The Tao of Warren Buffett: Warren Buffett's Words of Wisdom: Quotations and Interpretations to Help Guide You to Billionaire Wealth and Enlightened Business Management

by Mary Buffett

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. You don’t want to doubt that your parachute will open when you are about to jump out of a plane, and you don’t want to doubt the integrity of the person with whom you are about to jump into business.

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.

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.

Before signing a contract, imagine all the things that could go wrong—because they often do go wrong.

“It is easier to stay out of trouble than it is to get out of trouble.”

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.

the couple that makes money together is often the couple that stays together.

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.

Conviction is based on what you know will happen; faith is based on what you hope will happen.

This is the big secret in Warren’s buy-and-hold-forever strategy. If you buy and hold a business that requires lots of capital to grow, your stock is never going to grow in value.

Warren knows what he wants before he wants it.

with stocks, unlike casino games of chance, the risk varies dramatically from one stock to another, all of it based largely on two factors—the quality of the company and the price you pay for its shares in relation to that quality. The higher the quality, the lower the risk, and the lower the price in relation to the quality of the business, the lower the risk.

every single stock is a new game, with new odds, which change as the price of the stock changes, so wait till you find one where the odds are so much in your favor that you have a margin of safety, then bet big.

The funny thing about the stock market is that, unlike a casino, it occasionally serves up a sure thing. Warren is all about the sure thing.

Ben Graham taught that you should only buy a stock when it is selling at a low price in relationship to its long-term value. The low price will give you a margin of safety against calamity. Phil Fisher said that you need to buy a high-quality company, then hold it for a long, long time and let the retained earnings build up the value. Warren took Ben’s “buy at a low price to get a margin of safety” and married it to Phil’s “buy the highest-quality company and hold it forever” and ended up with “buy high-quality companies at low prices in relation to their value and then hold them for a long, long time.”

If everyone agrees with you that a particular stock is the next Microsoft, you are going to have to pay a steep price—which leaves little upside and lots of downside. What you want is to find a stock that no one is looking at or that is out of favor with the big investment funds and is selling at a low price relative to its long-term economic value. Many that have risen shall fall, and many that have fallen shall rise again. This was the battle cry of Warren’s mentor Benjamin Graham.

Warren has always subscribed to the idea that the better the teacher, the smarter the student body. Thus, the smarter the journalists, the smarter the society. The only people who don’t want a smarter society are liars, thieves, and politicians who are trying to hide something.

Medieval English philosopher and Franciscan monk William of Ockham (ca. 1285–1349), affectionately known in some scientific circles as Billy Occam, put forth the idea that the simplest explanation is usually the best explanation.

Every profession is ultimately a conspiracy against the laity. Only when something is made difficult to understand is there a need for experts, who can charge high fees for having figured it all out. The greater the complexity, the greater the need for an expert to help guide you through the complexity.

He says that you only have to make a few right decisions to end up rich, and that if

you are getting more than one brilliant investment idea a year, you are probably deluding yourself.

Warren knows what he is doing, so he prefers to concentrate his investments on a few well-chosen eggs, and then he watches them like a hawk.

For you to make money in the stock market, you need to buy a great company at a fair price or below and hold it for a long time—thereby letting the company’s retained earnings build up its underlying value. This is how everyone from Bill Gates to Warren Buffett got superrich. Gates did it with just one stock, and Warren did it on a half dozen.

The principles of life and investing often parallel each other. To succeed in life you really only have to get a few things right. The only way that you can screw it up is to make a series of bad decisions. That doesn’t mean that you can’t make mistakes, you just can’t make too many big ones.

he decided that he would invest only in the businesses that he was absolutely sure of and then bet heavily on them. He owes 90% of his wealth to just ten of these. Sometimes what you don’t do is just as important as what you do.

“If you let yourself be undisciplined on the small things, you will probably be undisciplined on the large things as well.”

Discipline is the key to success in the investment game—just as it is a key to success in much of life.

Warren never buys into a company if he can’t gauge how the company will perform in the future. He is not a “get in on the ground floor” kind of guy. He likes a great business with a predictable future that is selling at a discounted price that was brought on by a correctable mistake by management or an industry recession or a bear market.

