warren buffet speech and thoughts

7/30/2019 Warren Buffet speech and thoughts

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The Sage from Omaha

Warren Buffett, a.k.a. the "Sage from Omaha", is generally regarded as the most

successful investor of all time. Even at the young age of eleven, Warren was as

fascinated with stocks as other boys his age were fascinated with model airplanes. It was

at this age that Buffet bought his first stock, Cities Service preferred at $38/share. He

bought six shares in total, three for him and three for his sister Doris. He watched his

investment drop to $27/share and eventually rebound to $40. It was at $40/share that he

sold. Directly after he divested, the shares skyrocketed to $200. This was Buffett's first

lesson in patience and one that this eventual multi-billionaire would never forget.1

The remainder of this brief journey through the life of Warren Buffet is broken up

into five distinct sections. The first section provides some background on Warren and his

family. Next, the story of Buffet's higher education and introduction to Benjamin

Graham will be discussed. Then, Buffet's chronology through the ranks of the business

elite will be presented. The fourth section contains excerpts from Buffett's essays and

annual reports to Berkshire Hathaway shareholders. The last section has

acknowledgement notes and source information.

I. Buffett's Formative Years

Warren Edward Buffet was born on August 30, 1930 in the small community of

Omaha, Nebraska. Howard Buffet, his father, was working for a local bank as a

securities salesman, and his mother, already caring for Buffett's older sister Doris, mainly

stayed at home. It was shortly before Warren's first birthday that his father, Howard,

announced to the family that the bank he was working in had closed. The Depression


2/19 Joe Stout, November 20012

was beginning and the Buffetts were headed for hard times. It was soon after the bank

closed that Howard told the family that he and his friend George Sklenicka were opening

their own business, Buffett, Sklenicka & Co. To take advantage of the newly vacated

space, they started their business in the same building, as the bank that Howard had

recently worked for was once in. Howard would peddle "Investment Securities,

Municipal, and Public Utilities, Stocks and Bonds" in this new business.2

By Warren's sixth birthday, his family's financial condition had vastly improved.

His father was doing well in the firm and the Buffetts were able to move to a larger home

in town. The bad times of the previous years were not discussed among the family later

in life. However, it was these first five difficult years of Buffett's life that had a major

impact on the young boy. He had decided at the early age of five that he would be "very,

very rich". It would become a mantra for his existence. He knew with absolute certainty

that he would achieve this objective and he scarcely stopped thinking of ways to

accomplish that goal.3

It is difficult to overestimate the impact Warren's father had on him. Howard

Buffett was a very religious man. He was fair and just. He tired to always encourage his

children and help to guide them in their moralistic beliefs. Every week, Howard would

drill his children in religious values. He taught an adult Sunday school class and was a

member of the local school board. He was a creature of habit and a messenger of his

faith. He reminded his kids that they not only had a duty to God but also to the

community itself. He was known to say that "you are not required to carry the whole

burden - nor are you permitted to put down your share". Howard was staunchly

Republican and was convinced that Roosevelt was destroying the dollar. He would give



his children precious coins and buy nice things for the house. He would even go so far as

to buy canned goods and a farm for the family, which were both intended to be a refuge

from the hellfire of inflation.4 Warren, or "fireball", as his father would affectionately

call him, was not unlike most young boys admiring his father yet selectively internalizing

his beliefs. Warren would not be nearly as conservative as his father was. Instead,

Warren would actually turn out to be quite the opposite in political beliefs and in

particular moral traits.

Perhaps Warren's lack of spiritual faith, in distinct contrast to his father's, was the

basis for his one overwhelming fear. Death. Warren was and I would imagine still is

terrified of it. At his father's request, he would attend church and Sunday school, but it

had no effect on him. In fact during the sermons, an astute observer could notice the

young Buffett analyzing the life spans of the believers in the Bible. He would do this not

out of boredom but instead to determine whether or not faith could be positively

correlated to longer life spans. He concluded it was not.5 This example was used to

illustrate Buffett's real "faith", which was in numbers. He absolutely loved them. He

understood them. He felt comforted by their unyielding consistency. It was obvious that

Warren did not like change. He was always quite comfortable with what he already knew

and trusted. It was these characteristics that helped make Buffett such a great investor.

