Wisdom of Warren Buffett

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Wisdom of Warren Buffett Quotes, tips and life advice by Oracle of Omaha - Raghunath Soman

Transcript of Wisdom of Warren Buffett

Page 1: Wisdom of Warren Buffett

Wisdom of

Warren BuffettQuotes, tips and life advice

by Oracle of Omaha

- Raghunath Soman

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Every year, Bill Gates writes about the books he has read. In the Year 2014 list, he recommended Tap Dancing to Work: a book about Warren Buffet compiled & edited by Carol Loomis, editor of Fortune magazine.

Bill Gates did such an impressive job of persuading his readers, that in the next few months, I had read everything in public domain on Warren Buffett, including this book.

Warren Buffett is indeed a treasure-trove, not just of wealth, but also of some sound advice on life in general and of course, investment in particular. This presentation is a collection of some of his quotes and tips.

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Whom you choose to associate with matters. Hang out with people better than you, and you cannot help but improve.

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.

You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But it's terribly important that you know where the perimeter is.

It pays to conduct your affairs so that no matter how foolish other people get, you’re still around to play the game the next day.

You can always tell someone to go to hell tomorrow.

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Either hold a rock concert, or a ballet. But don’t hold a rock concert and advertise it as a ballet.

Someone’s sitting in the shade today because someone planted a tree long time ago.

Honesty is a very expensive gift. Do not expect it from cheap people.

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Never ask a barber if you need a haircut.

You do whatever the probabilities indicated based on the knowledge that you have at that time, but you are always willing to modify your behaviour or your approach as you get new information.

Bad habits are hard to kick, but good habits are too. So why not decide to have good habits?

Price is what you pay. Value is what you get.

The most important thing to do if you find yourself in a hole is to stop digging.

Risk comes from not knowing what you're doing.

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If you spend money on things you don’t need, soon you’ll have to sell the things you need.Don’t save what’s left after spending, but spend what’s left after saving.Never test the depth of a river with both feet.Look for three things in a person: intelligence, energy and integrity. If they don’t have the last one, don’t even bother with first two. Never depend on a single source of income. Invest to create a second source. No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.

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The stock market is a no-called-strike game. You don't have to swing at everything — you can wait for your pitch

Rule #1: Never lose moneyRule #2: Never forget Rule #1.

We don't get paid for activity, just for being right.

The free market’s the best mechanism ever devised to put resources to their most efficient and productive use. … The government isn’t particularly good at that. But the market isn’t so good at making sure that the wealth that’s produced is being distributed fairly or wisely.

You do whatever the probabilities indicated based on the knowledge that you have at that time, but you are always willing to modify your behaviour or your approach as you get new information.

I happen to have a talent for allocating capital. But my ability to use that talent is completely dependent on the society I was born into. If I’d been born into a tribe of hunters, this talent of mine would be pretty worthless. I was lucky enough to be born in a time and place where society values my talent, and gave me a good education to develop that talent, and set up the laws and the financial system to let me do what I love doing — and make a lot of money doing it. The least I can do is help pay for all that.

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I call investing the greatest business in the world … because you never have to swing. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.

You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K.

I'll tell you why I like the cigarette business. … It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.

Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times. … Buy into a company because you want to own it, not because you want the stock to go up. … People have been successful investors because they've stuck with successful companies. Sooner or later the market mirrors the business.

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It’s a game of a million inferences. There are a lot of things to draw inferences from — cards played and not played. These inferences tell you something about the probabilities. It's got to be the best intellectual exercise out there. You're seeing through new situations every ten minutes. Bridge is about weighing gain/loss ratios. You're doing calculations all the time.If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need. If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the Grand Canyon, you may feel you want a little larger margin of safety...

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Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.

Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.

Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway.

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The approach and strategies of bridge and stock investing are very similar. In the stock market you do not base your decisions on what the market is doing, but on what you think is rational. With bridge, you need to adhere to a disciplined bidding system. While there is no one best system, there is one that works best for you. Once you choose a system, you need to stick with it.

If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950sBut I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

If you invested in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time.We're more comfortable in that kind of business. It means we miss a lot of very big winners. But we wouldn't know how to pick them out anyway. It also means we have very few big losers - and that's quite helpful over time. We're perfectly willing to trade away a big payoff for a certain payoff.

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The free market’s the best mechanism ever devised to put resources to their most efficient and productive use. … The government isn’t particularly good at that. But the market isn’t so good at making sure that the wealth that’s produced is being distributed fairly or wisely. Some of that wealth has to be plowed back into education, so that the next generation has a fair chance, and to maintain our infrastructure, and provide some sort of safety net for those who lose out in a market economy. And it just makes sense that those of us who’ve benefited most from the market should pay a bigger share. … When you get rid of the estate tax, you’re basically handing over command of the country’s resources to people who didn’t earn it. It’s like choosing the 2020 Olympic team by picking the children of all the winners at the 2000 Games.The 400 of us pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you're in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.

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I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It is like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die.

More than 99% of my wealth will go to philanthropy during my lifetime or at death. Measured by dollars, this commitment is large. In a comparative sense, though, many individuals give more to others every day.

Millions of people who regularly contribute to churches, schools, and other organizations thereby relinquish the use of funds that would otherwise benefit their own families. The dollars these people drop into a collection plate or give to United Way mean forgone movies, dinners out, or other personal pleasures. In contrast, my family and I will give up nothing we need or want by fulfilling this 99% pledge.

Moreover, this pledge does not leave me contributing the most precious asset, which is time. Many people, including — I’m proud to say — my three children, give extensively of their own time and talents to help others. Gifts of this kind often prove far more valuable than money.

