Warren Buffett

Guide to Investing

For Warren Buffett, To prove his point, in 2007, he made a massive 10-year
bet for charity with a proponent of active investing
deciding what stocks to that a low-cost Vanguard S&P 500 index fund would
outperform a hand-picked basket of hedge funds,
buy is “simple but which charge large fees.
not necessarily easy.”
At the end of the wager, the S&P index fund had
He spends most of his day reading. He calls it gained 125.8%. The hedge funds were up an average of
his “secret.” Buffett reads hundreds of pages a week to around 36%.
build up “compound knowledge” over decades.
He reads books, newspapers, and especially, annual A key element of the index fund strategy, however, is
reports. “The beauty of it is that the knowledge is that you don’t put everything in at once.
cumulative… What you’re learning about Company A
will help you thinking about Company B,” he said. “I would do it over a period of time, because the very
nature of index funds is that you are saying, I
It’s a lot of work and it takes a lot of time. Buffett think America’s business is going to do well over a —
enjoys that work and has the time to do it. He is a reasonably well — over a long period of time, but
professional investor. I don’t know enough to pick the winners and I don’t
know enough to pick the winning times.”
Most people aren’t professional investors. The advice — 2002 BERKSHIRE ANNUAL MEETING

he’s given, time and time again over the years, is that
for most people, the best thing to do is make regular If you do want to do it yourself, Buffett says you need
contributions to a low-cost stock index fund and to know three investing principles that have guided
spend your time on the other things you need, or him since he was a young man.
want, to do.
They’re from a book first published in 1949:
He adds, “You will not get that advice from anybody “The Intelligent Investor” by Benjamin Graham.
else because nobody gets paid to give you that advice.” Buffett read it while he was an undergraduate at
the University of Nebraska.
And, he stresses, don’t take advice from anyone who
is paid to offer it. “You will have all kinds of people “ ‘The Intelligent Investor’ changed my life... Graham’s
telling you how much better they can do for you” if book gave me a philosophy, a bedrock philosophy,
you pay them, “but they won’t do better.” on investing that made sense.”
— 2013 BERKSHIRE ANNUAL MEETING

“They come in and they talk for hours, and you pay
them a large fee, and they always suggest something
other than just sitting on your rear end and
participating in American business without cost.”
— 2016 BERKSHIRE ANNUAL MEETING
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 WARREN BUFFETT GUIDE TO INVESTING

Principle One 1.
“One that we can understand …”
Don’t look at a stock like it is a
ticker symbol with a price that When Buffett talks about “understanding” a company,
he means he understands how that company will be
goes up and down on a chart. able to make money far into the future.
It’s a slice of a company’s profits
far into the future, and that’s He’s often said he didn’t buy shares of what turned out
how they need to be evaluated. to be very successful tech companies like Google and
Microsoft because he didn’t understand them.
At the 2000 annual meeting, a skeptical shareholder
“Charlie (Munger, Buffett’s longtime business told Buffett he couldn’t imagine him not
partner) and I haven’t the faintest idea where the understanding something. Buffett responded, “Oh,
stock market is going to go next week, next month, we understand the product. We understand what
or next year. We never talk about it… it does for people. We just don’t know the economics
of it 10 years from now.”
“What we see when we look at the stock market is
thousands and thousands and thousands of
companies priced every day, and we ignore 99.9 2.
percent of what we see… “With favorable long-term prospects …”

“And then every now and then we see something that Buffett often refers to a company’s sustainable
looks like it’s attractively priced to us, as a business. competitive advantage, something he calls a “moat.”
Forget about the word ‘stock.’
“Every business that we look at we think of as an
“When we buy a stock, we would be happy with that economic castle… And you want the capitalistic
stock if they told us the market was going to close system to work in a way that millions of people are
for a couple years. We look to the business.” out there with capital thinking about ways to take
your castle away from you, and appropriate it for
their own use. And then the question is, what kind of
What does Buffett look for in a business? In his a moat do you have around that castle that
1977 letter to shareholders, Buffett listed four things protects it?”
he wants to see, whether he’s buying the entire — 2000 BERKSHIRE ANNUAL MEETING
company for Berkshire, or just a slice of it as a stock.
A “moat” consists of things a company does to keep
and gain loyal customers, such as low prices, quality
products, proprietary technology, and, often, a well-
known brand built through years of advertising, such
as Coca-Cola. An established company in an industry
that has large start-up costs that deter would be
competitors can also have a moat.