Later in life, he would make a fortune dealing only in securities that he "knew" or was

"comfortable" with.

When Warren was eleven, his life went through a major change, and Warren did

not like changes. His father Howard was elected to the U. S. Congress and was forced to

move the family to Washington D.C. A few weeks after arriving in Washington, Warren



informed his parents he had trouble sleeping at night. He knew that this would worry his

parents, and so he continued this charade until his parents agreed that he could move back

to Omaha and stay with his grandfather and aunt. He was elated to return to Omaha, and

it was while living with his aunt, who was a schoolteacher, that Warren was remembered

as saying that he would be a millionaire by age 35. Coming from a young boy in eighth-

grade, this was hardly believable, but to Warren it was plain and simple. He had no

doubts. When asked why he wanted all that money, he responded, "It's not that I want

money. It's the fun of making money and watching it grow." During his stay, Warren

was also working for his grandfather at the Buffet & Son grocery store. It was there that

Buffet saw for the first time the inner operations of a successful business. Importantly,

and unbeknownst to Buffet, at that same store working as a stock boy on Saturday

afternoons was Charlie Munger, who would eventually become Warren's primary

business partner and vice-chairman at Berkshire Hathaway.6

Warren eventually joined his parents in Washington and remained there through

his father's three terms as a Congressman. In Washington, Warren would harness his

inherent business sense and entrepreneurial spirit into his own business. He began as a

paperboy for the Washington Post. Warren was 13 at the time. His grades were

mediocre in school, so his father threatened to pull him off the paper route. Quickly

Buffett became an 'A' student. However, he was upset with life in Washington D.C., so

he and a couple of friends ran away. It was an unsuccessful trip, and they were back the

next day. Warren continued on his paper route and eventually expanded. He had a large

pool of subscribers and attempted to expand his scope of products by adding magazines

to his route. He filed and paid his own taxes from the age of thirteen and reportedly still



does them himself today. He was so protective of his money that he would not even

allow his parents to go near his profits. Every penny had to be there or something was

amiss. While in high school, Warren and a friend began a new business Wilson Coin

Operated Machine Company. Warren and his friend would rent out pinball ball machines

to local barbershops and collect profits from its users. Buffet and his friend would act as

if they were just workmen for the boss and tell the barbershops that the real boss was in

the Mafia. This would limit complaints about old machines and make it look as if

Warren was a simple yes-man.7

Warren graduated from his high school in 1947 and was sixth in his class. When

it was time to go to college, he decided on the nearby Wharton School of Finance and

Commerce at the University of Pennsylvania. By the time he had left for college, he had

delivered over 600,000 newspapers and made approximately $5,000. When he and his

friend sold Wilson Coin, Warren pocketed an additional $600 in 1947 dollars.8 Warren

was well on his way, but he was still lacking knowledge that could only be found in the

mind of his eventual mentor, Benjamin Graham.

II. Buffet's Education and the Impact of Graham

When Warren's father suggested that he attend the University of Pennsylvania,

Warren replied that "college would be a waste". After all, how many other sixteen-year-

olds had two successful businesses reaping profits over $5,600? The correct answer was

probably none. By the time Warren graduated from high school, he reportedly had read

over a hundred business books. He felt that even though Wharton had a great reputation,

there was little he could learn from the august university. However, he did reluctantly



concede to his father and enrolled at Wharton in the fall of 1947. Warren soon found out

that he was right and his father was wrong. Warren constantly complained that he knew

more than his professors and that the program lacked in substance. His major annoyance

was that his professors had fancy theories, but they offered little in the area of profit

accumulation, which was what Warren craved. Warren felt that the program was too

broad and general for his needs. To illustrate his point, Warren told an acquaintance that

"all I need to do is to open the book the night before and drink a big bottle of Pepsi-cola

and I'll make 100." Warren was known to spend a lot of his time at a securities firm in

Philadelphia following stocks. At this point in his life he did not have a system in place

for evaluation but that was soon to present itself.9 By the end of his freshman year,

Warren was ready to leave Penn and go back home to Omaha. However, his father was

able to convince him to stay another year and give Penn one more chance.

