15.8x 1963 earnings, 7.8x EV/1963 EBIT, and 2.3x P/TB. It didn’t look that cheap, and this valuation didn’t include an adjustment for the cost of the salad oil settlement.270

The investment was approximately 14.3% of the Partnership’s assets when he wrote to Howard Clark in June 1964. But Buffett kept buying the stock as the salad oil scandal receded from the limelight. By November, he owned approximately 90,000 shares, up from the 70,000 in June. Buffett kept buying the stock into 1966, more than tripling his stake in the company: He scooped up more than 5% of American Express’s shares, up from the 1.6% stake when he wrote to Howard Clark in 1964.277 The position became such a significant percentage of the portfolio that Buffett amended his ‘Ground Rules’ to partners in November 1965, adding a seventh rule: We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment.278 American Express was the Partnership’s largest investment at the end of 1965 and 1966, and it crushed the market in each of 1964, 1965, and 1966.279 The salad oil scandal was considered over by the end of 1964 despite negotiations still ongoing; the major claims wouldn’t settle until 1967, with some minor suits outside the main case lasting until the 1970s.280,281 Table 2 shows that revenue and income exploded as the Partnership added to its stake.

The stock was an obvious bargain—anyone looking at the Moody’s Manuals could tell it was cheap. But this was a small company, and its stock was hard to find. Even Buffett, with a net worth of around $100,000 at this point, had to be resourceful to source enough shares to build a meaningful position. So he ran ads in the local newspaper to find holders that would sell to him. But the company knew its stock was cheap, and it ran competing ads. Since Union Street Railway was a public utility, Buffett was eventually able to get the list of largest shareholders from the Massachusetts public utility commission. These efforts allowed him to source 576 shares, 3.1% of the company’s 1953 shares outstanding.

The valuation analysis was simple—anyone could see the stock was incredibly cheap. But it had been traded below net cash for several years before the company distributed cash to shareholders. Returning the cash was the critical factor in driving excellent returns. Assuming Buffett bought the stock in 1954 at $35 and sold in 1957 (having received the $50 per share distribution and a few dollars extra in dividends) when it traded between $20 and $28, he would have more than doubled his money and earned around a 30% IRR.135 The stock didn’t work because it was cheap—it worked because management returned capital to shareholders. The other securities discussed in this book were also incredible bargains—but it took action to drive wonderful returns for shareholders.

For railroads, ownership of coal lands was a way to stabilize an industry levered to economic volatility and weather, with warmer winters depressing demand. The vertical integration of railroads and miners also helped the players control production and shipments. The industry became highly concentrated, with seven railroad companies controlling over 90% of the coal production in the region. This oligopoly occasionally entered into collusive arrangements and tried to manipulate the price of this critical energy source. Despite these advantages, the Reading Railroad’s spending spree eventually led to trouble, as the combination of leverage, competition, and economic volatility caused the company to declare bankruptcy three times between 1880 and 1896.143 The Reading finally experienced financial success in the early 1900s, only to confront a new problem: The federal government was now determined to curb the power of the railroad and its peers. Congress began to enact legislation designed to split anthracite coal producers from railroads. These early attempts were easily circumvented by the anthracite giants. In 1915, however, the Supreme Court started ruling that the railroad companies violated anti-trust law. In 1920, the Court banned the stock control of coal companies outright, which finally forced some of the largest anthracite operators, including the Reading Railroad, to separate their coal and railroad operations.144

As anthracite production fell after the divorce from the railroad, P&R’s management raised debt to try and minimize the decay through capital investment, thinking new facilities could help the company remain competitive. But industry conditions worsened, and the Great Depression decimated economic activity, leading to significant losses for P&R throughout much of the 1930s. These results culminated in a declaration of bankruptcy in 1937.147 It took eight years for the company to emerge, but the reorganized firm possessed a leaner balance sheet, better prepared to withstand the declining market.148 Ultimately, it didn’t matter, as alternative fuel competition was simply overwhelming. As Figure 1 illustrates, production of hard coal eventually fell nearly 70%, dropping from 99.6 million tons from its 1917 peak all the way down to 30.9 million in 1953. Coal prices rose, mitigating the volume decline (as seen in Figure 2). But there was no hope that the industry would return to its former glory; anthracite coal was in an irreversible decline. This was the seemingly hopeless situation that confronted the young Warren Buffett, still in his early 20s, when he began looking at Philadelphia & Reading. Yet he started buying P&R stock at around $19 per share in 1952. When the stock soon plummeted to $9, Buffett, unphased by the decline, loaded up. By the end of 1954, he had invested $35,000 into the company, making it his largest personal position.149

