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Hello, I'm Adam Smith. In this program, you'll meet a remarkable man, probably the greatest investor of his generation. When you talk about the greatest investor, you measure these things with numbers, and this man didn't inherit a fortune. He made over a billion dollars in the stock market, and I mean a billion with a capital B.
I met him almost 20 years ago, and I must say you can't help but appreciate him. In the world of investing, he's a legend, but he doesn't have an office on Wall Street. He doesn't spend his time glued to a computer screen, and he says that if you invest correctly, he could close the stock market for two years, and it wouldn't make any difference.
He doesn't usually give interviews, but I recently contacted him to gather some wisdom and aphorisms from Warren Buffett. Warren's defining characteristic is that he runs his financial empire not from Wall Street or the trading floors of Chicago, but from OMA, Nebraska, in the heart of America. OMA is home to the Union Pacific Railroad and, of course, the Mutual of OMA insurance company.
It's hardly a financial capital, in fact, Omaha is better known for its livestock markets than its stock market. Buffett's headquarters are in an Omen version of an office tower. He runs his empire with a team of only 7 people. Warren, what would have happened if I had given you $10,000 when I first met you—and I sincerely wish I had— I would have millions today.
If you had joined the partnership when we started in 1956 and reinvested the profits in Berkshire, which was sort of a continuation, you would now have a little over $15 million. From $10,000, from $10,000 to $15 million, something like that, that's a great result. That's good, but it doesn't tell you anything about tomorrow's results.
Well, let's talk about tomorrow. Is there anyone who could do the same thing as you starting today? They shouldn't try to do too much in the first week. How does Warren Buffett do it? Did he turn $10,000 into $15 million the traditional way? He doesn't have a computer, no stock quotes on a screen, just common sense and a strict set of principles.
Let's examine Buffett's investment formula, and we'll hear his wise advice on everything from the stock market to the beware of inheritance in a moment. First, here's how the man known as the Wizard Doma got started. Buffett's interest in the stock market appeared very early. His father, Howard, was a stockbroker until he was elected to the United States Congress.
Howard Buffett was a frugal Republican. When Congress voted itself a pay raise from $10,000 to $12,500, Howard Buffett refused to accept the additional sum. Warren, on the other hand, bought his first stock at the age of 11 and made a profit of $5. He went on to attend the University of Nebraska and was then rejected by Harvard Business School.
So Buffett went to New York and Columbia Business School. where he met Professor Benjamin Graham. Graham was not only the co-author of *Security Analysis*, but he had also written *The Intelligent Investor*. Graham advocated what is called value investing: finding companies undervalued by the stock market, buying stocks, and then waiting.
Warren put his theories into practice at the age of 25. He formed his own investment partnership and began buying stocks. An investor who had invested $1,000 when Buffett started the partnership in 1956 had nearly $300,000 by 1969 when the partnership was dissolved. During this period, the Buffett partnership never experienced a downturn.
You know what academics say? They say the market is efficient and no one can beat it. But you did, and a number of other people who followed Benraham's principles did as well. In fact, everyone I know personally who has truly adhered to Benraham's principles for 20 years or more has significantly outperformed the market.
And what about the Those learned business schools that say you can't beat the market, well, they're not so learned, but you've seen some of these articles. I've seen the articles, but I've also seen other people's tax returns. One of the companies Buffett acquired during his partnership years was a small New England textile factory, Berkshire at Taw.
He later sold the factory but kept the name. Buffett began investing Berkshire's funds in the stock market, and in some cases, he bought entire companies and integrated them into Berkshire at Taw. Berkshire at Taw is now a holding company with a net worth of over $3 billion. Last month, Berkshire at Taw held its annual meeting, chaired by Buffett and Vice President Charlie Munger.
Buffett believes it's very important to have patient and rational shareholders because it's one of those principles that Wall Street's obsession with the short term and frantic trading is counterproductive. Thus, Berkshire at Taw He has never split his stock and Buffett never talks to analysts, but this is the happiest group of shareholders you will ever meet in America.
Warren Buffett is certainly the greatest investor of the post-World War II era and perhaps the greatest investor in history. I think he has immense integrity and a very, very clear worldview. The superlatives could go on and on; it could last a long time. Buffett's shareholders have every reason to be happy.
A share cost $12 in 1965; today, a single share sells for over $3,900. That's right, $3,900 per share on the over-the-counter market. Buffett achieved all this by staying true to his fundamental principles and keeping things simple. Warren, you say you like buying companies. How do you know what a company is worth?
