Warren Buffett: 90 Years of Investment Wisdom Summed Up in 15 Minutes (2021)

Whenever someone asks me how they can learn more about investing, the first thing I tell them is study Warren Buffett. He has an amazing ability to make complicated finance concepts seem so simple. Here are my five favorite clips of Warren Buffett explaining some of the most important concepts of investing. Enjoy!

Have you ever pretended 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 percent of their earnings for the rest of their lives.

I ask 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. But 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. I think you'll find when you get through, 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 here, and intelligence is here, but some of you are going to be bigger winners than others.

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 can kick a football 60 yards; it's not whether you can run the 100-yard dash in 10 seconds; 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. 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—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 and again. It isn't the person with the lowest grades or anything of the sort; it's the person who just doesn't shape up in the character department.

We look for three things when we hire people: we look for intelligence, we look for initiative or energy, and we look for integrity. And 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. 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. When you write down the qualities of that person that you'd like to buy 10 percent 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.

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

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.

Mr. Buffett and Mr. Munger, I'm Mark Rabanov from Melbourne, Australia. I just wanted to ask you, how do you judge the right margin of safety to use when investing in various common stocks? For example, in a dominant, long-standing, stable business, would you demand a 10 percent margin of safety? And if so, how would you increase this in a weaker business? Thank you.

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 try 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.

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, you don't know whether they weigh 300 pounds or 325 pounds; you still know they're fat, right? You know? 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, of the equivalent of 270 pounds, we'll 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 20 years—because that's what investing is, is 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 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 Korea recently, but you don't see those sort of things very often.

Does that mean you should sit around and hope they come back for 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?

Yeah, that margin of safety concept boils down to getting more value than you're paying. That value can exist in a lot of different forms. If you're paid four to one on something that's an even-money proposition, well, that's a value proposition too.

It's high school algebra, and people who don't know how to use high school algebra should take up some other activity. I would say this: if you have doubts about something being in your circle of confidence, it isn't. I mean, I never—I would look down the list of businesses, and I will bet you that you can—I mean you can understand a Coke bottler; you can understand the Coca-Cola Company; you can understand McDonald's; you can understand, you know, you can understand in a general way, General Motors.

You may not be able to value it, but there are all kinds of businesses you can certainly understand Walmart. That doesn't mean whether you decide what the price should be, but you understand Walmart; you can understand Coach.

If you get to something that your friend is buying or that everybody says a lot of money can be made and you're not sure whether you understand it or not, you don't. You know? I mean, it's better to be well within the circle than to be trying to tiptoe along the line, and you'll find plenty of things within the circle.

It's not terrible to have a small circle of confidence. I'd say my circle of confidence is pretty small, but it's big enough. I can find a few things. And when somebody calls me with a Larson Jewel that is within my circle of confidence, I hadn't even thought about it before, but I know it's within it. I can evaluate a business like that.

If I get called—I got called the other day on a very large finance company. I understand what they do, but I don't understand everything that's going on within it. I don't understand whether I can continually fund it, you know, on a basis independent from using Berkshire's credit and so on. So, even though I could understand every individual transaction they did, I don't regard the whole enterprise or the operation of it necessarily as being within my circle of confidence.

Charlie?

Yeah, I think that if you have competence, you almost automatically have a feeling of where the edge of the competence is. Because, after all, it wouldn't be much of a competence if you didn't know its boundary. And so, I think you asked a question that almost answers itself. My guess is you do know what you're perfectly competent to do in all kinds of areas, and you do have all kinds of other areas where you know you'd be over your depth.

I mean, you're not trying to play chess against Bobby Fischer or do stunts on the high trapeze if you had no training for it. My guess is you know pretty well where the boundaries of your competence lie. I think you also probably know pretty well where you want to stretch the boundary, and you've got to stretch the boundary by working at it, including practice.

One of the drawbacks to Berkshire, of course, is that Charlie and I, our circles largely overlap, so you don't get two big complete circles at all. But that's just the way it is—probably why we get along so well too.

Good morning. I know you're famed for your success, but I was curious if there were any particular moments in your life that, or mistakes or failures that you've made, that were particularly memorable? What you may have learned from them, and if you had any particular advice for the students here in dealing with discouraging circumstances?

Yeah, well, I mean I've made a lot of mistakes. The biggest mistake—well, not the biggest necessarily, the biggest—but buying Berkshire Hathaway itself was a mistake because Berkshire was a lousy textile business, and I bought it very cheap. I've been taught by Ben Graham to buy things on a quantitative basis, look around for things that are cheap, and that I was taught that, we'll say, in 1949 or it made a big impression on me.

So, I went around looking for what I call "cigar butts" of stocks, and the cigar butt approach to buying stocks is that you walk down the street, and you're looking around for cigarette butts. You find this honestly—this terrible looking soggy, ugly looking cigar with one puff left in it, but you pick it up, and you get your one puff. Disgusting! You throw it away, but it's free. I mean, it's cheap.

Then you look around for another soggy, you know, one puff cigarette. Well, that's what I did for years. It's a mistake. Although you make money doing it, you can't make it with big money. It's so much easier just to buy wonderful businesses.

So now, I would rather buy a wonderful business at a fair price than a fair business at a wonderful price. But in those days, I was buying cheap stocks. Berkshire was selling below its working capital per share. You got the plants for nothing; you got the machinery for nothing; you got the inventory and receivables at a discount. It was cheap, so I bought it.

Twenty years later, I was still running a lousy business, and that money did not compound. You really want to be in a wonderful business because time is the friend of the wonderful business. You keep compounding; it keeps doing more business, and you keep making more money. Time is the enemy of the lousy business.

I could have sold Berkshire, perhaps liquidated it, and made a quick little profit, you know, one puff. But staying with those kinds of businesses is a big mistake. So you might say I learned something out of that mistake, and I would have been way better off taking what I did with Berkshire. I kept buying better businesses. I started an insurance business, See's Candy, the Buffalo—all kinds of things.

I would have been way better doing that with a brand new little entity that I'd set up rather than using Berkshire as the platform. Now I've had a lot of fun out of it. I mean, everything in life seems to turn out for the better, so I don't have any complaints about that, but it was a dumb thing to do.

Warren, what do you do that's different than 90 percent 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.

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 you if they close 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. Then look at the price later to see whether it's way out of line with what my value.