As a sophomore in college, Warren began some new interests. He joined the

Alpha Sigma Phi fraternity. He moved into their house during that year. Some readers

might think that historically all fraternities and their members fit the now ever present

stereotype of constant partying and bingeing. However, fraternities in that period were

still of the sort that would wear a shirt and tie to dinners and sporting events. While

Warren's fraternity was like most others that held parties, Warren was not the outgoing

type. Following in his father's footstep, Warren was not one to drink alcohol or engage in

promiscuous behavior. When his fraternity would throw beer parties on the weekends,

Warren would sit on a couch in the main room and entertain the guests with lectures on

the gold standard and various other market related concepts. The audience of fellow

college students was said to be captivated by this young man. Remember, he was only



seventeen at the time. He was able to get large groups to entertain question and answer

sessions with him on any topic of interest. Warren knew it all. He had an unassuming air

and was known to have a great wit and a self-deprecating humor. In the fall of 1949,

Warren's fraternity brothers were shocked when he did not return to school. Instead,

Warren transferred to a more familiar setting, the University of Nebraska at Lincoln. 10

Warren was home again.

At Nebraska, Warren was more in his element. He enjoyed being near his home

and was once again feeling comfortable with his life. Being in a hurry to complete his

degree to move onto more rewarding studies, so he took heavy academic loads to

graduate early. In all it took him only three years to compete his undergraduate degree.

While in Lincoln, he started another newspaper delivery service having local kids run the

routes for him. The work was basically full time. By the time he graduated, he had

saved over $9,800 in profits. He had yet to spend a dime. When he was done at

Nebraska, he decided to apply to Harvard. Surprisingly to Warren, he was turned down.

He wrote in a letter to a friend,

Those stuffed shirts at Harvard didn't see there [sic] way clear to admitme to their graduate school. They decided 19 was too young to getadmitted and advised me to wait a year or two.

He would later write to the same friend,

To tell you the truth, I was kind of snowed when I heard from Harvard.

Presently, I am waiting an application blank from Columbia. They havea pretty good finance department there; at least they have a couple of hotshots in Graham and Dodd that teach common stock valuation.11

Buffett was a little coy in his letters to his friend. He had recently read Benjamin

Graham's new book, The Intelligent Investor, while he was at the University of Nebraska.

He had found the book to be quite captivating and was interested in discussing it more



with Graham. Later, friends would remark that after Buffett had read Graham's book, "it

was like he had found a god". Much to Warren's delight, he received a letter of

acceptance that year in August and was on his way to Columbia to study with the

master.12

Benjamin Graham was a professor at Columbia. He first hit the headlines when

he and a fellow professor named David Dodd wrote a textbook entitled Security Analysis.

It would become the seminal textbook in the field. After that book was completed,

Graham would begin work on his own book called The Intelligent Investor. This book

above all others would forever leave his mark among the elite in corporate

finance/investing theories. Graham's approach to investing was quite different from

those of his time. Most investors where statisticians and used speculation to prepare their

decisions. Graham, however, had a simple premise. He would look for companies that

were so cheap as to be free of risk. Graham and Dodd both would posit that when

investing in securities, investors should concern themselves with the underlying business

itself, not the stock movement. At a time when great minds like Gerald M. Loeb were

pronouncing that stock picking had more to do with psychology then the business itself,

Graham and Dodd were offering radical advice. Graham and Dodd said that the investor

should focus on the assets of the business, cash flows, future prospects, etc. to derive the

"intrinsic value" of the stock, which they believed was independent of its market price.

