Warren Buffett: 90 Years of Wisdom Summed up in 16 Minutes

And yeah, Ben Franklin did this and my old boss Ben Graham did this at early ages in their young teens. They just—Ben Graham looked around and he said, "Who do I admire?" You know, and he wanted to be admired himself. He said, "You know, why do I admire these other people?" And he said, "If I admire them for these reasons, maybe other people will admire me if I behave in a similar manner." He decided what kind of a person he wanted to be.

And if you follow that, at the end, you'll be the person you want to buy ten percent of. I mean, that's the goal in the end. Testing one million, two million, very okay. I came in from Nebraska today and you’re probably all familiar with us mainly by our football team. We have those fellows with the big white helmets with those red ends on them. I asked one of our starters the other day, "What's the 'N' stand for?" And he said, "Knowledge."

We make it tough on them though. I mean, you don't coast in Nebraska just because you're a football player. They major in agricultural economics, and there's a two-question final for all of the players. The first question is, "What did Old MacDonald have?" They were giving that to one of our potential Heisman trophy winners the other day, and he started to sweat. Finally, he brightened up. He said, "Farm!" The professor is delighted. Of course, you don't want to flunk a Heisman candidate. So he said, "Now, you're halfway home. Just one more question: How do you spell 'farm'?"

Now the guy really starts to sweat. He looks at the ceiling, and he looks around trying to find his face. Right? So he says, "E-I-E-I-O." So watch for that guy this year. He'll be dynamite.

I really want to talk about what's on your mind, so we're going to do a Q&A in a minute. There are a couple questions I always get asked. You know, people always say, "Well, who should I go to work for when I get out?" I've got a very simple answer. We may elaborate more on this as we go along. But you know, the real thing to do is to get going for some institution or individual that you admire.

I mean, it's crazy to take jobs just because they look good on your resume or because you get a little higher starting pay. I was up at Harvard a while back, and a very nice young guy picked me up at the airport—a Harvard Business School attendee. He said, "Look, I went to undergrad here and then I worked for X and Y and Z, and now I've come here." He said, "I thought it would really round up my resume perfectly if I went to work now for a big management consulting firm."

I said, "Well, is that what you want to do?" He said, "No, but that's the perfect resume." I said, "Well, when are you going to start doing what you like?" He said, "Well, I'll get to that someday." I said, "Well, you know, your plan sounds to me a lot like saving up sex for your old age. You know, it just doesn't make a lot of sense." But I told that same group, I said, "You know, go to work for whomever you admire the most." I said, "You can't get a bad result. You'll jump out of bed in the morning and you'll be having fun."

Dean called me up a couple weeks later. He said, "What'd you tell those kids?" He said, "They're all becoming self-employed." So you've got to temper that advice a little bit.

Play one game a little bit with me for just a minute, and then we'll get to your questions. I'd like for the moment to have you—well, I have you pretend I've made you a great offer and I've told you that you could pick any one of your classmates. You now know each other probably pretty well after being here for a while. You can pick. You have 24 hours to think it over, and you can pick any one of your classmates, and you get 10% of their earnings for the rest of their lives.

I asked you what goes through your mind in determining which one of those you would pick. You can't pick the one with the richest father; that doesn't count. I mean, you've got to do this on merit. You probably wouldn't pick the person that gets the highest grades in the class. I mean, there's nothing wrong with getting the highest grades in the class, but that isn't going to be the quality that sets apart a big winner from the rest of the pack.

Think about who you would pick and why, and I think you'll find when you get through that you'll pick some individual. You've all got the ability; you wouldn't be here otherwise. You've all got the energy. I mean, you've got the initiative; the intelligence is here throughout the class. But some of you are going to be bigger winners than others, and it gets down to a bunch of qualities that, interestingly enough, are self-made.

I mean, it's not how tall you are. It's not whether you kick a football 60 yards. It's not whether you can run the 100-yard dash in 10 seconds. It's not whether you're the best-looking person in the room. It's a whole bunch of qualities that really come out of Ben Franklin or the Boy Scout code.

