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Einstein is reputed have said that compound interest is the eighth wonder of the world or something like that and it goes back to that story you probably learned when you were in grade school where somebody did something for the king and the king said what can I do for you and he said well let's take a chess board and put one kernel of wheat on the first square and then doubled it on the second and doubled it on the third and the King readily agreed to it and by the time he figured out what to to the 64th him how did - he was giving away the entire kingdom so it's a pretty simple concept but over time it accomplishes extraordinary things rule number one never lose money rule number two never forget rule number it's your emotional about investment you're not going to do well you may have all these feelings about the stock the stock has no feelings about you being just at the top lose money for the firm and I will be understanding lose a shredder reputation for the firm and I will be ruthless I like I like businesses I can understand we'll start with that that narrows it down about 90% yeah there are all kinds of things I don't understand but fortunately there's enough I do understand and you got this big wide world out there almost every company's publicly owned so you got you got all American business practically available - yeah now to start with it doesn't make sense to go with things that you think you can understand but you can understand something I can understand this I mean you can understand this anybody can understand this I mean this is a product that basically hasn't been changed myself out of the cherry but you know since 1886 or whatever it was and it's a simple business it's it's not an easy business I don't want a business it's easy for competitors so I wanted a business with a moat around it I want a very valuable castle in the middle and then I want to i want to i want the duke who's in charge of that castle to be honest and hardworking and able and then I want a big moat around the castle and that moat can be various things the moat in a business like our auto insurance business at Geico is low cost I mean if people have to buy auto insurance so everybody's gonna have an one auto insurance policy per car basically or for driver and and I can't sell them 20 you know but but they have to buy one what are they gonna buy on they're gonna buy on based on service and cost most people will assume the service is fairly identical among companies are close enough so they're gonna do it on cost so I got to be the low cost producer that's my motion the extent my costs get further lower than the other guy I've thrown a couple of sharks into the moat yeah but all the time if you've got a wonderful castle there are people out there gonna try and attack it and take it away from you and I want a castle that I can understand but I want to castle with a motor on it 30 years ago he's been Kodak's moat was was just as white as coca-cola smoke I mean if you were gonna take a picture of your six-month-old baby and you're gonna want to look at that picture 20 years from now and you're gonna look at 50 years from now and you're never going to get a chance I mean you're not a professional photographer so that you can evaluate what's gonna look good 20 or 50 years ago what is in your mind about that about that photography company is what counts because they are promising you that the picture you take today is going to be terrific to look at 20 or 30 or 50 years from now about something that's very important to you maybe your own child or whatever it may be well Kodak had that in spades 30 years ago that they had what I call share of mine forget about share market share mine they had something and everybody's mind around the country around the world with a little yellow boxing ring that said Kodak is the best time that's priceless they've lost some of that they've been lost at all and not new to George Fisher on to George's doing a great job but they let that moat narrow they let Fuji come and start narrowing the moat in various ways they love them get into the Olympics and take away that special aspect that only only Kodak was fit to photograph the Olympics so Fuji gets there and immediately in people's minds Fuji becomes more out of parody with with Kodak haven't seen that with coke cokes mold is whiter now than it was 30 years ago you can't see the moat day by day but every time you know the infrastructure gets built in some country that isn't yet profitable for Coke that will be 20 years from now the moat is widening a little bit that things are all the times changing that mode in one direction other ten years from now you can see the difference our managers are the best as we run I think I've got one message to them you know which is the widening moat and we want to we want to throw crocodiles and sharks and everything else Gators I guess yeah if it into the moat to keep away competitors and that that comes from Bob through service it comes about through quality of product that comes about through cost it comes about sometimes through patents it comes about through real estate location so that's the business I'm looking for now what kind of businesses are I'm gonna find like that well I'm gonna find them I'm gonna find them in simple products because I'm not going to be able to figure out what the moats going to look like for Oracle or Lotus or Microsoft ten years you know I mean is it the best businessman I've ever run into and you know they've got a hell of a position but I really don't know what that business going to look like ten years from now and I certainly don't know what his competitors businesses are gonna look like ten years you know now I'll name one I don't own I know what the chewing-gum business is gonna look like from ten years from now I mean the Internet is not gonna change that we chew them that's and nothing much else is gonna change that we chew gum and then are there gonna be lots of new products is it really you know our spearmint usually fruit and all those