The Only Investment Approach That Actually Works

Let’s hear it straight from the horse’s mouth! Here is an abstract of an interview with Warren Buffett.

Reporter: “…when I spoke with [Warren Buffett] last fall in his office in Omaha, he very characteristically made his investment style seems so perfectly simple.”

Warren Buffett: The first rule on investment is – don’t lose and the second rule of investment is – don’t forget the first rule. And that’s all the rules there are. I mean that if you buy things for far below what they’re worth and you buy a group of them, you basically don’t lose money.

Reporter: All right. What do you consider the most important quality for an investment manager?

Warren Buffett: It’s the temperamental quality not an intellectual quality. You don’t need tons of IQ in this business. I mean you have to have enough IQ to get from here to downtown Omaha, but but you do not have to be able to play three-dimensional chess or be in the top leagues in terms of bridge playing or something of a sort. You need a stable personality. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd because this is not a business where you take polls.

It’s a business where you think; and then Graham would say that “you’re not right or wrong because a thousand people agree with you and you’re not right or wrong because a thousand people disagree with you”. You’re right because your facts in your reasoning is right.

Reporter: What do you do that’s different than 90% of the many managers who are in the market?

Warren Buffett: Certainly most of the professional investors focus on what the stock is likely to do in the next year. To avail all kinds of arcane methods of approaching, but they do not really think of themselves as owning a piece of a business. That is the real test of whether you’re investing from a value standpoint or not. Whether you care whether the stock market is open tomorrow. If you’re making a good investment in a security, it shouldn’t bother you if they close down the stock market for five years.

All the ticker tells me is the price and I can look at the price occasionally to see whether the price isn’t outlandish wrong, but what prices don’t tell me anything about a business. Business figures themselves tell me something about a business but the price of a stock doesn’t tell me anything about a business. I would rather value a stock or a business first and not even know the price so that I’m not influenced by the price and establishing my valuation and then look at the price later to see whether it’s way out of line with what my value is.

Reporter: So Buffett chose to stay in this world, Omaha Nebraska where corn grows just minutes from downtown. Now Omaha is a nice town but nobody claims it’s a world financial center. Here the only thundering herd is actually on four feet. Don’t you find home a little bit off the beaten track for the investment world?

Warren Buffett: Well believe it or not we get mail here and we get periodical so we get all the facts needed to make decisions; and unlike Wall Street you’ll notice we don’t have 50 people coming up and whispering in our ears that we should be doing this or that this afternoon. You appreciate the lack of stimulus here. I like the lack of stimulation. We get facts not stimulation here.

Reporter: How can you stay away from Wall Street?

Warren Buffett: Well, if I were in Wall Street, I’d probably be a lot poor. You get over stimulated in Wall Street and you hear lots of things and you may shorten your focus and a short focus is not conducive to long profits. Here I can just focus on what businesses are worth and I don’t need to be in Washington to figure out what the Washington Post newspaper is worth. I don’t need to be in New York to figure out what some other company is worth. That’s it. It’s simple. It’s an intellectual process and unless the most static, there is in that an intellectual process really the better off you are.

Reporter: What is the intellectual process?

Warren Buffett: The intellectual processes is defining your level. Defining your area of competence and valuing businesses and then within that area of competence finding whatever sells at the cheapest price in relation to value. There are all kinds of things I’m not competent to value, but there are few that I am competent to value.

Reporter: Have you ever bought a technology company?

Warren Buffett: No, I really haven’t in 30 years of investing. Not one. I haven’t understood any of them.

Reporter: So, you haven’t ever bought, for example, IBM?

Warren Buffett: We have never owned IBM. Marvelous company. It may be the sensational company, but I haven’t known IBM.

Reporter: So, here is this technological revolution going on and you’re not gonna participate?

Warren Buffett: Pass me.

Reporter: It’s that all right with you?

Warren Buffett: It’s okay with me. Yeah, well, I don’t have to make money in every game. I mean I don’t know what cocoa beans are gonna do. I don’t know. There are all kinds of things I don’t know about and that may be too bad, but you know why should I know all about them? I haven’t worked that hard on them in securities business.

You literally, every day have thousands of the major American corporations offered to you at a price and a price that changes daily and you don’t have to make any decisions. You have to make that nothing is forced upon you. So, there are no called strikes in this business. The pitcher just stands there and those balls at you and if you’re playing real baseball and it’s between the knees and the shoulders you either swing or you got a strike. I need to get too many called. I knew you’re out in the securities business. You sit there and they throw us steal at 25 and they throw general motors at 68. You don’t have to swing at any of them. They may be wonderful pitches to swing at, but if you don’t know enough you don’t have to swing and you can sit there and watch thousands of pitches. And finally you get one right there where you want it, something that you understand, and then you swing.

Reporter: So, you might not swing for six months?

Warren Buffett: Might not swing for two years!

Reporter: Isn’t boring?

Warren Buffett: It would. It would bore most people and certainly boredom is a problem with most professional money managers. If they stay sit, to sit out an inning or two not only do they get somewhat antsy, but their clients are start yelling, you start yelling – swing you bum. You know from the stands and that’s very tough for people to do.

Reporter: Your approach seems so simple? Why doesn’t everybody do it?

Warren Buffett: Well, I think partly because it is so simple that the academics, for example, focus on all kinds of variables. Partly because academic professors.

Reporter: Right, yeah. The data in Business School?

Warren Buffett: Sure. That and the data is there so they focus on whether if you buy stocks on Tuesday and sell them on Friday you’re better off or if you buy them in election years and sell them in other years you’re better off. Or if you buy small companies. There are all these variables because the data are there and they learn how to manipulate data and as a friend of mine says – “to a man with a hammer everything looks like a nail” and once you have these skills, you just are dying to utilize them in some way. But they aren’t important. If I were being asked to participate in a business opportunity, would it make any difference to me whether I bought it on a Tuesday or Saturday or an election year? It’s not what a businessman thinks about in buying businesses so when I think about it when buying stocks because stocks are just pieces of a business.