Warren Buffett: 10 Mistakes Every Investor Makes

we would never have cash around just to have cash I mean we would never think that we should have a cash position of x%c and I frankly I think these asset allocation things that tacticians in Wall Street put out you know about 60% stocks and 30 we we think that's total nonsense uh so we want to have all our money working in decent businesses but sometimes we can't find them or sometimes cash comes in expectedly or sometimes we sell something uh and and we have more cash around than we would like and more cash around

than we would like means that we have 10 or 15 cents around because we we want money employed but we'll never employ a just employ it and you will uh find us quite unhappy over time if if cash just keeps building up and I I think one way or another we'll find ways to use it you may have trouble believing this but I I uh Charlie and I never have an opinion about the market because it wouldn't be any good and it might interfere with the opinions we have that are good at uh if we're

right about a business if we think a business is attractive it would be very foolish for us to not take action on that because we thought something about what the market was going to do or or or anything of that sort because we just don't know and and and to give up something that you do know and that is profitable for something that you don't know and won't know because of that it just doesn't it doesn't make any sense to us and it doesn't really make any difference to us there's nothing magic we like to

put a lot of money and things that uh that we feel strongly about and that gets back to the diversification question um we think diversification as practice generally makes very little sense for anyone that knows what they're doing diversification is a protection against ignorance 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 that is a perfectly sound approach for somebody who who does not feel they know how to analyze businesses if you know how to analyze

businesses and and value businesses it's crazy to own 50 stocks or 40 stocks or 30 stocks probably because there aren't that many wonderful businesses that are understandable to a single human being in all likelihood and it and to have some super wonderful business and then put money in number 30 or 35 on your list of attractiveness and and forego putting more money into number one just strikes Charlie and me as as Madness it's conventional practice and it you know if all you have to achieve is is average uh it's a confession in our view that

you don't really understand the businesses that you own on a personal portfolio basis you know I own one stock you know but it's a business I know it and it leaves me very comfortable H you know do I do I need to own 28 stocks in order you know have proper diversification you know be nonsense three wonderful businesses it's more than you need in this life to do very well the average person isn't going to run into that I mean if you look at how the fortunes were built in this country they weren't built out

of a portfolio of 50 companies they were built by someone who identified with this with a wonderful business much of what is taught in modern corporate finance courses is twaddle volatility does not measure risk and the problem is that the people who have written and taught about risk do not know how to measure risk and the nice thing about beta which is a measure of volatility is that it's nice and mathematical and wrong in in terms of measuring risk it's a it is it's a measure of volatility but past volatility does not determine the risk

of investing I mean actually take it with Farmland here in 1980 or in the early 1980s Farms that sold for $2,000 an acre went to $600 an acre I bought one of them uh when the the banking and farm crash took place and the beta of farms shot way up and according to standard economic theory Market Theory I was buying a much more risky asset at $600 an acre then the same Farm was at 2,000 an acre now people because Farmland doesn't trade often and prices don't get recorded you know they would regard that as

nonsense that that might purchase a $600 an acre of the same farm that sold for 2,000 an acre a few years ago was riskier but in socks because the prices jiggle around every minute and because it lets the people who teach Finance use the mathematics they've learned they have in effect they would explain this away a little more technically but they have in effect translated past volatility in terms of all kinds of measures of risk and it it's nonsense risk comes from the nature of certain kinds of businesses it can be risky to be in

some businesses just by the simple economics of the type of business in uh and and it comes from not knowing what you're doing and you know that it it is if you understand the economics of the business in which you are and engaged and you and you know the people with whom you're doing business and you know the price you pay and is sensible you don't run any real risk and I don't think Charlie and I certainly at Berkshire I don't think we've ever had a permanent loss in marketable Securities that was what 1% maybe

half a percent of that worth I made a terrible mistake in buying Dexter shoe which cost us a significantly more than 1% of net worth where I bought an entire business then but I was wrong about the business uh had nothing to do with the volatility of shoe prices or leather or anything else just was wrong uh but in terms of marketable secures I I I cannot recall a case where we've lost Eon and we've done a lot of things in things in Securities that had a very high beta we done of things a lot

of things in Securities at a low beta it just the whole development of of volatility as a measure of risk we've never found a way for it to be useful to us both corporate finance and Investment Management courses as taught in the major universities we would argue it's at least 50% twaddle yet these people have very high IQs one of the reasons we've been able to do pretty well is that we early recognized that very smart people do very dumb things and we tried to figure out why I also wanted to know who so we

