Warren Buffett: “You Can Be Right… and Still Lose Money.” | Terry Leadership Speaker Series 2001

[Transcript]

WARREN BUFFETT: I have an old-fashioned belief that I can—only should expect to make money in things that I understand. And when I say understand, I don’t mean understand what the product does or anything like that. I mean understand what the economics of the business are likely to look at—look like ten years from now or twenty years from now.

I know, in general, what the economics of, say, Wrigley Chewing Gum will look like ten years from now. Internet isn’t going to change the way people chew gum. It isn’t going to change which gum they chew. You know, if you own the chewing gum market in a big way and you’ve got Doublemint, Spearmint and Juicy Fruit, those brands will be there ten years from now. So, I can’t pinpoint exactly what the numbers are going to look like on Wrigley, but I’m not going to be way off if I try to look forward on something like that. That—evaluating that company is within what I call my circle of competence. I understand what they do. I understand the economics of it. I understand the competitive aspects of the business.

There can be all kinds of companies that have wonderful futures, but I don’t know which ones they are. I mean—I have given talks in the past where I carry with me a 70-page tightly-printed list and it shows 2,000 auto companies. Now—if at the start of the 20th century, you had seen what the auto was going to do to this country—the impact it would have on the lives of—then your children and grandchildren and so on—it just transformed the American landscape. But of those 2,000 companies—you know, three basically survive. And they haven’t done that well many times. So, how do you pick three winners out of 2,000? It’s not so easy to do it. It’s easy when you look back, but it’s not so easy looking forward.

So, you could have been dead right on the fact that the auto industry—in fact, you probably couldn’t have predicted how big of an impact it would have—but you wouldn't have made money if you had bought companies across the board because the economic characteristics of that business were not easy to define. I said—I’ve always said the easier thing to do is figure out who loses. And what you really should have done in 1905 or so when you saw what was going to happen with the auto is you should have gone short horses. There were 20 million horses in 1900 and there’s about 4 million horses now. It’s easy to figure out the losers. You know, the loser is the horse. But the winner was the auto overall, but 2,000 companies—just about failed. A few merged out and so on.

There were three companies—auto companies in the Dow Industrials in the 1920s and ‘30s—Studebaker, Nash-Kelvinator, and Hudson Motor. Now, those names are all familiar to me and maybe some of them are familiar to you, but they’re not making any cars. You know, they didn’t make money. And yet, at one time, they were in the Dow 30. They were the aristocrats of American business—and they got creamed. So figuring out the economic characteristics of the winners in a wonderful business is not easy.

In North Carolina, you know, Orville and Wilbur took off—or I guess Orville took off and Wilbur watched, I would have been Wilbur—(Laughter)—but if you could have seen the future of the airline business from that point forward and how that would transform things, you know, it would have blown you away. And it has excited people, incidentally, ever since. But if there had been a capitalist at Kitty Hawk, he should have shot Orville down, I mean it—because it’s done nothing but cost investors money. There were over 400 airplane companies in the 1920s and ‘30s alone. There was an Omaha, there was a Nebraska. We were the Silicon Valley, apparently, of aircrafts—and they all disappeared. It’s been a terrible business.

At the end of 1991, if you added up the aggregate earnings from all airline companies—with billions poured in—since Wilbur and Orville were down there, they came to less than zero. The number of passengers went up every year, now, the importance of the industry was dramatically increased decade by decade, and nobody made any money.

So, figuring out the economic consequences—TV. I think there are—I don't know—20–25 million sets a year sold in the United States. I don't think there's one of them made in the United States anymore. I mean, you’d say TV set manufacturer, what a wonderful business. I mean everybody—now, nobody had a TV in 1950 or thereabouts ’45 to ’50—everybody has multiple sets now. But nobody in the United States has made any real money making the sets. They’re all out of business. You know, the Magnavox’s, the RCA’s, all of those companies.

Radio was the equivalent—there were over 500 companies making radios in the 1920s. Again, I don’t think there is a U.S. radio manufacturer at the present time. But Coca Cola, you know, what was it, 1884 at Jacobs Pharmacy—or whatever—the fellow comes up with something? A lot of copiers over the years, but now you’ve got a company that is selling roughly 1.1 billion 8-ounce servings of its product—not all Cokes—Sprite and some others—daily throughout the world 117 years later.

So, understanding the economic characteristics of a business is different than predicting the fact that an industry is going to do wonderfully. So, when I look at the internet businesses or I look at tech businesses, I say this is a marvelous thing and I love to play around on the computer—and now I order my books from Amazon and all kinds of things—but I don’t know who’s going to win. And unless I know who’s going to win, I’m not interested in investing. I’ll just play around on the computer. And the—(Laughter)—defining your circle of competence is the most important aspect of investing.

It's not how important—how large your circle is—you don’t have to be an expert on everything—but knowing where the perimeter of that circle of what you know and what you don’t know is, and staying inside of it, is all-important.

Tom Watson Sr., who started IBM, said in his book, he said, “I’m no genius." He said, "But I’m smart in spots, and I stay around those spots.” And you know, that is the key. So if I understand a few things, and I stick in that arena, I’ll do okay. And if I don’t understand something, but I get all excited about it, because my neighbors are talking about it, stocks are going up and everything, I start fooling around someplace else and eventually I’ll get creamed. And I should.

Source: https://youtu.be/2a9Lx9J8uSs?si=hvfkap4Rvr_pCtVY

 

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