I look for a company where I think I have a general idea of what's going to happen. If you buy a bond, you know exactly what's going to happen if it's a good bond. A US government bond, if it It indicates 9% coupons. You know your coupons will be 9% for maybe 30 years if it's a 30-year bond. Now, when you buy a company, you're buying something with coupons too, except the only problem is they are n't printed in advance with the amount, and it's my job to determine the coupon amount.
For some companies, I feel capable of doing that; for others, I haven't the slightest idea. You seem to avoid high-tech companies. Give me the names of 10 high-tech companies and ask me where they'll be in 10 years or 10 months, and I haven't the slightest idea. It would be exactly like buying cocoa beans or something; I just don't know what's going to happen.
Have you ever really had great success just by buying these predictable stocks? Yes, you can. Yes, not often, but every now and then, sensational companies are given away. In the mid-70s, for example, the entire Washington Post company was sold for $80 million at a time when this type of property was worth no less than $400 million, and no one would have disputed the $400 million value of these properties.
The price was visible to all, but people simply weren't very enthusiastic about the world. Then Buffett took full advantage of this undervaluation. In 1973, he bought 1.7 million shares of the Washington Post Company. At the time, he distributed the Washington Post; now he owns 13%. This investment cost Warren Buffett $9.7 million.
Today, it's worth $370 million, and Buffett says he will never sell his shares. Another of his ongoing investments is in Capital Cities. In 1985, Buffett bought 3 million shares of Capital Cities when it acquired ABC. This investment cost $517 million, and it's now worth $927 million. The chairman of Capital Cities is Tom Murphy, a good friend of Warren Buffett.
Another masterstroke was achieved. With Geiko, the government employees' insurance company, struggling in the mid- 1970s, Buffett bought 42% of Geiko for $46 million. Its value today is $849 million. Last year, Buffett made only one major investment: he bought a $700 million convertible preferred bond from Salomon Brothers, the New York investment bank.
It's still too early to say if this investment will be another masterstroke by Buffett. One thing all these deals have in common is that the shares were bought because Buffett believed they were undervalued by the market. You've preached this philosophy for years; it's no secret. So why doesn't everyone do it?
Well, it requires patience, which many people lack. People much prefer to be promised they'll win the lottery next week rather than slowly building wealth over time. It's often said that I'm broke in the long term but not in the short term. And if you 're short-term, you probably won't get good results in the long term.
You said he could close the New York Stock Exchange for two years and you wouldn't mind. Can you explain that? We own shares of a company when we own stock, and the fact that the New York Stock Exchange is open has no impact on the growing value of the Washington Post over a period of five or ten years.
What we want is to be right about the company. If we're right about the company, the market will regulate itself. And if the stock exchange closes on Saturdays and Sundays, you know, I don't have an allergic reaction. So if it closed for a few years and the company was doing well, then we would be doing very well.
Buffett is known not only as a wise investor but also as a kind of sage. His annual report has no photos or sophisticated graphs, but it is filled with Warren Buffett's wisdom. These reports are so popular that the company has compiled past reports. It's a kind of Warren Buffett bestseller. I noticed in your annual report that you say if you've been playing poker for 30 minutes and you don't know who the sucker is, then you're the sucker.
Is that right? How do you apply that to the market, to investing in the market? If you think the market knows more about your company—in other words, if your stock drops 10% and it bothers you—it obviously means you think the market knows more about the company than you do, and in that case, you're the sucker.
If the stock drops 10% and you want to buy more because you know the company is worth as much as when you bought it, or will be worth a little more over time, then the market is the sucker. Where do these aphorisms come from, the ones for which you've become so well known? Well, I know that's pretty much the limit of my intellectual capacity, so I have to be content with one sentence.
It's a kind of self- deprecation by Buffett, but he's not fooling many people. Buffett is a brilliant man. Those who Those around him say his mind works so fast they have trouble keeping up. He reads just about everything he can get his hands on, and beyond that, he says a large part of his day is spent simply thinking.
Often these thoughts concern the stock market. Was October 19th an aberration, or could it happen again? Anything can happen in the financial markets. If you read financial history over several hundred years and examine the South Sea Bubble, the Tulip Mania, and some of the panics we've had in this country—we closed the stock exchange for a few months around 1914—anything can happen, and you should organize your affairs so that even if extraordinary events occur, you're still there to trade the next day.
One thing Buffett has long warned against is the development of stock index futures. These are essentially bets on the direction the stock market will take. In 1982, when index futures were first developed, Buffett wrote a letter to MP John Dinger warning that These new instruments would be, and I quote, extremely harmful to our financial markets.
Every time you offer a high price for a small amount of money, you encourage foolish behavior from those you target, and the low margins you can obtain through the futures market encourage this kind of activity. How should the small investor approach stock index futures, index arbitrage, and all the volatility that has entered the stock market?
