Speaker 1: Warren Buffett is the greatest investor of all time. If you would put $1,000 into his investment company when it started, it would be worth over $30 million today. Such returns can seem unrealistic, but how did Buffett actually do it? The answer is, he understands what most people don't and is sticking to a few key principles that you can implement in your everyday life. Keep watching, because by the end of this video,

Speaker 2: you will learn all of them. We look for three things when we hire people. We look for intelligence, we look for initiative or energy, and we look for integrity. And if they don't have the latter, the first two will kill you. Because if you're going to get somebody without integrity, you want them lazy and dumb. I mean, you don't want them smart and energetic. So the answer is that investors behave in very human ways, which is they get very excited, during bull markets, and they look in the rearview mirror and they say, I made money last year, I'm going to make more money this year, so this time I'll borrow. You know, or the neighbor says, you know, I wasn't in last year when that neighbor was dumber than I, I made a lot of money, so I'm going to go in this year. So they're always looking in the rearview mirror. And when they look in the rearview mirror and they see a lot of money having been made in the last few years, they plow in and they just push and push and push on prices. And when they look in the rearview mirror and they see no money having been made, they just say, this is a lousy place to be. So they don't care what's going on in the underlying business. And it's astounding, but that makes for a huge opportunity, just huge opportunity. I've been taught by Ben Graham to buy things on a quantitative basis, look around for things that are cheap. And I was taught that, say in 1949 or 50, they made a big impression on me. So I went around looking for what I call used cigar butts of stocks. And the cigar butt approach to buying stocks is that you walk down the street and you're looking around for cigar butts and you find this on the street, this terrible looking, soggy, ugly looking cigar, one puff left in it. But you pick it up and you get your one puff, disgusting, you throw it away, but it's free. I mean, it's cheap. And then you look around for another soggy, you know, one puff cigar. Well, that's what I did for years. It's a mistake. Although you can make money doing it, but you can't make it with big money. It's so much easier just to buy wonderful businesses. So now I would rather buy a wonderful business at a fair price than a fair business at a wonderful price. I have an old fashioned belief that I can only should expect to make money and things that I understand. And when I say understand, I don't mean understand, you know, what the product does or anything like that. I mean, understand what the economics of the business are likely to look at, look like 10 years from now or 20 years from now. I know in general what the economics of, say, Wrigley chewing gum will look like 10 years from now. The internet isn't going to change the way people chew gum. It isn't going to change which gum they chew. You know, if you own the chewing gum market in a big way and you've got Doublemint and Spearmint and Juicy Fruit, those brands will be there 10 years from now. So I can't pinpoint exactly what the numbers are going to look like on Wrigley, but I'm not going to be way off if I try to look forward on something like that. That evaluating that company is within what I call my circle of competence. I understand what they do. I understand the economics of it. I understand the competitive aspects of the business. But the biggest mistakes we've made by far, I've made, not we've made, the biggest mistakes I've made by far are mistakes of omission and not commission. I mean, it's the things I knew enough to do, they were within my circle of competence, and I was sucking my thumb. And that is really, those are the ones that hurt. They don't show up anyplace. I probably cost Berkshire at least $5 billion, for example, by sucking my thumb 20 years ago or close to it when Fannie Mae was having some troubles and we could have bought the whole company for practically nothing. And I don't worry about that if it's Microsoft, because I don't know it. Microsoft isn't in my circle of competence. And so I don't have any reason to think I'm entitled to make money out of Microsoft or out of cocoa beans or whatever. But I did know enough to understand Fannie Mae and I blew it. And that never shows up under conventional accounting. But I know the cost of it. I know, you know, I passed it up. And those are the big, big mistakes. And I've had plenty of them. And unless I tell you about them in the annual report, and I resist the temptation sometimes, unless I tell you about them in the annual report, you're not going to know it because it doesn't show up under conventional accounting. But omission is way bigger than commission. There's big opportunities in life have to be seized. We don't do very many things, but when we get the chance to do something that's right and big, we've got to do it. And even to do it in a small scale is just as big a mistake almost as not doing it at all. I mean, you've really got to, you got to grab them when they come. Because they, you're not going to get 500 great opportunities. You would be better off if when you got out of school here, you got a punch card with 20 punches on it. And every big financial, every financial decision you made, you