In his 1961 letter to partners, Buffett laid out three broad categories of investments: generals, workouts, and controls. Generals were undervalued securities where Buffett had no say in corporate policies, nor a timetable for when the stock might reflect its intrinsic value. Buffett pointed out that the generals would behave like the Dow in the short term but outperform the index over the long term. Buffett expected to have five or six positions in this category that were 5% to 10% of total assets each, with smaller positions in another ten to fifteen. Later on, in his 1964 letter, Buffett would break generals into two categories: private owner basis and relatively undervalued. Private owner generals were generally cheap stocks with no immediate catalyst, while relatively undervalued securities were cheap compared to those of a similar quality. Relatively undervalued securities were generally larger companies where Buffett did not think a private owner valuation was relevant.173 Workouts were securities whose performance depended on corporate actions, such as mergers, liquidations, reorganizations, and spin-offs. Buffett expected to have ten to fifteen of these in the portfolio and thought this category would be a reasonably stable source of earnings for the fund, outperforming the Dow when the market had a bad year and underperforming in a strong year. He anticipated these investments would earn him 10% to 20%, excluding any leverage. Buffett would take on debt, up to 25% of the partnership’s net worth, to fund this category. While he didn’t disclose his allocation every year, he put around 15% of the partnership in workouts in 1966 but increased that to a quarter of the portfolio in 1967 and 1968, when he was having trouble finding bargains.174 The final category was controls, where the partnership took a significant position to change corporate policy. Buffett said these investments might take several years to play out and would, like workouts, have minimal correlation to the Dow’s gyrations. Buffett pointed out that generals could become controls if the stock price remained depressed.

Table 1: Change in compensation Source: British Columbia Power, 1962 annual report. Figures in thousands other than per share data. The second key legislation was the British Columbia Hydro and Power Authority Act. This act merged the British Columbia Power Commission, a government-owned public utility that served smaller communities unserved by BC Electric, with BC Electric into a single corporation named the British Columbia Hydro and Power Authority. This maneuver cemented the two entities together, creating an additional complication if the Court later reversed the takeover.188 With the Amending Act payment in hand, BC Power had cash—less all liabilities—of C$19.30 per share. The stock sold for less than this, closing at C$16.75 the day after the payment and then fluctuated around this number over the coming months.189 At this price, the stock traded at a 13.2% discount to net cash, held around C$2.10 of additional assets, and possessed continued upside if litigation went the company’s way.

Buffett had a strong view of how employees should be accountable to the business’s owners, and Marshall-Wells’ leadership did not seem to fit the bill. Management’s lackadaisical approach towards shareholders likely turned the young investor off. And he simply found other investments. At the end of 1950, Buffett owned stocks such as Parkersburg Rig & Reel and two closed-end funds: Selected Industries and U.S. & International Securities.40

Warren Buffett wird nicht müde zu betonen, dass es an ihm ist, sich selbst die Verwaltung des kleinsten Geldbetrages sehr angelegen sein zu lassen. Und eben darin bekundet sich jenes Verantwortungsbewusstsein, mit dem Staat zu machen ist.

Charlie and I believe our four criteria are essential if directors are to do their job — which, by law, is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark. Over the years I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?” The questions I instead

An old Wall Street joke gets close to our experience: Customer: Thanks for putting me in XYZ stock at 5. I hear it’s up to 18. Broker: Yes, and that’s just the beginning. In fact, the company is doing so well now, that it’s an even better buy at 18 than it was when you made your purchase. Customer: Damn, I knew I should have waited.

Stocks cannot forever overperform their underlying businesses, as they have so dramatically done for some time.

In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors

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

Most institutional and individual investors will find the best way to own common stock 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.”1 —Warren Buffett, chairman of Berkshire Hathaway

Rather than attempt to time the market or pick individual stocks, it is more productive to invest and stay invested. As Warren Buffett said: “We continue to make more money when snoring than when active.” Mr. Buffett also said: “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 expenses and fees) delivered by the great majority of investment professionals.

