Quotes from Warren Buffett

"Don't try to catch a falling knife until you have a handle on the risk"

"Cash combined with courage in a crisis is priceless"

"The role that Charlie and I play in the success of our operating units can be illustrated by a story about George Mira, the one-time quarterback of the University of Miami, and his coach, Andy Gustafson. Playing Florida and near its goal line, Mira dropped back to pass. He spotted an open receiver but found his right shoulder in the unshakable grasp of a Florida linebacker. The right-handed Mira thereupon switched the ball to his other hand and threw the only left-handed pass of his life - for a touchdown. As the crowd erupted, Gustafson calmly turned to a reporter and declared: "Now that's what I call coaching."" - Chairman's Letter 1991

“My most surprising discovery: the overwhelming importance in business of an unseen force that we might call ‘the institutional imperative." WEB elaborated “for example: (1) as if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) just as work expands to fill available time, corporate projects or acquisitions will materialise to soak up available funds; (3) any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.”- 1989 Letter to Shareholders

"What the DeBeers did with diamonds, the Arabs are doing with oil; the trouble is we need oil more than diamonds." And there is the population explosion, resource scarcity, nuclear proliferation. But, he went o­n, you can't invest in the anticipation of calamity; gold coins and art collections can't protect you against Doomsday. - WEB 1974, Forbes

"I call investing the greatest business in the world," he says, "because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike o­n you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."
But pity the pros at the investment institutions. They're the victims of impossible "performance" measurements. Says Buffett, continuing his baseball imagery, "It's like Babe Ruth at bat with 50,000 fans and the club owner yelling, 'Swing, you bum!' and some guy is trying to pitch him an intentional walk. They know if they don't take a swing at the next pitch, the guy will say, 'Turn in your uniform.'" Buffett claims he set up his partnership to avoid these pressures.
Stay dispassionate and be patient, is Buffett's message. "You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K." First the crowd is boozy o­n optimism and buying every new issue in sight. The next moment, it is boozy o­n pessimism, buying gold bars and predicting another Great Depression.

Derivatives:

“Derivatives are dangerous because they can be so mispriced. You have interconnectedness in financial markets like you’ve never had before. Trillions are held by people which, if they get a trigger, they’d all behave the same way.” It’s a crowded trade with out people knowing it’s crowded.“It’s like the portfolio insurance doomsday machine on October 19, 1987- failure should’ve been predicted. It was less than 1% of the market but took 23% off the market and the market was almost closed. It’s now the electronic herd all over the world, waiting to act on a stimulus and it’s accentuated by derivatives.”Additionally, total return swaps “are financial weapons of mass destruction” because they create chaos in the markets. “It’s amazing the trouble people can get into with leverage.”

The Gift to the Bill and Melinda Gates Foundation:

“It was an absolute no brainer for me. They’ll keep running it decades after I’m dead.” “There are plenty of people who want to put their name on a building for $10 million and that’s great but it doesn’t do anything for me.”

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“The point is to engineer backwards from where you want to be and do what you must to get there. It’s like a country song, you should sing it backwards so you get your home back, your car back, your dog back……….”

Q: Aside from winning the “ovarian lottery” as you’ve called it, what was the most important year in your life and why?

“When I proposed to my wife.” It also happens that that year was when I was taking the Carnegie public speaking course. They would give pencils every week to theperson who had improved the most and the week that I proposed, they asked me, ‘Did she say yes?” And that was the week I got the pencil.

Miscellaneous Questions and some other thoughts and asides from Mr. Buffett:Municipal insurance:

“Municipal insurance might be more risky in the future than it’s been in the past.” If municipal bonds get insured, then often cities will default more frequently just because they are insured.
“Be very careful using historical information in business”, like looking at historical default rates on municipal bonds. The default rate is very different, for a reason, during a period when a project or a city is insured vs. when it’s not.

