Warren Buffet Philosophy:
"I don't read economic forecasts. I don't read the funny papers."
“A market downturn doesn't bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity."
“What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes.”
I buy expensive suits. They just look cheap on me.
It's only when the tide goes out that you learn who's been swimming naked.
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
I violated the Noah rule: Predicting rain doesn't count; building arks does.
If you have a harem of 40 women, you never get to know any of them very well. means Wide diversification is only required when investors do not understand what they are doing.
"There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do."
Never invest in a business you cannot understand.
In the business world, the rearview mirror is always clearer than the windshield.
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful".
We enjoy the process far more than the proceeds.
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
"If you're an investor, you're looking on what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game."
“Obviously, every investor will make mistakes. But by confining himself to a relatively few, easy-to-understand cases, a reasonably intelligent, informed and diligent person can judge investment risks with a useful degree of accuracy.”
"If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need. If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the
"The fact that people will be full of greed, fear or folly is predictable.
The sequence is not predictable."
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."
"The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
"Investors making purchases in an overheated market need to recognize that it
may often take an extended period for the value of even an outstanding
company to catch up with the price they paid."
"Time is the enemy of the poor business and the friend of the great business.
If you have a business that's earning 20%-25% on equity, time is your friend.
But time is your enemy if your money is in a low return business’’
"If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? "Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. "This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."
"The strategy (of portfolio concentration ) we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it."
Tragedy for short term speculations and warning for those who are mutual fund investors:
"In 1971, pension fund managers invested a record 122% of net funds available in equities - at full prices they couldn't buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks."
More Diversification is bad:
“We think diversification, as practiced generally, makes very little sense for anyone who knows what they're doing. Diversification serves as protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There's nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses.
On a Portfolio design:
"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."
Holding time:
“Our policy is to concentrate holdings. We try to avoid buying a little of
this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.”
SIZE of investment:
“I made a study back when I ran an investment partnership of all our larger investments versus the smaller investments. The larger investments always did better than the smaller investments. There is a threshold of examination and criticism and knowledge that has to be overcome or reached in making a big decision that you can get sloppy about on small decisions. Somebody says 'I bought a hundred shares of this or that because I heard about it at a party the other night.' Well there is that tendency with small decisions to think you can do it for not very good reasons.”
The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:
- Is the company in an industry of good economics, i.e., not an industry competing on price points. Does the company have a consumer monopoly or brand name that commands loyalty? Can any company with an abundance of resources compete successfully with the company?
- Are the Owner Earnings on an upward trend with good and consistent margins?
- Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average?
- Does the company have high and consistent Returns on Invested Capital (his version differs from the popular definition)?
- Does the company retain earnings for growth?
- The business should not have high maintenance cost of operations, low capital expenditure or investment cash outflow. This is not the same as investing to expand capacity.
- Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
- Is the company free to adjust prices for inflation?
Buffett's next concern would be when to buy. He does not hurry to invest in businesses with indiscernible value. He will wait for market corrections or downturns to buy solid businesses at reasonable prices, since stock-market downturns present buying opportunities.
