Buffett: The Making of an American Capitalist
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Buffett’s genius was largely a genius of character—of patience, discipline, and rationality.
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He would play Monopoly for what seemed forever—counting his imagined riches.
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Mr. Market is very obliging indeed. Every day he tells you what he thinks your interest is worth. BENJAMIN GRAHAM, THE INTELLIGENT INVESTOR
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The trick was to invest when prices were far below intrinsic value, and to trust in the market’s tendency to correct.
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He lacked the patience for small talk, and would often disappear to read in the middle of his own dinner parties.
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One day, as they were going to lunch at a delicatessen near the office, Graham said, “Money won’t make any difference to you and me, Warren. We’ll be the same. Our wives will just live better.”
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He could measure each stone against the skyline, and there was no one else whose analysis he trusted better than his own.
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His talent lay not in his range—which was narrowly focused on investing—but in his intensity. His entire soul was focused on that one splendid outlet, as it had been when he was a boy delivering papers.
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This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.43
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I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.17
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merely wanted Rosner to read him the previous five years’ balance sheets over the telephone. The next day, Buffett called back with an offer.
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“It takes twenty years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.”
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Then Buffett explained to Chace the basic theory of return on investment. He didn’t particularly care how much yarn Chace produced, or even how much he sold. Nor was Buffett interested in the total profit as an isolated number. What counted was the profit as a percentage of the capital invested. That was the yardstick by which Buffett would grade Chace’s performance.
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“I’d rather have a $10 million business making 15 percent than a $100 million business making 5 percent,”
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Ringwalt stated his philosophy in simple terms: “There is no such thing as a bad risk. There are only bad rates.”
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Ringwalt also was possibly the cheapest of the long line of tightwads in Buffett’s acquaintance. He even left his coat in the office when he went downtown for lunch so as to avoid a coat check.
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In the evenings, Buffett would go to Cris Drugstore, on 50th Street, for the late edition of the World-Herald, which carried the closing stock prices. Then he would go home and read a stack of annual reports. For anyone else it would have been work. For Buffett it was a night on the town.
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Buffett was as fearful of inflation as anyone. His response was to hunt for stocks, such as newspapers, that would be able to raise rates in step. Similarly, he avoided companies with big capital costs. (In an inflationary world, capital-intensive firms need more dollars to replenish equipment and inventory.)
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Maybe grapes from a little eight-acre vineyard in France are really the best in the whole world, but I have always had a suspicion that about 99% of it is in the telling and about 1% is in the drinking.6
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Buffett’s point was that overall growth didn’t matter—merely growth per share. It was like shrinking the number of slices in a pizza.
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At one meeting, Jeffrey Epstein, a young M.B.A. who was scouting for new fields of investment, gave an overview of what consumers were spending in each part of the media and entertainment industry. His figure for home entertainment was $5 billion.
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He insistently reminded them—as he had Ken Chace, so many years earlier, outside the textile mill—that size was not the goal; the return to shareholders was.
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And by the end of 1985, when Buffett would leave the board, Berkshire’s $10 million investment would be worth $205 million.
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Your Chairman has a firm belief that owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business, currently and prospectively. You would demand that in a private company; you should expect no less in a public company.43
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But in his 1983 letter, Buffett ruled out a split. Slicing the pie into more pieces would hardly increase its value. (Try it with a pizza.)
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One question Buffett always asked himself in appraising a business is how comfortable he would feel having to compete against it, assuming that he had ample capital, personnel, experience in the same industry, and so forth.
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His approach seems strange in a modern context, but it was in accord with the notion of J. P. Morgan, Sr., that the principal judgments in business are those concerning character.
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In fact, Buffett made about as much money in fifteen months in furniture as he had in nineteen years in textiles.
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The situation is suggestive of Samuel Johnson’s horse. “A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”35
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Murphy was so frugal that he had once painted only the two sides of his Albany headquarters that faced the road—not the
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sides facing the
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Hudson ...
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eschewed high-tech and looked for strong cash flow. Like Buffett, he took a long-term view and was, at heart, a financial person, not a manager.
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And frequently, in the financial markets, the weak link is borrowed money.
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This ability of Buffett’s to cut through the clutter suggests a certain genius. Buffett focused so exquisitely on his object, and his simplicity was a counterpart to that genius.
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Buffett thought of everything in terms of odds: horse races, plane crashes, even nuclear war.
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That was insurance: if you figured out the odds of a hurricane, or a three-car fatal, and priced your policies accordingly, you were playing with loaded dice.
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While other companies cut prices to hang on to market share, Buffett recognized this as betting against the odds. So he and Goldberg refused to play.
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If the business was unprofitable, Buffett didn’t want the business. Someday—he wrote this in 1982—losses would force providers to pull back, and prices would rise. In the meantime, he would wait.
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As each lunatic has his vision, each bull market has its rationale.
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Occasionally, certain stocks sold for far less than they were “worth.” An astute investor could profit by buying them.
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One striking contrast was in the rival camps’ definition of “risk.” Risk, to Buffett, was the risk of paying more than a business would prove to be worth.
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They studied what was measurable, rather than what was meaningful.
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Eugene Fama demonstrated that the beta of a stock had no relation to its actual return.43 Nobel prizes had been awarded for treatises on beta; now, it developed, beta was useless.
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“Don’t tell me about the economics—I know they’re great. You make a product for a penny, you sell it for a dollar, and you sell it to addicts. And it has tremendous brand loyalty.”
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what the wise did in the beginning, “fools do in the end.”
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But when the world turned gloomy, his instinct was deadly.
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Generally, Buffett did not like banks. An outsider had no way of gauging the soundness of their loans until it was too late.
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Though fearful of hostility, he knew what many are slow to learn—that a sustained demonstration of good faith is apt to be returned in kind,
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if it is not undermined by any conflicting behavior.
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