We don’t buy and sell stocks based upon what other people think the stock market is going to do (I never have an opinion) but rather upon what we think the company is going to do.

When Warren was a little boy fingerprinting nuns and collecting bottle caps, he had no knowledge of what he would someday become. Yet as he rode his bike through Spring Valley, flinging papers day after day, and raced through the halls of The Westchester, pulse pounding, trying to make his deliveries on time, if you had asked him if he wanted to be the richest man on earth—with his whole heart, he would have said, Yes. That passion had led him to study a universe of thousands of stocks. It made him burrow into libraries and basements for records nobody else troubled to get. He sat up nights studying hundreds of thousands of numbers that would glaze anyone else’s eyes. He read every word of several newspapers each morning and sucked down the Wall Street Journal like his morning Pepsi, then Coke. He dropped in on companies, spending hours talking about barrels with the woman who ran an outpost of Greif Bros. Cooperage or auto insurance with Lorimer Davidson. He read magazines like the Progressive Grocer to learn how to stock a meat department. He stuffed the backseat of his car with Moody’s Manuals and ledgers on his honeymoon. He spent months reading old newspapers dating back a century to learn the cycles of business, the history of Wall Street, the history of capitalism, the history of the modern corporation. He followed the world of politics intensely and recognized how it affected business. He analyzed economic statistics until he had a deep understanding of what they signified. Since childhood, he had read every biography he could find of people he admired, looking for the lessons he could learn from their lives. He attached himself to everyone who could help him and coattailed anyone he could find who was smart. He ruled out paying attention to almost anything but business—art, literature, science, travel, architecture—so that he could focus on his passion. He defined a circle of competence to avoid making mistakes. To limit risk he never used any significant amount of debt. He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. He had an unusual way of turning problems around in his head, which gave him insights nobody else had. He developed a network of people who—for the sake of his friendship as well as his sagacity—not only helped him but also stayed out of his way when he wanted them to. In hard times or easy, he never stopped thinking about ways to make money. And all of this energy and intensity became the motor that powered his innate intelligence, temperament, and skills.

1. Investors give fund managers money at the wrong time. Now that you’ve had some time to read this book and understand the importance of buying stocks during fear cycles and holding during greed cycles, this first indicator should make sense. To understand this principle, imagine that you’re the fund manager of a $100 billion investment fund. When the stock market crashes and you’re able to purchase severely undervalued businesses with minimal debt, not only do you lack funds to invest, but all your resources are being depleted by scared investors. Instead of receiving money to buy the great deals, your investors are selling their shares in the fund and you don’t have the capacity to take advantage of the market behavior. This reason alone severely handicaps fund managers as they attempt to beat the market.

Charlie and I enjoy issuing Berkshire stock (for acquisitions) about as much as we relish prepping for a colonoscopy.” -2009 letter

Being right on a stock had something of the purity of a perfect move in chess; it had an intellectual resonance.

From 1964, when Buffett began gobbling up businesses, through 2012, the value of Berkshire’s stock has soared 586,817 percent.2

Course 1, Unit 1 Stock 101

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.

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.10

I resurrect this “market-guessing” section only because after the Dow declined from 995 at the peak in February to about 865 in May, I received a few calls from partners suggesting that they thought stocks were going a lot lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 in May, why didn’t they let me in on it then; and, (2) if they didn’t know what was going to happen during the ensuing three months back in February, how do they know in May? There is also a voice or two after any hundred point or so decline suggesting we sell and wait until the future is clearer. Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you—or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn’t look so clear in retrospect. If

If a 20% or 30% drop in the market value of your equity holdings (such as BPL) is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet—Harry Truman—“If you can’t stand the heat, stay out of the kitchen.” It is preferable, of course, to consider the problem before you enter the “kitchen.

I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.

The availability of a quotation for your business interest (stock) should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage of it.”1 —

you can think better about the market; you don’t hear so many stories, and you can just sit and look at the stock on the desk in front of you. You can think about a lot of things.” 32   Buffett

Jason Zweig, senior writer and columnist at Money magazine and coauthor of the revised edition of Benjamin Graham's classic, The Intelligent Investor: "If you buy-and then hold-a total stock market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run. Graham praised index funds as the best choice for individual investors, as does Warren Buffett.

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. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.