Warren Buffett: You Only Need To Know These 7 Rules

June 20, 2024

Warren Buffett: You Only Need To Know These 7 Rules

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warren buffett is the greatest investor of all time if you would put 1 000 into his investment company when it started it would be worth over 30 million dollars today such returns can seem unrealistic but how did buffett actually do it the answer is he understands what most people don’t and is sticking to a few key principles that you can implement in your everyday life keep watching because by the end of this video you will learn all of them we look for three things when we hire people we look for intelligence we look for 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 to you don’t want to smart and energetic so the answer is that investors behave in very human ways which is they get very excited during bull markets and they look in the rear view mirror and they say i made money last year i’m going to make more money this year so this time i’ll borrow you know or or the neighbor says you know i wasn’t in last year when that neighbor was dumber than i made a lot of money so i’m going to go in this year’s they’re always looking in the rearview mirror and when they look in the rearview mirror and they see a lot of money having been made in the last few years they plow in and they just push and push and push on prices and when they look in the rearview mirror and they see no money having been made they just say this is a lousy place to be so they don’t care what’s going on in the underlying business and it’s it’s astounding but that’s that makes for a huge opportunity just huge opportunity 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 they made a big impression on me so i went around looking for what i call you 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 and you find this honestly this terrible looking soggy ugly looking cigar 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 and then you look around for another soggy you know one puff cigarette well that’s what i did for years it’s a mistake uh although you make money doing it but 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 i have an old-fashioned belief that i can only should expect to make money and 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 at look like 10 years from now or 20 years from now i know in general what the economics will 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 but the biggest mistakes we’ve made by far i’ve made not we’ve made biggest mistakes i’ve made by far are mistakes of omission and not commission i mean it’s the things i knew enough to do they were within my circle of competence and i was sucking my thumb and that is really those are the ones that hurt they don’t show up any place i probably cost berkshire at least five billion dollars for example by sucking my thumb 20 years ago or close to one fannie mae was was having some troubles and we’re gonna bought the whole company for practically nothing and i don’t worry about that if it’s microsoft because i don’t know it because microsoft isn’t in my circle of components and so i i i i don’t have any reason to think i’m entitled to make money out of microsoft or out of cocoa beans or whatever but i did know enough to understand fannie mae and i blew it and that never shows up under conventional accounting but the i know the cost of it i know i know you know i i passed it up and those are the big big mistakes and uh i’ve had plenty of them at uh and you’ll unless i tell you about them in the annual report and i resist the temptation sometimes uh unless i tell you about them in the annual report you’re not gonna know it because it doesn’t show up under conventional county but omission is way bigger than commission there’s big opportunities in life have to be seized uh we don’t do very many things but when we get the chance to do something that’s right and big we’ve got to do it and even to do it in a small scale is just as big a mistake almost is not doing it at all i mean you’ve really gotta you gotta grab them when they come because they you’re not gonna get 500 great opportunities you would be better off if when you got out of school here you got a punch card with 20 punches on it and every big financial every financial decision you made you used up a punch you get very rich because you’d think through very hard each one of you went to a cocktail party and somebody talked about a company he didn’t even understand what they did or couldn’t pronounce the name but they made some money last week and another one like it you wouldn’t buy it if you only had 20 punches on that card in terms of our wholly owned businesses we’re not going to sell no matter how much anybody offers us for i mean if somebody offers us three times what something is worth that sees candy the buffalo news board shines whatever it may be we’re not going to sell it i may be wrong in having that approach i know i’m not wrong if i owned 100 of berkshire because that’s the way i want to live my life i’ve got all the money i could possibly need it just amounts to which a change in the newspaper story on my obituary and the amount of money the foundation has and the break off relationships with people i like and people that have joined me because they think it’s a permanent home to do that simply because somebody waves a big check at me would be like selling one of my children because i’ll be waiting a big chick so i i won’t do that and i want to tell my partners i won’t do it so that they’re not disappointed me more and more with certain stocks we’ve got that approach now if we were chronically short of funds and all kinds of opportunities coming we might have a somewhat different approach but our inclination is not to sell things unless we get really discouraged perhaps with the management or we think the economic characteristics of the business change in a big way i mean and that happens so but we’re not going to sell simply because it looks too high in all likelihood so now let’s go over here hello mr buffett i got two short questions one is how do you find intrinsic value in a company well intrinsic value is what is the number that if you were all knowing about the future and could predict all the cash that a business would give you between now and judgment day discounted at the proper discount rate that number is what the intrinsic value of businesses in other words the only reason for making investment and laying out money now is to get more money later on right that’s that’s what investing is all about now when you look at the stock when you look at a bond so it means united states government very easy to tell what you’re going to get back it says it right on the bond it says when you get the interest payments says when you get the principal so it’s very easy to figure out the value of a bond it can change tomorrow if interest rates change but you are the cash flows are printed on the bond the cash flows aren’t printed on a stock certificate that’s the job of the analyst is to print out change that stock certificate which represents an interest in the business and change that into a bond and say this is what i think it’s going to pay out in the future when we buy you know some new machine for shaw to make carpet that’s what we’re thinking about obviously and you all learn that in business school but it’s the same thing for a big business if you buy coca-cola today the company is selling for about a hundred and ten to fifteen billion dollars in the market the question is if you had 110 or 15 billion you wouldn’t be listening to me but i’d be listening to you incidentally but the question is would you lay it out today to get what the coca-cola company is going to deliver to you over the next two or three hundred years the discount rate doesn’t make much difference after as you get further out but and that is the question how much cash they’re going to give you this isn’t a question of you know any question about how many analysts are going to recommend it or what the volume in the stock is or what the chart looks like or anything it’s a question how much cash it’s going to get you that’s the only reason it’s a true if you’re buying a farm it’s true if you’re buying an apartment house any financial asset oil in the ground you’re laying out cash now to get more cash back later on and the question is is how much you’re going to get when are you going to get it and how sure are you and when i calculate intrinsic value of a business when we buy businesses and whether we’re buying all of a business or a little piece of a business i always think we’re buying the whole business because that’s my approach to it i look at it and say what what will come out of this business and when and what you really like of course is them to be able to use the money they earn and earn higher returns on it as you go along i mean berkshire has never distributed anything to its shareholders but its ability to distribute goes up as the value of the businesses we own increases we can compound it internally but the real question is berkshire selling for we’ll say 105 or so billion now uh what can we distribute from that hundred if you’re gonna buy the whole company for 105 billion now can we distribute enough cash to you soon enough to make it sensible at present interest rates to lay out that cash now and that’s that’s what it gets down to and if you can’t answer that question you can’t buy the stock you know you can gamble in the stock if you want to or your neighbors can buy it but if you don’t answer that question and i can’t answer that for for internet companies for example a lot of companies all kinds of companies i can’t answer for but i just stay away from those

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