gonna evaporate some isn't gonna happen you'll give me a billion dollars and tell me to go in the chewing gum business and try and make it build them in Wrigley's I can't do it and that's the way I think about businesses I say to myself give me a billion dollars and how much can I hurt the guy give me ten billion dollars give me ten billion dollars and how much can I hurt coca-cola around the world I can't do it well those are good businesses now give me some money and tell me they hurt somebody and in some other fields and I can figure out how to do it so I want a simple business easy to understand great economics now honest and able management and and then I can see about in a general way where they're gonna be ten years from now and if I can't see where they're gonna be ten years and I don't want to buy it basically I don't want to buy any stock or if they close the New York Stock Exchange tomorrow for five years I won't be happy only I buy a farm and I don't get a quote on it for five years and I'm happy if the farm goes okay you know I buy an apartment house don't get a quote on it for five years I'm happy if the apartment house produces the returns that I expect but people buy a stock and they look at the price the next morning and they decide whether they're doing well or not doing well that's crazy that they're buying a piece of a business that's what Graham the most fundamental part of what he taught me yeah you're not buying a stock you're buying out you're buying a part ownership in the business you will do well if the business does well and if he didn't pay a totally silic price and that's what it's all about and you ought to buy businesses you understand just like if you're buying farms yalta by farms you understand it's it's not complicated and said in calling us Graham Buffett I mean it's just pure Graham I was very fortunate because I I picked up a book when I was 19 he got interests in stocks when I was about six or seven and I bought my first stock when I was 11 but I was playing around with all this stuff and I had charts Charlie Munger's bad a big impact on me and moving me toward looking for wonderful companies at fair prices rather than fair companies at wonderful prices and that was enormous ly important because it enabled Berkshire to scale up in a way that would have been impossible to do otherwise don't think it's terribly important I think if you're interested in the stocks you should you should buy it you know and you've got a little capital you should buy a few I mean I don't like there's any way of learning about them better than experiencing and doing it on paper isn't the same I can guarantee you if you lose money on paper or lose real money it's a different experience and I and so I I think they're I think you'll learn more about yourself if you do it that way I bought my first knock when I was 11 I was actually I was a Rosehill at the time and I bought three shares of city service preferred at 38 and it went down to 27 which is something I still remember even though it was 11 at the time and then it went up to 40 and I sold it I made five bucks on my three shares after commissions and then it went to two hundred and something so you know I I probably remember that a little better than if I'd been doing it on paper and I fooled around doing a lot of things between about age 11 and 19 in the stock market I did charts I did all kinds of technical analysis I read every book I could get on the subject and I didn't do that well I didn't do terrible but but I did I was really just floundering around but by that meant by the age of 19 when I read Ben Graham's book I was at the University Nebraska in Lincoln I went and bought this book called the intelligent investor just come out and an enormous impact on me now if I hadn't done in the previous eight years if I hadn't been all over the lot I'm not so sure that that book would have had the same impact on me I mean I was by that time I was prepared to read Ben Graham's book which changed my life financially in an incredible way I mean I wouldn't be up here today if I hadn't read that book but yeah part of life is getting prepared so that when something does happen that's significant you can grasp the significance of it and know what to do with it and I would say that first eight years of fooling around even though it produced nothing financially to speak of produced a lot in terms of getting my mind prepared for what I really did read something that made sense and so I was ready to accept it and I actually went back and went to Columbia the study under the under Graham and because of of reading that book and all kinds of things flowed out of it so I would encourage you if you're interested in the field to to do a few things I'd still try and make up as intelligent as possible I would try to stick with things businesses I thought I understood I'd still get out that sheet of paper and I'd write I'm doing this because and just test my reasoning and then I go back and read it a year later and and see whether what you thought would be true turned out to be true so I would always check myself I believe in grading myself on everything you know doctors have post-mortems and they they do it because they learned from post-mortems and business people don't like to do post-mortems what I can be on the board of a company and they got honors building plants or buying companies and they never wanted two years later to run a check on how that decision turned out because it it can be unpleasant but you learn from post-mortems and you don't want to learn it's better to learn from other people's mistakes in your own but you got to learn from a few of your own - and the time to do it is when you're young those are low return businesses but time is the friend of the wonderful business it's the enemy of the lousy business you're in a lousy business for a long time you're going to get a lousy result even if you buy a cheap if you're in a wonderful business for long time even if you pay a little too much going in you're gonna get a wonderful result if you stay in a long time