WARREN BUFFETT: You may have trouble believing this, but
Charlie and I never have an opinion about the market because
it wouldn’t be any good and it might interfere with the opinions we have that are good.
(Laughter)
If we’re right about a business,
if we think a business is attractive,
it would be very foolish for us to
not take action on that because we thought
something about what the market was going to do, or anything of that sort.
Because we just don’t know. And to give up something that you do know and that is
profitable
for something that you don’t know and won’t know
because of that, it just doesn’t make any sense to us,
and it doesn’t really make any difference to us.
I mean, I bought my first stock in, probably, April of 1942 when I was 11.
And
since then, I mean, actually World War II didn’t look so good at that time.
I mean, the prospects, they really didn’t. I mean, you know, we were not doing well in
the Pacific.
I’m not sure I calculated that into my purchase of my three shares.
(Laughter)
But I mean, just think of all the things that have happened since then, you know?
Atomic weapons
and
major wars, presidents resigning, and all kinds of things,
massive inflation at certain times.
To give up what you’re doing well because of guesses about what’s going to happen
in some macro way
just doesn’t make any sense to us.
The best thing that can happen from Berkshire’s standpoint — we don’t wish this on anybody
but is that over time is to have markets that go down a tremendous amount.
I mean, we are going to be buyers of things over time.
And if you’re going to be buyers of groceries over time,
you like grocery prices to go down.
If you’re going to be buying cars over time, you like car prices to go down.
We buy businesses. We buy pieces of businesses: stocks.
And we’re going to be much better off
if we can buy those things at an attractive price than if we can’t.
So we don’t have any fear at all.
I mean, what we fear is an irrational bull market that’s sustained for some long period
of time.
You, as shareholders of Berkshire,
unless you own your shares on borrowed money or are going to sell them in a very short
period of time,
are better off if stocks get cheaper,
because it means that we can be doing more intelligent things on your behalf
than would be the case otherwise.
But we have no idea what — and we wouldn’t care what anybody thought about it. I mean,
most of all ourselves.
(Laughter)
Charlie, do you have anything?
CHARLIE MUNGER: No. I think the —
if you’re agnostic about those macro factors
and therefore devote all your time to thinking about the individual businesses
and the individual opportunities, it’s just, it’s a way more efficient way to behave,
at least with our particular talents and lacks thereof.
WARREN BUFFETT: If you’re right about the businesses, you’ll end up doing fine.
We don’t know,
and we don’t think about when something will happen. We think about what will happen.
It’s fairly, it’s not so difficult to figure out what will happen.
It’s impossible, in our view, to figure out when it will happen.
So we focus on what will happen.
WARREN BUFFETT: Yeah, we’ve tried to put in the annual report pretty much how we approach
securities.
And book value is not a consideration — virtually, not a consideration at all.
And the best businesses,
by definition,
are going to be businesses that earn very high returns on capital employed over time.
So, by nature, if we want to own good businesses,
we’re going to own things that have relatively little capital employed
compared to our purchase price.
That would not have been Ben Graham’s approach.
But Ben Graham was — Ben was not working with very large sums of money.
And he would not have argued with this approach, he just would’ve said his was easier.
And it is easier, perhaps, when you’re working with small amounts of money.
My friend Walter Schloss
has hewed much more toward the kind of securities that Ben would’ve selected.
But he’s worked with smaller amounts of money. He has an absolutely sensational record.
And it’s not surprising to me at all. I mean, when Walter left Graham-Newman,
I would’ve expected him to do well.
But
I don’t look at the primary message, from our standpoint, of Graham, really, as being
in that —
in anything to do with formulas.
In other words, there’s three important aspects to it.
You know, one is your attitude toward the stock market.
That’s covered in chapter eight of “The Intelligent Investor.” I mean,
if you’ve got that attitude toward the market, you start ahead of 99 percent of all people
who are operating in the market.
So, you have an enormous advantage.
Second principle is the margin of safety, which again, gives you an enormous edge,
and actually has applicability far beyond just the investment world.
