How Warren Buffett Finds Great Investment Ideas

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. Uh, it's far over right. We never look at any analyst reports. I mean, I don't think I've, you know, if I read one, it was because the funny papers weren't available.

You know, my name is Oliver Grosza 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 their headquarters or any subsidiaries of companies? And, uh, which sources of information, like books for example, Value Lines, Standard and 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?

And the second part, if you think that a company like the Washington Post, Gecko, or Gillette 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 balance sheet and profit and loss account statement of the company?

Thank you very much.

Thank you. Uh, the answer to the first part is sort of, and maybe the second part is sort of all of the above. I mean, we read a lot and 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 accumulates. 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.

And we, at least, you know, I read. Charlie used to read, may still read a fair amount, but I read a lot of 10-Ks, read a lot of annual reports. Forty or fifty years ago, I did a lot of talking to managements. 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've 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 look at competitors, and I try 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. You know, managements are not the best reporting; most case, 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, as I said earlier, whether 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 the 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. Um, Charlie, you know, the more basic knowledge you have, I think the less new knowledge you have to get. The game is a lot like that 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.

And so there, in terms of what publications, I don't know, Warren, I would hate to give up the Wall Street Journal. Oh, you'd also hate to give up the Buffalo News, but you could. Well, you want to read lots of financial materials that comes along, and actually the New York Times has a far better business section than they had 25 years ago.

But you want to read Fortune, you know. 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. Uh, it's far over right; we never look at any analyst reports. I mean, I don't think, you know, if I read one, it was because the funny papers weren't available.

You know, it just doesn't— I mean, it, I don't understand why people do it. Uh, but there's a lot of data out there, and you know the beauty of it is, it's really what makes the investment game great is you don't have to be right on everything. You don't have to be right on twenty percent of the companies in the world or ten percent of the companies in the world or five percent. You only have to get one good idea every year or two.

So it's not something, you know, when I used to be very interested in horse handicapping, and 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 come up with a very profitable decision on a single company.

I would hate to be measured if somebody 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 know how I would do, but maybe I can find one in there where I think I'm nine and ten, ninety percent in being right. That it's an enormous advantage in stocks, and you only have to be right on a very, very few things in your lifetime as long as you never make any big mistakes.

Okay, what's interesting is that 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 going to do better over the next 20 years.

And they can do that stock by stock all through the 500 and have wide diversification, and at the end of 10 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.

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, uh, you know, I've always said that the way to get a reputation for being a good businessman is to buy a good business.

You know, it’s much easier than taking a lousy business, you know, and showing how wonderful you are at it, because I haven't seen that done very often. Number two.