What Quotes from Warren Buffett Reveal About How He Thinks As an Investor

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2:05All right, folks. Welcome to Investing for Beginners podcast. Today, I thought we would do something a little different. We are going to take some quotes that our friend John Rotonti put together, a collection. and we're going to talk about some Buffett quotes and we'll read them on the air. And then Andrew and I will kind of go back and forth on what our thoughts are on those and how we can learn and become better investors from these quotes. Buffett is the master and most of these are coming from his shareholder letters. And I think there's one quote from an interview he did on CNBC. So full credit goes to John Rotanti for finding all these things.

2:42Andrew and I's thoughts are ours and ours alone. So let's start with an easy one. So what Buffett kind of looks for when he's looking for his pot of gold, if you will. So his goal, he says, your goal as an investor should be simply to purchase at a rational price a part interest in an easily understood business whose earnings are virtually certain to be material higher 5, 10, and 20 years from now. And this is from his 1996 letter. So how does that strike you and what do you think of that quote? A couple of things that kind of jump out the page for me is he says, earnings are virtually certain to be materially higher.

3:26That's one of those things that would exclude a lot of businesses from your list. A lot of businesses. Business is not that certain. So that makes stock picking really hard when that's your criteria. Yes. Yes, for sure. It does. And if you think about the companies that he has bought along the way, in hindsight, you look at that quote and you look at the companies in hindsight and it makes sense. It connects the dots. Gillette, Dairy Queen, American Express, Coca-Cola, Seize Candies, BNSF, the railroad, the insurance businesses that he's bought along the way. All of those would definitely fall into those camps.

4:09Companies that you notice that are excluded from that, that he has not bought, that he wasn't able to wrap his brain around Amazon, Google, for example, or Alphabet. Those two kind of jump to the top of the list of companies he doesn't own that are not part of that list that he didn't feel like he had a circle of competence on. I find that kind of thinking and quote really intriguing. And I think that's one of the things that you try to do is you work really hard to try to find companies that have predictable earnings. And you might say are air quote more boring, if you will. But I think there's a lot of strength in that.

4:48If you're a beginner, why is it this way? Why are so many businesses actually not, there's not that kind of level of certainty that they will grow by a lot over the long term? if i had to hazard a guess i would say there's probably a few things that kind of jump to mind number one depending on what industry they're in it could be super super cyclical cyclical it could be that the product or service that they offer may not be as strong of a moat as you may originally think it also could be that the technology that they are using is very easily replicable and And so it's easy to breach that moat very, very quickly.

5:34And I think that's one of the reasons why he has probably stayed away from tech is because it can change very, very fast compared to something like ice cream and Dairy Queen or razor blades for Gillette. The disruption that comes for those kinds of industries is probably a lot lower than it is for something that's tech related. Think of semiconductors or laptops or security or AI, any of those things. There's a ton of competition and the disruption potential, I think, is much, much higher in those industries. Well, just look at how fast NVIDIA grew. I've seen charts on Instagram showing the time it takes for certain tech platforms to get a certain number of users.

6:18I don't know if it was hit like a million users or something. You just see these exponential charts, and it's like what used to take years to reach a certain scale. I can't remember what the numbers were for ChatGPT, but it was less than 100 days or something. They got to the same scale as Instagram took seven years or something. I don't know what the number is, but it's truly extraordinary. I saw the same chart, and it was kind of showing the evolution of how quickly technology is moving and how quickly some of these platforms get adopted compared to what it was like even five years ago. And then if you look 10 years back, it's even a slower rate of adoption.

7:01So yeah, the rate of adoption for these things has accelerated tremendously. And that's one of the things, if you kind of tangentially think about that, it's one of the things that concerns me about Uber is what's going on with Waymo and how they're starting to pick up the pace of acceleration of of starting to offer their services in more and more cities i'm not saying it's going to happen overnight but it certainly could be one of those things where you think it's going to happen and all of a sudden it's here it's like oh okay that was fast that's a lot easier to download an app to get people to download an app than it is for you to open a thousand new ice cream stores around the u.s right yeah yeah way way easier or you know to buy to find the next greatest underwear brand or something you know i think he owns haynes too so you know the you know it's just you know those kinds of things are a lot harder and slower to disrupt hey those are fighting words man you're calling haynes best underwear we're gonna have problems i don't think i have a i don't have a dog in that hunt i literally wear whatever my wife buys me so that would be some podcast content huh a fiery debate about men's underwear right fiery debate fiery all right let's move on to the next quote we can discuss so this is kind of buffett's thoughts on his ideal holding period so he says we are quite content to hold any security indefinitely so long as the prospective return on equity capital of the underlying business is satisfactory management is competent and honest and the market does not overvalue the business and this is from his 87 letter which i would argue is probably one of his top five or ten letters that he wrote of the 50 61 of that he's written so what are your thoughts on this quote it's so simple and if you can prescribe to it and it takes a little bit of like persistence or perseverance of having conviction in your ideas.

