Category: Lessons From Warren Buffett

When it comes to discussing a company’s financial performance, EBITDA (earnings before interest, taxes, depreciation, and amortization), has become such a common reference point that you would think that everyone embraces its utility. However, neither Warren Buffett, nor Charlie Munger, who famously said “I think that, every time you see the word EBITDA, you should substitute the words ‘bullshit earnings,’” have much good to say about the acronym. Buffett has even gone so far as to call its widespread use a “mass delusion.”

“In respect to EBITDA, depreciation is an expense, and it’s the worst kind of an expense,” Warren Buffett said at the 2017 Berkshire Hathaway Annual Meeting. “You know, we love to talk about float. And float is where we get the money first and we have the expense later. Depreciation is where you spend the money first, you know, and, then, record the expense later. And it’s reverse float. And it’s not a good thing. And to have that enter into a multiple, it’s much better to buy a business that has, everything else being equal, has no depreciation because it has, essentially, no investment and fixed assets that makes X, than it is to buy a company where there’s a lot of depreciation in getting to X. . . . And, of course, it’s in the interests of Wall Street, enormously, to focus on something called EBITDA because it results in higher borrowing power, higher valuations, and all of that sort of thing. So it’s become very popular in the last 20 years. . . . It’s a very misleading statistic that can be used in very pernicious ways.”

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.

When it comes to evaluating a company, you can’t rely on the reports Wall Street provides you, according to Warren Buffett. You have to do your own work, reading annual reports, including the annual reports of a company’s competitors.

“You can’t read Wall Street reports and get anything out of them,” Warren Buffett said at the 1996 Berkshire Hathaway Annual Meeting. “You have to do it yourself and get your arms around it. I don’t think we’ve ever gotten an idea, you know, in forty years from a Wall Street report. But, we’ve gotten a lot of ideas from annual reports.”

Buffett’s full explanation on evaluating a company

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.

One of the most popular theories about stock market prices is that at any given time prices reflect all that is known about a company. Known as the Efficient Market Hypothesis (EMH), it became especially popular during the 1970s, as the rise of the Information Age brought about exponential increases in the storage and exchange of data.

It would thus stand to reason, that five decades later, when even the most casual investors have access to valuation tools that the most sophisticated traders of the 1950s would never even have dreamt about, that prices have reached an efficiency where stocks are always fairly and accurately priced.

However, Warren Buffett doesn’t believe when it comes to the market that there is anything efficient about it, and that in fact, far from the market always reflecting an accurate valuation of a company’s worth, that it is “built into the system that stocks get mispriced.”

“The beauty of stocks is they do sell at silly prices from time to time,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “Ben Graham writes about it in Chapter 8 of The Intelligent Investor. . . 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.”

Buffett’s full explanation on the stock market and stock prices

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.

If Warren Buffett is known for anything, it is for his legendary patience. He is willing to build up tens of billions in cash, even well over 100 billion, and not feel compelled to use it until the deal is right. According to Buffett, who has compared investing to being a baseball batter waiting for just the right pitch, the stock market is the ideal place for such patience.

“The stock market is the most obliging, money-making place in the world because you don’t have to do anything,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “You know, you sit there with thousands of businesses being priced at the same price for the buyer and the seller. . . and it changes every day, and you’ve got lots of information about most of those businesses, and you don’t have to do anything. Compare that to any other investment alternative you’ve got. I mean, you can’t do that with farms. If you own a farm and the guy has the farm next to you and you’d kind of like to buy him out or something, he’s not going to name a price every day at which he’ll buy your farm or sell you his farm, but you can do that with Berkshire Hathaway or IBM. It’s a marvelous game. The rules are stacked in your favor, if you don’t turn those rules upside down and start behaving like the drunken psychotic instead of the guy that’s there to take advantage of it.”

Hear Buffett’s full explanation on being a patient investor

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 it comes to teaching investing, Warren Buffett is less than impressed with what business schools teach on the subject.

For Buffett, it is all about knowing how to value a business, and the more esoteric the financial theory, the more it seems to drift from the basic task of determining valuations.

“I think they’ve taught to students a lot of nonsense about investments,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “I mean, it is astounding to me how the schools have focused on sort of one fad after another in finance theory, and it’s usually been very mathematically based.”

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.

When it comes to finding companies to invest in, Warren Buffett likes opportunities that are so clear and obvious that they practically jump right out and grab you. He doesn’t want to have to dive deep into analyzing a company before it becomes clear that it is a good investment.