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Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends.My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.) My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate’s distribution of long straws is wildly capricious.The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs. My pledge starts us down that course.

The approach and strategies are very similar in that you gather all the information you can and then keep adding to that base of information as things develop. You do whatever the probabilities indicated based on the knowledge that you have at that time, but you are always willing to modify your behaviour or your approach as you get new information. In bridge, you behave in a way that gets the best from your partner. And in business, you behave in the way that gets the best from your managers and your employees.

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When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.

Price is what you pay; value is what you get.

Our performance, relatively, is likely to be better in a bear market than in a bull market … in a year when the general market had a substantial advance, I would be well satisfied to match the advance of the averages.I make no attempt to forecast the general market — my efforts are devoted to finding undervalued securities. However, I do believe that widespread public belief in the Inevitability of profits from investments in stocks will lead to eventual trouble. Should this occur, prices, but not intrinsic values in my opinion, of even undervalued securities can be expected to be substantially affected.

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After all, you only find out who is swimming naked when the tide goes out.Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. I've reluctantly discarded the notion of my continuing to manage the portfolio after my death — abandoning my hope to give new meaning to the term "thinking outside the box."Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.

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An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities — at full prices they couldn't buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.We have tried occasionally to buy toads at bargain prices with results that have been chronicled in past reports. Clearly our kisses fell flat. We have done well with a couple of princes — but they were princes when purchased. At least our kisses didn’t turn them into toads. And, finally, we have occasionally been quite successful in purchasing fractional interests in easily-identifiable princes at toad-like prices.When returns on capital are ordinary, an earn-more-by-putting-up-more record is no great managerial achievement. You can get the same result personally while operating from your rocking chair. Just quadruple the capital you commit to a savings account and you will quadruple your earnings. You would hardly expect hosannas for that particular accomplishment. Yet, retirement announcements regularly sing the praises of CEOs who have, say, quadrupled earnings of their widget company during their reign — with no one examining whether this gain was attributable simply to many years of retained earnings and the workings of compound interest.Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising "Take two aspirins"?For example: (1) As if governed by Newton's First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over because we acquired any ability to clear seven-footers.The most common cause of low prices is pessimism — some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.

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Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.We will reject interesting opportunities rather than over-leverage our balance sheet.Those who attended [the annual meeting] last year saw your Chairman pitch to Ernie Banks. This encounter proved to be the titanic duel that the sports world had long awaited. After the first few pitches — which were not my best, but when have I ever thrown my best? — I fired a brushback at Ernie just to let him know who was in command. Ernie charged the mound, and I charged the plate. But a clash was avoided because we became exhausted before reaching each other.The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities—that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future—will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.Instead, we try to apply Aesop's 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to "A girl in a convertible is worth five in the phonebook.").But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street — a community in which quality control is not prized — will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.

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Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.

We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.

In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.Our future rates of gain will fall far short of those achieved in the past. Berkshire's capital base is now simply too large to allow us to earn truly outsized returns. If you believe otherwise, you should consider a career in sales but avoid one in mathematics (bearing in mind that there are really only three kinds of people in the world: those who can count and those who can't).

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People will always try to stop you doing the right thing if it is unconventional.

You want to be greedy when others are fearful. You want to be fearful when others are greedy. It's that simple. … They're pretty fearful. In fact, in my adult lifetime, I don't think I've ever seen people as fearful economically as they are right now.

I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.Over the years, we have observed many accounting-based frauds of staggering size. Few of the perpetrators have been punished; many have not even been censured. It has been far safer to steal large sums with pen than small sums with a gun.In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. Managers and investors must

understand that accounting numbers is the beginning, not the end, of business valuation.

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Most people have 400-horsepower of IQ or talent and through sheer laziness they make do with 100-hp output. I would rather have a 200-hp engine and get 150-hp through hard work and focus.

You are never right or wrong just because people agree or disagree with you. You are right because your facts are right and your reasoning is correct.

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I have seen too many companies in which the top management should rather focus on managing the business rather than managing each other.

Managers should only do two things: Set clear goals and clear obstacles... including themselves.

There is never just one cockroach in the kitchen.~ implying that when you notice a defect/bug/fault, almost always many more exist.

When selecting a career, choose the work that you would do if you were independently wealthy and didn't have to work for a living.

You’ve got to keep control of your time. You can’t let people set your agenda in life.

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When I was sixteen, I had just two things on my mind - girls and cars. I wasn't very good with girls. So I thought about cars. I thought about girls, too, but I had more luck with cars.

Let's say that when I turned sixteen, a genie had appeared to me. And that genie said, 'Warren, I'm going to give you the car of your choice. It'll be here tomorrow morning with a big bow tied on it. Brand-new. And it's all yours.'

Having heard all the genie stories, I would say, 'What's the catch?' And the genie would answer, 'There's only one catch. This is the last car you're ever going to get in your life. So it's got to last a lifetime.'

If that had happened, I would have picked out that car. But, can you imagine, knowing it had to last a lifetime, what I would do with it?

I would read the manual about five times. I would always keep it garaged. If there was the least little dent or scratch, I'd have it fixed right away because I wouldn't want it rusting. I would baby that car, because it would have to last a lifetime.

That's exactly the position you are in concerning your mind and body. You only get one mind and one body. And it's got to last a lifetime. Now, it's very easy to let them ride for many years. But if you don't take care of that mind and that body, they'll be a wreck forty years later, just life the car would be.

It's what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now.

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Thank You!

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