Warren Buffett: The Oracle of Omaha Speaks

Warren Buffett: The Oracle of Omaha Speaks

A guru expounds on stocks, fortune tellers, and other secrets of success.

(This text has an historic value, as it was written in 1994).

Warren Buffett, the chairman of the Omaha-based holding company Berkshire Hathaway, Inc., is famous both for his spectacular investment acumen and his folksy, commonsense approach to choosing stocks. He also is, according to Forbes magazine, the second richest person in the nation, with an estimated fortune of some $9.2 billion (Microsoft chairman is the richest). With an initial investment of $100,000 at the age of 25, Buffett built a business empire worth nearly $20 billion today that includes major holdings in Coca-Cola, the insurance giant GEICO, the Washington Post, and General Dynamics.

Buffett enjoys a reputation as a maverick outside, preferring small-town Omaha to Wall Street canyons. But, as Forbes said in 1994, “Don’t bet he’s lost his touch”.

When asked about publishing his gems of investment wisdom gleaned from his letters to shareholders in recent (for 1994) Berkshire Hathaway annual reports, he agreed.

“What makes sense in business also makes sense in stocks : As investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.”

“I am quite content to hold a security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business.”

“Beware of past performance proofs in finance. If history books were the key to riches, the Forbes 400 would consist of librarians”.

“The only value of stock forecasters is to make fortune tellers look good. Even now, Charlie (Charles Munger, Berkshire’s vice chairman) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

New York, 57th street. Photo by Elena

“The most common cause of low prices is pessimism – sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”

“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that stays intact.”

“Just as you should be suspicious of managers who pump up short-term earnings by accounting maneuvers, asset sales and the like, so also should you be suspicious of those managers who fail to deliver for extended periods and blame it on their long-term focus. (Even Alice, after listening to the Queen lecture her about “jam tomorrow”, finally insisted, “It must come sometimes to jam today”.)

“We think the very term “value investing” is redundant. What is investing if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labelled speculation (which is neither illegal, immoral nor – in our view – financially flattening).”

“We try to stick to business we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change, we’re not smart enough to predict future cash flows. Incidentally, that shortcoming doesn’t bother us. What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know. An investor needs to do very few things right as long as he or she avoids big mistakes.”

“Tax-paying investors will realize a far, far greater sum from a single investment that compound internally at a given rate than from a succession of investments compounding at the same rate.”

“An investor who does not understand the economics of specific business and nevertheless believes it in his interest to be a long-term owner of American industry, should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when “dumb” money acknowledges its limitations, it ceases to be dumb.”

“If you are a know something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding the money to his top choices – the businesses he understands best and that present the least risk, along with the greatest profit potential.”