"There is a woman in Omaha in her 80s, she's Polish Jew, she's a wonderful person, she's a friend of mine, when she was a young teen, she was in Aushwitz, with other members of her family, not all of whom came out, and she says, Warren, when I look at someone I am slow to make friends because at the back of my mind, the question always is "Would they hide me?" Now I would say this, if you get to be 60 or 70 or my own age, 77, and you and you have a lot of people that would hide you, you are a success and if you don't have anyone that who would hide you, no matter how rich you are, no matter how many honorary degrees you have been given, no matter what hospitals are named after you, you're a failure. And its another way of saying how many people love you, basically. And I have not seen anyone who has the love of dozens of people as they get older, who is not a success or who doesn't feel that he's a success." - IMD, May 2008

"You have certain things you want to achieve, but if you don’t have the love and respect of people, you are always a failure. That is the one thing you must earn, it can never be bought. No one that has the love and respect of others is ever a failure." - Nebraska Business 2001

"Only buy businesses that are so good that someone with Alzheimer's can manage them!"

"We see change as the enemy of investments, if it wasn't the richest people would be librarians"

"Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems." - FORTUNE, March 3, 2003

"By far, the most important quality is not how much IQ you've got. IQ is not the scarce factor. You need a reasonable amount of intelligence, but the temperament is 90% of it."

"The simple test of good ethics, is how would you feel about any act, if a reasonably intelligent, but unfriendly reporter were to write it up and put it in tomorrow’s paper for everyone to see. If it passes that test, it’s okay, and if you have to think about it, it probably isn’t the right thing to do." - Nebraska Business 2001

"How long does the management have to think before they decide to raise prices?"

"I would suggest that the big successes I’ve met had a fair amount of Ben Franklin in them. And Donald Trump did not." - Notre Dame Faculty, 1991

"Every business student you have has the requisite intelligence and requisite energy. Integrity is not hard wired into your DNA. A student at that age can pretty much decide what kind a person they are going to be at sixty. If they don’t have integrity, they never will. The chains of habit are sometimes too heavy to be broken." - Nebraska Business 2001

"The two biggest weak links in my experience: I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. Donald Trump failed because of leverage. He simply got infatuated with how much money he could borrow, and he did not give enough thought to how much money he could pay back." - Notre Dame Faculty, 1991

"I would say, follow what you are passionate about. I think it is crazy to be someplace where you feel your ethics or whatever is out of sync with your work. You really want to be in a place where you jump out of bed in the morning and you are all fired up to get to work. I have always felt that way, basically," - Nebraska Business 2001

"The natural heroes are the parents. Kids usually emulate their parents, and if the parents behave well, the kids are very, very likely to behave well." - Nebraska Business 2001

“I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” - Vanderbilt, Jan. 2005

"Capitalism without failure is like Christianity without hell."

“There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.” - Vanderbilt , Jan. 2005

"I think everybody in business school should really know accounting; it is the language of business. If you are not comfortable with the language, you can’ t be comfortable in the country. You just have to get it into your spinal cord. It is so valuable in business." - Nebraska Business 2001

"The advice doesn’t promise enough…it’s not a “get rich quick” scheme, which is what a lot
of other philosophies promise" - Vanderbilt, Jan. 2005 (On why more people don't follow his advice)

"I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult." - 1984

"Rule No.1 is never lose money. Rule No.2 is never forget rule number one."

"Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner."

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."

"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."

"We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do."

From the Tuck Investment Club site:
Q: In one of your letters to shareholders you reference Byron Trott grudgingly as "an investment banker who earns his fee". What do you feel Wall St. does well and doesn't do well?