could avoid them it's a temperamental quality not an intellectual quality you don't need tons of IQ in this business I mean you have to have enough IQ to get from here to Downtown Omaha but uh but uh you do not have to be able to play three-dimensional chess or be in the top leagues in terms of bridge playing or something of the sort you need a stable personality you need a temperament that neither derives great pleasure from being with the crowd or against the crowd because this is not a business where you take polls it's

a business where you think and Ben Graham would say that you're not right or wrong because a thousand people agree with you and you're not right or wrong because a thousand people disagree with you you're right because your facts and your reasoning are right but by far the best investment you can make is in yourself I mean that for example communication skills I tell the students that come that they're going to graduate schools and business and they they're learning all these complicated formulas all that if they just learn to communicate better and both in writing

in in person they increase their value at least 50% if you can't communicate somebody says you know it's like winking at a girl in the dark nothing happens you know basically and and you have to be able to get get forth your ideas and uh and that's that's relatively easy I did it myself with the Dale Carnegie of course some people wish I'd takeen a shorter course now terms my talking later on but it it's just hugely important and you if you invest in yourself nobody can take it away from you if I gave you

a car and it' be the only car you get in the rest of your life you take care of it like you can't believe and scratch you'd fix that moment you read the owner's manual you keep a garage and do all these things and you get exactly one mind to one and one body in this world and and you can't start taking care of it when you're 50 by that time you'll have rushed it out if you haven't done anything so you you should you should really make sure that you just remember that you just

got one mind and body to get through life with and to do the most with it we think the best way to minimize risk is to think and the idea that you have you know you say I've got 60% in stocks and 40% in bonds and and then have a big announcement now we're moving it to 6535 is some Str strategist or whatever they call them in Wall Street do I mean that that has to be pure nonsense I mean at uh uh 6040 or 653 it just doesn't make any sense I what you ought

to do is have your default position is always shortterm instruments and whenever you see anything intelligent to do you should do it and you shouldn't be trying to to to match up with some some goal like that I I found it entertaining I was just reading yesterday an article I think it was the about the two fellows at Google and and all of the problems they're going to have because they're each going to get a few billion dollars and I mean it was it was I mean I want to send a sympathy card I almost

went down a Hallmark store because this article went on they've got this this terrible problem and that terrible problem and they're going to need lawyers and they're going to need financial they don't need anybody those guys are smarter than the people that are coming to them and they do not have a big problem and and they're very capable of thinking it through themselves the people that have the problem are the people who want to sell their services to them and are going to have to convince them that they have a problem but uh so much

of what you see when you talk about asset allocation something it's just merchandising it's a way to make you think that if you don't know how to determine whether it should be 6040 or 6535 that you need these people and you don't need them at all in investing I mean most of the professionals that tell you you're you're going to get in great trouble unless you listen to them and sign up for their services you know they're good at selling but uh um it's one my brother-in-law former brother-in-law that worked at the um Stockyards used

to say was that people would bring in cattle or something and I'd say to him you know how do you get how do you get the farmer to employ you to sell the Swift or armor or cut instead of the guy right next to you I mean you know it's a cow is a cow and armor is going to buy it the same way and he gave me this disgusted look and he said Warren it's not how you sell them it's how you tell them well that there's a lot of that in Wall Street yeah

people have always had this craving to know the future you know the King used to hire the magician or the forecaster and he'd look in sheep guts or something for an answer as to how to handle the next war and so there's always been a market for people who reported to know the future based on their expertise and there's a lot of that still going on it's just as crazy as when the King was hiring the the uh forecaster who looked at the shap guts and and people have an economic incentive to sell some nostrom

it can be sold over and over and over again the really interesting figures are when you combine the underperformance of the market say by the mutual fund industry which is probably a couple of points per anom that that under States it now if you take all of the investors in the mutual funds who are constantly whips swing from One Fund to another by a bunch of brokers who want commissions now you take a subnormal performance and it goes down another three or four percentage points due to the shuffling of the mutual fund investment so the

poor guy in the general public uh is is getting a terrible result from contacting the experts and these guys are heading the Scout Troop and the community chest drive and are locally reputable people I think it's disgusting it's much better to make a living by by being part of a system that delivers value to the people who are buying the product but nobody refrains from creating gambling casinos or something on my theory if it'll work to make money why we tend to do it in this country desire of people to gamble and they gamble in