An interesting concept they posited was that the stock market was not a "weighing

machine" of the firm's value but it was instead a "voting machine" of what the fellow

stock investors thought the actual value was. One could beat the market and reap profits

by investing in firms that had a price well below its intrinsic value and trust that the



market would correct itself to the appropriate values. However, assuming the prices of

stocks were in fact below their true value, Graham and Dodd admitted that it would take

an "inconveniently long time for the market to correct itself." Graham would add clarity

to this concept in his Intelligent Investor. He would coin the phrase "margin of safety"

as a way to ensure profit redemption. The premise was that the investor should insist on

a very big gap between the quoted price and the actual intrinsic value, thus insuring you

of profits regardless of how high the price rebounded. 13

Graham would also encourage investors to pay no heed to the stock ticker. If the

investment was sound and based on his principles, the volatility of the market shouldn't

matter. Graham came up with another groundbreaking concept where investors had their

"basic advantage" called Mr. Market,

Imagine that in some private business you own a small share that costyou $1,000. One of your partners named Mr. Market, is very obligingindeed. Every day he tells you what he thinks your interest is worth andfurthermore offers either to buy you out or to sell an additional intereston that basis. Sometimes his idea of value appears plausible. Often,

on the other hand, Mr. Market lets his enthusiasm or his hears run awaywith him, and the value he proposes seems to you a little silly.

The key was that the investor could take advantage of Mr. Market's daily quote or choose

to ignore it because Mr. Market would always return with a new one.14 A smart investor

was able to see past Mr. Market's manic-depressive moments and analyze whether the

business being quoted had really changed or whether perhaps Mr. Market was acting up

again. Buffett was fascinated by these concepts and would build his fortune off of

Graham and Dodd's basic techniques.

Buffett became Graham's greatest pupil ever. In his twenty-year tenure at

Columbia, Graham awarded only one A+ in his investment course and that belonged to

Warren Buffett. When it came time to graduate, Buffett was uncertain as to where he



would work. His father and Graham both recommended that Warren not pursue a career

on Wall Street. He agreed. He instead tried to get a position working with Graham as a

broker in Graham's own investment service. Much to his surprise, Graham turned him

down. His reasoning was not because Buffett wasn't qualified but because at that time,

Wall Street did not allow Jews into their firms. Graham thought that was unfair, so he

promoted his own policy of no Gentiles allowed. Graham was not being prejudice, but

instead wanted to give Jews their own opportunity to find work at his firm. So Buffett

decided to return back to Omaha and work for his father at his father's brokerage firm.15

Buffett had returned to Omaha, but he was not through with Graham.

III. Buffett's Rise

After working for his father a few years, Buffett received a call from his mentor,

Graham. The religious barriers on Wall Street were dropped and Buffett was welcome to

join Graham at his partnership. It was during this time with Graham that he would really

see Graham's concepts in work. Buffett utilized Graham's concepts of intrinsic value and

margin of safety masterfully. In fact, he was forced to follow Graham's tenets so

steadfast that Buffett began to realize that he did not always agree with his mentor.

Graham would always look for "cigar butts". Cigar butts were firms that were down and

out but perhaps still had one more "puff" of value left in them. Buffett began to realize

that he was not quite as risk-averse as Graham. They both said that the main goal of the

investor is to not lose money, but Buffett thought that Graham was missing opportunities

with firms that did not exactly fit the cigar butt model. While Buffett still credits Graham

with his success, he was able to see that there was profit opportunities beyond the strict



Graham model. Warren felt that Graham was too quantitative. Graham's technique

required that you set quantitative measurements of stock price, intrinsic value and margin

of safeties to determine whether the investment was sound. Where Graham and Buffett

differed was that Buffett was able to price the intangibles of a firm, such as brand loyalty,

intellectual capital, etc.16 Graham would not incorporate these into his models because it

was too subjective and open to human error. While Warren understood that errors could

be made, he had what all investors need - confidence. Warren knew he was right and was

willing to stake money on that. He did not feel it was risky because the analysis was on

his side. In 1956, when Graham decided to retire from investing and fold the partnership,

Buffett was on his own at last.