Well, they should hope that these instruments make others act very foolishly. Then they should intervene from time to time but ignore them themselves. But since these foolish instruments sometimes lead to absurd prices, they can profit from it, and the rest of the time they ignore them. Old basketball players are less skillful.
Do old investors become less skillful? I don't think so. I think they probably lose some of their skill, but they don't need it that much. And being a successful investor requires, above all, a certain control of one's temper and the ability to know what one knows and what one doesn't. We don't know, and acting from time to time, I don't see any reason why that would change with age.
When you think about it, it could give you an example or more, but so far it hasn't had any effect. In a sense, you continue to accumulate a little more business knowledge over time, and that's an advantage. Warren Buffett the investor is only half the story; there's also Warren Buffett the manager.
Over the years, he hasn't just bought shares of publicly traded companies; he's also acquired entire businesses that are now under the management of Berkshire Hathaway. These companies aren't very glamorous or famous, but they are generally extremely profitable. For example, Sis Candy in California has been making candy for over 60 years and is renowned for its high-quality chocolates.
Berkshire Hathaway bought the company in 1972 for $25 million, and just last year, Sis Candy earned $30 million before tax. Another Berkshire Hathaway company is World Book. Berkshire Hathaway, which made $26 million in profit last year, also owns Kirby Vacuum Cleaners, the Fheimer Work Company, and various insurance companies.
There's a lot of talk about Silicon Valley culture. Is there a Berkshire Hathaway culture at ATW? I suppose there is a Berkshire Hathaway culture at ATW, but it's very different from Silicon Valley's. What is the Berkshire Hathaway culture at ATW? We like managers who are passionate about their company, just like we are.
These are people who feel so good about their jobs that they look forward to going to the office, and these are the kinds of managers we have. We're very lucky when we buy companies with managers who have been extremely successful for a while. They're usually rich after we buy the company and then work...
We're not so lucky with business school graduates. We find it hard to teach an old dog a new trick. We prefer people who have some experience, a perfect example From this philosophy, Rose Blumkin, 50 years ago, created a furniture store in Omar with $500 in savings. She transformed it into Nebraska Supply Mart, the largest furniture store in the country.
Warren Buffett always loved this store and appreciated the management, so in 1983 he came and bought the company. Buffett is always looking for new businesses to buy. He even once placed an ad in the Wall Street Journal offering a new home to interested companies. If you were to look at the next 5 or 10 years, which businesses do you think will be promising?
Businesses that have some kind of franchise. What makes a good business is that if I go to a drugstore and I want a Herch chocolate bar, they can't sell me an unbranded bar. You know, if I have to pay 35 cents for the Herch chocolate bar and they say, "But wouldn't you like this wonderful unbranded chocolate bar for 30 cents?" Well, I'll buy the Herch bar.
And if they don't have it... Not in stock, I'll go get it across the street. That's what makes a good business. I don't feel the same way about a carton of milk. I just take whichever carton of milk is in the freezer or refrigerator at the supermarket. So that's the power of franchising. Yes, when Ben Graham talked about these things, he was talking about tangible assets: iron and steel, bricks and mortar.
You've expanded Ben's idea to that of franchising, haven't you? I learned that after Ben. Yes, the principles of buying market value, security, and detachment from the market, I learned them from Ben. You could say I learned the appropriate temperament from Ben. The stocks I buy are entirely different from what Ben would buy if he were still alive today.
You might be skeptical about that. Does that billionaire really go to the pharmacy to buy a chocolate bar at the supermarket for a carton of milk? Don't doubt it. Warren Buffett lives in the same house. that he bought over 30 years ago for $32,000. There's no luxury car or designer clothes; he's rejected most of the outward signs of wealth one might expect from someone with his means.
Do you still file your own tax returns? Yes, yes, a fairly simple return. Really, yes, it's a very simple return. Warren, you've expressed your opposition to corporate perks for years, but you finally bought a private jet. I can't explain it; it's a black hole in my mind, given that I've given speeches against them for years.
And I must say, I love it. But you have the private jet, the... Cheapest in all of America? No, I don't want the cheapest private jet, but it suits me perfectly, and I must tell you that I have untapped potential for this kind of lifestyle, apparently, because it has made life much easier these past few years.
This video is over. I hope you enjoyed this very inspiring report made during Warren Buffett's golden age in the late 80s. This is valuable information for understanding his investment approach; we can draw inspiration from it to become better investors. If you enjoyed the video, don't forget to like it and subscribe so you don't miss the next videos. See you soon!
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