stocks incidentally too uh day trading I would say very often was came very close to gambling as defined uh but people people like to gamble you know I mean it's if the Super Bowl is on or even well better yet if a terribly boring football game is on but you don't have anything to do uh and you're sitting there with somebody else you're probably going to enjoy the game more if you bet a few bucks on it one way or the other the human propensity to gamble is is huge now when it was legalized only

in pretty much in Nevada you had to go to some distance or break some laws to do any serious gambling but as the states learned to you know what a great source of Revenue it was they gradually made it easier and easier and easier for people to gamble and believe me the easier it's made uh the more people will gamble I mean when I was my children are here and 40 years ago I bought a slot machine and I put it up on our third floor and I could give my kids any allowance they wanted

as long as it was in dimes I mean I had it all back by Nightfall I thought I thought it would be a good lesson for him and they weren't going to Las Vegas to do it but believe me when it was on the third floor they could find it you know and uh my payout ratio was terrible too but that's the kind of father I was uh but gambling you know people are always going to want to do it and for that reason I particularly think that to quite an extent gambling is a tax

on ignorance I mean if you want to if you want to tax the the ignorant people who will do things with the odds against them you know you just put it in and guys like me don't have to pay taxes and I I I really don't I find that I find it kind of socially revolting when a govern a government prays on the weaknesses of its citizenry rather than acts to serve them and and believe me when a government sticks lot you I I really said the growth and value they're indistinguishable they're they're part of

the same equation or really growth is part of the value equation so there I our position is is that there there is no such thing as as growth stocks or value stocks the way Wall Street generally portrays them as being contrasting asset classes growth usually is a positive for Value but only when it means that by adding Capital now you add more cash availability later on at a rate that's considerably higher than the current rate of of Interest so we calculate into any business we buy what we expect to have happen in terms of the

cash that's going to come out of it or the cash that's going to go into it so if you tell me that that you own a business that's going to grow to the sky and isn't that wonderful I don't know whether it's wonderful or not until I know what what the economics are of of that growth how much you have to put in today and how much you will reap from putting that in today later on and the classic case again is the airline business the airline business has been a growth business ever since well

you know that orbal took off but the growth has been the worst thing that happened to it been great for the American public but growth has been curse in the airline business because more and more Capital has been put into the business at inadequate returns Now growth is wonderful it Sees Candy because it requires relatively little incremental investment to sell more pounds of candy so it's growth and I've discussed this in some of the annual reports growth is a part of the equation but anybody that tells you you ought to have your money in growth

stocks or value stocks uh really does not understand investing other than that they're terrific people you know the real point is that we're trying to put out Capital now to get more capital or money we're trying to put out cash now to get more cash back later on and if you do that the business grows obviously and you can call that value or you can call it growth but they're not too different categories and uh I just cringe when I when I hear people talk about now it's time to move from grow stocks to value

stocks or something like that because it it just doesn't make any sense in general terms unless you find the the prices of a great company really offensive if you if you feel you've identified it and by definition a great company is one that's going to remain great for 30 years if it's going to be great a great company for three years you know it ain't a great company I mean it uh so you really want to go along with the U the idea of something that if you were going to take a trip for 20

years you wouldn't feel bad leaving leaving uh the money in with no orders with your broker and no power of attorney or anything and you just go on the trip and you know you come back and it's going to be a terribly strong company I think it's better just to own them I mean you know we could attempt to buy and sell some of the things that that we own that we think are fine businesses but they're too hard to find we found C's candy in 1972 where we find here and there we get the

opportunity to do something but they're too hard to find so to to sit there and hope that you buy them in the in the throws of some Panic uh you know that you'd sort of take the attitud ude of a a mortician you know waiting for a flu epidemic or something I mean it it I'm not sure that that uh I'm not sure that's a will be a great technique that's a lot to count on and you know if you start with the Dow at X and you're you think it's too high you know when

it goes to 90% of X do you buy well if it does and it goes to 50% of X it gets you know you you never get the benefit of those extremes anyway unless you just come into some accidental sum of money at some time so I I I think the main thing to do is find wonderful businesses so we've had our share of flu epidemics but uh you don't want to spend your life waiting around for them when people said cash is King a year ago I mean that's crazy I mean cash wasn't producing

anything and it was sure to go down in value over time on the other you always want to be sure you have enough I mean it's like Like Oxygen you want to be sure it's around you know but you don't need to have you don't need to have excessive amount of around