And then the third is just looking at stocks as businesses,
which gives you an entirely different view than most people that are in the market.
And with those three sort of philosophical benchmarks, the exact
— the evaluation technique you use is not really that important.
Because you’re not going to go way off the track,
whether you use Walter’s approach — Walter Schloss’s — or mine, or whatever.
We think first in terms of business risk, you know.
We — the key to [Benjamin] Graham’s approach to investing is not thinking of stocks as
stocks
or part of a stock market.
Stocks are part of a business.
People in this room own a piece of a business. If the business does well,
they’re going to do all right as long as they don’t pay way too much
to join into that business.
So we look at — we’re thinking about business risk.
Now, business risk can arise in various ways.
It can arise from the capital structure when somebody sticks a ton of debt into some business,
and so that
if there’s a hiccup in the business that the lenders foreclose.
It can come about just by the nature of the — certain businesses are just very risky.
Back in — when there were more commercial aircraft manufacturers,
Charlie and I would think of making a commercial airplane,
a big airliner, sort of as a bet-your-company risk because you would shove hundreds and
hundreds of millions of dollars out into the pot before you really had customers.
And then if you had a problem with the plane, you know, that company could go.
There’s certain businesses that inherently — because of long lead times,
because of heavy capital investment — that basically have a lot of risk.
And commodity businesses have risk unless you’re the low-cost producer, because
the low-cost producer can put you out of business.
Our textile business was not
the low-cost producer. And
we had a fine management, and everybody worked hard. We had cooperative unions,
all kinds of things. But we weren’t the low-cost producer, so it was a risky business.
The guy who could sell it cheaper than we could made it risky for us.
So there’s a lot of ways businesses can be risky.
We tend to go into businesses that inherently are low-risk,
and are capitalized in a way that that low risk of the business is transformed
into a low risk to the enterprise.
The risk beyond that is that even though you buy
— identify — such businesses, that you pay too much for them.
That risk is usually a risk of time rather than loss of principal,
unless you get into a really extravagant situation.
But then the risk becomes the risk of you yourself.
I mean, whether you can retain your belief in the real fundamentals of the business and
not get too concerned about the stock market.
The stock market is there to serve you, and not to instruct you.
And that’s a key to owning a good business,
and getting rid of the risk that would otherwise exist in the market.
You mentioned volatility. It doesn’t make any difference to us whether the volatility
of the stock market,
you know, is — averages a half a percent a day or a quarter percent a day or 5 percent
a day.
In fact, we’d make a lot more money if volatility was higher,
because it would create more mistakes in the market.
So volatility is a huge plus to the real investor.
Ben Graham used the example of “Mr. Market,” which is the — and we’ve used it.
I’ve copied it in the report. I copy from all the good writers.
And Ben said, “You know, just imagine that when you buy a stock,
that you — in effect, you’ve bought into a business where you have this obliging partner
who comes around every day and offers you a price at which you’ll either buy or sell.
And the price is identical.”
And no one ever gets that in a private business,
where daily you get a buy-sell offer by a party.
But in the stock market you get it. That’s a huge advantage.
And it’s a bigger advantage if this partner of yours is a heavy-drinking manic depressive.
(Laughter)
The crazier he is, the more money you’re going to make.
So you, as an investor, you love volatility.
Not if you’re on margin,
but if you’re an investor you aren’t on margin.
And if you’re an investor, you love the idea of wild swings
because it means more things are going to get mispriced.
WARREN BUFFETT: Well, we don’t want to nibble. But we would like to take big gulps in the
stock market from time to time.
But we’ve always wanted to acquire
entire businesses. People never seem to really believe that, back when we were buying
See’s Candy or the Buffalo News or National Indemnity.
But that’s been our number one preference right along.
It’s just that we’ve found that much of the time we could get far for more our money,
in terms of wonderful businesses, by buying pieces in the stock market, than we could
by negotiated purchase.
