Category: Lessons From Warren Buffett

Despite all the boom and bust cycles of the past, Warren Buffett notes that when it comes to people learning from the past, there is one very important lesson that can benefit investors.

“What we learn from history is that people don’t learn from history,” Warren Buffett said at the 2004 Berkshire Hathaway Annual Meeting. “And you certainly see that in financial markets all the time.”

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© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Are some companies so outstanding that it is worth paying any price for them? It is a question that is worth asking when stock prices reach truly stratospheric heights.

Back in 1997, in his Chairman’s Letter to Berkshire Hathaway’s shareholders, Warren Buffett singled out Coca-Cola and Gillette as companies that he labeled as “The Inevitables.” Buffett was referring to companies that “will dominate their fields worldwide for an investment lifetime.” However, at that year’s annual meeting, in response to a shareholder’s question, he did clarify that even a company that is an “Inevitable” can be priced too high to be a good investment.

“But you can pay too much, at least in the short run, for businesses like that,” Warren Buffett said at the 1997 Berkshire Hathaway Annual Meeting. “So, I thought it was only appropriate to point out that no matter how wonderful a business it is, that there always is a risk that you will pay a price where it will take a few years for the business to catch up with the stock. That the stock can get ahead of the business.”

Hear Buffett’s full explanation

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© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

If you are looking for a book that can show you how to get rich, Warren Buffett points to Benjamin Graham’s The Intelligent Investor as the only book you need.

“Chapters 8 and Chapters 20 are really all you need to do to get rich in this world,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “And Chapter 8 says that in the market you’re going to have a partner named ‘Mr. Market,’ and the beauty of him as your partner is that he’s kind of a psychotic drunk and he will do very weird things over time and your job is to remember that he’s there to serve you and not to advise you. And if you can keep that mental state, then all those thousands of prices that Mr. Market is offering you every day on every major business in the world, practically, that he is making lots of mistakes, and he makes them for all kinds of weird reasons. And all you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day, any given security.”

Hear Buffett’s full explanation

See the complete Lessons From Warren Buffett series

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

The boom in interest in SPACs as a way to take companies public has drawn a huge number of retail investors to pour their money into SPACs in the hope that they will end up owning the next hot company. However, there is a key thing Warren Buffett doesn’t like about SPACs, and that is the requirement that the SPAC has to buy a company within two years or hand its money back to investors. This incentivizes SPACs to make a deal no matter what.

“If you put a gun to my head and said, ‘You’ve got to buy a big business in two years,’ you know, I’d buy one. But it wouldn’t be much of one,” Warren Buffett wryly noted at the 2021 Berkshire Hathaway Annual Meeting. “I had a call from a very famous figure many years ago who was involved in it and wanted to learn about reinsurance. And I said, ‘Well, I don’t really think it’s a very good business.’ And he said, ‘Yeah, but,’ he says, ‘if I don’t spend this money in six months, I’ve got to give it back to the investors.’ So, you know, it’s a different equation that you have if you’re working with other people’s money, where you get the upside and you have to give it back to them if you don’t do something. ”

Hear Buffett’s full explanation

See the complete Lessons From Warren Buffett series

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Key to Warren Buffett’s efforts to find a company worth buying, whether it is the whole company, or just a minority stake, is his determination of the company’s intrinsic value. For Buffett, that intrinsic value is all about the future cash flow of the business. In his mind, those cash flows are like the interest paid on a bond, but unlike with bonds, the interest rate is not printed on a share of stock as it is with a bond.

“If we could see in looking at any business what its future cash inflows or outflows from the business to the owners, or from the owners, would be over the next, we’ll call it a hundred years, or until the business is extinct, and then could discount that back at the appropriate interest rate, which I’ll get to in a second, that would give us a number for intrinsic value,” Warren Buffett said at the 1997 Berkshire Hathaway Annual Meeting. “In other words, it would be like looking at a bond that had a whole bunch of coupons on it that was due in a hundred years. And if you could see what those coupons are, you can figure the value of that bond compared to government bonds, if you want to stick an appropriate risk rate in. Or, you can compare one government bond with 5 percent coupons to another government bond with 7 percent coupons. Each one of those bonds has a different value because they have different coupons printed on them. Businesses have coupons that are going to develop in the future too. The only problem is they aren’t printed on the instrument, and it’s up to the investor to try to estimate what those coupons are going to be over time.”

Buffett’s full explanation on determining intrinsic value

See the complete Lessons From Warren Buffett series

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

When stocks make sharp moves downward, the news is often full of commentaries decrying volatility. However, for Warren Buffett, volatility is just what he is hoping for.

“Volatility is a huge plus to the real investor,” Warren Buffett said at the 1997 Berkshire Hathaway Annual Meeting. “Ben Graham used the example of ‘Mr. Market’. . . . And Ben said, ‘You know, just imagine that when you buy a stock, that you in effect, you’ve bought into a business where you have this obliging partner who comes around every day and offers you a price at which you’ll either buy or sell. And the price is identical.’ And no one ever gets that in a private business, where daily you get a buy-sell offer by a party. But in the stock market you get it. That’s a huge advantage. And it’s a bigger advantage if this partner of yours is a heavy-drinking manic depressive. The crazier he is, the more money you’re going to make. So you, as an investor, you love volatility. Not if you’re on margin, but if you’re an investor you aren’t on margin. And if you’re an investor, you love the idea of wild swings because it means more things are going to get mispriced.”

Buffett’s full explanation on volatility

See the complete Lessons From Warren Buffett series

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Once a company loses its competitive advantage, it is very rare that it can regain it, according Warren Buffett. He has seen it on occasion, but he certainly wouldn’t bet on it.

“In terms of competitive advantage and then regain — lost and then regained — there aren’t many examples of that,” Warren Buffett said at the 2003 Berkshire Hathaway Annual Meeting. “I’ve got a friend who always wants to buy lousy companies with the idea he’s going to change them into wonderful companies. And I just ask him, you know, ‘Where in the last hundred years have you seen it happen?’”

See the complete Lessons From Warren Buffett series

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Diversify your portfolio. It is a bedrock tenet that gets preached over and over. However, to Buffett, if you know what you are doing, that doesn’t make sense. Why? Because there are only a limited number of great companies that are worth owning. So, why do people do it? “Diversification is a protection against ignorance,” Warren Buffett says. However, he notes that its not the secret to great wealth. As he points out, “If you look at how the fortunes were built in this country, they weren’t built out of a portfolio of fifty companies.”

“We think diversification is, as practiced generally, makes very little sense for anyone that knows what they’re doing,” Warren Buffett said at the 1996 Berkshire Hathaway Annual Meeting. “I mean, if you want to make sure that nothing bad happens to you relative to the market, you own everything. There’s nothing wrong with that. I mean, that is a perfectly sound approach for somebody who does not feel they know how to analyze businesses. If you know how to analyze businesses and value businesses, it’s crazy to own fifty stocks or forty stocks or thirty stocks, probably, because there aren’t that many wonderful businesses that are understandable to a single human being, in all likelihood. And to have some super-wonderful business and then put money in number thirty or thirty-five on your list of attractiveness and forego putting more money into number one, just strikes Charlie and me as madness.”

Buffett’s full explanation on diversification

See the complete Lessons From Warren Buffett series

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.