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Rupert Hargreaves
Rupert Hargreaves
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Warren Buffett's Best Business Decision

What was the greatest business decision he ever made?

December 05, 2018 | About:

Bill Gates (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) are possibly the most successful investors who have ever lived. Over their careers, they have made a string of impressive business decisions, most of which have worked out favorably for these two billionaires.

But what has been the best business decision these investors have made in their careers?

Admittedly, this is a broad question than one can never really definitively answer. However, Buffett and Gates both tried to answer it in 1998, when giving a talk to students at the University of Washington Business School.

The best business decision

When asked "what was the best business decision you ever made," Warren Buffett (Trades, Portfolio) was the first to reply: "It was just jumping in the pool, basically."

He went on to say that in the investment world, the great thing is you only need a few good investments to perform exceptionally well. He then gave his famous punch card quote:

"In fact, if when you got out of business school here, you got a punch card with 20 punches on it, and every time you made an investment decision you used up one punch, and that's all you were going to get, you would make 20 very good investment decisions. And you could get very rich, incidentally. You don't need 50 good ideas at all."

The trick is, finding these investment ideas. Buffett said that most people will "know them" when they appear because "they're so cheap." He gave the example of:

"Genessee Valley Gas, a little tiny company up in upstate New York, a public utility selling at one times earnings. There were no brokerage reports on it, no nothing, but all you had to do was turn the page. It worked out so well I actually went through the book a second time."

But this strategy has not always worked. Gates reminded Buffett that earlier in the day, he claimed Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) was his worst-ever investment because he bought it when it was cheap without any regard to its future earnings potential. Buffett agreed with this statement and added that he has made all kinds of bad decisions over his career that have cost Berkshire Hathaway and its investors billions of dollars.

But, while Buffett has had his fair share of losing investments, it is his winning investments that have earned him the reputation that he has today. His ability to cut losers and run winners is unrivaled. In the lecture, he said that he tries not to worry about his investment mistakes too much and instead focuses his efforts on finding new investment opportunities and keeping up to date with his current businesses.

"I've made all kinds of bad decisions that have cost us billions of dollars. They've been mistakes of omission rather than commission. I don't worry about not buying Microsoft, though, because I didn't understand that business. And I didn't understand Intel. But there are businesses that I did understand--Fannie Mae was one that was within my circle of competence. I made a decision to buy it, and I just didn't execute. We would've made many billions of dollars. But we didn't do it."

Gates took over the conversation there and told the audience that his best business decisions have been hiring the right people for the right jobs. He said it is important to work with someone who you trust and who is totally committed with a shared vision, although they must also be willing to tell you when you are wrong and have a different skill set to complement you. Buffett finished this section by agreeing with Gates and mentioning his partner Charlie Munger (Trades, Portfolio), although Munger is rather a unique partner:

"I've had a partner like that -- Charlie Munger (Trades, Portfolio) -- for a lot of years, and it does for me exactly what Bill is talking about. You have to calibrate with Charlie, though, because Charlie says everything I do is dumb. If he says it's really dumb, I know it is, but if he just says it's dumb, I take that as an affirmative vote."

Disclosure: The author owns shares in Berkshire Hathaway.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

Rating: 5.0/5 (1 vote)



Bigzoo - 2 months ago    Report SPAM

why would you call Gates one of " the most successful investors who have ever lived."? He has never been and I would guess he never will be an investor. Yes, he is a remarable businessman and exceptional good-doer but did not made his fortune as an investor. If I am not mistaken his money is managed by Michael Larson.

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