Warren Buffett (Trades, Portfolio) is arguably the greatest investor of all time. Generations of investors have learned to succeed thanks to his storied investing career.
In a lecture at the University of North Carolina in 1996, Buffett spoke on various topics such as when to sell your stocks, the dangers of trading vs. investing, how to spot wonderful businesses and more. This is the second part of my summary of this interview; part one was on predicting the stock market, business brands and his investing strategy.
The early years
In the 1950s and 1960s Buffett ran an investment partnership that produced an incredible annual return of nearly 30% per year for 13 years. Then in 1965, Buffett paid just $12 per share for an old textile company called Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), which now trades at over $418,000 per Class A share as the world's largest investing conglomerate (the Class A shares have famously never been split, which is why the cheaper Class B shares were created).
In 1996, Buffett’s Berkshire owned shares in Coca Cola (KO, Financial), American Express (AXP, Financial), Gillette and more. Berkshire also owned 100% of companies that made up its operating business, such as See’s Candies and Nebraska Furniture Mart.
When to sell stocks
Finding wonderful businesses is difficult, and thus when Buffett finds one he likes to “hold on forever." He likes to say that “time is the enemy of the poor business” but the “friend of a wonderful business.” He aims to sell stocks only when the long-term fundamentals of a business have changed or the moat has started to become eroded. When this occurs, he has no problem selling stocks. Another time to sell a stock according to Buffett is when you have a greater investment opportunity elsewhere. For example, let's say you have an investment with an expected return of ~10%, but now find an investment with a return potential of 15%, so you may wish to move your funds over. However, it should be noted that it is best to think in terms of risk-adjusted returns, as ideally, you are looking for the highest return with the lowest risk.
In technology businesses or growth stocks, potential returns can be very high, but also there is alot of intrinsic risk as these types of businesses tend to generate high competition, which was especially true during the dot-com bubble of the late 90s. Buffett tends to stay away from many of these stocks as he finds it difficult to pick the winner. He looks for “one-foot hurdles” to step over, not “seven-foot ones.”
Investing mistakes
Buffett highlights that he tends to make more investing mistakes when he has a lot of “cash around." This reminds me of the quantitative easing-driven market bubble in the U.S. in 2020 and 2021. When more cash is flowing, less thought seems to go into each investment.
Despite this, Buffett states he hasn’t made many bad investments that have materially impacted Berkshire's net worth. However, he has made many mistakes of “omission.” A key example was Disney (DIS, Financial), which in 1966 was trading at a market cap of just $80 million. Buffett bought 5% of the stock for $4 million but says he should have loaded up the truck. In fact, he sold it for $6 million “about a year later." That 5% would have been worth $1 billion by 1996 and a staggering $10 billion by 2022.
In 1966, Disney invested $17 million building the pirates ride alone. Buffett jokes that the company was “selling at less than five times rides."
Nebraska Furniture Mart
Buffett’s investment into Nebraska Furniture Mart was driven strongly by the business founder Rose Blumkin (“Mrs. B”) who was truly committed to the business. Mrs. B was born in Belarus in 1893 and arrived in the U.S. in 1917 when she couldn’t speak a word of English. She brought with her seven siblings and started the furniture store with just $500 in 1937. Blumkin worked seven days per week according to Buffett and was truly committed to the business. By 1996, Nebraska Furniture Mart made $230 million in revenue and $27 million in earnings pre-tax, which was astonishing. This was also over double the amount of business of any other single-store furniture mart in the U.S. and likely the world.
In 1983, Blumkin sold 80% of the Nebraska Furniture Mart to Warren Buffett (Trades, Portfolio) in a “one page” handshake deal. The founder was 101 years old in 1996 and was the spiritual head of the place, having worked there until her death in 1998 at 104 years old.
Buffett’s investment in Nebraska Furniture Mart teaches us about the importance of investing with great founders and/or management. A company is a collection of people, and thus a bet on the company is a bet on the people.
Identifying great management
During the Salomon Brothers scandal in 1990, Buffett had to find a replacement CEO. He interviewed 12 people who were all fairly high up in the corporate world. Buffett knew these people all had a high IQ, but he was also looking for other qualities. These qualities included the ability to give credit to others and deliver on what they promise.
Going back to his classic thought experiment, Buffett asks the class to think of the qualities of a person in the class who they think will be most successful. Buffett identifies that this is likely not just the highest IQ or the person who can run the fastest. It is more likely a combination of other qualities. Buffett’s mentor and hero Benjamin Graham actually did this thought experiment in real life. He sat down many years ago and identified the qualities he liked and disliked in certain people. Graham then decided to emulate the qualities he liked while aiming to not display the other qualities he disliked.
Buffett also believes it is best to try and work with people you like. If you don't, it's a little like “marrying for money, which is likely bad under any circumstances… especially if you're already rich!" Buffett also suggests identifying someone you admire and offering to work for them. For example, in Buffett’s early years he admired the father of value investing, Benjamin Graham, so he tried (and succeeded) to get a job with him.
Dangers of trading
The ease of which you can buy and sell stocks causes people to make alot of poor decisions according to Buffett. At first, stocks could be bought over the phone, then online, and nowadays we can trade using a simple app with zero fees. Buffett gave the analogy of becoming part owner of General Electric (GE, Financial) at 10am and selling it at 10:05am.
“Most fortunes are made in relatively few securities of which the buyer understands,” Buffett said. The ease of trading means being a long-term investor is more challenging than ever.
Final thoughts
Warren Buffett (Trades, Portfolio) is an incredible investor who takes a simple but disciplined approach to investing and life. His timeless wisdom was extremely relevant decades ago and is still relevant and useful in the present day. The overall goal is to live a happy, successful and hopefully wealthy life, and Buffett’s wisdom can help us to develop the right habits to achieve this in the long term.