There may have been — there may be some movement,
in terms of the availability of the two, toward the negotiated purchase,
although you — it’s almost impossible to make a wonderful buy in a negotiated purchase.
I mean,
you will never make the kind of buy in a negotiated purchase
that you can in a bad — that you can make via stocks in a stock — in a weak stock market.
It just isn’t going to happen.
The person on the other side cares too much.
Whereas, in the stock market, in a 1973 or 1974, you were dealing with
the marginal seller. And whatever price they establish for the business,
you could buy it.
I couldn’t have bought the entire Washington Post Company for $80 million in 1974.
But I could buy 10 percent of it from a bunch of people who were just operating,
you know, based on calculating betas or doing something of the sort.
And they were in a terrible market. And it was possible to buy a piece of it on that
valuation.
You never get that kind of buy in a negotiated purchase.
We always are more interested in a negotiated — large negotiated — deals than we are
in stock purchases.
But we are not going to find a way, probably, to use all the money that way.
And we occasionally may get chances to put big chunks of money into attractive
businesses that are — which we buy through the stock market,
five, 10 percent of company or something of that sort.
Charlie?
CHARLIE MUNGER: My guess is over the next five years, we’ll do some of both.
Both the entire business and the big gulps in the stock market.
WARREN BUFFETT: Yeah, I agree with that.
We’ll keep working at both.
We’re not finding a lot in either arena. We might be a little more likely to find it
in the negotiated business.
It won’t be any huge bargain. We’re not going to get any huge bargain in the —
in a negotiated purchase.
We are more likely to find what I would call a fair deal there under today’s circumstances,
than we will in the market. But I agree with Charlie.
Over the next five years, I think you’ll see us do both.
CHARLIE MUNGER: I do think that there’s a lot to be said for
developing a temperament that can own securities without fretting.
I think that the fretful disposition is the — it’s an enemy of long-term performance.
WARREN BUFFETT: Well, it’s almost — I think it’s almost impossible if you’re —
to do well in equities over a period of time if you go to bed every night thinking about
the price of them.
I mean, Charlie and I, we think about the value of them.
But we would be happy, just as in that movie —
if they closed the Stock Exchange tomorrow,
you know, Dick Grasso wouldn’t be happy and Jimmy Maguire, our specialist, wouldn’t
be happy.
It wouldn’t bother me and Charlie, at all.
We would keep selling bricks, selling Dilly Bars, selling candy, writing insurance.
You know, a lot of people have private companies and they never get a quote on them.
You know, we bought See’s Candy in 1972.
We haven’t had a quote on it since.
Does that make us wonder about how we’re doing with See’s Candy?
No, we looked at the company results.
So you — there’s nothing wrong with focusing on company results.
Focusing on the price of a stock is dynamite,
because it really means that you think that the stock market knows more than you do.
Now if the stock market may know more than you do,
but then you shouldn’t be in stocks. I mean,
you should have — the stock market is there to serve you and not to instruct you.
So you need to formulate your ideas on price and value,
and if the price gets cheaper and you have funds, you know, logically,
you should buy more, if — and we do that all the time.
Where we make our mistakes, frankly, is where
we focus on price and value and we start buying,
and the price goes up a little and we quit, you know, like Charlie referred to, we might
have done on See’s Candy.
A mistake like that cost us $8 billion in the case of Walmart stock a few years ago,
because it went up in price.
And you know, we are not happy when things we’re buying go up in price.
We want them to go down, and down, and down.
And we’ll keep buying more and — hopefully we won’t run out of money.
Of course, that’s a different story.
Charlie and I haven’t the faintest idea where the stock market is going to go next
week, next month, or next year.
We never talk about it. You know, it never comes up.
Our directors will tell you that they’ve never been to a directors meeting where the
subject of the direction of the stock market is —
we are not in that business. We don’t know how to be in that business.
Obviously, if we could guess successfully a high percentage of the time where the stock
market was going to go,
we would do nothing but play the S&P futures market.
There wouldn’t be any reason to look at businesses and stocks.