It is one thing to look for something that you will never find, and it is another to look for something that you know from experience you will occasionally see. That is what Warren is looking for—an investment situation that he knows shows up occasionally under the right circumstances. What are the circumstances? A general bear market, an industry recession, a onetime event that doesn’t destroy the underlying great business, a panic sell-off—all these things create situations in which the stocks of some really great companies sell for

some amazingly low prices.

The only thing that he has to do is be patient and wait for those events to occur, which they do—not every day, not every month, and sometimes not every year, but with enough regularity that they ...

When it is time to sell, you don’t want to hesitate because you “love” the stock. Also, when the stock goes down, there is no reason to be mad at it—it doesn’t know you own it. It doesn’t experience rejection and neither should you.

Too much greed leads to envy, and envy is a road paved with the inadequacy of never having enough. The name of the game is to be consumed with passion for making money, rather than being consumed with envy because of what the other guy or gal has in the piggy bank. The happiest rich people are those who love the business life that goes with making money and haven’t the least interest in other people’s wealth. Besides, what fun is it to be rich if being rich means being miserable with envy?

Warren—forever rational—says that the increase in life expectancy that a shift to a health-conscious diet might bring is not worth the decrease in the pleasure he would get from eating less junk food. Mark Twain felt the same way about drinking and cigars.

If you don’t understand what you are doing, then why are you doing it? The proper investment approach is not intuitive—it is rational mixed with the right temperament. Ignorance is bliss, unless you are investing.

If you want to be able to explain what you did wrong, you need to know how to explain what you did right, and why you did it in the first place. You need to know a good business from a bad one, and you need to be able to determine if a company is underpriced or overpriced. If you can’t do that, then you should find someone who can do it for you, otherwise you are just throwing dice at a craps table where the odds are always stacked against you.

The road that leads to great success is usually paved with a ton of mistakes, so get over it and on with it.

“Our method is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That’s all I’m trying to do.”

Pick the wrong company at the right price and you lose; pick the right company at the wrong price and you lose. You have to pick the right company at the right price to win.

“Any business craving of the leader, however foolish, will be quickly supported by studies prepared by his troops.”

If you make your living pleasing the boss, you will certainly please the boss by supporting his position, regardless of your true feelings. You get nowhere in the business world by being the guy who says “I told you so.” You get ahead by being the guy who says “That’s a brilliant idea, J.R.!” And if the idea wasn’t brilliant, you get to be the guy who says “Don’t feel bad, boss, we all thought it was a great idea.” Misery loves company, even to the point of stupidity. That is why Warren looks in the mirror when he wants advice—it’s speedier, cheaper, and right or wrong, it always leads to the same brilliant decision.

When I asked her how she could make money selling so cheap, she said that the secret was in the buying. If she got it at a low enough price, she could sell it at a lower price than her competitors and still keep her margins. How did she always get the low price? Her competitors bought on credit and paid full price; she paid cash, bought large quantities, and always got a big discount. She also owned her own building so she didn’t have to pay rent, which kept her costs even lower. And, yes, she really couldn’t read or write, but, boy, she could sure count money.

“For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.”

“That which goes up doesn’t necessarily have to come down.” Warren said this in reference to Berkshire Hathaway’s stock price. It has risen from $19 a share in 1965 to $95,000 a share in 2006. A company with an expanding intrinsic value—such as Berkshire Hathaway—can find itself with a stock price that keeps rising and rising and rising….

It’s that old story: What the wise man does in the beginning, the fool does in the end.”

Warren is buying on the assumption that he is buying into a business. The stock market sometimes allows him to do this at a cost below what the whole business would sell for to a private buyer. Warren isn’t playing the stock market, but rather institutions that are so shortsighted that they are willing to ignore a company’s long-term economics in the never-ending search for the quick buck, the glory of being named top mutual fund of the year.

“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”

Great businesses, over time, really do grow up to make their shareholders rich; it just takes a little longer than a month.

“What would you buy today and feel comfortable with if they closed the stock market for the next ten years?” These questions cause you to stop thinking in the short term and start thinking in the long term. When you start thinking long term, you start thinking quality and the long-term economic nature of the business. This leads you to ask whether the company’s product has a durable competitive advantage. This means high margins on a product that doesn’t have to change. This means that the plant and equipment never go obsolete, which means you never have to retool and you have low research and development costs.

The thing to remember is that short-term efficiency often creates long-term inefficiency, which you can exploit to make yourself superrich.