Video Link: https://youtu.be/raocYC-UPYA
In this episode, Warren Buffett shared one of his investment philosophy: only buy things that he 'understand' and his definition of 'understanding' a business.
In this episode, you’ll learn:
What is Warren Buffett definition of 'understanding' a business?
What is Warren Buffett's investment philosophy?
How does Warren Buffett invest?
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~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
WARREN BUFFETT 00:08
The answer is we will never buy anything we don’t think we understand. And our definition of understanding is thinking that we have a reasonable probability of being able to assess where the business will be in 10 years.
But, you know, we’d be delighted — we have a man here who’s done very well. And if he has any business cards, you know, you could always invest with him, and — (Laughter)
And we’d welcome — you know — you can — we’ll give you a booth in our exhibitor’s section. And anybody that wants to do that is perfectly — obviously — free to do it with you or through any other — through anybody else that they select.
Now, you have a whole bunch of people out there that say they can do this. And maybe they can and maybe they can’t and maybe you can spot which ones can and can’t. The only way we know how to make money is to try and evaluate businesses.
And if we can’t evaluate a carbon steel company, we don’t buy it. It doesn’t mean it isn’t a good buy. It doesn’t mean it isn’t selling for a fraction of its worth. It just means that we don’t know how to evaluate it.
If we can’t evaluate the sensibilities of putting in a chemical plant or something in Brazil, we don’t do it. If somebody else knows how to do it, you know, more power to them.
There are all kinds of people that know how to make money in ways that we don’t. But, you know, it’s a free world and everybody can invest in those sort of things. But they would be making a mistake, a big mistake, to do it through us.
I mean, why pick a couple of guys like Charlie and me to do something like that with — when you can pick all kinds of other people that say they know how to do it.
I would say this. Incidentally, you mentioned a point earlier, which is how the popular press tends to think of things. But we don’t consider ourselves — Charlie and I don’t — richer or poorer based on what the stock does. We do feel richer or poorer based on what the business does.
So we look at the business as to how much we’re worth. And we do not look at the stock price, because the stock price doesn’t mean a thing to us. I mean, it doesn’t for a variety of reasons, but beyond that, imagine trying to sell hundreds of thousands of shares at the stock price.
We can always sell the business — we’re not going to do it — but we could always sell it for what the business is worth. We can’t sell our stock for what the — necessarily — what the stock price is. So we look at the business, entirely, in terms of evaluating our net worth.
We figure our net worth went up very, very, slightly — very slightly — in 1999. And we would figure that no matter what the stock was selling for — it just doesn’t make any difference — because we do look at the businesses.
We really look at it as if there wasn’t any quote on the stock. Because we don’t know what the stock is going to do.
If we do — if the business gets worth more at a reasonable rate, the stock will follow, over time. But it won’t necessarily follow week by week, or month by month, or year by year.
We had a lousy year in 1999, but the stock price did not calibrate with that in any perfect, or close to perfect, manner.
And we’ve had good years other times, when the stock price is way overpriced or over-described what happened during the year.
So we really measure all the time by the business. We think of it as a private business, basically, for which there’s a quotation. And if it’s handy to use that quotation, either in buying more stock or something of the sort, we may do it. But it does not govern our ideas of value.
CHARLIE MUNGER 03:37
Yeah. Generally, I would say that if you have a lot of lovely wealth in a form that makes you comfortable, and somebody down the street has found a way to make money a lot faster, in a way you don’t understand, you should not be made miserable by that process.
There are worse things in life than being left behind in possession of a lot of lovely money. I mean —
WARREN BUFFETT 04:03
Would you want to name a couple? (Laughter)
No, Charlie made — I mean, when farmland was — went from — farmland probably tripled here in the late ’70s, without any real change in yields per acre or the price of the commodity.
You know, are we going to sit around and stew because, you know, they — we didn’t buy farmland at the start?
You know, are we going to stew because all kinds of stuff — uranium stocks in the ’50s — or you can go back — all kinds of things that have — the conglomerates in the late ’60s, the leasing companies, I mean, you can just go down the line.
And it just doesn’t make any — we’re not in that game.
We would know how to create a chain letter, believe me. I mean, we’ve seen it down some many times. You know, we know the game. But it just isn’t our game.
Charlie? (Applause) Number 3?