(Quesion)
WARREN BUFFETT: Well, we look at —
I’m glad you came.
I hope there’s a large group. I got a note,
I think from your teacher, on that.
(Applause)
We look at it — the criteria for selecting a stock
is really the criteria for looking at a business.
We are looking for a business we can understand.
That means they sell a product that we think we understand,
or we understand the nature of the competition,
what could go wrong with it over time.
And then when we find that business
we try to figure out whether the economics of it
means the earning power
over the next five, or 10, or 15 years is likely to be
good and getting better or poor and getting worse.
But we try to evaluate that future stream.
And then we try to decide whether we’re getting in with
some people that we feel comfortable being in with.
And then we try to decide what’s an appropriate
price for what we’ve seen up to that point.
And
as I said last year,
what we do is simple but not necessarily easy.
The —
The checklist that is going through our mind
is not very complicated.
Knowing what you don’t know is important,
and sometimes that’s not easy.
And knowing the future is definitely —
it’s impossible in many cases, in our view,
and it’s difficult in others.
And sometimes it’s relatively easy,
and we’re looking for the ones that are relatively easy.
And then when you get all through you have to find it
at a price that’s interesting to you,
and that’s very difficult for us now.
Although there have been periods in the past
where it’s been a total cinch.
And that’s what goes through our mind.
If you were thinking of buying a
a service station, or a dry cleaning establishment,
or a convenience store in Omaha
to invest your life savings in and run as a business,
you’d think about the same sort of things.
You’d think about the competitive position
and what it would look like five or 10 years from now,
and how you were going to run it,
and who was going to run it for you,
and how much you had to pay.
And that’s exactly what we think of
when we look at a stock,
because the stock is nothing
other than a piece of a business.
Charlie?
CHARLIE MUNGER: Yeah. If finance were —
when finance is properly taught,
it should be taught from cases where
the investment decision is easy.
And
the one I always cite is the early history
of National Cash Register Company,
and that was created by a fanatic who
bought all the patents,
and had the best salesforce,
and the best production plants.
He was a very intelligent man
and passionately dedicated to the cash register business.
And of course,
the cash register business was a godsend to
retailing when cash registers were invented.
So that was the pharmaceuticals of a
former age.
If you read
an early annual report prepared by Patterson, who was CEO of National Cash Register,
an idiot could see that this was a talented fanatic.
Very favorably located,
and that, therefore, the investment decision was
was easy.
If I were teaching finance,
I would collect a hundred cases like that.
And that’s the way I would teach the students.
WARREN BUFFETT: We have that annual report.
What was that, 1904 or something, Charlie?
But it’s really a classic report because
Patterson not only tells you why his cash register
is worth about 20 times
what he’s selling for to people,
but he also — (laughs) —
tells you that you’re an idiot
if you want to go in competition with him.
It’s a classic.
CHARLIE MUNGER: It is just a (inaudible).
But no intelligent person can read this report
and not realize — (laughs) —
that this guy can’t lose.
(sub)