In June 1996, Warren Buffett issued a booklet entitled “An Owner’s Manual” to Berkshire’s shareholders. In this manual, he set down 13 business principles, which are the foundation upon which he built Berkshire Hathaway Inc.
These principles are an amazing free gift to all of us, who try to emulate Mr. Buffett. My favorite is the eleventh principle, which begins thus:
“You should be fully aware of one attitude Charlie [Munger] and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash…”
Now, what’s so great about this statement?
To answer this question we must remember how Warren Buffett invests. As we all know, he doesn’t buy a stock based on its price. He buys a stock so he can own a share of a great business. When he likes a company a lot, he buys the whole business. GEICO is a case in point.
Then, when we look at Berkshire’s investments, we see companies like Coca-Cola and American Express and The Washington Post Company, all of which Mr. Buffett has held for over 20 years.
In principle one of the owner’s manual, he says the following in regard to the stocks he buys:
“In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies.”
This is all great for Berkshire Hathaway, but the question we, small-time investors, need to ask is: How can we use Warren Buffett’s insights to become better investors?
First, we must buy stocks of solid businesses with longevity. Meaning, if you are 40 years old, make sure you buy a stock that will be around for the next 50 years, in case you live up to 90.
Second, we must learn to wait. And when I say wait, I mean “forget about waiting.” Warren Buffett will die before he sells his stocks. Can we do this? We better.
Third, we must stop buying stocks based on their price. This is such a difficult concept that 99 out of 100 investors can’t do it. Very few people can buy a stock at $50 and still hold it when the price drops to $20. But then, very few of us are billionaires.
Lastly, when we find a company we really like, we must buy its stock all the time. Imagine if we, or our parents or friends, bought Wal-Mart in August 1972 and continued to buy it, year in and year out, until today? If we bought 100 shares each quarter in the last 35 years, we would have 14,000 shares today. But in 1972, a share cost $0.0635. Today, it cost $48.80. When we add the dividends and the 21 splits, we begin to smile involuntarily.
So, when the charts and the ratios and the EPS estimates fail us, which they will, these four steps will save us, and more.
Amen!
These principles are an amazing free gift to all of us, who try to emulate Mr. Buffett. My favorite is the eleventh principle, which begins thus:
“You should be fully aware of one attitude Charlie [Munger] and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash…”
Now, what’s so great about this statement?
To answer this question we must remember how Warren Buffett invests. As we all know, he doesn’t buy a stock based on its price. He buys a stock so he can own a share of a great business. When he likes a company a lot, he buys the whole business. GEICO is a case in point.
Then, when we look at Berkshire’s investments, we see companies like Coca-Cola and American Express and The Washington Post Company, all of which Mr. Buffett has held for over 20 years.
In principle one of the owner’s manual, he says the following in regard to the stocks he buys:
“In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies.”
This is all great for Berkshire Hathaway, but the question we, small-time investors, need to ask is: How can we use Warren Buffett’s insights to become better investors?
First, we must buy stocks of solid businesses with longevity. Meaning, if you are 40 years old, make sure you buy a stock that will be around for the next 50 years, in case you live up to 90.
Second, we must learn to wait. And when I say wait, I mean “forget about waiting.” Warren Buffett will die before he sells his stocks. Can we do this? We better.
Third, we must stop buying stocks based on their price. This is such a difficult concept that 99 out of 100 investors can’t do it. Very few people can buy a stock at $50 and still hold it when the price drops to $20. But then, very few of us are billionaires.
Lastly, when we find a company we really like, we must buy its stock all the time. Imagine if we, or our parents or friends, bought Wal-Mart in August 1972 and continued to buy it, year in and year out, until today? If we bought 100 shares each quarter in the last 35 years, we would have 14,000 shares today. But in 1972, a share cost $0.0635. Today, it cost $48.80. When we add the dividends and the 21 splits, we begin to smile involuntarily.
So, when the charts and the ratios and the EPS estimates fail us, which they will, these four steps will save us, and more.
Amen!
