Warren Buffett | How To Invest For Beginners: 3 Simple Rules

i had started investing when i was 11. i just dithered away until when i was seven or eight nine but so unfortunately i didn't get started till i was 11. but i bought my first stock when i was 11 and then i experimented with a whole bunch of things like timing of stocks and charting and doing all these crazy things it was a lot of fun profitless but a lot of fun and i did that until i was 19.

and i read all the books on investing in the public library and just i ate it up it was fascinating to me but i had no framework i was just searching for something i was hoping that little things on a chart would tell me something about what a stock was going to do it was kind of crazy but everybody else was doing it so i figured i'd do it too sometimes you turn the chart upside down you know it still wouldn't help then in 1949 i read the intelligent investor by ben graham i'd never heard of them up until then and there are really only two chapters in that book that are the key to it but they set my philosophical framework for investing in three ways they're so basic and so simple it's hard to understand how they could be that important but the ten commandments are simple you know the first is that a stock is part of a business i mean you you can't think of a sock as something different it's you value a business and then you divide by the shares outstanding but what you have to think about is what kind of a business are you getting into what are its economic characteristics for its competitors what's its management like all of these things that relate to a business instead of a little ticker symbol i used to know when i was 11 or 12 the ticker symbols of every company virtually on the new york stock exchange i could mark the boards of harris up them you know but i didn't know anything i mean i could you know i knew that x was u. s steel and t was at t and so on but i didn't i didn't know anything i didn't know what was behind them so i had to start looking at at these little symbols or these little names in the paper as businesses and decide how do you value a business what counts the second thing in that in the book is that graham gives you a marvelous set point in terms of how the investor should react to stock market fluctuations he talks about his mythical mr market in chapter eight there's been no better thing written in terms of the investors attitude toward stock prices most people react the wrong way to stock prices i mean they feel good when their stocks go up they feel bad when they go down they think the stock market is there to instruct them and mr market is this partner you have in investing you know he's a remarkably obliging partner this guy comes around every day and he tells you what he'll pay you for your interest in the business or what he'll sell you more at the same price nobody ever does that in in private business if you owned you and i owned a gas station together and i said every day i want you to come in and offer me your half interest in the station and i can either buy your half or sell you my my half at the same price and you have to come in every day and do it you'd be at a terrible disadvantage and you'd be at a particular disadvantage if you're mr market in the market because mr market or a friend of the market who obligingly gives you those figures every day different figures at the end of the day in the start of the day but he's naming a price at which you'll either buy herself the beautiful thing about him is that this guy is an alcoholic manic depressive i mean i mean he is as unsound as they come he wanders around all day you know and looks at the crazy things and he you know he he's going to name all kinds of crazy prices and you don't have to pay any attention to them except when it's to your advantage to do so if that's once a year if it's once every five years it's one stock out of three thousand all you have to do is sit there there you have no moral responsibility to this jerk you know i mean he is naming these numbers you didn't ask him to but he's doing it and all you have to do is pick the one time when he is particularly depressed or particularly manic or particularly drunk or whatever it may be and the market will be all of those things and and you take advantage of it and that's what's remarkable about stocks if you think about it is that if you look at the high and low on all of these american companies for the last year you'll see case after case after case where the high is twice below now that's for sound american businesses running along paying people selling goods and so on if you go out look at farmland 10 miles from here there's no way in the world over here that the farmland is going to range in value from x to 2x it doesn't maybe go from x to 110 of x or vice versa if you look at an apartment house near here and figures on essentially apartment houses like that over a year it won't it won't move 10 in a given year but here are the finest of american businesses and people just name these numbers that go all over the place and you don't have to play except when you want to that's the important thing and that's the that's what graham tells you the market isn't there to instruct you to tell you anything the markets is there just basically to serve you when you want it to serve you you know one of the most important things remember in stocks very hard to do but people have all these feelings about it the stock doesn't know you own it you know you're sitting there with these certificates for berkshire the company doesn't even know you own it you know and the stock doesn't it's trading now and they don't know you own it so it has no feelings about you i mean you've got all these feelings about it but it's just part of a business if berkshire is worth 75 000 times a million and a half shares you know roughly 110 billion or something like that it's a good investment if it isn't it's a lousy investment you know you have to value the business and graham you know it's amazing but people don't do that in wall street you bet you you hear price targets or that kind of thing but you see no one write a paper that says here is the nature of this business over the next 20 years you know what will that what should that business sell for forget about what it's selling for in fact one of the things i always like to do when i'm looking at investments is i like to look at them without knowing the price because if you see the price it automatically