So whatever it may be, I mean, it's integrity. It's honesty. It's generosity. It's being willing to do more than your share. It's just all those qualities that are self-selected. And then if you look on the other side of the ledger—because there's always a catch to these, you know, free gifts and genie jokes—you also have to—and this is the fun part—you also have to sell short one of your classmates and pay ten percent of what they do.

So who do you think is going to do the worst in the class? This is way more fun. And think about it again. It isn't the lowest grades or anything of the sort; it's the person who just doesn't shape up in the character department. I mean, we look for three things when we hire people. We look for intelligence, we look for initiative or energy, and we look for integrity.

If they don't have the latter, the first two will kill you. Because if you're going to get somebody without integrity, you want them lazy and dumb. I mean, yeah, you don't want them smart and energetic. So it's that third quality. But everything about that quality is your choice. You know, you can't change the way you are wired much, but you can change a lot of what you do with that wiring.

It's the habits that you generate now on those qualities or those negative qualities. I mean, the person who always claims credit for things they didn't do, that always cuts corners— that you can't count on. I mean, in the end, those are habit patterns. The time to form the right habits is when you're your age. I mean, it doesn't do me much good to get golf lessons now. If I’d gotten golf lessons when I was your age, I might be a decent golfer.

But someone once said, "The chains of habit are too light to be felt until they're too heavy to be broken." I see that all the time. I see people with habit patterns that are self-destructive when they're 50 or 60, and they really can't change them. They're imprisoned by that. But you're not imprisoned by anything, so when you write down the qualities of that person that you'd like to buy 10% of, look at that list and ask yourself, "Is there anything on that list I couldn't do?" The answer is, there aren't; there won't be.

And when you look at the person you sell short and you look at those qualities that you don't like, if you see any of those in yourself— or egotism, whatever it may be—selfishness—you can get rid of that. I mean, that is not ordained.

If you follow that—and Ben Franklin did this and my old boss Ben Graham did this at early ages in their young teens—they just—Ben Graham looked around and he said, "Who do I admire?" You know, and he wanted to be admired himself. And he said, "You know, why do I admire these other people?" He said, "If I admire them for these reasons, maybe other people will admire me if I behave in a similar manner." He decided what kind of a person he wanted to be, and if you follow that, at the end, you'll be the person you want to buy ten percent of.

I mean, that's the goal in the end, and it's something that's achievable by everybody in this room. So that's the end of the sermon. Now let's talk about what's on your mind, and you can ask anything.

The only thing I won't tell you is what we're buying or selling or about—let's say, yeah, I don't even tell myself that. I mean, I write it down, and then it's like the Coca-Cola formula; you know, there's only two people that can get into the trust department and find out what they are, and I don't know who the two are. So it's—we don't talk about what we're buying or selling, but anything else is fair game—personal, business, anything you'd like to talk about.

And actually, the tougher the questions are, the more interesting it is for me. So don't spare my feelings. I mean, just throw up my head. And with that, let's—I guess we've got a microphone. Is this the only microphone, or is there one? This is the only microphone.

I have an old-fashioned belief that I can only expect to make money in things that I understand. And when I say understand, I don't mean to understand, you know, what the product does or anything like that. I mean understand what the economics of the business are likely to look like 10 years from now or 20 years from now.

I know in general what the economics of, say, Wrigley chewing gum will look like 10 years from now. The internet isn't going to change the way people chew gum. It isn't going to change which gum they chew, you know? If you own the chewing gum market in a big way and you've got Double Mint and Spearmint and Juicy Fruit, those brands will be there 10 years from now.

So I can't pinpoint exactly what the numbers are going to look like on Wrigley, but I'm not going to be way off if I try to look forward on something like that that evaluating that company is within what I call my circle of competence. I understand what they do, I understand the economics of it, I understand the competitive aspects of the business.

