Collection: Warren Buffett - #360 'How to Make the RIGHT Decision in Investing & Business'
[Transcript]
AUDIENCE MEMBER 00:00
I’m Bob Klein (PH) from Los Angeles. You so eloquently stated that you can’t see who’s swimming naked until the tide goes out.
Could you discuss the issue of trying to employ a rational decision-making process in investing, or in business generally, as opposed to focusing on outcomes or results of just a few instances or over a short period of time?
For example, it may not be a good idea to underwrite some insurance policies if competition has lowered the premiums too far. And, likewise, in the stock market, momentum investors may get good results for a while. But buying high and trying to sell higher isn’t a good long-term strategy.
So I’d just like to hear you guys provide some detail on the importance of using an effective decision-making process, even though it may lead to some bad outcomes and underperformance in the short run.
WARREN BUFFETT 00:58
Yeah. Well, Ben Graham said long ago that you’re neither right nor wrong because people agree with you or disagree with you.
In other words, being contrarian has no special virtue over being a trend follower.
You’re right because your facts and reasoning are right. So all you do is you try to make sure that the facts you have are correct. And that’s usually pretty easy to do in this country. I mean, information is available on all kinds of things. Internet makes it even easier.
And then once you have the facts, you’ve got to think through what they mean. And you don’t take a public opinion survey. You don’t pay attention to things that are unimportant. I mean, what you’re looking for is something — things that are important and knowable.
If something’s important but unknowable, forget it. I mean, it may be important, you know, whether somebody’s going to drop a nuclear weapon tomorrow but it’s unknowable. It may be all kinds of things. So you — and there are all kinds of things are that knowable but are unimportant.
In focusing on business and investment decisions, you try to think — you narrow it down to the things that are knowable and important, and then you decide whether you have information of sufficient value that — you know, compared to price and all that — that will cause you to act.
What others are doing means nothing. It’s what Graham writes in Chapter 8 of “The Intelligent Investor,” that the market is there to serve you and not to instruct you. That’s of enormous importance.
When people talk about momentum in stocks or charting or any kind of things like that, they’re saying that the market is instructing you. The market doesn’t instruct us; the market is there to serve us.
If it does something silly, we get a chance to do something because it’s doing something silly. We do it. But it doesn’t tell us anything. It just tells us prices.
And if the price is out of line where the facts and reasoning lead you, then you — then action is called for. And if it doesn’t, you forget it and go play bridge that day and the next day, see whether there’s something new. And the nice thing is there always is something new.
I mentioned the LTCM crisis. We were getting calls on Sunday from people that had portfolios that were in trouble. Now, I will tell you that if — you can make a lot of money on Sunday.
You may not get a chance very often, but any calls you get on Sunday you’re probably going to make money on. (Laughter)
Things are really screwed up if you’re getting calls on Sunday. And all you have to do is make sure that you’re the callee and not the caller — (laughs) on Sunday.
But if you get those calls — you get a call on a Sunday and somebody says that the off-the-run is trading 30 basis points away from the on-the-run, you know, all you have to do is decide whether — how you handle that particular piece of information — whether it’s correct in the first place — but how you handle that piece of information, whether you can play out your hand.
You never get in a position, obviously, where the other fellow can call your tune. You have to be able to play out your hand under all circumstances. But if you can play out your hand, and you’ve got the right facts, and you reason by yourself, and you let the market serve you and not instruct you, you can’t miss.
Charlie?
CHARLIE MUNGER 04:18
Well, I would say some of you probably can miss. (Laughter)
WARREN BUFFETT 04:26
I would say Charlie can’t miss. I’ll put it that way. He’ll agree with that. (Laughter)
Do you have anything further to add?
CHARLIE MUNGER 04:34
No.
WARREN BUFFETT 04:34
OK. (Laughter) At least I’ve got him off that previous subject. Number 11. (Laughter)
(Source: https://buffett.cnbc.com/2006-berkshire-hathaway-annual-meeting/)
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
[YAPSS Takeaway]
Focus on what is important and knowable.
Act based on the right facts and reasoning not public opinions.