9:13But if you can really stick to it, it would simplify your life so much. Because I think a lot of investors, myself included, I can fall into this trap and hopefully rein myself in. But it's like I want to think about a lot of different companies in my portfolio. Like, is this the time to get out? Is this the time to sell? Do I sell high here? But if you listen to this quote, it's not about selling or getting out. It's about earning a return on the capital. that's a completely different conversation. Yeah, it really is. And he comes back to that over and over and over again. It's a common theme throughout all of his letters as well as his shareholder meetings and interviews he gives.

9:56This is definitely part of his mantra is looking at that return on capital and how he can grow that over a long period of time. To your point, these are very air quote simple rules. Doesn't mean they're easy because in most cases, we are all smart enough, IQ-wise, education-wise, to pull these off. But the challenge is the mental part of it. I think that's one of the underrated parts of his investment style is not only the patience, but also the mental capital that he has to be able to understand what he's trying to do and stay on task. We all get distracted by the shiny object or we get distracted by more recent news and the air quote noise can throw us all off the path quite easily.

10:48So the challenge is to stick to these simple rules and to stay on the path and not to get emotional about these decisions and just try to focus on the return on capital. And I think if you do that, it kind of helps filter away some of the things that we can get distracted by so easily. I get tempted sometimes to just say, man, what if I just sold everything and just had four positions? Does that thought ever cross your mind? Is that just me? On occasion, I have thought of that. And then I get scared and think, well, I don't know. I don't feel like I know enough to have that level, that Charlie Munger level of conviction of owning four businesses and not really caring literally till the day he died.

11:39That's what he did. He didn't care. And he was happy. I think some of it comes to he had enough. And so I would hazard if you have enough, then your attitude probably changes too. Like, eh, what's an extra billion? Big deal. I already have more than I could ever spend literally in my life. And so what does it really matter? At that point, I would suspect that it's more about the game than it is the actual money. It is interesting that the context of Buffett, how he buys stocks, he's doing it for Berkshire Hathaway. And so he feels that pull to kind of chase those shiny objects. But he's determined that the best path for him and Berkshire is to just have satisfactory.

12:33It's interesting he doesn't use maximal or optimal or any of these productivity buzzwords that you hear these days. it's satisfactory. And that, that takes a lot of, to your point, discernment of what's enough for me and what's enough for Berkshire. And if people don't want that, then, Hey, the door is open. You don't have to be a part of this. And I think that that's part of their secret sauce actually. Yeah, I would definitely agree. I think the other thing, and I kind of touched on it too, is the patience that he has, the willingness to not do anything. It's a decision and it's an action, but most of us always feel like we have to be doing something all the time.

13:20And whenever the market has gone through turmoil, there's always lots of speculation that now is when he's going to air quote, bring out the elephant gun and, you know, make some huge purchase. And inevitably, he never does. And he gets a lot of blowback in the finance world because he doesn't, you know, he's lost it. He doesn't blah, blah, blah, blah, blah, all those different things. But I would argue that that's probably when he's showing his brilliance the most is that he's, he's showing restraint and he understands who he is, what he's trying to do. And he's not just going to do something just to do something.

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16:40And this one is a little bit about valuation. So he says in his 2009 letter, Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities. and then only when we can employ a range of values rather than some pseudo-precise figure. So how does this strike you, and what are your thoughts on this? Super profound. Here's a little tidbit, too, that you have in our notes. He wrote this in 2009. So this is a guy who's been buying stocks since 19, I mean, at least for other people, as partnerships or part of Berkshire, since 1965. So what's the math on that?