A: Wall St. makes money well. Per incremental unit of energy and IQ, you will make more money on Wall St. than anywhere else. Wall St. is very good at selling things and at auctions, they're good if you're selling a business. On the other hand, there are so many products that Wall St. has created and not all of them are good. There's a pervasive sense of 'if you don't do it someone else will'. There's an HBO movie coming out in October called Last Best Chance, it's about a nuclear crisis precipitated by a Russian soldier who is bribed by terrorists stealing a weapon. He almost didn't go through with it but they told him 'if you don't do it someone else will, so you may as well be the one to get the money'. This type of thinking has gotten people into trouble, like CEOs managing earnings. In 1985 a Cleveland firm, Scott & Fetzer [a conglomerate that included World Book encyclopedias] was selling their business, First Boston was their advisor and they sent pitches to twenty buyers without anyone biting. Berkshire didn't get a pitch, but I sent the seller, Mr. [Ralph] Schey, a letter saying we were interested and did the deal. Since First Boston was due a fee from any transaction, at a closing dinner they offered Charlie [Munger] their pitch book with pages of analysis, Charlie replied 'no thanks'. We only buy companies where the seller cares about where the business goes.

Q: How will the expensing of stock options affect entrepreneurship and small business?

A: Not much at all. Berkshire has never used options as compensation in our companies. At The Pampered Chef [a Berkshire acquired cooking utensil company], our employees value travel awards as a kind of extra compensation. Often the recipients of stock options don't place the same value on them as the giver does, or should. In the 90's when we were involved with Salomon Brothers instead of granting stock options to employees I offered to sell them options at 80% of their present value. They turned it down.

From 1998 CNBC interview:
As part of his coverage of the 1998 Berkshire annual meeting, Scott asked Buffett about the then high-flying U.S. stock market.

Buffett: Things that go up, and stocks, don't necessarily have to come down. I mean, businesses get worth more over time and they should sell for more over time as they become worth more. But the real question is, if returns on equity would return to 13 or 14 percent for American business or if interest rates went up substantially, then we would look back and say this was a time of overvaluation. But, I don't know the answer on that today and I've never said I knew the answer.

Scott Cohn: You're putting your bets on things like commodities, silver, oil, bonds ..

Buffett: Those are minor positions. No, our big money is in businesses. We own, at present market, 15 billion dollars worth of Coca-Cola and we own a number of operating businesses. So we love to own great businesses run by people we admire and trust. So that's, the other stuff is around the edges.

Scott: I guess what I'm wondering though is, the money that you have parked there, you've made a decision to do that. Is that something that people should follow your lead. Can they be as successful as you seem to have been in those areas?

Buffett: No, I think people should follow their own lead. They should decide what they know and understand and what they have competence in. And then they should do that, whatever that may be.

Scott: Let me ask you about Berkshire Hathaway stock. It seems to keep going up and up and up. You've talked before about whether you'd buy it ... You've been silent on that this year. Would you buy it at this price?

Buffett: I haven't bought a share of Berkshire Hathaway in a long, long time, but I haven't sold a share either.

On May 3, 2008 (Morningstar):

Mr. Buffett said that the most important investment you can make is in yourself, because an individual's potential often exceeds realization. He further said that he asks high school students that if they could buy one car for their entire life, how would they treat it? He then drew an analogy to caring for an individual's mind and body. Mr. Buffett said that the reason people are effective in life is because other people want to be around them and work with them.


2006 Letter BRK/A:

"When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with the experience ends up with the money." - WB

WB May 4, '08:

"There's going to be more pain, sure," Buffett said. "The action of the Fed, in terms of Bear Stearns, prevented in my opinion the contagion where you're essentially going to have bank runs on the investment banks ... The idea of a financial panic ... has been pretty well taken care of. That was a watershed event."

OMAHA (Money Magazine) -- On Sunday, May 4, I attended the press conference where Berkshire Hathaway Chief Executive Warren Buffett and vice chairman Charlie Munger took questions from print reporters for two hours, then went off and did more interviews for TV.

Buffett, who composes his thoughts at blazing speed and speaks in long and complex paragraphs, spent the entire weekend talking. Munger, who is as laconic as Buffett is loquacious, saves his voice - speaking, as always, only a handful of words at a time.

Buffett and Munger, aged 77 and 84 respectively, have the mental energy and sharpness of someone half their age.

Here are some highlights.