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3. 4.
“Operated by honest and competent “Available at a very attractive price.”
people …”
“The key to [Benjamin] Graham’s approach to
“Generally, we like people who are candid. We can investing is not thinking of stocks as stocks or part of a
usually tell when somebody’s dancing around stock market. Stocks are part of a business. People
something, or where their — when the reports are in this room (Berkshire shareholders) own a piece of
essentially a little dishonest, or biased, or something. a business. If the business does well, they’re going
And it’s just a lot easier to operate with people to do all right as long as they don’t pay way too much
that are candid. to join into that business.”
— 1997 BERKSHIRE ANNUAL MEETING
“And we like people who are smart, you know.
I don’t mean geniuses... And we like people who are
focused on the business.” Buffett’s goal is to buy when the price is below a
— 1995 BERKSHIRE ANNUAL MEETING company’s “intrinsic value.”

“The intrinsic value of any business, if you could

The quality of the business itself, however, takes foresee the future perfectly, is the present value of all
precedence. cash that will be ever distributed for that business
between now and judgment day.
“The really great business is one that doesn’t require
good management. I mean, that is a terrific “And we’re not perfect at estimating that, obviously.
business. And the poor business is one that can only (Laughs)
succeed, or even survive, with great management.”
— 1996 BERKSHIRE ANNUAL MEETING “But that’s what an investment or a business is all
about. You put money in, and you take money out.

“Aesop said, ‘A bird in the hand is worth two in the

bush.’ Now, he said that around 600 B.C. or
something like that, but that hasn’t been improved
on very much by the business professors now.”
— 2014 BERKSHIRE ANNUAL MEETING

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 WARREN BUFFETT GUIDE TO INVESTING

Principle Two Buffett talks about the importance of emotional

discipline.
The stock market is there to
“If you have a temperament that when others are
serve you, not instruct you. fearful you’re going to get scared yourself, you know,
you are not going to make a lot of money in securities
Many non-professional investors become concerned
over time, in all probability.
when stock prices fall. They think the market is
telling them they made a mistake. Some may even be
“You know, people really — if they didn’t look at
so shaken that they sell stocks at the lower prices.
quotations — but, of course, the whole world is urging
them to look at quotations, and more than that, do
Buffett takes the opposite view. If he buys a stock
something based on small changes in quotations…
because he thinks the company will be a long-term
winner, he doesn’t let the market convince him
“Think how much more rational investing in a farm
otherwise.
is than the way many people buy stocks.
“My enthusiasm for stocks is in direct proportion to
“If you buy a farm, do you get a quote next week, do
how far they go down. I like it when things I like go
you get a quote next month? If you buy an apartment
down in price…
house, do you get a quote next week or month?
“Am I better off if I have to pay high prices or low
“No, you look at the apartment house or the farm
prices? So, it’s not bad news for us when stocks go
and you say, I expect it to produce so many bushels
down at all. Now, you know, it’s bad news for us when
of soybeans and corn, and if it does that, it meets
something goes wrong with a company.
my expectations…
“But the fact that something gets cheaper, I mean, if
“Some people really do not have the — apparently, they
I walked into McDonald’s tomorrow and they’ve cut
don’t have the temperament, or emotional stability,
the prices of hamburgers by half, you know, I will
or whatever it may be, to invest in securities…
be happy because I’m going to be buying hamburgers
for a long time.”
“In the end, what counts is buying a good business at a
— CNBC SQUAWK BOX INTERVIEW, MARCH 1, 2010
decent price, and then forgetting about it for a long,
long, long time. And some people can do it and some
people can’t.”
Fear is a natural reaction when stocks fall. Most
— 2010 BERKSHIRE ANNUAL MEETING
people find the pain of losing something is greater
than the pleasure of gaining something.
The traditional view is that investors face greater risk
when stock prices are making big moves, up or down.
For Buffett, that volatility is good because there’s a
greater chance there will be “mistakes” in the market.
And when those mistakes push a stock price lower,
it can be an opportunity.

