Warren Buffett's 7 Rules to be a Great Investor

Price people are really strange on that. I mean, they cause most people, most, most, your listeners are savers, and that means they'll be net buyers, and they should want the stock market to go down. They should want to buy at a lower price, but they’ve got that feeling that they just feel better when stocks are going up.

Ted Williams wrote a book called "The Science of Hitting," and in it, he had a picture of himself at bat and the strike zone broken into I think 77 squares. He said if he waited for the pitch that was really in his sweet spot, he would bat .400, and if he had to swing at something on the lower corner, he would probably bat .235.

In investing, I’m in a no-called-strike business, which is the best business you can be in. I can look at a thousand different companies, and I don’t have to be right on every one of them or even 50% of them. So, I can pick the ball I want to hit, and the trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. If people are yelling, "Swing, you bum," ignore them.

There's a temptation for people to act far too frequently in stock simply because they're so liquid. Over the years, you develop a lot of filters, and I do know what I call my circle of competence. So, I stay within that circle, and I don't worry about things that are outside that circle. Defining what your game is, where you're going to have an edge, is enormously important.

At Berkshire Hathaway, we have all kinds of businesses. We own 73 businesses now, and in businesses, we're looking for an entity that has durable competitive advantage. Somebody that not only is doing well now but will do well 10 or 20 years from now. Capitalism, when you have a wonderful business, it's like having an economic castle, and the nature of capitalism is that people want to come in and take your castle.

Perfectly understandable. I mean, if I'm selling television sets or something, there's going to be 10 other people who can try and sell a better television set. If I have a restaurant here in Omaha, people are going to try and copy my menu and get more parking and take my chef, and so on. So, capitalism is all about somebody coming and trying to take the castle.

Now, what you need is a castle that has some durable competitive advantage. Some castle that has a moat around it, and that moat, that's one of the best moats in many respects, is to be a low-cost producer. But sometimes the moat is just having more talent. I mean, if you're the heavyweight champion in the world and you keep knocking out people, you've got a competitive advantage as long as you can keep doing it, and it's very profitable if you're the one that happens to be able to do it.

If you can turn out great motion pictures, I mean, you know, Steven Spielberg, I mean, he's a fellow to bet on, and it has enormous economic value. Well, we're looking for that institutionalized. We're not looking for the best brain surgeon in town; we're looking for the Mayo Clinic. So, we want an institution that, regardless of the person in charge, will maintain that competitive advantage over the decades.

We hope we find that in some businesses, and then we try to get the best person that we can to run them. Usually, it's the person who's been running them. Are you always right, or do you make mistakes? No, we make mistakes. It wouldn't be any fun if we didn't make mistakes. I mean, if I went out and played golf and on every one of the 18 holes I had a hole in one, I wouldn't be playing golf for very long.

I mean, you have to go into the rough occasionally to make the game interesting—not too often, though—but we can go beyond that. Certainly, when we took over Berkshire, Berkshire was selling at fifteen dollars a share, and gold was selling at twenty dollars an ounce. And then gold is now sixteen hundred, and Berkshire’s a hundred and twenty thousand.

But you can take a broader example than that. If you buy an ounce of gold today and you hold it a hundred years, you can go to it every day, and you can coo to it, and you can caress it, and you can fondle it; and a hundred years from now, you'll have one ounce of gold, and it won't have done anything for you in between.

If you buy a hundred acres of farmland, it will produce for you every year. You can use that money to buy more farmland. You can do it all kinds of things. But for a hundred years, it'll produce things for you, and you still have 100 acres of farmland at the end of the 100 years.

You could buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then 20. At the end, it was 11,400. But you’d all gotten dividends for a hundred years. So, a productive asset of any kind, a decent productive asset is going to kill a non-productive asset over time.

Now, in any given one-year period, five-year period, any asset can outperform another. If you go on CNBC and say that bonds are kind of a poor investment, you know, people don't get mad at you. You don't even hear from the treasury. I mean, you can knock almost any investment, and people may get a little irritated.

But when you talk about gold, and of course, that says something about their motivations for ownership. They want people to agree with them. They want everybody; they want everybody to get so scared they run to a cave with gold. And caves might be a better investment than gold. I mean, at least they're not producing more caves all the time.

So, they want people to be as afraid as they are because that's what's going to produce an increase in prices. Incidentally, they're right to be afraid of paper money. I mean, their basic premise that paper money around the world is going to get worth less and less and less over time is absolutely correct, but you just disagree with the investment theory beyond that.

Yeah, where they run from that—and they should run from it—is where, in my view, they make the mistake, but they have a correct basic premise. Well, if you own stocks like a farm or an apartment house, you don’t get a quote on those every day or every week. I think you look at the business, and the value of American business depends on how much it delivers in cash to its owners over between now and Judgment Day, and I don't think it changes in 10 and in a two-month period.

If you're looking at it as a business, now you've got anything can happen in markets. I mean, anything can happen to markets, and that's why they don't ever borrow money against securities that markets don't have to open tomorrow. I mean, you can have extraordinary events.

So, I think to some extent, you can get some of the instruments that people don’t understand very well that have a lot of firepower in them: volatility. Yeah, the idea of people taking a position, and they're gambling; they're not investing. Nobody's investing when they buy some supercharged index on how the VIX does or something like that. They don’t need it in their life; it's an unnecessary instrument.

Now, you know, they will create instruments that the public will buy, and then you can just count on that. Wall Street's been doing that since they met under the buttonwood tree in 1792 or whatever it was on the exchange.

But if you're investing—if I’m going to buy a half interest in the McDonald’s stand and you're going to run it, or McDonald's franchise, you're going to run it—I look to the business to determine whether I made a good investment. And I'm concerned about whether we have new competition, how we do over the years. But it's the business I look at.