So it’s just not our game.
We don’t think —
what we see when we look at the stock market
is we see thousands and thousands and thousands of companies
priced every day, and we ignore 99.9 percent of what we see,
although we run our eyes over them.
And then every now and then we see something
that looks like it’s attractively priced to us, as a business.
Forget about the word “stock.”
So when we buy a stock,
we would be happy with that stock
if they told us the market was going to close for a couple years.
We look to the business.
It’s exactly the same way as if you were going to buy a farm a few miles here outside
of Omaha.
You would not get a price on it every day, and you wouldn’t ask, you know,
whether the yield was a little above expectation this year or down a little bit.
You’d look at what the farm was going to produce over time.
You’d look at expected yields. You’d look at expected prices, the taxes, the cost of
fertilizer,
and you would evaluate the intelligence of your purchase based on what the farm produced
relative to your purchase price.
Quotes would have nothing to do with it. That’s exactly the way we look at stocks.
We look at them as businesses.
We make judgments about what the future of those businesses will be.
And if we’re right about — in those judgments, the stocks will take care of themselves.
We don’t have an opinion about where the stock market’s going to go tomorrow or next
week or next month.
So to sit around and not do something that’s sensible because you think there will be something
even more attractive,
that’s just not our approach to it.
Anytime we get a chance to do something that makes sense,
we do it. And if it makes even more sense the next day,
and if we’ve got money, we may do more. And if we don’t,
you know, that — what can we do about it?
So picking bottoms is basically not our game.
Pricing is our game. And that’s not so difficult.
Picking bottoms, I think, is probably impossible, but —
When you get — when you start getting a lot for your money,
you buy it. And as I say, after I wrote that, stocks did get cheaper.
And anytime we like to do something, we really like to do it. I mean,
our idea is not to tiptoe into anything.
So we buy them as fast as we can, when prices are right.
You don’t really have to worry about, you know, what’s going on in IPOs,
or people making money.
People win lotteries every day, but there’s no reason
to have that effect you at all. You shouldn’t be jealous about it.
I mean, you know, if they want to
do mathematically unsound things, and one of them occasionally gets lucky,
and they put the one person on television, and the million that contributed to the winnings,
with the big slice taken out for the state, you know,
don’t get on there — it’s nothing to worry about.
Just, all you have to do is figure out what makes sense.
And you don’t — you look at buying
— when you — when you buy a stock, you get yourself in the mental frame of mind that
you’re buying a business,
and if you don’t look at a quote on it for five years, that’s fine.
You don’t get a quote on your farm every day or every week or every month.
You don’t get it on your apartment house, if you own one.
If you own a McDonald’s franchise, you don’t get a quote every day.
You know, you want to look at your stocks
as businesses, and think about their performance as businesses.
Think about what you pay for them,
as you would think about buying a business.
And let the rest of the world go its own way.
You don’t want to get into a stupid game just because it’s available.
CHARLIE MUNGER: Yeah, well, I think that your children are right to look for people they
can trust
in dealing with stocks and bonds.
Unfortunately,
more than half the time, they will fail,
in a conventional answer. So you — they really have to — they have a hard problem.
If you just listen to your elders, they’ll lie to you and make — spread — a lot of
folly.
WARREN BUFFETT: But they really have an easy problem,
in the sense that American business, as a whole,
is going to do fine over time. So the only way they can —
CHARLIE MUNGER: But not the average client of a stock broker.
WARREN BUFFETT: Well, we’ll get to that later.
(Laughs)
The stockbroker will do fine. The —
(laughter)
CHARLIE MUNGER: Yes, that’s true.
WARREN BUFFETT: But, they don’t have to do that and we can talk
— I’d rather address that just a little later.
But — just — you don’t want to worry — you don’t want to be —
a lot of problems are, as Charlie would say, are caused by envy.
You don’t want to get envious of somebody who’s won the lottery,
or bought an IPO that went up.
You have to figure out what makes sense and follow your own course.