Mazor'sEdge

Are some companies so outstanding that it’s worth paying any price for them? This question becomes particularly relevant when stock prices reach stratospheric heights.

In his 1997 Chairman’s Letter to Berkshire Hathaway’s shareholders, Warren Buffett highlighted Coca-Cola and Gillette as “The Inevitables.” He described these companies as ones that “will dominate their fields worldwide for an investment lifetime.” However, during that year’s annual meeting, Buffett clarified that even these “Inevitable” companies can be overpriced.

“You can pay too much, at least in the short run, for businesses like that,” Buffett said at the 1997 Berkshire Hathaway Annual Meeting. He emphasized that no matter how wonderful a business is, there’s always a risk of paying a price so high that it takes years for the business to catch up with the stock. Essentially, the stock can outpace the business itself.

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© 2024 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.

Throughout history, pivotal moments of insight have often emerged in the most unexpected of places. Just as the ancient Greek mathematician Archimedes famously exclaimed “Eureka!” upon his realization in a bath, so too did Warren Buffett find inspiration while soaking in his tub.

In the depths of the Great Recession in 2011, when investing in banks seemed perilous, Buffett made a bold move. His “Eureka moment” led him to invest $5 billion in Bank of America, a decision that raised eyebrows at the time but ultimately proved to be immensely profitable. Over the years, this investment brought Buffett over $22 billion in returns.

Yet, Buffett himself is quick to downplay the significance of the bathtub in his revelation. Speaking at the 2013 Berkshire Hathaway Annual Meeting, he attributed his moment of clarity not to the water around him, but to the vast reservoir of knowledge he had accumulated over decades. He recalled reading “Biography of a Bank” more than 50 years prior, a book chronicling the history of banking and the likes of A.P. Giannini, the founder of Bank of America. This foundational understanding of the industry, cultivated over half a century, laid the groundwork for his inspired investment.

In essence, both Archimedes and Buffett exemplify the power of preparation meeting opportunity. While the setting may differ, the common thread remains: a deep understanding of their respective fields paved the way for their moments of genius. Whether it’s a bathtub or a boardroom, the lesson endures—the path to enlightenment is often paved with knowledge and experience.

Hear Buffett’s full explanation

See the complete Lessons From Warren Buffett series

© 2024 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’re searching for a book to guide you to financial success, Warren Buffett recommends Benjamin Graham’s “The Intelligent Investor” as the essential read.

At the 2012 Berkshire Hathaway Annual Meeting, Buffett highlighted two chapters as particularly crucial: “Chapters 8 and 20 are really all you need to do to get rich in this world.”

In Chapter 8, Graham introduces the concept of “Mr. Market,” a metaphor for the stock market’s volatility. Buffett explained, “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. He will do very weird things over time, and your job is to remember that he’s there to serve you, not to advise you.”

Buffett emphasized the importance of maintaining a rational perspective: “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, he is making lots of mistakes. He makes them for all kinds of weird reasons. 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.”

By understanding and applying these principles, investors can leverage market fluctuations to their advantage and achieve financial success.

Buffett’s full explanation

See the complete Lessons From Warren Buffett series

© 2024 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.