In investing, two individuals have carved out their legacies based on their incredible wealth, successes, insights, and wisdom. Warren Buffett and Charlie Munger, serve as guiding lights for many who venture into the investing world. Their unique, simple, wise, and profoundly effective approaches have outperformed most of the investment world overall for decades.
This article delves into their insights, unraveling their strategies and tactics. Drawing from the words of these two investing legends, I aim to distill the essence of their wisdom, providing readers with a roadmap for uncovering exceptional investment ideas. So, buckle up as we embark on this fascinating journey, guided by two of the most successful investors of all time.
Warren Buffett on Finding Investing Ideas
Below is a transcript from a Berkshire Hathaway weekend shareholder meeting in 2003. In this question-and-answer session, Buffett gives insights into his fundamental investing research process.[1]
The first question from the audience was, “My name is Oliver Causa, and I’m from Vienna, Austria. My question has two parts. The first part is, how do you get a few excellent investment ideas to be so successful? Do you read any special newspapers or industry magazines, or – do you visit the headquarters or any subsidiaries of companies? And which sources of information, like books, for example, Value Line, Standard & Poor’s, Moody’s, databases like Reuters, Bloomberg, Datastream, annual reports, internet, and so on, do you use to get the right impression of a company?”
“The second part is, if you think that a company like The Washington Post, GEICO, or Gilllet has a very competitive product, what are the steps before you ultimately decide to invest in the company? Which publications do you read to get the best knowledge of the product and how important is the better balance sheet and profit and loss account statement of the company? Thank you very much. Thank you very much.”
Warren Buffett answers, “The answer to the first part is sort of, and maybe the second part is sort of, all of the above. We read a lot. We read daily publications; we read weekly or monthly periodicals, we read annual reports, we read 10-Ks; we read 10-Qs. Fortunately, the investment business is a business where knowledge cumulates. I mean, everything you learn when you’re 20 or 30, you may tweak some as you go along, but it all kind of builds into a knowledge base that’s useful forever. We, at least, you know, I read a lot.”
“Charlie used to read a fair amount, but I read a lot of 10-Ks, read a lot of annual reports. 40 or 50 years ago, I did a lot of talking to management. I used to go out and take a trip every now and then and really drop in on maybe 15 or 20 companies. I haven’t done that for a long, long time. I find everything we do, pretty much, I find through public documents. When I made an offer for Clayton Homes, I’d never visited the business; I’d never met the people. I’d done it over the phone, I’d read Jim Clayton’s book, I looked at the 10-Ks, I knew every company in the industry, I looked at competitors, and I tried to understand the business and not have any preconceived notions.”
“There is adequate information out there to evaluate a great many businesses. We do not find it particularly helpful to talk to managements. Managements frequently want to come to Omaha and talk to me, and they usually have a variety of reasons that they say they want to talk to me, but what they’re really hoping is we get interested in their stock. That never works. In most cases, the figures tell us more than a management does. So we do not spend any real amount of time talking to management. When we buy a business, we look at the record to determine what the management’s like, and then we want to size them up personally to see if they will keep working. But we don’t give a hoot about anybody’s projections. We don’t want to hear about them in terms of what they’re going to do in the future. We’ve never found any value in anything like that. But just a general business knowledge, you know what we’ve seen work, what we’ve seen has not worked. There’s a lot to absorb over time, Charlie.”
Charlie Munger adds, “Yeah, the more basic knowledge you have, I think the less new knowledge you have to get. The game is a lot like that. The fellow that plays chess blindfolded, he’s got a memory of the board and everything that happened before, and that enables him to do the next move in a way he never could if you just showed him the board mid-game, cold.”
“So, there… And in terms of what publications… I don’t know, Warren. I would hate to give up The Wall Street Journal.”
Buffett jokingly adds, “Oh, you’d also hate to give up the Buffalo News. But you could… Well, you want to read lots of financial material as it comes along. Actually, The New York Times has a far better business section than they had 25 years ago. But you… You want to read Fortune. You know, you… You want to read lots of annual reports. You really want to have a database in your mind, so that you can tell what kind of a business you’re looking at in general by looking at the figures.”
