Require a Statement Before Being Allowed to Buy a Stock
You shouldn’t buy a stock, in my view, for any other reason than the fact that you think it’sselling for less than it’s worth, considering all the factors about the business.I used to tell the stock exchange people that before a person bought 100 shares of GeneralMotors they should have to write out on a [piece of paper:] “I’m buying 100 shares of GeneralMotors at X” and multiply that by the number of shares “and therefore General Motors is worthmore than $32 billion” or whatever it multiplies out to, “because ... [fill in the reasons]” And if they couldn’t answer that question, their order wouldn’t be accepted.That test
should be applied
. I should never buy anything unless I can fill out that piece of paper. Imay be wrong, but I would know the answer to that. “I’m buying Coca Cola right now, 660million shares of stock, a little under $50. The whole company costs me about $32 billiondollars.” Before you buy 100 shares of stock at $48 you ought to be able to answer “I’m paying$32 billion today for the Coca Cola Company because...” [Banging the podium for emphasis.] If you can’t answer that question, you shouldn’t buy it. If you
answer that question, and you doit a few times, you’ll make a lot of money.
Tests of a Good Business
A couple of fast tests about how good a business is. First question is “how long does themanagement have to think before they decide to raise prices?” You’re looking at marvelousbusiness when you look in the mirror and say “mirror, mirror on the wall, how much should Icharge for Coke this fall?” [And the mirror replies, “More.”] That’s a great business. When yousay, like we used to in the textile business, when you get down on your knees, call in all thepriests, rabbis, and everyone else, [and say] “just another half cent a yard.” Then you get up andthey say “We won’t pay it.” It’s just night and day. I mean, if you walk into a drugstore, and yousay “I’d like a Hershey bar” and the man says “I don’t have any Hershey bars, but I’ve got thisunmarked chocolate bar, and it’s a nickel cheaper than a Hershey bar” you just go across thestreet and buy a Hershey bar.
is a good business.The ability to raise prices – the ability to differentiate yourself in a real way, and a real waymeans you can charge a different price –
makes a great business.I’ll try this on the students later: What’s the highest price of a daily newspaper in the UnitedStates? [Pause] [This is what he said to the students later: Most of you are familiar with it. Thehighest priced daily newspaper in the United States, with any circulation at all, is the
Daily Racing Form
. It sells about 150,000 copies a day, and it has for about 50 years, and it’s either$2.00 or $2.25 (they keep raising prices) and it’s essential. If you’re heading to the racetrack andyou’ve got a choice between betting on your wife’s birthday, and Joe’s Little Green Sheet, andthe
Daily Racing Form
, if you’re a serious racing handicapper, you want
. You cancharge $2.00 for
, you can charge $1.50, you can charge $2.50 and people are going tobuy it. It’s like selling needles to addicts, basically. It’s an essential business. It will be anessential business five or 10 years from now. You have to decide whether horse racing will bearound five or 10 years from now, and you have to decide whether there’s any way people willget their information about past performances of different horses from different sources. But