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“Ben Graham used the example of ‘Mr. Market’… “So, we look for one-foot bars to step over rather than
seven-foot or eight-foot bars to try and set some
“And Ben said, “You know, just imagine that when Olympic record by jumping over. And it’s very nice,
you buy a stock, that you — in effect, you’ve bought because you get paid just as well for the one-foot bars.”
into a business where you have this obliging partner — 1998 BERKSHIRE ANNUAL MEETING
who comes around every day and offers you a
price at which you’ll either buy or sell. And the price
is identical.
Beyond Graham’s three principles, Buffett has a list
“And no one ever gets that in a private business, where of things you should do as an investor, and things
daily you get a buy-sell offer by a party. But in you shouldn’t do.
the stock market you get it. That’s a huge advantage.
And it’s a bigger advantage if this partner of yours is DO:
a heavy-drinking manic depressive. (Laughter)
Buy and hold (mostly)
“The crazier he is, the more money you’re going to make.” Buffett often says his favorite holding period is
— 1997 BERKSHIRE ANNUAL MEETING
“forever” and recommends buying a stock that you
don’t ever want to sell. But he stresses, that doesn’t
mean he never sells a stock. If a company loses
its long-term competitive advantage or he thinks
Principle Three the money can be used for a better opportunity
elsewhere, Buffett will, and has, sold stocks in
Maintain a margin of safety Berkshire’s portfolio.

“We try not to do anything difficult …

DO:
“This is not like Olympic diving. In Olympic diving, Grab opportunities
they have a degree of difficulty factor. And if you can
do some very difficult dive, the payoff is greater “Big opportunities come infrequently. When it’s raining
if you do it well than if you do some very simple dive. gold, reach for a bucket, not a thimble.”
—2009 LETTER TO BERKSHIRE SHAREHOLDERS

“That’s not true in investments. You get paid just

as well for the most simple dive, as long as you DO:
execute it all right. And there’s no reason to try those
three-and-a-halfs when you get paid just as well
Go against the crowd
for just diving off the side of the pool and going “We simply attempt to be fearful when others are
in cleanly. (Laughter) greedy and to be greedy only when others are fearful.”
— 1986 LETTER TO BERKSHIRE SHAREHOLDERS

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 WARREN BUFFETT GUIDE TO INVESTING

DO: DO NOT:
Stay in your “circle of competence” Try to time the market
Buffett often uses baseball legend Ted Williams to “We don’t have an opinion about where the stock
illustrate an important aspect of his investing market’s going to go tomorrow or next week or next
philosophy. month. So, to sit around and not do something
that’s sensible because you think there will be
As Buffett explained in an HBO documentary, “If he something even more attractive, that’s just not our
waited for the pitch that was really in his sweet spot, approach to it.
he would bat .400. If he had to swing at something on
the lower corner, he would probably bat .235. “Anytime we get a chance to do something that makes
sense, we do it. And if it makes even more sense the
“The trick in investing is just to sit there and watch next day, and if we’ve got money, we may do more…
pitch after pitch go by and wait for the one right in
your sweet spot. And if people are yelling, ‘Swing, you “Picking bottoms is basically not our game. Pricing is
bum!’ ignore them.” our game. And that’s not so difficult. Picking bottoms,
I think, is probably impossible.”
And those “fat” pitches are likely to be in what Buffett — 2009 BERKSHIRE ANNUAL MEETING
calls his “circle of competence”.