Even during his time working for Graham, Buffett was choosing investments for

three partnerships. Remarkably, he was able to outperform Graham's brokerage firm

every year that he worked for him. This helped build his already strong confidence.

When Graham retired, Buffett moved back to Omaha. It was here that he formed his first

investment firm, the Buffett Partnership. Warren would use the principles that he gained

from both Graham and Dodd, coupled with his own investment philosophies to

consistently outperform the market every year. Through his continued success, he

attracted large sums of capital from local Omaha residents as well as some contacts he

had made while away in college up north. It was with this capital that he would make the

investment that would serve as the catalyst for his future multi-billion dollar fortune. He

bought an old textile firm called Berkshire Hathaway. He used profits and cost cutting

techniques at Berkshire Hathaway to allow him to invest more and more into the market.

By the end of the 1960s, which in market terms was the Go-Go period, Buffett



Partnership had grown immensely. He had achieved his goal of beating the market every

year and had made fortunes for his investors. However, he felt that due to the recent bull

market, there was little opportunity for him and so he felt it best to liquidate the

partnership. He would sell all of his holdings except Berkshire and Diversified.17

By 1974, Buffett was back in the market. He had sat out long enough. Warren

felt that the recent bear market had taken stock prices well below many firm's actual

intrinsic values. He remarked as to how he felt about the market's recent valuation

scheme, "I feel like an oversexed guy in a whore-house. This is the time to start

investing." Investing is exactly what he did. He would make a lot of money investing in

firms, such as The Omaha Sun, Washington Post, GEICO, Blue Chip, and Diversified

Retailing. This was the rebirth of Buffett, and it was the last time that he would sit on the

sidelines of the investment industry. There were periods of time in the future where he

would put money in bonds as opposed to stocks if he felt the market was overvalued, but

for the most part he has remained active to this day looking for attractive investments in

firms. He would eventually become a major shareholder in many firms that are everyday

household names, including Coca-Cola, ABC, Walt-Disney, and Salomon Brothers. He

has never under performed the market in any year and for many years he was the richest

man in the world, until Bill Gates came along.18

IV. Excerpts from the Sage

Below are selected excerpts by category from essays that Warren Buffett has

written to the shareholders of Berkshire Hathaway in their annual reports. As a reminder,

Charlie Munger is an old friend and business partner with Buffett at Berkshire.



Fiduciary Duties and Management in General19

Although our form is corporate, our attitude is partnership. CharlieMunger and I think of our shareholders as owner-partners, and ofourselves as managing partners. (Because of the size of ourshareholdings we are also, for better or worse, controlling partners.) Wedo not view the company itself as the ultimate owner of our businessassets but instead view the company as a conduit through which ourshareholders own the assets.

Our long-term economic goal is to maximize Berkshire's average annualrate of gain in intrinsic business value on a per share basis. We do notmeasure the economic significance of performance of Berkshire by itssize; we measure by per-share progress. We are certain that the rate ofper-share progress will diminish in the future - a greatly enlarged capitalbase will see to that. But we will be disappointed if our rate does notexceed that of the average large American corporation.

We use debt sparingly and, when we do borrow, we attempt to structureour loans on a long-term fixed-rate basis. We will reject interestingopportunities rather than over-leverage our balance sheet. Thisconservatism has penalized our results but it is the only behavior thatleaves us comfortable, considering our fiduciary obligations topolicyholders, lenders and the many equity holders who have committedunusually large portions of their net worth to our care. (As one of theIndianapolis "500" winners said: "To finish first, you must first finish.")

We feel noble intentions should be checked periodically against results.We test wisdom of retaining earnings by assessing whether retention,

over time, delivers shareholders at least 41 of market value for each 41retained. To date, this test has been met.

We will issue common stock only when we receive as much in businessvalue as we give. This rule applies to all forms of issuance - not onlymergers or public stock offerings, but stock-for- debt swaps, stockoptions, and convertible securities as well. We will not sell smallportions of your company - and that is what the issuance of sharesamounts to - on a basis inconsistent with the value of the entireenterprise.