has some influence on you if you just sit down with the reports if i get an idea about looking up a company and i get these 10ks and so on i would rather not know the price because i'd rather value it without knowing the price when i used to handicap horses when i was a kid one of the things i would do is i'd get the racing form ahead of time and if there were nine horses in a race will say obviously the probabilities of of each one winning the race had to add up to 100 percent i mean one horse was going to win the race absent a dead heat or all of them dropping dead on the backstretch so if you went through the racing form and i would look at the third race at hialeah i would try to figure out the percentage chance of each horse winning the race and that had to add to 100 then i would compare those percentages to the odds but i first of all i wouldn't look at the odds first i would look at the past performance and all that thing first stock market's the same way third thing in graham's book is the margin of safety if you come up to a bridge and it says capacity ten thousand pounds and you're driving a 9 800 pound truck you drive down further and find another bridge i mean you know they nobody knows exactly what that capacity is and it may have been signed may have been put up three years ago so you always leave a margin of safety you don't try to cut things that close you wait till something kind of shouts at you in the stock market and uh with those three principles you can build all kinds of all kinds of structures on that but that's the foundation and if you've got that in mind and that's in the intelligent investor i've never found anything that remotely compares with all three of the ones i just you can't get rid of one leg of the three-legged stool and still have a good investment philosophy but i would say that the most important thing uh over a long period and working with big money uh is to understand the business let's just say for the moment that you were given a million dollars or whatever some was necessary and you could look around knoxville or look around all of tennessee if you want and buy into any three businesses you know between now and a week from now private businesses not trading or anything of the sort you've got a week to do it or you have to give the money back what will you be doing during the next week i mean you can look at all these companies some of them you're quite familiar with some of them you're less familiar with some you know by reputation some of them you know the management some of them you know you know their competitive situation what will you be thinking about during that seven day period how will you actually be screening these companies out i think you look for three businesses and you can't trade them after you buy them you're just gonna you're gonna own the rest of your life you're gonna be looking for businesses that have enduring competitive advantage you don't want to buy a burger king franchise just because nobody's come within 10 miles of it yet because you know wendy's and donald's and all of those will be there pretty soon it isn't necessarily who's earning the most money now you're going to look for something with enduring competitive advantage now that takes a business with some kind of a moat around it because capitalism by definition is a system where every time somebody has an economic castle somebody else is going to come after it's just the nature if you open a restaurant that's successful here in town you know somebody's going to take your menu and probably take your chef maybe cut your price maybe offer a little more parking maybe be a better better okay whatever i mean capitalism consists of going after the other guy's castle if that's the case you want a castle with a big moat around it there's a lot of ways you can have a motor on something you could have it by patent protection you could have it by location in certain certain areas i mean if you have something in people's mind like coca-cola six billion people in the world practically all of them have something in their mind about coca-cola largely favorable they don't have anything in their mind about rc cola and if rc cola spent a billion dollars advertising they wouldn't have anything in their mind about rc cola but they've got something in their mind about coke and generally it's favorable that's why coke wants to be where people are happy because they want to be at the theater they want to be at disney world they want to be at the world series they want always have you drinking that drink of coca-cola while at the same time experiencing happiness and if they do that they're going to sell a lot of coca-cola and it won't make any difference if somebody is a half a cent less of some serving than coke so that's an enduring competitive advantage and you want it run by honest enabled people don't want to go in with a crook and you don't want to go in with a dope now the best businesses to buy are the ones where you could have a dope in there i mean peter lynch says you know buy a business that's so good that an idiot can run it because sooner or later one will you know and and there's some merit to that uh in fact i got a question the other day from this student group and they said you know what's going to happen to berkshire when you go gaga and i said well berkshire's so good that i can go gaga in fact i may even be you know those are the kind of businesses to own so you want but you want a management that's able and honest and then you want a price that's sensible and that's what you'd look for you go around tennessee got a week to do it and you'd immediately screen out a whole bunch of things you just know that they weren't a fertile area you know that's an important thing to be able to do to know just get rid of all kinds of things there was a great article in the new yorker 30 years ago when bobby fischer was playing spassky in famous chess match which drew attention around the world and they examined how the mind could with billions and billions and billions of possibilities how it could group things so it immediately cast it down to where you had like four options and of course when the humans play something like deep thought you know or whatever the latest version is of the computer on that that computer is making maybe 700 000 or a million calculations a second and the human mind is competing against that but the computer is checking every possibility and the human mind somehow has this ability to cast out 99.