Building a philosopy
In response to a question from Barbara Kiviat of Time on how he and Munger control their emotions, Buffett replied: "[It] comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from Benjamin Graham and The Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff."

"You have to have the right temperament. I tell the students who come visit me that if you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor. You need a philosophy and the ability to think independently...It doesn't make any difference what other people think of a stock. What matters is whether you know enough to evaluate the business," he opined.

"You should be able to write down on a yellow sheet of paper, 'I'm buying General Motors at $22, and GM has [566] million shares for a total market value of $13 billion, and GM is worth a lot more than $13 billion because _______________." And if you can't finish that sentence, then you don't buy the stock. [Note: Buffett mentioned GM for illustrative purposes only.] All this requires some temperamental detachment from other people's behavior. Both Charlie and I have a natural instinct in that direction. We value our opinions more than others' -- perhaps to an extreme!"

Kiviat followed up by asking whether they mind being regarded as "a bastion of calm" by others. Buffett simply stated, "I think they're probably right," while Munger was more loquacious: "Not only are they right, but it's a huge advantage to us to get the reputation of being wiser and stronger than other places. Would any of you object to being considered wiser and stronger when you're trying to get anything in life? The key is not to be seduced by crazy ideas, but instead just stick to the fundamentals year after year. Academia doesn't get too interested in us -- we're too simple. What would the professors do? A great many of the formulas [they use to analyze securities and markets] are dead wrong. They exist purely to give the intellectual class something to do. We don't do anything just exercise our intellectual proclivity for mathematical formulas."

Then Buffet said one of the most remarkable things I've ever heard him say: "There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month."

Look at that sentence again. What Buffett is actually saying is that most people's emotions work backwards: They get greedy when stock prices go up and fearful when they go down. Instead, if you are a true investor, you should shop for stocks the same way you shop for anything else: Look for sale prices, and never regard falling prices as inherently bad news. Instead, falling prices create the opportunity to buy even more of something that was already worth owning.

In that single sentence Buffett captured the difference between investing and speculating: An investor, like Buffett, wants the price of a stock to fall below the value of its underlying business so he can buy even more and hold for as long as possible. A speculator (like Jim Cramer) only wants the price of a stock to go up, with no regard for the value of the underlying business at all, so he can sell as fast as possible. To the investor, the market's opinions do not matter. To the speculator, they are the only thing that matters.


Bond insurers beware

In what may spell trouble for bond insurers MBIA and AMBAC, Buffett said, "We see every day that people are coming to us and paying more than they paid the original bond insurer to see that they have an insurer." Berkshire wrote $400 million in municipal-bond insurance in the first quarter of 2008 and is already licensed to operate in 49 states. "This is entirely a secondary-market business," said Buffett, "where people are telling us, 'We'll pay you just to back them up.' "

Note carefully what is going on here: People who already have insurance on a very low-risk investment (municipal bonds) are coming to Buffett and asking him to ensure that their existing insurance will be adequate. It is like a man who is already wearing a belt paying you to put a pair of suspenders on him. This is the kind of business that Buffett loves. Without naming names, he criticized MBIA and AMBAC for ravaging their own capital by insuring too much dicey mortgage debt: "If they keep writing the business at any price, eventually the secondary market is likely to reflect that in the price [of bonds that carry their insurance]. And if you're writing business to pay for yesterday's losses, you'll be sorry."

Then Buffett marveled at the fact that "You have one bond insurer whose stock went from $96 to $4 [AMBAC (ABK)] and they're still rated AAA. The other one issued 14% paper with Treasuries at 4% [MBIA (MBI)] and they're still rated AAA." At that point, Munger elicited laughter from the room by intoning, "The rating agencies, with 20-20 hindsight, could have done better."


Korea and China vs. U.S. regional banks

When a Korean journalist asked whether Berkshire would buy any other Korean companies in addition to its existing holding in steelmaker Posco, Buffett revealed that he had bought "a number of" Korean stocks for his personal portfolio "a few years ago," when "that stock market got about as cheap as any market I've seen in my lifetime."