You should be fully aware of one attitude Charlie and I share that hurtsour financial performance: Regardless of price, we have no interest at allin selling any good business that Berkshire owns. We are also veryreluctant to sell sub-par businesses as along as we expect them togenerate at least some cash and as long as we feel good about theirmanagers and labor relations. Nevertheless, gin rummy managerialbehavior (discard your least promising business at each turn) is not ourstyle. We would rather have our overall results penalized a bit thanengage in that kind of behavior.



We will be candid in our reporting to you, emphasizing the pluses andminuses important in appraising business value. Our guideline is to tellyou the business facts that we would want to know if our positions werereversed. We owe you no less. We also believe candor benefits us asmanagers: The CEO who misleads others in public may eventuallymislead himself in private.

References to EBITDA make us shudder - does management think thetooth fairy pays for capital expenditures? We're very suspicious ofaccounting methodology that is vague or unclear, since too often thatmeans management wishes to hide something. And we don't want toread messages that a public relations department or consultant has turnedout. Instead, we expect a company's CEO to explain in his or her ownwords what's happening.

Charlie and I think it is both dangerous and deceptive for CEOs topredict growth rates for their companies. They are, of course, frequentlyegged on to do so by both analysts and their own investor relations

departments. They should resist however because too often thesepredictions lead to trouble.

At our annual meetings, someone usually asks, "What happens to thisplace if you get hit by a truck?" I'm glad they are still asking thequestion in this form. It won't be too long before the query becomes:"What happens to this place if you don'tget hit by a truck?

The requisites for board membership should be business savvy, interestin the job, and owner-orientation. Too often, directors are simplyselected because they are prominent or add diversity to the board. That

practice is a mistake. Furthermore, mistakes in board selecting directorsare particularly serious because they are so hard to undo: The pleasantbut vacuous director need never worry about job security.

Our prototype for occupational fervor is the Catholic tailor who used hissmall savings of many years to finance a pilgrimage to the Vatican.When he returned, his parish held a special meeting to get his first-handaccount of the Pope. "Tell us," said the eager faithful, "just what sort offellow is he?" Our hero wasted no words: "He's a forty-four medium."

We intend to continue our practice of working only with people whom

we like and admire. This policy not only maximize our chances of goodresults, it also ensures us an extraordinarily good time. On the otherhand, working with people who cause your stomach to churn seemsmuch like marrying for money - probably a bad idea under anycircumstances, but absolute madness if you are already rich.

My conclusion form my own experiences and from much observation ofother businesses is that a good managerial record (measured by economicreturns) is far more a function of what business boat you get into than itis of how effectively you row (though intelligence and effort helpconsiderably, of course, in any business, good or bad). Should you find



yourself in a chronically leaking boat, energy devoted to changingvessels is likely to be more productive than energy devoted to patchingleaks.

A common result is the use of the stockholder's money to implement thecharitable inclinations of the corporate manager, who usually is heavilyinfluenced by specific social pressures on him. Frequently there is an

added incongruity; many corporate managers deplore governmentalallocation of the taxpayer's dollar but embrace enthusiastically their ownallocation of shareholder's dollar.

Of course, stock options often go to the talented, value-adding managersand sometimes deliver them rewards that are perfectly appropriate.(Indeed, managers who are really exceptional almost always get far lessthan they should.) But when the result is equitable, it is accidental.Once granted, the option is blind to individual performance. Because itis irrevocable and unconditional (so long as the manager stays with thecompany), the sluggard receives rewards from his options precisely as

does the star. A managerial Rip Van Wrinkle, ready to doze for tenyears, could not wish for a better incentive system.

Corporate Finance and Investing20

Whenever Charlie and I buy common stocks for Berkshire's insurancecompanies we approach the transaction as if we were buying into aprivate business. We look at the economic prospects of the business, thepeople in charge of running it, and the price we must pay. We do nothave in mind any time or price for sale. Indeed, we are willing to hold a

stock indefinitely so long as we expect the business to increase inintrinsic value at a satisfactory rate. When investing, we view ourselvesas business analysts - not as market analysts, not as macroeconomicanalysts, and not even as a security analyst.

