Warren Buffett's SECRET to Making Millions from IRRATIONAL BEHAVIOUR!

There's a certain irony in that we will, we would do the best over decades if we operated in a market where people operated very foolishly. The more people respond to short-term events and exaggerated things, or anything that causes people to get wildly enthusiastic or wildly depressed, is actually what allows people to make lots of money in securities. On the other hand, it's not the greatest thing for a society. Charlie and I have benefited enormously from the fact that over a 50-year period, there have been a few periods—probably the most extraordinary being 1973 and 74—where you could buy stocks unbelievably cheap, cheaper than happened in 2008 and 2009.

You know, it doesn't make sense to have that much volatility in the market, but humans behave the way humans behave, and they're going to continue to behave that way in the next 50 years. I mean, if you're a young investor and you can sort of stand back and value stocks as businesses, and invest when things are very cheap, no matter what anybody is saying on television or what you're reading, and perhaps, if you wish, sell when people get terribly enthused, it is really not a very tough intellectual game. It's an easy game if you can control your emotions.

Well, we've had all of our own net worth in the company. We've had all our family's net worth, and we've had all these friends that came out of our partnership, many of whom put half or more of their net worth with us. And so, we've been very, very, very cautious in what we've done. There probably were times when we could have stretched a little and pulled off something quite large, that we made a mistake looking back on, but I wouldn't want to take a 1% chance, you know, of wiping out my Aunt Katie's net worth or something. It's just not something in life that I could live with, so I would rather be, you know, 100 times too cautious than 1% too incautious, and that will continue as long as I'm around.

But people looking at our past would say that we missed some big opportunities that we understood and could have swung if we wanted to go out and borrow more money. Charlie, well that's obviously true. If we had used the leverage that a lot of successful operators did, Berkshire would be a lot bigger— a lot bigger, a lot bigger. But we would have been sweating at night. It's crazy to sweat at night over financial things. Financial things, yes. Maybe I'll get shot by a jealous husband, but this is a really minor event. Charlie will tell you how minor it is.

Well, as a matter of fact, I rather resent all this attention and sympathy Warren is getting. I probably have more prostate cancer than he does. He's bragging. I don't know because I don't let them test for it. He's not kidding at any rate. I want the sympathy. If you were me and had the chance to start over, what areas would you look to get into, and do you think that my generation will have the same number of opportunities as yours? And if not, would you look to focus on emerging markets? Oh, I think you have all kinds of opportunities.

I would probably do very much what I have done in life, except I'd do it a little earlier. I would have tried to be a little bit better when I was running a partnership in terms of aggregating the money faster. I used to work with $5,000 contributions from partners. You know, I would try to develop an audited record of performance as early as I could. I would try to attract some money, and then when I'd build up a fair amount of money out of investing, I would try to get into something much more interesting, which would be buying businesses to keep.

You mentioned private equity, which very often is buying businesses to sell, but I don't want to be buying and selling businesses. I mean, if I establish relationships with people that come to me with their business and they want to join Berkshire, I want it to be for keeps. And that's been enormously satisfying, but it takes some capital to get into that business, and I didn't have any capital when I started out. So, I built it through managing money for myself and other people combined. Like I say, I would get us through that process as fast as I could and then into a game where I could buy businesses of significance and interest to me, and then I spent the rest of my life doing it just as I've done.

Charlie, well I've got nothing to add to that either. I do it with Charlie incidentally. I just think that people like me that have huge incomes—I have no tax planning, I don't have any gimmicks, I don't have Swiss bank accounts, I don't have any of that kind of stuff. But when I get all through, you know, I've made the calculation four different times—three different times, 2004, 2006, and 2010—and in all three of those years, when my income was anywhere from 25 to 65 or so million, I came in with the lowest tax rate in our office. We had maybe 15 to 22 or so people in the office at different times during that, and everybody in the office was surprised. They were all in the 30s, and I was several times, you know, in this area of 17%.

That's because the tax law has gotten moved over the years in a way to favor people that make huge amounts of money. Imagine having 270 million of income, and I believe there were 31 of the 400 that were below 10% on tax rates, and that counts payroll taxes as well. Like I say, my cleaning lady, and I've been asked to explain— I keep talking about my cleaning lady. Well, my wife wants it very clear: she doesn't have a cleaning lady.

This is a cleaning lady at the office—Mary—that I—my wife has gotten very—she does not have a cook, she does not have a cleaning lady, and she got a little tired of me implying that she had one. So, it's my cleaning lady at the office has been paying 15.3% on social security taxes, at the same time that an appreciable number of people making hundreds of millions of dollars a year are paying less than 10%. I think it's time to take a look at that.

