Favourite Snippets from The Warren Buffett Philosophy Of Investments by Elena Chirkova

Table of Contents

1. What kind of business does Warren Buffett like?

2. Warren Buffett’s Investment Principles

   1. Investing Within One's Circle of Competence

   2. Long-Term Horizon

   3. Independence of Opinion

   4. The Purchase Price

What kind of business does Warren Buffett like?

•  The really big money tends to be made by investors who are right on qualitative decisions.

  • -WARREN BUFFETT [CITED IN SCHROEDER, 2008, P. 265)

• In a business selling a commodity-type product, it's impossible to be a lot smarter than your dumbest competitor.

  • -WARREN BUFFETT [BUFFETT, 1977-2013, 1990]
    

• One of the lessons... is the importance of being in businesses where tailwinds prevail rather than headwinds.

  • - WARREN BUFFETT [BUFFETT, 1977-2013, 1977]
    

• Buffett opines that between two "wonderful" businesses one should choose the least capital inten-sive. He admits that it took Charlie (Munger) and him 25 years to figure this out.

  • [Buffett, 1991b].
    

• According to Bill Gates who is a close friend of Buffett, Buffett does not believe in buying businesses in which success is possible only if all the employees involved are excellent 

  • [Gates, 1996].
    

• Buffett's recommendation that one should buy tickets only for good shows: "The funny thing is, better shows don't cost that much more then lousy shows" 

  • [cited in Lowe, 2007, p. 170].
    

• In investing, there is no score multiplier for making difficult investments.

  • -WARREN BUFFETT [BUFFETT, 2003]

Warren Buffett’s Investment Principles

Investing Within One's Circle of Competence

• If you try to predict the future of everything, you attempt too much.

  • -WARREN BUFFETT (CITED IN LOWE, 2007, P. 158]
    

• "If you can't write an essay describing why I'm going to buy the entire company at the current valuation," you have no business buying 100 shares of stock" 

  • [Matthews, 2009, p. 77].
    

• "It’s no sin to miss a great opportunity outside one's area of competence" 

  • [Buffett, 1977-2013, 1989]
    

• In an interview, Buffett was once asked to advise a beginner investor on how to start investing. Buffett recommended that the investor "learn about every company in the United States that has publicly traded securities," as he himself had done when he was young. "That bank of knowledge will do [an investor] terrific good over time." The journalist objected to the suggestion on the grounds that there were 27,000 public companies in the United States. This did not put Buffett out of countenance: "Well, start with the A's" [cited in Hagstrom, 2005, p. 26]. Buffett advises researching everything personally, without taking anything for granted.

  He recommends that an investor study one industry at a time, develop a level of expertise in half a dozen industries, and not accept the conventional wisdom about any industry as meaning anything at all until this wisdom has been thought through [Lowe, 2007, p. 157]. Once, in 2003, Buffett remarked that he is "generally familiar" with 1,700 or 1,800 American companies 

  • [Buffett, 2003].

Long-Term Horizon

• My favorite time frame for holding a stock is forever.

  • —WARREN BUFFETT [BUFFETT, 1977-2013, 1988]
    

• "We don't sell. We have an entrance strategy, but we have no exit strat-egy," assures Buffett 

  • [cited in Kilpatrick, 2005, p. 770].
    

• "Whenever Charlie and I buy common stocks... we do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate" 

  • [Buffett, 1977-2013, 1987]
    

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

  • [Buffett, 1977-2013, 1996]
    

• Once in 1990, at a meeting at Harvard Business School, a student asked Buffett when he plans to retire; Buffett responded, "About five to ten years after I die" [Buffett, 1977-2013, 1991). 

  Perhaps Buffett is keen to make sure that the positive effects of his decisions are self-sustaining even after he is gone.
  

• We need time, which is "the friend of the wonderful busi-ness, the enemy of the mediocre" [Buffett, 1977-2013, 1989].
  

• "You could have bought a share of Coca-Cola in 1919 for $40 a share. A year later it was $19.50. Sugar prices went up and you lost half your money. Today that $40, if you had reinvested all dividends, is worth $1.8 million and that's with depressions and wars. How much more fruitful it is to invest in a wonderful business" Berkshire Hathaway Annual Shareholders' Meeting, 1992).

Independence of Opinion

• "I give you the one piece of advice that I got at Columbia from Ben Graham that I've never forgotten, which is: You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right—and that's the only thing that makes you right" [Buffett, 1991a]
  

• As Buffett observes, the line separating investment and speculation becomes blurred when most market participants have recently enjoyed triumphs. "Nothing sedates rationality like large doses of effortless money" [Buffett, 1977-2013, 2000].
  

• "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

• "It's optimism that is the enemy of the rational buyer" [Buffett, 1977-2013, 1990]. "Fear is the foe of the faddist, but the friend of the fundamentalist" —remember that sooner or later, the market will price securities at their fair value [Buffett, 1977-2013, 1994]
  

• In Buffett's view, to be a successful investor, it is not sufficient to have an appropriate education. To be able to distinguish between a good and a bad business, it is necessary to have an intuition. One must also have self-control and self-confidence to be courageous enough to hold an opinion that is independent of that of the crowd, to act conservatively and without leaving the framework of the boundaries that one has set for oneself. An independent opinion is a key component of Buffett's investment doctrine. Buffett, as Munger comments, "believes successful investment is intrinsically independent in nature" [Grant, 1991].

The Purchase Price

• Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results" [Buffett, 1957-1970, January 18, 1963].
  

• In 1977, he wrote to his shareholders that Berkshire was ready to buy other companies that were things that "we can under-stand, with favorable long-term prospects, operated by honest and competent people, and available at a very attractive price" [Buffett, 1977-2013, 1977].
  

• "All intelligent investing is value investing— to acquire more than you are paying for"
  

• Buffett appears to feel that the market is excessively high when investments that he would consider suitable are not available at a price that he considers reasonable and vice versa. In 1973, during a period of inflated markets, when share prices were very high and Buffett could not find anything to buy, he remarked that he felt "like an oversexed guy on a desert island" [cited in Lenzner, 1993). In 1974, the market corrected. It fell 50 percent from its peak in November 1972; shares were relatively inexpensive, and, in Buffet's opinion, the time to start investing had arrived—this time, he felt like an "oversexed man in a harem" [cited in Davis, 1990].

• When Buffett is unable to locate investment targets that suit his requirements, he may avoid investing, sometimes for over the course of several years in a row. This demonstrates his independence of opinion in practice.
  

• He seeks not to compromise his investment standards, although he finds that doing nothing is the most difficult task of all: "One English statesman attributed his country's greatness in the nineteenth century to a policy of 'masterly inactivity? This is a strategy that is far easier for historians to commend than for participants to follow" [Buffett, 1977-2013, 1984]. Nevertheless, Buffett appears to be able to cope with the challenge.