used up a punch. You'd get very rich because you'd think through very hard each one of them. You went to a cocktail party and somebody talked about a company, you didn't even understand what they did or couldn't pronounce the name, but they'd made some money last week and another one like it. You wouldn't buy it if you only had 20 punches on that card. In terms of our wholly owned businesses, we're not going to sell no matter how much anybody offers us for. I mean, if somebody offers us three times what something is worth, See's Candy, the Buffalo News, Borsheim's, whatever it may be, we're not going to sell it. I may be wrong in having that approach. I know I'm not wrong if I owned 100% of Berkshire, because that's the way I want to live my life. I've got all the money I could possibly need. It just amounts to a change in the newspaper story on my obituary and the amount of money the foundation has. And to break off relationships with people I like and people that have joined me because they think it's a permanent home, to do that simply because somebody waves a big check at me would be like selling one of my children because somebody waved a big check. So I won't do that. And I want to tell my partners I won't do it so that they're not disappointed in me. More and more with certain stocks, we've got that approach. Now, if we were chronically short of funds and all kinds of opportunities coming, we might have a somewhat different approach. But our inclination is not to sell things unless we get really discouraged, perhaps with the management, or we think the economic characteristics of the business change in a big way. I mean, and that happens. So but we're not going to sell simply because it looks too high in all likelihood. So now let's go over here. Hello, Mr. Buffett. I got two short questions. One is how do you find intrinsic value in a company? Well, intrinsic value is what is the number that if you were all knowing about the future and could predict all the cash that a business would give you between now and judgment day, discounted at the proper discount rate, that number is what the intrinsic value of business is. In other words, the only reason for making investment and laying out money now is to get more money later on, right? That's what investing is all about. Now, when you look at a stock, when you look at a bond, somebody's United States government, it's very easy to tell them what you're going to get back. It says it right on the bond. It says when you get the interest payments. It says when you get the principal. So it's very easy to figure out the value of a bond. It could change tomorrow if interest rates change. But you are, the cash flows are printed on the bond. The cash flows aren't printed on a stock certificate. That's the job of the analyst is to print out, change that stock certificate, which represents an interest in the business, and change that into a bond and say, this is what I think it's going to pay out in the future. When we buy, you know, some new machine for Shaw to make carpet, that's what we're thinking about, obviously. And you all learned that in business school. But it's the same thing for a big business. If you buy Coca-Cola today, the company is selling for about $110 to $15 billion in the market. The question is, if you had $110 or $15 billion, you wouldn't be listening to me, but I'd be listening to you, incidentally. But the question is, would you lay it out today to get what the Coca-Cola company is going to deliver to you over the next 200 or 300 years? The discount rate doesn't make much difference after, as you get further out. And that is a question of how much cash they're going to give you. It isn't a question of, you know, it isn't a question about how many analysts are going to recommend it, or what the volume in the stock is, or what the chart looks like, or anything. It's a question of how much cash it's going to give you. That's the only reason. It's true if you're buying a farm. It's true if you're buying an apartment house. Any financial asset, put oil in the ground, you're laying out cash now to get more cash back later on. And the question is, is how much you're going to get, when are you going to get it, and how sure are you? And when I calculate intrinsic value of a business, when we buy businesses, and whether we're buying all of a business or a little piece of a business, I always think we're buying the whole business, because that's my approach to it. I look at it and say, what will come out of this business and when? And what you really like, of course, is them to be able to use the money they earn and earn higher returns on it as you go along. I mean, Berkshire has never distributed anything to its shareholders, but its ability to distribute goes up as the value of the businesses we own increases. We can compound it internally, but the real question is, Berkshire's selling for, we'll say, 105 or so billion now. What can we distribute from that hundred? If you're going to buy the whole company for 105 billion now, can we distribute enough cash to you soon enough to make it sensible at present interest rates to lay out that cash now? And that's what it gets down to. And if you can't answer that question, you can't buy the stock. You know, you can gamble in the stock if you want to, or your neighbors can buy it. But if you don't answer that question, and I can't answer that for internet companies, for example. There are a lot of companies, there are all kinds of companies I can't answer it for, but I just stay away from those.