Our approach makes an active trading market useful, since it periodicallypresents us with mouth-watering opportunities. But by no means is itessential: a prolonged suspension of trading in the securities we holdwould not bother us. Eventually, our economic fate will be determinedby the economic fate of the business we own, whether our ownership ispartial or total.

Ben's Mr. Market allegory may seem out-of-date in today's investmentworld, in which most professional and academicians talk of efficientmarkets, dynamic hedging and betas. Their interest in such matters isunderstandable, since techniques shrouded in mystery clearly have valueto the purveyor of investment advice. After all, what witch doctor hasever achieved fame and fortune by simply advising, "Take two aspirins"?

The value of market esoterica to the consumer of investment advice is adifferent story. In my opinion, investment success will not be producedby some arcane formulae, computer programs or signals flashed by the



price behavior of stocks and markets. Rather as investor will succeed bycoupling good business judgement with an ability to insulate his thoughtsand behaviors from the super-contagious emotions that about themarketplace. In my own efforts to stay insulated, I have found it highlyuseful to keep Ben's Mr. Market concept firmly in mind.

To evaluate arbitrage situations you must answer four questions: (1) How

likely is it that the promised event will indeed occur? (2) How long willyour money be tied up? (3) What chance is there that something betterwill transpire - a competing takeover bid for example? And (4) What willhappen if the event does not take place because of anti-trust action,financing glitches, etc.?

The other way we differ from some arbitrage operations is that weparticipate in transactions that have been publicly announced. We do nottrade on rumors or try to guess takeover candidates. We just readnewspapers, think about a few of the big propositions, and go by our ownsense of probabilities.

In my opinion, the continuous 63-year arbitrage experience of Graham-Newman Corp., Buffett Partnership, and Berkshire illustrates just howfoolish the Efficient Market Theory is. Naturally the disservice done tostudents and gullible investment professionals who swallowed EMT hasbeen an extraordinary service to us and other followers of Graham. Inany sort of a contest - financial, mental, or physical - it's an enormousadvantage to have opponents who have been taught that it's useless toeven try. From a selfish point of view, Grahamites should probablyendow chairs to ensure the perpetual teaching of EMT.

An investor cannot obtain superior profits from stocks by simplycommitting to a specific investment category or style. He can earn themonly by carefully evaluating facts and continuously exercising discipline.Investing in arbitrage situations, per se, is no better a strategy thanselecting a portfolio by throwing darts.

The strategy we've adopted precludes our following standarddiversification dogma. Many pundits would therefore say that thestrategy must be riskier than that employed by more conventionalinvestors. We disagree. We believe that a policy of portfolioconcentration may well decrease risk if it raises, as it should, both the

intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.In stating this opinion, we define risk, using the dictionary terms, as "thepossibility of loss or injury."

Academics like to define investment "risk" as the relative volatility of astock or portfolio of stocks - that is, their volatility, as compared to thatof a large universe of stocks. Employing databases and statistical skills,these academics compute with precision the "beta" of a stock - itsrelative volatility in the past - and then build arcane investment andcapital-allocation theories around this calculation. In their hunger for a



single statistic to measure risk, however, they forget a fundamentalprinciple: It is better to be approximately right than precisely wrong.

If you are a know-something investor, able to understand businesseconomics and to find five to ten sensibly priced companies that possessimportant long-term competitive advantages, conventional diversificationmakes no sense for you. It is apt simply to hurt your results and increase

your risk. I cannot understand why an investor of that sort elects to putmoney into a business that is his 20th favorite rather than simply addingthat money to his top choices - the businesses he understands best andthat provide the least risk, along with the greatest profit potential. In thewords of the prophet Mae West: "Too much of a good thing can bewonderful."

In addition, we think the very term "value investing" is redundant. Whatis "investing" if it is not the act of seeking value at least sufficient to

justify the amount paid? Consciously paying more for a stock than itscalculated value - in the hope that it can soon be sold for a still-higher

price - should be labeled speculation (which is neither illegal, immoralnor - in our view - financially fattening).