“We’re not looking for needles in haystacks or anything of the sort,” Warren Buffett said at the 1994 Berkshire Hathaway Annual Meeting. “You know, we like haystacks, not needles, basically, and we want it to shout at us.”

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.

Investing is not just about return, it is also about peace of mind, and Warren Buffett sees the value of index funds, such as those tracking the S&P 500, in accomplishing that goal, especially for inexperienced investors that might be prone to worry, or easily convinced by others to take on risky investments.

“What is the best investment, meaning one that there would be less worry of any kind connected with and less people coming around and saying, ‘Why don’t you sell this and do something else?’ and all those things,” Buffett explained at the 2017 Berkshire Hathaway Annual Meeting. It is even an investment he would recommend for his wife after she inherits his assets, not that she would be selling her Berkshire Hathaway stock. “The object is not to maximize. It doesn’t make any difference whether the amount she gets doubles or triples or anything of the sort. The important thing is that she never worries about money the rest of her life.”

Speaking of money and worry, Buffett tells the story of his elderly aunt.

“I had an Aunt Katie here in Omaha, who Charlie knew well, and worked for her husband, as did I. And she worked very hard all her life. And had lived in a house she’d paid, I think, I don’t know, $8,000 for at 45th and Hickory all her life. And because she was in Berkshire, she ended up, she lived to 97, she ended up with, you know, a few hundred million. And she would write me a letter every four or five months. And she said, ‘Dear Warren, you know, I hate to bother you. But am I going to run out of money?’ I would write her back. And I’d say, ‘Dear Katie, it’s a good question because, if you live 986 years, you’re going to run out of money.’”

Buffett’s full explanation on index funds

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.

Companies need to provide quality goods or services, and they also good management that can chart a course to long term profitability. How can an investor evaluate the quality of the management? According to Warren Buffett, it all comes down to two things.

“Well, I think you judge management by two yardsticks,” Warren Buffett explained at the 1994 Berkshire Hathaway Annual Meeting. “One is how well they run the business, and I think you can learn a lot about that by reading about both what they’ve accomplished and what their competitors have accomplished, and seeing how they have allocated capital over time. You have to have some understanding of the hand they were dealt when they themselves got a chance to play the hand. But, if you understand something about the business they’re in, and you can’t understand it in every business, but you can find industries or companies where you can understand it, then you simply want to look at how well they have been doing in playing the hand, essentially, that’s been dealt with them. And then the second thing you want to figure out is how well that they treat their owners.”

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.

If there is one thing Warren Buffett is clear about, it is that gambling type of behavior, whether it is in the stock market or just buying a lottery ticket, will lead an investor astray. And, as opportunities to speculate look ever more enticing, it’s most important to remember that just because you can gamble doesn’t mean that you should.

“People win lotteries every day, but there’s no reason to have that effect you at all. You shouldn’t be jealous about it,” Buffett said at the 2016 Berkshire Hathaway Annual Meeting. “If they want to do mathematically unsound things, and one of them occasionally gets lucky, and they put the one person on television, and the million that contributed to the winnings, with the big slice taken out for the state, you know, don’t get on, it’s nothing to worry about. Just, all you have to do is figure out what makes sense. . . . When you buy a stock, you get yourself in the mental frame of mind that you’re buying a business, and if you don’t look at a quote on it for five years, that’s fine. You don’t get a quote on your farm every day or every week or every month. You don’t get it on your apartment house, if you own one. If you own a McDonald’s franchise, you don’t get a quote every day. You know, you want to look at your stocks as businesses, and think about their performance as businesses. Think about what you pay for them, as you would think about buying a business, and let the rest of the world go its own way. You don’t want to get into a stupid game just because it’s available.”

Buffett’s full explanation about lotteries and markets

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.

Investors often think that to be a great investor they need a complicated approach. It is as if they think that the more arcane their investment strategy is the more rewarding it will be. Warren Buffett disagrees.

“You don’t have to do exceptional things to get exceptional results,” Warren Buffett noted at the 1994 Berkshire Hathaway Annual Meeting. “And some people think that if you jump over a seven-foot bar that the ribbon they pin on you is going to be worth more money than if you step over a one-foot bar. And it just isn’t true in the investment world, at all.”

Buffett’s full explanation on keeping investing simple

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.