17:2355 years? Yeah. He says they estimating intrinsic value, which is what the entire stock market is trying to do all the time. And a guy who's been doing it 55 years, who's the goat of investing. He says, we can only do it for a portion of equities. There's a lot of humility there. And I think there's a lot of wisdom there. Yeah. Yeah. Yeah, for sure. Whenever people talk about valuation, He has never, to my knowledge, revealed exactly how he values companies. He's thrown out lots of hints of different things here or there, little tidbits and whatnot. But he's never specifically come out and said, this is how Charlie and I do it.

18:05We look at this, this, and this, and this is how we value the companies. And Charlie's even said in his way that they don't use any of the formulas or gobbledygook that's taught in schools on how to value companies. And they've talked a lot about this idea that the value should jump off the page at you by just looking at the numbers. And if you have to use spreadsheets, then it's maybe not the most obvious thing in the world. Buffett is certainly, and I think I've said this before, Buffett has a computer-like mind. And even though he may not do DCFs in the way that Andrew and I do them and other people do them, he certainly is doing that kind of work in his head.

18:47and he can figure that out on his own. And as you said, he's been doing it at this point, he had been doing it for 55 plus years. So he had a bit of experience figuring all this stuff out. I think the thing that I like about it is that he defines that he's looking for a range of values rather than some specific number. And I think that's one of the things that when people talk about valuation, they get bogged down in the final number as opposed to what are the range of values you should be looking for because nothing is certain in the market. And when you're trying to value the value of a company, that's based on the numbers you're looking at today.

19:29And those are always changing. And so it can't be a precise thing. And I think also if you're gonna get bogged down in the minutia of I'm only gonna buy Berkshire Hathaway if it's trading at$382. If it's$384, forget it. If it's$390, forget it. It's got to be$382 or I'm out kind of thing. And I think that is a very short-sighted way to try to value companies. And I think this idea of having a range of values is a much, much better way to give yourself some latitude on what could be wrong in your estimation of the value. Because again, it's not precise. and we're using, if you're using a DCF, you're using estimates.

20:14And so it's not going to be exactly right, even though it's very mathematical. So, I mean, I love this quote. Me too. Having to think of a range kind of forces you out of your biases for a minute. You have to consider, what if I'm wrong? Because you're putting a number in that's hopefully, whether you're playing for the worst, hoping for the best kind of thing, but you're having to make explicit what that maybe not worst case is but more bearish case and lots of different great thought leaders have kind of said the same thing in different ways when he should provide heads i win tails i don't lose much michael mobison have a bear case bull case and neutral case and then average out the three it's there's a lot of power to it for sure A question for you.

21:06Do you have a group of stocks that industries, sectors, whatever, where you're just like, I am not confident in estimating intrinsic value there and I probably never will? Do you have a bucket or buckets like that? I certainly do. I've said this before and I'll say it again. Commodities feels like voodoo to me. I mean, I understand it on a certain level, but to have the confidence to estimate an intrinsic value for something like Chevron or Exxon or anything in the oil industry, forget about it. It's too hard piled quite easily. Airlines scare me. Flying doesn't scare me, but investing in an airline terrifies me.

21:48Auto industry, to a certain extent, definitely falls into that industry as well. I don't feel like I understand. I'm not a car person. I don't get that whole thing. And there are certain areas in the tech industry that I probably stay away from as well. So there's definitely, those are two or three that popped to my mind immediately immediately that i'm like no this is too hard pile for me what about you a lot of the ones you mentioned biotech for me oh yeah i cannot hard i cannot that feels like i would rather play roulette because at least it's kind of fun to watch the ball bounce around uh just so many of those businesses fail i flirt i flirt with energy i flirt with energy um but it's it's a really hard place it's like uh like well the number could be this if gas was here if you know if the price of oil was here then this company would be worth this much but what if the price of oil was over here and what if the price of oil is over there and then like my mind just starts getting all twisted up.

22:59There's other places too. There's plenty, but yeah, the ones you mentioned, I think are pretty good as well. Yeah. Yeah. I just, I don't understand them. And the cool thing about it is that's okay. You don't have to invest in those places and the things that maybe I feel comfortable in, or you do, maybe people don't want to invest in those and maybe they figured out the whole commodity thing. They can invest in oil and natural gas and whatnot and feel super comfortable about it and awesome for them. And that's, I think one of the beauties of the market is there's a lot of different ways you can grow your wealth and it doesn't have to be exactly the way Buffett did it or the way that we do it.