When you get into consumer products, you're really interested in finding out or thinking about what is in the mind of how many people throughout the world about a product now and what it's likely to be in their mind five or 10 or 20 years from now. Now virtually every person in the globe—maybe, well, let's get it down to 75% of the people in the globe—have some notion in their mind about Coca-Cola. The word Coca-Cola means something to them. You know, RC Cola doesn't mean anything to virtually anyone in the world but, you know, does with the guy who owns RC, you know, and the bottler.

But everybody has something in their mind about Coca-Cola, and overwhelmingly it's favorable. It's associated with pleasant experiences. Now part of that is by design; I mean it is where you are happy. It is Disneyland, Disney World, and it's at ballparks, and it's every place that you're likely to have a smile on your face, including the Berkshire Hathaway meeting, I might add. That position in the mind is pretty firmly established, and it's established in close to 200 countries around the world with people. A year from now, it will be established in more minds and it will have a slightly, slightly, slightly different overall position.

And 10 years from now, the position can move just a little bit more. It's share a mind; it's not share a market. It's share a mind that counts. Disney is the same way: Disney means something to billions of people. If you're a parent with a couple of young children and you've got 50 videos in front of you that you can buy, you're not going to sit on and preview an hour and a half of each video before deciding what one to stick in front of your kids. You know, you have got something in your mind about Disney, and you don't have it about the ABC Video Company, or you don't even have it about 20th Century, you know, you don't have it about Paramount.

So that name, to billions of people, including lots of people outside this country, has a meaning, and that meaning overwhelmingly is favorable. It's reinforced by the other activities of the company. Just think of what somebody would pay if they could actually buy that share of mind, you know, of billions of people around the world. You can't do it. You can't do it by a billion dollar advertising budget or a $3 billion advertising budget or hiring 20,000 super salesmen.

So you've got that. Now the question is, what does that stand for five or 10 or 20 years from now? You know there will be more people. You know there will be more people who have heard of Disney, and you know that there will always be parents who are interested in having something for their kids to do, and you know that kids will love the same sort of things.

And that—whoops—he emphasizes the key points when we get to those, but that is what you're trying to think about with a consumer product. That's what Charlie and I were thinking about when we bought See's Candy. I mean, here we were in 1972— you know, we think we know a fair amount about candy. I know more than when I sat down this morning. I mean, I had about 20 pieces already. But, you know, how does their face light up on Valentine's Day when you hand them a box of candy and say, you know, it’s some nondescript thing?

Say, here, honey, I took the low bid, you know, or something of the sort. No, I mean you want something, you know, you've got tens of millions of people—at least many millions of people—that remember that the first time they handed that box of candy, it wasn't that much thereafter that they got kissed for the first time or something. So, the memories are good; the associations good. The total process isn't just the candy; it's the person who takes care of you at Christmas time when they've been on their feet for eight hours and people have been yelling at them because they've been in line with 50 people in line and that person still smiles at them.

The delivery process, it's the shop in which they get all kinds of things, the treat we give them; it's all part of the marketing personality. But that position in the mind is what counts with a consumer product, and that means you have a good product. A very good product means you may need tons of infrastructure because you've got to have that. I had a case of Cherry Coke awaiting me at the top of the Great Wall when I got there in China. Now that, you know, you've got to have something there so that the product is there when people want it.

And that happened in World War II. General Eisenhower, you know, said to Mr. Woodruff that he wanted a Coca-Cola with an arms length of every American serviceman in the world, and they built a lot of bottling plants to take care of them.

That sort of positioning can be incredible and seems to work especially well for American products. I mean, people want certain types of American products worldwide: you know, our music, our movies, our soft drinks, our fast food. You can't imagine—at least I can't—a French firm or a German firm or a Japanese firm having that selling 47 or 48% of the world’s soft drinks. I mean, it just doesn’t happen that way. It's part of something you could broadly call an American culture, and the world hungers for it.

Kodak, for example, probably does not have quite the same—George Fisher is doing a great job with the company. This goes back before that, but Kodak probably does not have the same place in people's mind worldwide quite as it had 20 years ago. I mean, people didn't think of Fuji in those days, we'll say, as being in quite the same place, and then Fuji took the Olympics, as I remember, in Los Angeles, and they just—they pushed their way to more of a parity with Kodak, and you don't want to ever let them do that.

That's why you can see a Coca-Cola or Disney or companies like that doing things that you think, well, this doesn't make a hell of a lot of sense, you know, if they didn't spend this $10 million, wouldn't they still sell as much Coca-Cola? But...