“It’s far overrated. Right, we never look at any analyst reports. I mean, I… I don’t think I’ve… You know, if I read one, it was because the funny papers weren’t available. It just doesn’t… I mean, it… I don’t understand why people do it. But there’s a lot of that out there. And you know, the beauty of it is, what makes the investment game great, you don’t have to be right on everything. You don’t have to be right on 20% of the companies in the world, or 10% of the companies in the world, or 5%. You only have to get one good idea every year or two.”
“So, it’s… It’s not something… You know, when I used to be very interested in horse handicapping, the old story was, and I hope Bob Dwyer is still here, that, you know, ‘You can beat a race, but you can’t beat the races.’ And you can… You can come up with a very profitable decision on a single company. I would hate to be measured if somebody took, gave me all 500 stocks in the S&P, and I had to make some prediction about how they would behave relative to the market over the next couple of years. I don’t… I don’t know how I would do.”
“But maybe, I can find one in there where I think I’m nine in ten, ninety percent, and being right is an enormous advantage in stocks. You only have to be right on the very, very few things in your lifetime, as long as you never make any big mistakes.”
Charlie Munger interjects, “At least 90 percent of the professional investment management operations don’t think the way we do at all. They just think if they hire enough people, they can be better at determining whether Pfizer or Merck is gonna do better over the next 20 years. And they can do that stock by stock, all through the 500, and have wide diversification. At the end of ten years, they’ll be way ahead of other people. And, of course, they won’t. Very few people have this idea of searching for just a few opportunities.”
Buffett continues, “Yeah, you wait for the fat pitch. Ted Williams wrote about that in a book called ‘The Science of Hitting.’ He said the most important thing in being a good hitter, you know, is to wait for the pitch in the sweet spot, basically. But you know, I’ve always said that the way to get a reputation for being a good businessman is to buy a good business. There, it’s much easier than taking a lousy business and showing how wonderful you are at it because I haven’t seen that done very often.”
The next question is asked of Buffett and Munger,”Number two, good afternoon, David Winters, Mountain Lakes, New Jersey. Thank you again for hosting the Berkshire weekend, it’s just great. Interest rates are the lowest they’ve been, and equity values in aggregate are still high. Berkshire has meaningful free cash flow, a short-duration bond portfolio, and you’re a buyer of low multiple, high-quality private businesses and a few stocks. Assuming that the stimulated economic policy is to deal with the recession eventually causes interest rates to go up and maybe equity values to come down, Berkshire seems very well-positioned to benefit. Would you comment, and also, are there any concerns on both of your parts about investors inadequately understanding the conglomerate structure of Berkshire and, therefore, improperly pricing the shares?”
Buffett answers, “Well, to answer the second question first, we hope the latter wouldn’t be true because we do our best to explain it. I used 14,000 words in the last annual report, which caused certain members of my family to ask what I was getting paid by the word. We want you to understand Berkshire, and I hope that comes true. That’s why we have these kind of meetings. That’s why we spend a lot of time writing an annual report. We try to tell you what we would like if the position was reversed. And if our positions were reversed, and we think that the information in the annual report, if you’ve read it, by somebody, they have to have some understanding of business and accounting. But if they don’t, nothing is going to help really in terms of helping them understand the business. But we think if they have some understanding of it, we have given them the information that Charlie and I would need in order to come up with our rough ideas of the valuation of Berkshire, and we hope we get across what it’s all about.”
“There are a lot of companies in Berkshire, but it’s not important that you understand the nuances of every single one. Looking at what happens in aggregate, in many cases, will be sufficient. In terms of how we’re positioned, we have 16 billion of cash, not because we want 16 billion in cash or because we expect interest rates to go up, or because we expect equities to go down. We have 16 billion of cash because we don’t see anything that makes us want to part with that cash, where we feel we’re getting enough for our money. But we would spend it, I mean if we spent it Monday morning on the right sort of business, or even if we could find equities that we liked, or if we could find, like last year, we found some junk bonds we liked. We’re not finding them this year at all because prices have changed dramatically.”
