Warren Buffet: The first rule of investment is don't lose. And the second rule of investment is
don't forget the first rule. And that's all the rules there are, I mean that if you buy things
for far below what they're worth and you buy a group of them you basically don't lose money.
Everyone has thought about investing, but most people don’t know how to start.
They think it is too hard, too risky, or too complicated.
And maybe you are one of these people.
But not anymore!
Right now you have the chance to learn in easy
steps how to make the best investments for yourself.
So listen closely, and learn how to get rich from the greatest investor of all time!
One! Have a circle of competence.
It is impossible to know everything in life. So if you want to succeed,
it is of the utmost importance you choose a niche.
When you choose a certain field to act in, you are able to acquire
a lot of knowledge about it and make the best choices.
Warren Buffet: I can only, should expect to make money in things that I understand. And when I say
understand I don't mean understand, you know, what the product does or
anything like that. I mean understand what the economics of the business are likely to look at,
look like 10 years from now, 20 years from now. I know in general what the economics of,
say, Wrigley chewing gum will look like 10 years now. The internet isn't going to change the way
people chew gum. It isn't going to change which gum they chew. You know, if you own the chewing
gum market in a big way and you've got double mint, the spearmint, and the juicy fruit, those
brands will be there ten years from now. So I can't pinpoint exactly what the numbers are gonna
look like on Wrigley, but I'm not gonna be way off if I try to look forward on something like that.
Evaluating that company is within what I call my circle of competence. I understand what they do,
I understand the economics of it, I understand the competitive aspects of the business.
Two! Manage the risks.
There is no reward without risk. But that doesn’t mean you should be going all around taking all
kinds of risks without understanding anything. Good risks are calculated ones. The ones you
can measure to understand if the reward is high enough to take it.
Warren Buffet: We don't have any formula that evaluates risk. But we certainly make
our own calculation of risk versus reward in every transaction we do. And it's true whether
it's marketable securities, that's true whether it's private investments, that's true whether
it's making in the best minute of business. And sometimes we're wrong and we're gonna be wrong
sometimes in the future. You can't make a lot of decisions in this business without
being wrong but we don't think the procedure or the results would be changed favorably by
having lots of committees and lots of spreadsheets and that sort of thing.
Three! Evaluate companies first.
To make a good investment it is essential that you know what you are investing in. When you
buy stocks, you are not just putting your money someplace, you are buying a piece of a business.
So before buying any stock, ask yourself “ Is this
a business I would like to own?” Interviewer: For the average person
who's maybe never bought a stock before what's your advice about that? You can't constantly
sit there and wait and say oh it's going to go higher, it's going to go higher.
Warren Buffet: We don't even think about that. What we think about is how much is it selling
for, how much do we think it's worth. When we bought it at 35 billion effectively
I felt the company was probably worth at least a hundred billion.
Interviewer: How did it come to your attention. How do you find a stock like PetroChina?
Warren Buffet: I sit there in my office and I read an annual report which fortunately was in English
and it described a very good company and told about the oil reserves, told about
the refining - all about the chemicals, everything else. And I sat there in rhetoric and I thought
to myself this company is worth about a hundred billion. Now, I didn't look at the price first.
I look at the business first and try and figure out what it's worth because if I look at the price
first I'll get influenced by that. So I look at the company first, I try to value it and I look
at the price. And if the price is way less than what I've just valued that I'm going to buy it.
Four! Invest in productive assets.
If you want to make way more money, you have to
put your money into something that will produce more of it.
When you do this your money grows exponentially, and you become rich much faster.
Warren Buffet: The whole idea of investment is to lay out money to get more money back later on,
right. And if you buy a farm or you buy an apartment house or you buy into a
business, either one you own directly or when you own a piece up through stocks,
you are buying into an asset that you expect to produce something later on. Now if I buy a farm,
like I did 25 years ago in Nebraska. I bought a farm, 400 acres, I paid
close to $700 an acre for it and I looked and see how much it would get an estimate of how much corn
it would produce per acre, how much soybeans, what I have to pay the tenant farmer what the taxes
would be. And I made an estimate of the income that I would receive from that farm. I didn't go
out and get a quote on it, you know. I didn't turn on the farm channel, you know, every day to see
whether it was raining or something and it was good for my farm. Instead, I looked at the farm
itself as to what it would produce. That's what I do in terms of stocks. Now, there are other kinds
of assets that don't produce anything but you count on them becoming more attractive to people
next year or the year after. You can't, you're looking to the price change
rather than the output of the investment. That's a whole different game. I mean that, if you buy
we’ll say art as an investment and you pay twenty million dollars for some painting,
you know, you don't look for the painting to produce anything, you just,
if you're looking as an investment, you just hope somebody else will like that painting, even more,
a year from now or two years from now. You're betting on the price of the asset rather than
the productivity of the asset. I like things where I look at the productivity of the asset.
Five! Cash isn’t a good investment.
Some people like to have money in their hands to feel like they are rich,
and of course, you should have a good amount of it to satisfy your desires.
But too much stale money is bad business.
Cash doesn’t give the return investments have, as such you should use your money in a wiser way.
Interviewer: This is something that goes with your philosophy today.
Get out of cash and get into assets because we don't know what's going to happen to the dollar.
Warren Buffet: Well, cash is always a bad investment. I mean when people said cash is
king a year ago, I mean that's crazy, I mean cash wasn't producing anything and it was
sure to go down in value over time, and then you always want to be sure you have enough. I mean,
it's like oxygen you want to be sure it's around, you know. But you don't need to have
you don't need excessive amounts of it around. And cash, we will always have enough cash around but
anytime we have surplus cash around I’m unhappy. I mean, I would much rather have good businesses
than cash. And we found a chance in the last year thereabouts to deploy. We came in with something
over 40 billion of cash and we've got about 20 billion now. And we've had some earnings. So we
put a lot of cash to work and I like that. No, I’d much rather own a good business than have cash.
Interviewer: And it is a hedge against the dollar.
Warren Buffet: Well, you can say all assets are a hedge against the dollar, I mean. But
all you know is that the dollar is going to be worth less in 10,20,
30 years from now. I say worth less not worthless, right. You want to watch that.
But it will be, you know. But that's true of almost every currency that I can think
of. The question is how much it depreciates in value. But cash, cash is not a place.
Six! Take advantage of the big opportunities.
Big opportunities are what bring great success.
There is no moving forward in life without them.
So when you see one, go for it. Make the best! investment of your life!
Warren Buffet: Big opportunities in life have to be seized. We don't do very many things but when
we get the chance to do something that's right and big we've got to do it. And even, to do it
in a small scale is just as big a mistake almost as not doing it at all. I mean you've really got
to grab them when they come. Because they, you're not going to get 500 great opportunities. You
would be better off if when you got out of school here, you got a punch card with 20 punches on it.
And every big financial, every financial decision you made you used up a punch.
You'd get very rich because you'd think through very hard. Each one of you went to a cocktail
party and somebody talked about a company, he didn't even understand what they did or couldn't
pronounce the name, but they made some money last week and another one like it, you wouldn't buy it
if you only had 20 punches on that card. There's a temptation to dabble if,
particularly during bull markets, in stocks, it's so easy, you know. It's easier now than
ever because you can do it online, you know. Just, you click it in and maybe it goes up the
point and get excited about that and you buy another one the next day and so on.
You can't make any money over time doing that. But if you had a punch card with only 20 punches
you weren't going to get another one in the rest of your life, you would think a long time
before every investment decision. And you would make good ones. And you'd make big ones. And
you probably wouldn't even use all 20 punches at the, in your lifetime, but you wouldn't need to.