But most Korean stocks are too small to have a significant impact on Berkshire's portfolio, so Buffett and Munger don't expect to put much money there. Nevertheless, "Korea represents sound value," said Munger, and Buffett added: "It's one of the better stock markets in the world."

Later, in answering a question about whether the credit crisis has turned regional bank stocks into good values, Buffett said: "It's hard to get much conviction on how [the management] will behave and whether they tell the truth. There's a lot of leeway [in the accounting procedures and the reported financial statements]. Talking to the CEOs isn't very useful. When they're lying, they believe it themselves a lot of the time. I want to see how people behave in different situations."

In short, Buffett is not bullish on regional banks. Munger, however, was more upbeat: "For somebody who's very diligent, you've identified a prospecting territory that has some promise. It wouldn't necessarily work for us [because BRK needs to buy very large blocks of stock], but it might work for others."

Buffett wasn't done criticizing the impervious financial statements of US banks: "If you had $1 million," he retorted to Munger, "it would be easier to go through a manual of Korean stocks than to select a few good American banks." This time Munger agreed: "I'd take the Korean stock market so much faster than the American banks that it'd make your head spin."

I don't think, by the way, that Buffett and Munger were trying to say that the Korean stock market is a steal. They were, instead, merely pointing out that investors need to think for themselves and to cast a wide net. If you run out today and buy a bunch of Korean stocks without researching them first, you're not following Buffett and Munger's advice, you're violating it.

A Chinese reporter asked whether Berkshire will be buying more stocks in China now that its market has fallen by almost half, and what the next year will hold for Chinese investors. Buffett's answer held a lesson for investors based anywhere. "We're not in the business of forecasting what the market will do in the next year," said Buffett. "But if a market goes down, we like that. There's no way Charlie and I get upset when stocks go down. We like it, because falling prices give us the opportunity to buy more good businesses at better prices."

"We don't predict stock prices," he went on to day. "All we know is, the lower they go, the more interesting they get. I think it was Agatha Christie, who was married to an archeologist, who said: 'I don't mind getting older, because the older I get, the more interested my husband becomes in me.' Well, the lower stock prices go, the more interested we get in them...We are not looking at any stocks in China now, but China will always be on our radar screen."


Valuing stocks

Asked how he evaluates financial stocks when so many have balance sheets complicated by derivatives, Buffett said: "There are some that I can't value. I probably couldn't value them even if I worked there, even if I were in charge, and even if I had a year to do it. It's just too complicated [with such large positions in complex derivatives]....Most of them, I'm agnostic. I guess that means I don't trust them. When you're buying stock in a financial institution, you should have a reason to be quite comfortable with the risk-assessment capabilities of the people in charge...to have a real fix on the people running the institution. We can't do that with a lot of [banks]. We just can't figure out what they're doing most of the time.... [the accounting doesn't] really spell out where the institution stands. So you'd better know more about the people running it than any set of figures can give you."

Buffett added that not long ago, he read the 270-page 10-K annual report of a bank he was curious about. "After a couple of hours," he said, "I had about 25 pages marked with big question marks that I couldn't answer." (This raises the obvious question: If Warren Buffett can't understand the financial statements of big banks with derivatives, who can?)

Munger summed up the complexity of derivatives this way: "Wall Street is always going to go where the money is and not worry about the consequences. First they invent things they shouldn't sell to anybody, then they end up selling them to their grandmothers."

Munger commented later, "Many of the present troubles were richly deserved. A lot of financial institutions behaved with a combination of stupidity and over-reaching, and that's not a good combination. I think the world is right to exact a large penalty. Capitalism wouldn't exist without failure."

Added Buffett: "Capitalism without failure is like Christianity without hell. These institutions not only brewed the Kool-Aid but drank it. [Some of the banks and mortgage companies] were like an arsonist who got caught in the house after he set it on fire."

Munger's final word on the subject: "In some of these institutions, the main product is not banking, it's testosterone."