When you're just looking at the price of something, you’re not investing. I mean, if you buy something, Bitcoin for example, or some cryptocurrency, you're not looking to the asset itself to produce anything. If you buy an apartment house, you're looking at all the apartment houses. If you buy a farm, you look at the farm business. If you buy a whole business, you’re looking at how the business does. If you buy a part of a business, why shouldn’t you look at how the business is going to do?

But people get charmed by lots of action and the fact that things are liquid and all of that, and it does have repercussions back into the market when you get something like, you know, an ETN arrangement on the supercharged on the VIX. I mean, where you can lose 90% of your money in one day—I mean, that really doesn’t belong with the word investment. I mean, it's just a gambling form of action.

We're a net buyer of stocks over time, and just like being a net buyer of food, I expect to buy food the rest of my life, and I hope that food goes down in price tomorrow. So, when stocks are down, you know, we're going to be buying on balance. And who wouldn't rather buy at a lower price than a higher price? People are really strange on that.

I mean, they, because most people, most, most your listeners are savers, and that means they'll be net buyers, and they should want the stock market to go down. They should want to buy at a lower price, but they’ve got that feeling that they just feel better when stocks are going up.

Well, I look at a lot of figures just in connection with our businesses. I like to get numbers, so I’m getting reports in weekly in some businesses, but that doesn't tell me what the economy's gonna do six months from now or three months from now. It tells me what's going on now with our businesses, and it really doesn't make any difference in what I do today in terms of buying stocks or buying businesses what those numbers tell me. They're interesting, but they're not guides to me.

If we buy a business, we're going to hold the driver, so we're going to have good years, bad years in between years, maybe a disastrous year or something here. And we care a lot about the price. We do not care about the next 12 months.

But are you surprised at how long this economy has been expanding? I've been surprised by all kinds of things in the last 10 years about the economy. I mean, I don’t think there was any economist I’ve ever read that talked about negative interest rates for long periods of time.

I mean, if you go back and read Keynes or you read Samuelson, you read any of them—they do not get into a negative rate environment. I think now there's still 11 trillion of government debt around the world that's at a negative rate, so we've never seen it before. And we've never seen, at least the conventional wisdom, on a sustained period of long and growing deficits while the economy is getting better, extremely low interest rates, and really very little inflation.

So, something different is happening. But something different happens all the time. So, and that's one reason economic predictions just don’t enter into our decisions. Charlie Munger, my partner, and I, you know, 54 years now, we’ve never made a decision based on an economic prediction.

We make business predictions about what individual businesses will do over time, and we compare that to what we have to pay for. But we have never said yes to something because we thought the economy was going to do well in the next year or two years, and we’ve never said no to anything because we were right in the middle of a panic even if the price was right.

Alright, so you don't pay much attention to the dismal scientists then, I guess? Well, I pay none in the sense of as a guideline to doing anything. It’s entertainment! I mean, you know, it's like going to a variety show or something like that. But, and I just don't know of any economist that actually has bought businesses successfully or done well in stock. Paul Samuelson didn’t. He may know he was a big shareholder in Berkshire, but it's, you know, they make guesses, and there are so many variables.

I mean, in the hard sciences, you know, that, you know, if an apple falls from a tree, that isn't going to change over the centuries because of anything or political developments or 400 other variables that go in. But when you get into economics, there are so many variables, and the truth is, you've got to expect good times and bad times in business.

And if you were to buy an auto dealership and you're, you know, wherever you live locally or a McDonald's franchise or anything like that, you wouldn't try and time the purchase. You try and make the right purchase at the right price, and you want to be sure you got a good business. But you wouldn’t say I'm going to buy it because growth this year is going to be three percent instead of 2.8 or something.

We favor the businesses where we really think we know the answer, and therefore if a business gets to the point where we think the industry in which it operates, the competitive position, or anything is so chancy that we can't really come up with a figure, we don't really try to compensate for that sort of thing by having some extra large margin of safety. We really go on trying to go on to something that we understand better.

So, if we buy something like See's Candy as a business or Coca-Cola as a stock, we don't think we need a huge margin of safety because we don't think we're going to be wrong about our assumptions in any material way. What we really want to do is buy a business that's a great business, which means a business is going to earn a high return on capital employed for a very long period of time, and where we think the management will treat us right.

And we don't have to mark those down a lot. When we find those factors, we'd love to find them when they're selling at 40 cents on the dollar, but we will buy those at much closer to a dollar on the dollar. We don't like to pay a dollar on the dollar, but we'll pay something close.

And if we really get to something, you know, when we see a great business, it's like if you see somebody walk in the door, and you don't know whether they weigh 300 pounds or 325 pounds, you still know they're fat, right? And so if we see something where we know it's fat financially, we don't worry about being precise.

If we can come in, in that particular example, if the equivalent of 270 pounds will feel good. But if we find something where the competitive aspects are—it’s just the nature of the business that you really can't see out five or ten or twenty years—because that's what investing is. It's seeing out; you don't get paid for what's already happened. You only get paid for what's going to happen in the future.

The past is only useful to you in the extent to which it gives you insights into the future, and sometimes the past doesn't give you any insights into the future. And in other cases, like the stable business that you postulated, it probably does give you a pretty good guideline as to what's going to happen in the future, and you don't need a huge margin of safety.

You should have something that you should always feel you're getting a little more than what it's worth. There are times when we've been able to buy wonderful businesses at a quarter of what they're worth, but we haven't seen those. Well, we saw it in career recently, but you don't see those sort of things very often. And does that mean you should sit around and hope they come back for 10 or 15— you know, wait 10 or 15 years? That's not the way we do it.

If we can buy good businesses at a reasonable evaluation, we're going to keep doing it. Charlie.