Warren Buffett on Adam

Smith’s Money World

1985

Summary
Warren Buffett talked with George Goodman aka Adam Smith, author of ​The Money
Game​ and ​Supermoney​, on ​Adam Smith’s Money World​ in 1985 to discuss his
investment philosophy. This is a transcript of their conversation.

Note: This transcript is lightly edited for clarity, does not constitute recommended
investment advice, and is meant solely for entertainment purposes.

Novel Investor​ ​| Warren Buffett on Adam Smith’s Money World 1985

George Goodman:​ ​[narrator]​ ​Others with a more secular approach who have also
been very successful. Let's take Warren Buffett of Omaha, Nebraska. If you would put
$10,000 in 1965 into his company Berkshire Hathaway, you would have one million
today. Warren was a chapter in my 1972 book ​Super Money​, so I've known him a long
time. He learned his trade with Ben Graham the original dean of security analysis at
Columbia University.

I don’t think Warren has ever been on television until this interview, and he is certainly
never courted publicity, but recently he got a lot of it when he emerged as the key figure
in the takeover of ABC by Capital Cities. Warren will be the largest shareholder of the
new company and his own net worth is now far in excess of $500 million.

But when I spoke with him last fall in his office in Omaha, he very characteristically
made his investment style seem so perfectly simple.

Warren Buffett: ​The first rule of an investment is: Don’t lose. And the second rule of
investment is: Don't forget the first rule. And that's all the rules there are.

I mean, if you buy things for far below what they’re worth, and you buy a group of them,
you basically don't lose money.

Goodman:​ Warren, what do you consider the most important quality for an
investment manager?

Buffett: ​It's the temperamental quality, not an intellectual quality. You don't need tons
of IQ in this business. I mean, you have to have enough IQ to get from here to downtown
Omaha, but you do not have to be able to play three dimensional chess or be in the top
leagues in terms of bridge playing or something of the sort. You need a stable
personality. You need a temperament that neither derives great pleasure from being
with the crowd or against the crowd because this is not a business where you take polls,
it's a business where you think.

And Ben Graham would say that you're not right or wrong because a thousand people
agree with you. And you're not right or wrong because a thousand people disagree with
you. You're right because your facts and your reasoning are right.

Goodman: ​Warren, what do you do that's different than ninety percent of the​ ​money
managers who are in the market?

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Buffett: ​Certainly most of the professional investors focus on what the stock is likely to
do in the next year or two and they have all kinds of arcane methods of approaching
that.

They do not really think of themselves as owning a piece of a business. The real test of
whether you're investing from a value standpoint or not, is whether you care whether
the stock market is open tomorrow. If you're making a good investment in a security, it
shouldn't bother if they closed down the stock market for five years.

All the ticker tells me is the price. And I can look at the price occasionally to see whether
the price is outlandishly cheap or outlandishly high but prices don't tell me anything
about a business.

Business figures themselves tell me something about a business but the price of a stock
doesn't tell me anything about a business. I would rather value a stock or a business
first, and not even know the price, so that I'm not influenced by the price in establishing
my valuation and then look at the price later to see whether it's way out of line with what
my value is.

Goodman:​ ​[narrator]​ ​So Buffett chose to stay in this world, Omaha, Nebraska, where
corn grows just minutes from downtown. Now, Omaha is a nice town but nobody
claimed it’s the world financial center. Here, the only thundering herd is actually on four
feet.

Don’t you find Omaha a little bit off the beaten track for the investment world?

Buffett: ​Well, believe it or not to, we get mail here and we get periodicals and we get all
the facts needed to make decisions.

And, unlike Wall Street, you’ll notice we don't have fifty people coming up and
whispering in our ear that we should be doing this or that this afternoon.

Goodman:​ You appreciate the lack of stimulus here?

Buffett: ​I like the lack of stimulation. We get facts not stimulation here.

Goodman: ​How can you stay away from Wall Street?

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Buffett: ​Well, if I were on Wall Street, I’d probably be a lot poorer. You get
overstimulated on Wall Street. And you hear lots of things. And you may shorten your
focus and a short focus is not conducive to long profits.

And here I can just focus on what businesses are worth. And I don't need to be​ ​in
Washington to figure out what the Washington Post newspaper is worth. And I don't
need to be in New York to figure out what some other company is worth. It’s simple…
It's an intellectual process and the less static there is in an intellectual process, really,
the better off you are.

Goodman:​ What is the intellectual process?

Buffett: ​The intellectual process is defining your level…defining your area of

competence in valuing businesses. And then,​ ​within that area of competence, finding
whatever sells at the cheapest price in relation to value.

And there are all kinds of things I'm not competent to value. There are a few that I am
confident to value.

Goodman:​ Have you ever bought a technology company?

Buffett: ​No, I really haven't.

Goodman: ​In thirty years of investing, not one?

Buffett: ​I haven't understood any of em.

Goodman: ​So you haven’t ever owned, for example, IBM?

Buffett:​ Never owned IBM. Marvelous company. I mean, a sensational company. But I
haven’t owned IBM.

Goodman: ​And so, here is this technological revolution going on and you're not gonna
be a participant.

Buffett: ​Gone right past me.

Goodman: ​Is that alright with you?

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Buffett: ​It's okay with me. I don't have to make money in every game. I mean, I don't
know what cocoa beans are gonna do. There are all kinds of things I don’t know about,
and that may be too bad, but you know, why should I know all about it -- haven’t worked
that hard on it.

In securities business, you literally every day have thousands of the major American
corporations offered you at a price that changes daily and you don't have to make any
decision. Nothing is forced upon you.

There are no called strikes in the business. The pitcher just stands there and throw balls
at you. And if you're playing real baseball, and it’s between the knees and the shoulders,
you either swing or you got a strike called on you. If you get too many called on you,
you’re out.

In the securities business, you sit there and they throw U.S. Steel at 25 and they throw
General Motors at 16. You don’t have to swing at any of them. They may be wonderful
pitches to swing at but if you don't know enough, you don't have to swing.​ ​And you can
sit there and watch thousands of pitches and finally get one right ​there​ where you
wanted something that you understand and then you swing.

Goodman: ​So you might not swing for six months?

Buffett:​ Might not swing for two years.

Goodman:​ Isn’t that boring?

Buffett: ​It will bore most people and certainly boredom is a problem with most
professional money managers. If they sit out an inning or two, not only do they get
somewhat antsy, but their clients start yelling, “Swing you bum,” from the stands. And
that's very tough for people to do.

Goodman: ​Warren, your approach seems so ​simple​, why doesn't everybody do it?

Buffett: ​Well I think partly because it ​is​ so simple. The academics, for example, focus
on​ ​all kinds of variables partly because…

Goodman: ​By academics, you mean professors in finance in business school?

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Buffett: ​Right. The data is there. So they focus on whether if you buy stocks on Tuesday
and sell them on Friday, you're better off. Or if you buy em in an election years and sell
em in other years, you’re better off. Or if you buy small companies. There are all these
variables because the data are there. And they learn how to manipulate data.

And as a friend of mine says, to a man with a hammer everything looks like a nail. And
once you have these skills, you just are dying to​ ​utilize them in some way. But they aren’t
important.

If I were being asked to participate in a business opportunity, would it make any

difference to me whether I bought it on a Tuesday or a Saturday or an election year or
something? It’s not what a businessman thinks about in buying businesses. So why
think about it when buying stocks? Because stocks are just pieces of businesses.

This document was transcribed for N ​ ovel Investor Members​. If you are not a
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Novel Investor​ ​| Warren Buffett on Adam Smith’s Money World​ 1985

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