Warren Buffett: How To Achieve A 20% Return Per Year

The first role in investment is don't lose, and the second rule of investment is don't forget the first rule. And that's all the rules there are. I mean, that if you buy things for far below what they're worth and you buy a group of them, you basically don't lose money.

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Warren Buffett, the man, the myth, the legend. Of course, Warren Buffett is known around the world as the man that eats McDonald's for breakfast and drinks five cokes per day. And he also happens to make a little bit of money on the side through this stock market investing business. But jokes aside, I've got a really cool video for you guys today. We're going, we're rewinding the clock back to 1985 to Warren Buffett's first TV interview. And yes, there is a lot to learn from an interview that's over 30 years old. Kind of crazy how well this interview has stood up over time. So without further ado, let's hear from a younger Warren Buffett, and we'll discuss his points along the way.

"What do you consider the most important quality for an investment manager?"

"It's a temperamental quality, not an intellectual quality. You don't need tons of IQ in this business. I mean, you have to have enough IQ to get from here to downtown Omaha, but you do not have to be able to play three-dimensional chess or be in the top leagues in terms of bridge playing or something of the sort. You need a stable personality. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd because this is not a business where you take polls. It's a business where you think, and Ben Graham would say that you're not right or wrong because a thousand people agree with you, and you're not right or wrong because a thousand people disagree with you. You're right because your facts and your reasoning are right."

Interesting. So the interviewer says, you know, what's the best quality for an investment manager? But Warren's answer here is certainly applicable to each and every one of us. Also, as a bit of a side note, it's pretty crazy hearing the speed at which he speaks in that clip. He certainly was a little bit more spritely back then. But this may be one of the most important parts of this whole interview—talking about temperament. Really, you don't need to be the sharpest tool in the shed to be a great investor; it's all about temperament. As Buffett says, you don't want to be the guy that gets sucked in going along with the herd, but also, you know, you don't want to be the guy that specifically takes pride in going against the grain. You know, in investing, you just want to be right. You're not right or wrong because, you know, a thousand people agree with you; you're right because you've stayed rational and have analyzed the facts.

And it's incredibly important to keep a cool head and trust in the facts rather than getting caught up in what everybody else thinks. And that's why Warren Buffett keeps his home base about 1,200 miles from Wall Street in Omaha, Nebraska.

So Buffett chose to stay in this world, Omaha, Nebraska, where corn grows just minutes from downtown. Now Omaha is a nice town, but nobody claims it's a world financial center.

"Don't you find Omaha a little bit off the beaten track for the investment world?"

"Well, believe it or not, we get mail here, and we get periodicals, and we get all the facts needed to make decisions. And unlike Wall Street, you'll notice we don't have 50 people coming up and whispering in our ear that we should be doing this or that this afternoon."

"You appreciate the lack of stimulation?"

"I like the lack of stimulation! We get facts, not stimulation here."

"How can you stay away from Wall Street?"

"Well, if I were on Wall Street, I'd probably be a lot poorer. You get overstimulated in Wall Street and you hear lots of things, and you may shorten your focus, and a short focus is not conducive to long profits. Here I can just focus on what businesses are worth and I don't need to be in Washington to figure out what the Washington Post newspaper is worth. And I don't need to be in New York to figure out what some other company is worth. It's simply an intellectual process, and the less static there is in that intellectual process, really the better off you are."

Isn't that interesting? Buffett deliberately stays well away from the hustle and bustle of Wall Street. He distances himself from the big money managers; he gets away from the big media hubs. Why? Well, for the exact reason we discussed before, so he can avoid that stimulation, avoid being sucked up into opinion and speculation, so that he can focus on the facts. He can read the annual reports, he can listen to the conference calls without opinion getting in the way and clouding his judgment.

And this lets him simply focus on the business itself.

"Warren, what do you do that's different than 90% of the money managers who are in the market?"

"Certainly most of the professional investors focus on what the stock is likely to do in the next year or two. And there are all kinds of arcane methods of approaching that, but they do not really think of themselves as owning a piece of a business. But the real test of whether you're investing from a value standpoint or not is whether you care whether the stock market is open tomorrow. If you're making a good investment in a security, it shouldn't bother if they closed down the stock market for five years. All the ticker tells me is the price. And I can look at the price occasionally to see whether the price is outlandishly cheap or outlandishly high. But prices don't tell me anything about a business. Business figures themselves tell me something about a business, but the price of a stock doesn't tell me anything about a business. I would rather value a stock or a business first and not even know the price so that I'm not influenced by the price in establishing my valuation. And then look at the price later to see whether it's way out of line with what my value is."

This is a great clip, and Warren points out a huge flaw that most investors have. You know, when they're investing they get way too focused on what the stock will do over the next year or two. You know, this is another critical point to understand as to why Warren Buffett is so successful with his investing. Buffett does not care what happens to the stock over the next year or two. You know, if it goes up, great! But if it goes down, you know, that's even better because Buffett focuses on the business as opposed to the stock. And this really helps keep your emotions in check when the stock price starts darting around, which of course it will. Overall, that will make for much smarter, much better investments because, you know, even if the stock goes down 50%, you can just go back and read the quarterly reports, read through the market announcements. If the business is still growing, still performing really well, pumping out lots of free cash flow, then there's literally nothing to worry about.

But if you were focusing on just the stock, you would have probably freaked out and sold. Well, you know, honestly, Buffett would probably be on the other end of that transaction; he'd be buying the shares off you for a 50% discount.

