Updated: Apr 17, 2020
Video Link: https://youtu.be/RY3IeibP2OA
In this episode, Warren Buffett was asked to explain the criteria that he looks at when he is selecting stocks and Charlie Munger explain how he would teach finance.
In this episode, you’ll learn:
What is Warren Buffett criteria for selecting a stock.
Why investing is simple but not necessarily easy.
Why stock is nothing other than a piece of business.
How Charlie Munger would teach finance.
Brief story of National Cash Register Company.
To check out all Collection: Warren Buffett <click here>
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
AUDIENCE MEMBER 00:10
Hi. My name is Brennan Vecchio (PH) and I’m in the Academy of Finance at Northwest High School in Omaha.
Could you explain the criteria you look at when selecting your stocks?
WARREN BUFFETT 00:21
Well, we look at — I’m glad you came. I hope there’s a large group. I got a note, I think from your teacher, on that. (Applause)
We look at it — the criteria for selecting a stock is really the criteria for looking at a business. We are looking for a business we can understand. That means they sell a product that we think we understand, or we understand the nature of the competition, what could go wrong with it over time.
And then when we find that business we try to figure out whether the economics of it means the earning power over the next 5, or 10, or 15 years is likely to be good and getting better or poor and getting worse. But we try to evaluate that future stream.
And then we try to decide whether we’re getting in with some people that we feel comfortable being in with. And then we try to decide what’s an appropriate price for what we’ve seen up to that point. And as I said last year, what we do is simple but not necessarily easy.
The checklist that is going through our mind is not very complicated. Knowing what you don’t know is important, and sometimes that’s not easy. And knowing the future is definitely — it’s impossible in many cases, in our view, and it’s difficult in others. And sometimes it’s relatively easy, and we’re looking for the ones that are relatively easy.
And then we —
And then when you get all through you have to find it at a price that’s interesting to you, and that’s very difficult for us now. Although there have been periods in the past where it’s been a total cinch.
And that’s what goes through our mind. If you were thinking of buying a service station, or a dry cleaning establishment, or a convenience store in Omaha to invest your life savings in and run as a business, you’d think about the same sort of things.
You’d think about the competitive position and what it would look like five or 10 years from now, and how you were going to run it, and who was going to run it for you, and how much you had to pay. And that’s exactly what we think of when we look at a stock, because the stock is nothing other than a piece of a business.
CHARLIE MUNGER 02:32
Yeah. If finance were — when finance is properly taught, it should be taught from cases where the investment decision is easy.
And the one I always cite is the early history of National Cash Register Company, and that was created by a fanatic who bought all the patents, and had the best salesforce, and the best production plants. He was a very intelligent man and passionately dedicated to the cash register business. And of course, the cash register business was a godsend to retailing when cash registers were invented. So that was the pharmaceuticals of a former age.
If you read the early annual report prepared by Patterson, who was CEO of National Cash Register, an idiot could see that this was a talented fanatic. Very favorably located, and that, therefore, the investment decision was easy. If I were teaching finance, I would collect a hundred cases like that. And that’s the way I would teach the students.
WARREN BUFFETT 03:48
We have that annual report. What was that, 1904 or something, Charlie?
But it’s really a classic report because Patterson not only tells you why his cash register is worth about 20 times what he’s selling for to people, but he also — (laughs) — tells you that you’re an idiot if you want to go in competition with him. It’s a classic.
CHARLIE MUNGER 04:05
It is just a (inaudible). But no intelligent person can read this report and not realize — (laughs) — that this guy can’t lose.
WARREN BUFFETT 04:14
Area 8, please.