if you take John Meriwether and Eric Rosenfeld Larry Hill and branch Greg Hawkins victory Ghani the two Nobel Prize winners are in Mertens Shoals if you take the 16 of them that they probably have as high an average IQ as any 16 people working together in one business in the country including at Microsoft or wherever you want a name so that incredible amount of intellect in that room now you combine that with the fact that those 16 and had extensive experience in the field they're operating I mean this is the this one it was not a bunch of guys who had made their money you know selling men's clothing and then all of a sudden went into the securities business or anything they had they they'd had in aggregate the 16 that probably had 350 or 400 years of experience doing exactly what they were doing and then you throw in the third factor that most of them had virtually all of their very substantial networks in the business so they had their own money up hundreds and hundreds of millions of dollars of their own money up super high intellect working in a field they knew and essentially they went broke and that to me is absolutely fascinating I mean I that if I ever write a book it's gonna be called why smart people do dumb things my partner says it should be autobiographical but I what buddy this might be an interesting illustration and these are perfectly decent guys I you know III respect them and they helped me out when I was at problems with Salomon and so they're they're not bad people at all but to make the money they didn't have and didn't need they risked what they did have and did need and that's foolish that is just plain foolish I'd put my game is what your IQ is if you if you risk something that is important to you for something that is unimportant to you it just does not make any sense I don't care whether the odds are a hundred to one that you succeed or a thousand one this you see if you hand me a gun with a thousand chambers a million chambers in it and there's a bullet in one chamber you just have put it up your temple how much do you want to be paid to pull it once I'm not going to pull it you know you can name any sum you want but it doesn't do any for me on the upside and I think the downside is fairly clear so I'm not interested in that kind of a game and yet people do it financially then without thinking about it very much there was a great book wasn't a great book it was a great title it was a lousy book written once with a great title by Walter Guttman the title was you only have to get rich once now that seems pretty fundamental doesn't it what is what different if you've got a hundred million dollars at the start of the year and Neal coming you're going to make ten percent if your unleveraged and 20% of your leverage 99 times out of 100 what difference does it make the end of the year whether you've got a hundred and ten million or hundred twenty million makes no difference at all I mean if you if you die at the end of the year you know the guy that writes up the story may make a typo and he may say 110 even hundred twenty so you've got nothing at all you know what it can't it makes absolutely no difference makes deliveries to your family makes no difference to anything and yet the downside particular managing other people's money there's not only losing all your money but it's it's disgrace and humiliation and and facing friends as money you've lost in me I just I just can't imagine an equation that that makes sense for and yet sixteen guys with very high IQs who are very decent people entered into that game and you know I think it's madness and it's it's it's produced by an over-reliance to some extent on things you know those guys would tell me back when I was in Salomon you know that a Six Sigma event wouldn't you know wouldn't wouldn't touch us or a seven segment but they were wrong I mean that their history does not tell you the probabilities of future financial things happening and they had a great reliance on mathematics and they felt that that debate of the stock told you something about the risk of the stock it doesn't tell you a damn thing about the risk of the stock in my view had and and sigmaz do not tell you but the risk of going broke in my view and maybe in their view now to what but I you know I I don't I don't like to even use them as an example because they are I mean the same thing in a different way could happen to any of us probably where we where we really have a blind spot about something that's crucial because we know a whole lot about something else it's like henry kaufman said the other day that the people are going broke in this situation are just two of two types the ones who knew nothing and the ones that knew everything and it's it's it's it's sad in a way I urge you if anything we never basically borrow money and we get float through an insurance business into do kidding but I never borrowed money and I never borrowed money one had ten thousand bucks basically because what difference did it make I was having fun as I went along and it didn't make a verse was I had ten thousand dollars or a million dollars or ten million dollars you know except if I had a medical emergency or something that come along like that but I was gonna cut a card debt is something you bring on yourself and it's a way better it's way easier to stay out of trouble than to get out of trouble financially and and I will guarantee if you run a big credit card that you will be in trouble probably the rest of your life in terms of your financial situation on the other hand if you get ahead of the game even it's on a very modest scale so that money is coming in from investing and your your you people owe you money or equities over you ownership you'll be way out of the game compared to paying it be always be paying your creditors every month so my advice to you is if you can't pay for it don't buy it and get yourself in a position where you can pay for anything and then we'll be glad to see it bore Shyam's or the Brassica furniture martinet done now let's
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