So focus on the business and not the stock. Write that one down. Stick it up on your wall. Seriously.

But next up, if you're focused on the business, what process do you need to follow to find the right companies to invest in?

"What is the intellectual process?"

"The intellectual process is defining your area of competence and valuing businesses, and then within that area of competence, finding whatever sells at the cheapest price in relation to value. And there are all kinds of things I'm not competent to value, but there are a few that I am competent to value."

Just quickly note that one down: the first thing is to stay within your circle of competence. You know, if you love shoes, look at shoe brands. If you love gaming, stick to gaming companies. You know, if you love ice cream, stick to ice creameries. Then secondly, once you know you're in your circle of competence, then it's all about value. You only buy into the company when you understand that the shares are trading well below the intrinsic value. Two really important concepts.

Alright, back to it.

"Have you ever bought a technology company?"

"No, I really haven't in 30 years of investing. Not one. I haven't understood any of them."

"So you haven't ever owned, for example, IBM?"

"Never owned IBM. Marvelous company. I mean, a sensational company, but I haven't owned IBM."

"And so here is this technological revolution going on, and you're not going to be a participant, going right past me? Is that alright with you?"

"It's okay with me. I don't have to make money in every game. I mean, I don't know what cocoa beans are going to do. There are all kinds of things I don't know about, and that may be too bad. But, you know, why should I know all about them? In the securities business, you literally every day have thousands of the major American corporations offered to you at a price—a price that changes daily—and you don't have to make any decisions. You have to make nothing. Nothing is forced upon you. So there are no called strikes in the business. The pitcher just stands there and throws balls at you, and if you're playing real baseball and it's between the knees and the shoulders, you either swing or you got a strike called on you. If you get too many called strikes, I know you're out. In the securities business, you sit there and they throw U.S. Steel at 25, and they throw General Motors at 68, and you don't have to swing at any of them. They may be wonderful pitches to swing at, but if you don't know enough, you don't have to swing. And you can sit there and watch thousands of pitches, and finally you get one right there where you want it—something that you understand—and then you swing. And so you might not swing for six months; you might not swing for two years."

This is very important to understand—your circle of competence in investing is everything. Never drift outside your circle of confidence. That's the biggest rule. Buffett is, you know, he's the most successful investor of all time, and he's done it mostly without investing in technology companies. You know, the only tech company he's bought a chunk of is Apple, but the Teslas, the Microsofts, Amazons, Facebooks, the Googles—none of them. I mean, that has been a huge chunk of the market's return over the past 10 years—the technology companies—and Buffett has been able to remain the world's most successful investor without them.

Now, this shows you a really important point. It shows you don't need to be investing in the next big thing. You just need to stick to what you understand well because that's where you have an edge; that's where you make your money.

And then the next part of this clip is that, you know, unlike the big money managers, there is no pressure on you to do anything in the market. And that's what Warren Buffett is talking about with that baseball analogy. You know, you might have the tiniest hitting zone in the world, but as an investor, you can let pitch after pitch fly past you, perhaps for years until you get that perfect throw. You know, I love movies and TV shows; I've studied Disney inside and out, and I know it's a killer business. Now here it comes; it's been thrown at me at a 50% discount. That's when you swing hard—that's how value investors do it.

But you don't have to swing at stuff that you don't understand, and you don't have to swing at businesses that are overpriced.

And at about this point, you might be saying, you know, this strategy doesn't really sound so hard, and you would be right. It is a very simple set of rules that, when implemented, have had very favorable results for many investors. So why aren't more people doing it?

Well, lastly I wanted to play two clips here. The first is from Warren Buffett, and then straight after that we're going to hear from Buffett's longtime business partner, Charlie Munger.

"Warren, your approach seems so simple, why doesn't everybody do it?"

"Well, I think partly because it is so simple. The academics, for example, focus on all kinds of variables. Partly because academics, you mean professors, right?"

"Yeah, the data is in business school, sure. And the data is there, so they focus on whether if you buy stocks on Tuesday and sell them on Friday, you're better off, or if you buy them in election years and sell them in other years, you're better off, or if you buy small companies. There are all these variables because the data are there. And they learned how to manipulate data. If I were being asked to participate in a business opportunity, would it make any difference to me whether I bought it on a Tuesday or Saturday or an election year or something? It's not what a businessman thinks about in buying businesses. So why think about it when buying stocks? Because stocks are just pieces of businesses. That's a very simple set of ideas. And the reason that our ideas have not spread faster is they're too simple. The professional classes can't justify their existence if that's all I have to say. I mean, it's also obvious and so simple. What would they have to do with the rest of the semester?"

So there you go, team. That was Warren Buffett's first TV interview from 1985, yes, with a guest appearance from the great Charlie Munger. Anyway, I hope you guys got something out of that video. Interesting that, you know, it's pretty much the same stuff as what he's saying today. I think that's the most surprising thing.

But overall, guys, if you enjoyed it or if you found it useful, please leave a like on the video. I certainly appreciate it; it helps the video out in that YouTube algorithm. The easiest way to support the channel takes all of a second to do so. I really appreciate that. Of course, subscribe to the channel if you're new around here. If you're not subscribed already, jump on board. And if you're interested in learning about that Warren Buffett value investing approach, then you can check out Introduction to Stock Analysis. That's linked down in the description below.

That's, uh, that will take you over to Profitful, which is the business that I started up, and then you can have a look at that eight-hour long course if that is something that interests you. But guys, that will just about do us for today. Thank you very much for watching; I hope you enjoyed it, and I'll see you guys in the next video.

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