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Kindle Notes & Highlights
by
Mary Buffett
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” The great secret to getting rich is getting your money to compound for you, and the larger sum you start with, all the better.
Watch your costs and avoid losses.
Good things do come to those who wait—provided you pick the right stock.
“Never be afraid to ask for too much when selling or offer too little when buying.”
.c1
Simply stated, in the world of business, how much money you get from a sale or how much you have to pay when making a purchase determines whether you make or lose money and how rich you ultimately become. Once negotiations begin, you can come down in your selling price or up in your buying price. But it’s impossible to do the opposite.
.c2
“You can’t make a good deal with a bad person.” A bad person is a bad person, and a bad person will never make you a good deal. The world is filled with enough good and honest people that doing business with the dishonest ones is pure foolishness. If you even have to ask yourself the question “Do I trust this person?” you should immediately leave the negotiating table and look for more honest company with whom to do business.
.c1
If you can’t trust them now, you won’t be able to trust them later, so why trust them at all?
.c2
The rule is simple: People with integrity are predisposed to perform; people without integrity are predisposed not to perform. It is best not to get the two confused.
.c3
“The great personal fortunes in this country weren’t built on a portfolio of fifty companies. They were built by someone who identified one wonderful business.”
.c1
The key to Warren’s success is that he has been able to identify exactly what the economic characteristics of a wonderful business are—a business that has a durable competitive advantage that owns a piece of the consumer’s mind.
.c2
Warren has learned that sometimes the shortsighted nature of the stock market grossly undervalues these wonderful businesses, and when it does he steps up to the plate and buys as many shares as he can.
.c3
“It is impossible to unsign a contract, so do all your thinking before you sign.”
.c1
Before signing a contract, imagine all the things that could go wrong—because they often do go wrong.
.c2
Warren forgot to put a noncompete clause in his contract with eighty-nine-year-old Rose Blumkin when he bought her Omaha-based Nebraska Furniture Mart. A few years later Mrs. B. got angry at the way things were being done at the store, so she quit and started up a new store across the street—stealing tons of business from NFM. After a few years of suffering the stiff competition, Warren caved in and agreed to buy her new store for a cool $5 million. The second time around he had her sign a noncompete agreement,
.c3
“It is easier to stay out of trouble than it is to get out of trouble.” It is far easier to avoid the temptation of breaking the law to make easy money than it is to deal with the consequences if you get caught. To stay out of trouble, just do the right thing at the right time.
“You should invest like a Catholic marries—for life.”
.c1
You wouldn’t jump into a marriage without doing your research (dating) and discussing it with your advisers (your pals at the pub) and thinking long and hard about it…would you? Nor should you jump into an investment without knowing a lot about the company and making sure you understand it.
.c2
In 1973 Warren invested $11 million in the Washington Post Company, and he remains married to this investment even to this day, and over the thirty-three years he has held on to it, it has grown to be worth $1.5 billion.
.c3
The value of a well thought out investment, held for a long time, accrues the most value at the tail end and grows in value over years in the long term. To extend the analogy, the best relationships do the same.
One should beware of people who need to use your money to make you rich, especially when the more things they sell you means the more money they will make. More often than not, their agenda is to use your money to make themselves rich.
“It takes twenty years to build a reputation and five minutes to lose it. If you think about that, you will do things differently.”
.c1
It’s best not to do something that you know is wrong, because if you are caught, the price you pay may be more than you can afford.
.c2
Berkshire can afford to lose money, even lots of money; it can’t afford to lose reputation, even a shred of reputation…. And in the long run we will have whatever reputation we deserve.
.c3
The stock market is there to make you rich if you know what you are doing. But if you don’t know what you are doing, it will show no mercy in making you poor. Ignorance, when mixed with greed, is the stuff financial disasters are made of.
“I don’t try to jump over seven-foot bars; I look around for one-foot bars that I can step over.”
.c1
He is waiting for the perfect pitch and is staying with the sure thing: companies with products that don’t have to change, businesses that he knows will still be around in twenty years, selling now at a price that would make business sense even if he were buying the whole company. Lucky for him that the short-term focus of the stock market often neglects the long-term economics of a business, which means the stock market will often misprice a great business.