Should you choose to construct your own portfolio, there are a fewthoughts worth mentioning. Intelligent investing is not complex, thoughthat it is far from saying that it is easy. What an investor needs is theability to correctly evaluate selected businesses. Note the word"selected": You don't have to be an expert on every company, or evenmany. You only have to be able to value companies within your circle ofcompetence. The size of that circle is not very important; knowing itsboundaries, however, is vital.

To invest successfully, you need not understand beta, efficient markets,modern portfolio theory, option pricing, or emerging markets. You may,in fact, be better off knowing nothing of these. That, of course, is not theprevailing view at most business schools, whose finance curriculumtends to be dominated by such subjects. In our view, though, investmentstudents need only two well-taught courses - How to Value a Business,and How to Think About Market Prices.

Your goal as an investor should simply be to purchase, at a rational price,a part interest in an easily-understandable business whose earnings are

virtually certain to be materially higher five, ten and twenty years fromnow. Over time, you will find only a few companies that meet thesestandards - so when you see one that qualifies, you should buy ameaningful amount of stock. You must also resist the temptation to strayfrom your guidelines: If you aren't willing to own a stock for ten years,don't even think about owning it for ten minutes. Put together a portfolioof companies whose aggregate earnings march upward over the years,and so also will the portfolio's market value.



V. Source Notes and Acknowledgements

To conclude this apologetically brief journey through the life of Warren Buffett, I

need to acknowledge my sources. If your appetite for Buffett has only been whetted, I

would suggest two remarkable sources that I used throughout my research. The first

source written by Roger Lowenstein is called Buffett: The Making of an American

Capitalist. The book is biographical in context and was used to provide the information

regarding the first three sections of the preceding report; e.g. Buffet's Formative Years,

Buffett's Education and the Impact of Graham, etc. The second source is called The

Essays of Warren Buffett: Lessons for Corporate America, selected, arranged and

introduced by Lawrence A. Cunningham. This was the primary source used for the

fourth section called Excerpts from the Sage. Warren Buffett with possible co-authorship

of Charlie Munger wrote the essays contained in this book. I would advise that any who

are interested in furthering their knowledge of Warren Buffett including his investment

advice to read both of these books. The biography should be read first to enhance your

understanding of Mr. Buffett. Then, the essays will make more sense due to their

contextual relevance in your thoughts.

Disclaimer: Any and all excerpts from essays written by Warren Buffett were and

are to be used only for educational purposes as stated by the exception to copyright

infringement known as "Fair Use", where this author's intention was non-

commercial, non-compensatory, and was solely educational in nature.


19/19

END NOTES (sources)

1 Lowenstein, Buffet: The Making of an American Capitalist.2 Lowenstein, Buffet: The Making of an American Capitalist.3 Lowenstein, Buffet: The Making of an American Capitalist.4 Lowenstein, Buffet: The Making of an American Capitalist.5 Lowenstein, Buffet: The Making of an American Capitalist.6

Lowenstein, Buffet: The Making of an American Capitalist.7 Lowenstein, Buffet: The Making of an American Capitalist.8 Lowenstein, Buffet: The Making of an American Capitalist.9 Lowenstein, Buffet: The Making of an American Capitalist10 Lowenstein, Buffet: The Making of an American Capitalist11 Lowenstein, Buffet: The Making of an American Capitalist12 Lowenstein, Buffet: The Making of an American Capitalist13 Lowenstein, Buffet: The Making of an American Capitalist14 Lowenstein, Buffet: The Making of an American Capitalist15 Lowenstein, Buffet: The Making of an American Capitalist16 Lowenstein, Buffet: The Making of an American Capitalist17 Lowenstein, Buffet: The Making of an American Capitalist18 Lowenstein, Buffet: The Making of an American Capitalist19 Cunningham, The Essays of Warren Buffett: Lessons for Corporate America20 Cunningham, The Essays of Warren Buffett: Lessons for Corporate America

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