There can be all kinds of companies that have wonderful futures, but I don't know which ones they are. I've given talks in the past where I carry with me a 70-page tightly printed list, and it shows 2,000 auto companies. Now, for the start of the 20th century, you had seen what the auto was going to do to this country, the impact it would have on the lives of then your children and grandchildren and so on—that it just transformed the American landscape.

But of those 2,000 companies, you know, three basically survive, and they haven't done that well at many times. So how do you pick three winners out of 2,000? I mean, it's not so easy to do. It's easy when you look back, but it's not so easy looking forward. So you could have been dead right on the fact that the auto industry—in fact, you probably couldn't have predicted how big an impact it would have—but you wouldn't have made any money because the economic characteristics of that business were not easy to define.

I've always said the easier thing to do is figure out who loses. And what you really should have done in 1905 or so, when you saw what was going to happen with the auto, is you should have gone short horses. There were 20 million horses in 1900, and there's about 4 million horses now. So it's easy to figure out the losers. You know, the loser is the horse, but the winner was the auto overall.

But 2,000 companies just about failed; a few merged out and so on. There were three companies—auto companies—in the Dow Industrials in the 1920s and '30s: Studebaker, Nash Kelvinator, and Hudson Motor. Now those names are all familiar to me, and maybe some of them are familiar to you, but they're not making any cars. You know, they didn't make money, and yet at one time they were in the Dow 30. They were the aristocrats of American business, and they got creamed.

So figuring out the economic characteristics about the winners in a wonderful business is not easy. In North Carolina, you know, Orville and Wilbur took off. Or I guess Orville took off and Wilbur watched. I'd have been Wilbur.

But if you could have seen the future of the airline business from that point forward and how that would transform things, you know, it would have blown you away, and it's excited people incidentally ever since. But if there'd been a capitalist at Kitty Hawk, he should have shot Orville down. I mean, because it’s done nothing but cost investors money.

There were over 400 airplane companies in the 1920s and '30s alone. There was an Omaha. There was—in Nebraska, we were the Silicon Valley apparently of aircraft, and they all disappeared. It had been a terrible business. At the end of 1991, if you’d added up the aggregate earnings from all airline companies, with billions poured in since Wilbur and Orville were down there, they came to less than zero. The number of passengers went up every year; the importance of the industry was dramatically increased, decade by decade, and nobody made any money.

So figuring out the economic consequences—TV, I think there's—I don't know, 20-25 million cents a year sold in the United States. I don't think there's one of them made in the United States anymore. I mean, you'd say, “TV set manufacturer, what a wonderful business!” Everybody and nobody had a TV in 1950. There were about 45 to 50. Everybody has multiple sets now, but nobody in the United States has made any real money making the sets. They're all out of business. You know, the Magnavoxes, the RCAs, all of those companies.

Radio was the equivalent of the 20 over 500 companies making radios in the 1920s. Again, I don't think there's a U.S. radio manufacturer at the present time, but Coca-Cola, you know, I was in 1884 at Jacob's Pharmacy or whatever. A fellow comes up with something; a lot of copiers over the years, but now you've got a company that is selling roughly 1.1 billion 8-ounce servings of its product—not all Cokes, but some others—daily throughout the world, 117 years later.

So understanding the economic characteristics of a business is different than predicting the fact that an industry is going to do wonderfully. So when I look at the internet businesses or I look at tech messages, I say this is a marvelous thing, and I love to play around with the computer. I order my books from Amazon and all kinds of things, but I don't know who's going to win. Unless I know who's going to win, I'm not interested in investing. I'll just play around on the computer.

Defining your circle of competence is the most important aspect of investing. It's not how important—how large your circle is. You don't have to be an expert on everything, but knowing where the perimeter of that circle of what you know and what you don't know is and staying inside of it is all important. Tom Watson, Sr., who started IBM, said in his book, "I'm no genius. But I'm smart in spots, and I stay around those spots." And you know, that is the key.

So if I understand a few things and I stick in that arena, I'll do okay. And if I don't understand something but I get all excited about it because my neighbors are talking about stocks are going up and everything, they start fooling around someplace else, eventually I'll get creamed.