“So, we’re not really ever positioning ourselves. We’re simply trying to do the smartest thing we can every day when we come to the office. And if there’s nothing smart to do, cash is the default option, Charlie.”
Munger adds, “In terms of future opportunities, the issue is: Is it all likely that there’ll be an opportunity like 1973 or 1982 even, when equities generally are just mouth-watering. I think there’s a very excellent chance that neither Warren nor I will live to see either of those occasions again. If so, Berkshire’s not going to have a lot of no-brainer opportunities. We’re going to have to grind ahead the way we’ve been doing it recently, which is not all bad.”
Buffett adds, “It’s not impossible, though. We’ll get some mouth-watering opportunities. I mean, you just don’t know in markets. It’s unbelievable what markets do over time. And since you brought up interest rates, in Japan, the 10-year bond is selling to yield 5/8 of 1 percent. I don’t think there’s anybody in our annual meeting of 20 years ago, certainly including Charlie and myself, who would have dreamt the 10-year bond of a country running a significant deficit would be selling at 5/8 of 1 percent. I mean, would you say so, Charlie?”
Munger replies, “Would I ever, but strange things happen. And strange things happen, but if that could happen in Japan, something much less horrible for the investing class could happen in the United States.”
“It’s not unthinkable. I mean, we could be in for a considerable period when the average, intelligent, diversified investor in common stocks, using fancy paid advisors, just doesn’t do very well.”
Buffett adds, “But you can argue that if what we warned against, and hope doesn’t happen with derivatives should happen, it might create enormous opportunities for us in some arena. I mean, we wouldn’t be—it might very well turn out to be good for us if you get chaotic markets.”
“You had a somewhat disorganized market in junk bonds last year because there were a lot of them created much faster than the funds available to absorb them were coming in. Now this year, you have just the opposite situation. You have money pouring into the junk bond funds, a billion dollars a week roughly, and that’s changed the whole price situation. The world hasn’t changed that much; it’s just that the chaos has left the market for those instruments.”
Key Takeaways
- Successful investment doesn’t necessarily require comprehensive business knowledge; understanding what has worked and what hasn’t can prove fruitful.
- Investing is akin to a game of chess; the more you learn from past moves, the better your future strategies can become.
- Regularly consuming the fundamental data from financial news and publications can enhance your understanding of the value of businesses, aiding in informed investment decisions.
- Relying on analyst reports for investment decisions is discouraged. Instead, cultivating an understanding of business fundamentals is more beneficial.
- Successful investing doesn’t mandate a perfect record; being right about a good investment idea periodically can yield substantial rewards.
- The essence of investment lies in patience, akin to waiting for a perfect pitch in a baseball game.
- It’s not necessary to understand the intricacies of every investment. Evaluating aggregate performance is often sufficient.
- In an unpredictable market, holding cash can be a wise strategy when there aren’t compelling investment opportunities.
- Even in a lackluster market, unexpected opportunities may arise. Staying prepared and adaptable is crucial.
Conclusion
Success in the investment arena, according to Warren Buffett and Charlie Munger, is less about having an encyclopedic understanding of every business and how they will all perform in the future but more about discerning fundamental patterns for earnings, gleaning insights from past experiences, and exercising patience. Consuming the data and information in financial publications, understanding business basics, and identifying profitable investment opportunities, no matter how few, are among the key components of their investment approach. Rather than attempting to predict market trends, they advocate for maintaining liquidity until compelling opportunities arise. The duo’s philosophy emphasizes adaptability in a fluid market, underscoring that while the opportunity-rich investment landscapes of the past may not recur, unpredictable and profitable opportunities can surface unexpectedly, rewarding those who are prepared and vigilant.