23:40Yes. All right. So let's move on to the next question. So this is from a 2007 letter. So he said, long-term competitive advantage in a stable industry is what we seek in a business. Amen. What are your thoughts on that? Yeah. I feel like the longer I invest, the more this seems to become important. Like, why didn't I grasp this right away? Right. It's so obvious that when you see it, it's kind of like, duh, but it's hard to, I think to me, it's one of those things you have to, I think you have to learn with experience. yeah even the whole concept is like a stable industry because it's a good point you can be the leader you can have great competitive advantages but if your industry is being disrupted those competitive advantages might not matter right yeah for sure i mean if you look at the semiconductor industry i think that's a really good case study for how what appears to be a stable industry can get disrupted quite quickly.

24:49And you only have to look at Intel and what's happened to them over the last five or 10 years to see how it was happening gradually. And then it happened all at once. And it looked from the outside like a very stable industry and that that company had a very strong competitive advantage when in reality, it really, it didn't. And once and unraveled and unraveled very quickly. Yeah, that one's such a, I guess that one's close to you and I because we saw it happen in real time. Right. That's funny. I feel like you were watching my notes as I was preparing for my write-up this morning. So that's funny.

25:33What about the long-term competitive advantage part? Do you think there's sometimes a difference in that between long-term and just competitive advantage? Yeah, I think the long-term part of it, him being able to identify that is what sets him apart. I think being able to find a competitive advantage, I'm not saying it's easy, but being able to determine a long-term competitive advantage is kind of a next level. So if you think about American Express, I think that's a really good example of him being able to identify not only that the company had a competitive advantage, but that it had the potential for a long-term competitive advantage.

26:10And in hindsight, that has obviously played out extremely well. And kind of the same idea with Coke and probably to a certain extent Apple. And I think that's what set those investments apart from other ones that he has had and had success with. But those two, maybe three in particular, to me, really sets apart his ability to understand the competitive advantage and the long-term aspect of it. Yeah, that's been on my mind lately. I mean, we talked about retail in a recent episode. And it's like just that difference between competitive advantage now versus something that's more structurally in place.

26:54To your point about Apple, Coke, and American Express, it's almost like the business itself generates the long-term competitive advantage or the competitive advantage increases over time. So it's not one or two advantages they might have. It's not one or two. It's not the marketing division's brilliant or it's not that inventory management is the absolute best. It's the whole machine. And as the machine grows, the whole thing gets better. It's so cool and it's so rare. Yeah, yeah, for sure. and i think that also illustrates we all talk about i want to buy a company i want to hold it forever and that's always the goal right but i think it's only reasonable if the company has a long-term competitive advantage because otherwise something's coming for it right and it doesn't matter what the industry is and so it's always a good aspirational goal when you go into investing in a business let's pick nvidia nobody knows if that has if that company has a long-term competitive advantage history tells us it probably doesn't but how long that'll last we who knows you know you can't you could speculate forever on that that could be a podcast or six alone but when you think about the long-term competitive advantage of a business i think that's what really sets those kinds of investments apart and i again i think that's that's one of his superpowers and that's one of the things that is the hardest part of trying to determine does this company you know does this company does costco have a long-term competitive advantage looks like it but not sure yet right i need to hold it for another 10 15 years i'll tell you then well yeah everybody knows where I stand on that.

28:57But I think American Express and Costco really embody that if you study those competitive advantages and how they have a virtuous cycle to them. To me, that's in my opinion. But yeah, you could probably have a short list of stocks where that's the case. August is National Wellness Month, but most health trends equal things like buying random gadgets and guessing at what actually works based on whatever's trendy at the time. And I wanted to stop guessing at things like that and actually look at the data behind my body. I've mentioned it before, but lately I've been taking time in the gym much more seriously, not just to build a bunch of, you know, aesthetic muscles, but to build a good, sustainable, long-term health plan for my future.

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30:55Learn more at Accenture.com slash Spotify. So it says, leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must or will do the opposite. That is consistently employ over greater amounts of capital at a very low rate of return. Unfortunately, the first type of business is very hard to find. Most high return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.