“You don’t have to be an expert on every company,

or even many. You only have to be able to evaluate DO NOT:
companies within your circle of competence. The Get envious of people making money
size of that circle is not very important; knowing from risky behavior
its boundaries, however, is vital.”
— 1996 LETTER TO BERKSHIRE SHAREHOLDERS “People win lotteries every day, but there’s no reason to
have that effect you at all. You shouldn’t be jealous
about it.

“If they want to do mathematically unsound things,

and one of them occasionally gets lucky, and they put
the one person on television, and the million that
contributed to the winnings, with the big slice taken
out for the state don’t get on — it’s nothing to
worry about.

“All you have to do is figure out what makes sense…

Let the rest of the world go its own way. You
don’t want to get into a stupid game just because
it’s available.”
— 2016 BERKSHIRE ANNUAL MEETING

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 WARREN BUFFETT GUIDE TO INVESTING

DO NOT: DO NOT:
Bet against a stock’s price by Invest in nonproductive assets like
shorting it gold and cryptocurrencies

“It’s tempting. You see way more stocks that are “If you owned all the gold in the world you could have
dramatically overvalued in your career than you will a cube that would be 67 or 68 feet on a side, and you
see stocks that are dramatically undervalued… could get a ladder and you could climb up on top
of it, and you could say, I’m sitting on top of the world,
“It is a very, very tough business because of the fact and think you’re king of the world.
that you face unlimited losses, and because of the fact
that people that have overvalued stocks — very “You could fondle it, you could polish it, you could do
overvalued stocks — are frequently on some scale all these things with it. Stare at it. But it isn’t going
between promoter and crook… to do anything…

“But it is very painful and, in my experience, it was a “Anytime you buy an asset that can’t do anything,
whole lot easier to make money on the long side.” produce anything, you’re simply betting on whether
— 2001 BERKSHIRE ANNUAL MEETING somebody else will pay more for, again, an asset
that can’t do anything…

DO NOT: “I would bet on good-producing businesses to

Buy stocks on margin outperform something that doesn’t do anything over
any period of time.”
— 2011 BERKSHIRE ANNUAL MEETING
“It is crazy, in my view, to borrow money on securities…
It’s insane to risk what you have and need for
something you don’t really need. “If you and I buy various cryptocurrencies, they’re not
going to multiply — they’re not going to be a bunch
“Borrowing money is a way of trying to get rich a little of rabbits sitting there in front of us. They’re just going
faster, but there are plenty of good ways to get rich to sit there.
slowly. And you can have a lot of fun while you’re
getting rich as well.” “And I got to hope next time you get more excited after
— CNBC “SQUAWK BOX” INTERVIEW, FEBRUARY 26, 2018
I've bought it from you, and then maybe I’ll get more
excited and buy it from you.

“And actually, we could sit in the house by ourselves

and we could keep running up the price between
the two of us. But at the end of the time, there’s one
bitcoin sitting there. And now we’ve got to find
somebody else.”
— CNBC “SQUAWK BOX” INTERVIEW, MAY 7, 2018

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 WARREN BUFFETT GUIDE TO INVESTING

Finally, two important

things to remember
in investing and life
from Warren
1.
Doubling your net worth won’t make
you way happier, especially considering
the risk you would have to take.
“I wasn’t unhappy when I had $10,000 when I got out
of school. I was having a lot of fun. I was looking for
things to buy. And the fact that after I spent $10,000 I
ran out of money meant that I just kept looking for
things that were better than the ones I already had.

“But if you think that if you have $100,000 that means

that you’re an unhappy person and a million dollars
is going to make you happy, it is not going to happen.
Then you’ll look around and you’ll see people with two
million. And it just doesn’t work that way.

“You will not be way happier if you double your net

worth. You’ll get kind of a euphoric surge or
something like that, but to risk starting all over again
and losing everything… it’s just madness.”
— CNBC "SQUAWK BOX" INTERVIEW, FEBRUARY 26, 2018

2.
Remember the power of
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away. I’m playing in my playground.”
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OCTOBER 2007 Watch Newsletter.