.c2
“The chains of habit are too light to be felt until they are too heavy to be broken.”
.c1
It is best to consciously check where all your habits are taking you long before you get there. If you don’t like the direction in which you are headed, the time to change course is before you find your ship sinking in a sea of troubles.
.c2
This is what happened to Warren with the Benjamin Graham–inspired investment strategy of buying bargain stocks that were selling below book value regardless of the nature of the company’s long-term economics.
.c3
he stayed with this approach long after it wasn’t viable anymore—the chains of habit were too light to be felt.
.c4
he shifted over to a strategy of buying exceptional businesses at reasonable prices and then holding them for long periods—thereby
.c5
“It’s not necessary to do extraordinary things to get extraordinary results.”
.c1
You just need a positive edge, a long period of time, and enough in it to make it worth the while.
Warren is shooting for a 20% annual rate of return,
.c2
Invest $100,000 for twenty years at 20% a year and you end up with $3.8 million; hold it for thirty years and you end up with $23.7 million. You win with the running game—not
.c3
“You should look at stocks as small pieces of a business.”
.c1
Warren likes to look at stocks as owning a small piece of a business. This way he can judge whether he is paying too much for the business. He multiplies the stock price by the number of shares outstanding, then asks himself whether this would be a good deal or a bad deal if he were buying the whole business. If the price is too rich to be buying the whole business, then it is too rich to be buying even a single share. This thought alone can stop you from foolishly getting caught in the speculative frenzy
.c2
Principle applies to things worth doing. If it’s not worth doing it all the way through or you wouldn’t want to do everything that’s required, then it’s not worth doing at all.
“My idea of a group decision is to look in the mirror.”
.c1
To make big money in the investment world you have to learn to think independently; to think independently you need to be comfortable standing alone.
.c2
“You should invest in a business that even a fool can run, because someday a fool will.” There are businesses with great underlying economics and businesses with poor underlying economics. You want to invest in companies with great underlying economics because it is hard to damage these kinds of businesses.
“With each investment you make, you should have the courage and the conviction to place at least 10% of your net worth in that stock.” Conviction is based on what you know will happen; faith is based on what you hope will happen.
.c1
A surefire way to achieve Warren’s level of conviction is to invest significant amounts of money. This causes you to focus and make certain that you have done your homework before you make your investment.
.c2
“Anything that can’t go on forever will end.”
.c1
Most businesses that are doing well now will, at some future point, do poorly. Things change—it is only a matter of time. Buggy whips were at one time a great business in America, video players were once the rage, selling and fixing typewriters a necessary and intricate part of the commercial equation. Now they are just things of the past with no economic promise whatsoever. Things do end, which is why you not only have to keep your eye on the ball, but also on the road ahead.
.c2
“When management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”
.c1
There are no turnarounds so long as the economics are poor. The market always wins, no matter how brilliant the management. Change the system to align to the market, or get out.
A great business is usually awash in cash, carries little or no debt, and is in a great position to either buy its way out of trouble or ride out any downturn in the economy. Mediocre businesses are always struggling for cash and are loaded with debt, and if they get into problems, they usually have to rob Peter to pay Paul, which leads to even more problems. No matter how brilliantly a mediocre business is run, its poor inherent economics will keep it forever anchored to poor results.
.c2
“Accounting is the language of business.”
.c1
To read a company’s financial statement you need to know how to read the numbers. To do that you need to learn accounting. If you can’t read the scorecard, you can’t keep score, which means that you can’t tell the winners from the losers.
.c2
“Turnarounds seldom turn.”
.c1
Warren looks for a good business that is selling at a fair price, or even better, a great business at a bargain price (which is hard to find). Poor businesses remain poor businesses regardless of the price you pay for them.
.c2
If it is a good business, it will remain a good business, and if it is a bad business, it will remain a bad business. Bad businesses can’t be turned into great businesses.
.c3
Warren believes that the same managerial energy and capital would be better spent buying a business with good economics that is selling at a fair price, than on taking on a poor business in need of a magic kiss, even if it is selling at a bargain price.
.c4
“If a business does well, the stock eventually follows.”
.c1
