Berkshire Hathaway 1999 Annual Meeting Audience Question # 60

The best way to teach yourself accounting, finance and how to analyze companies

Warren Buffett:

Zone 1.

Audience Member:

Eric Tweedie from Shavertown, Pennsylvania.

I just wanted to express our appreciation of… regarding all the operating businesses that we’ve visited. They’ve been very warm and hospitable.

In fact, when we visited Executive Jets at the airport, the tour was so impressive my wife wanted to buy an airplane.

Warren Buffett:

What’s her name? What’s her name?

Audience Member:

Well, I won’t say that…

Charlie Munger:

Spell it out!

Audience Member:

American Express declined the $500,000 we tried to put on my card.

But you can thank the chairman for me next time you see him. Just kidding, but…

My question regards, basically, approach to investing. I’ve been investing my own money in equities for about 10 years. And my results, overall, have been relatively good.

In the process, however, I’ve taught myself some very painful and costly lessons. For instance, my first equity ever purchased was a share of Berkshire Hathaway for $5,500 in 1990 and I sold it 3 months later for something over $8,000 and congratulated myself for the rapid and shrewd profit.

And earlier this year, I repurchased the same share for $70,000. And I intend to own it for the rest of my life. So you can see I’m growing.

My question is, I have no formal education in accounting and finance. And I would just like some advice from you regarding an approach to educate myself and a reading list of basic texts, obviously, starting with the Berkshire Hathaway annual reports.

Thank you.

Warren Buffett:

Thank you, particularly for your comments about the people from our operating companies, because they have just been terrific.

They come out here…

They are here at five in the morning. They… I mean, they do a tremendous amount of work over this weekend. They’re cheerful.

I’ve met with them all on Saturday at lunch and, I mean, they’re just one sensational group of people, and…

You know, I’m very proud of them. And the managers should be very proud of the people they brought with us. And I hope you get a chance to thank as many of them as possible personally.

Incidentally, at the See’s counter you’ll find Angelica Stoner, who’s been with us for 50 years and, you know… here she comes from California to help us out and sell peanut brittle, and she’s having a good time doing it.

And the question you ask is a very good one about… you know, in terms of accounting and finance… what’s the best way to teach yourself?

I was always so interested in it from such a young age, that I… my approach was go to the Omaha… originally, was to go to the Omaha Public Library and just take out every book there was on the subject. And I learned a lot… … I learned a lot that wasn’t true in the process, too. I got very interested in charting and all that sort of thing and buying stocks.

But I did it by just a tremendous amount of reading, but it was easy for me because, you know, it was like going to baseball games or something of the sort.

And in terms of naming specific texts in accounting, you know, I think you may want to read some of the better, even, magazine articles that have appeared. I mean, there’ve been – or newspaper articles.

There have been some good commentary about accounting there.

I don’t have… can you think, Charlie, of any specific texts or anything that we could recommend?

Charlie Munger:

I think both of us learned more from the great business magazines than we do anywhere else. It’s such an easy, shorthand way of getting a vast variety of business experience, just to riffle through issue after issue after issue, covering a great variety of businesses.

And if you get the mental habit of relating what you’re reading to the basic structure of the underlying ideas being demonstrated, you gradually accumulate some wisdom about investing.

I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading. I don’t think there’s any one book that will do it for you.

Warren Buffett:

Yeah. You might think about picking out five or 10 companies where you feel quite familiar with their products, maybe but not necessarily so familiar with their financials and all of that.

But pick out something, so at least you understand what… if you understand their products, you know what’s going on in the business itself. And then, you know, get lots of annual reports. And, through the internet or something else, get all the magazine articles that have been written on it… on those companies for five or 10 years.

Just sort of immerse yourself as if you were either going to work for the company, or they’d hired you as the CEO, or you’re going to buy the whole business. I mean, you could look at it in any those ways.

And when you get all through, ask yourself, “What do I not know that I need to know?”

And back many years ago, I would go around and I would talk to… I would talk to competitors, always. Talk to employees of the company, and ask those kinds of questions. That’s, in effect, what I did with my friend Lorimer Davidson when I first met him at GEICO, except I started from ground zero. But I just kept asking him questions.

And that’s what it really is. You know, one of the questions I would ask if I were interested in the ABC Company, I would go to the XYZ Company and try and learn a lot about it. Now, you know, there’s spin on what you get, but you learn to discern it.

Essentially, you’re being a reporter. I mean, it’s very much like journalism. And if you ask enough questions… Andy Grove has in his book… he talks about the silver bullet, you know.

You talk to the competitor and you say, “If you had a silver bullet and you could only put it through the head of one of your competitors, which one would it be and why?” Well, you learn a lot if you ask questions like that over time.

And you ask somebody in the XYZ industry and you say, “If you were going to go away for 10 years and you had to put all of your money into one of your competitors… the stock of one of your competitors, not your own… which one would it be and why?” Just keep asking, and asking, and asking.

And you’ll have to discount the answers you get in certain ways, but you will be getting things poured into your head that then you can use to reformulate and do your own thinking about why you evaluate this business at this or that.

The accounting, you know, you just sort of have to labor your way through that. Might… I mean, you may be able to take some courses, even, in that. But the biggest thing is to find out how businesses operate.

And, you know, who am I afraid of? If we’re running GEICO, you know, who do we worry about? Why do we worry about them? Who would we like to put that silver bullet through? I’m not going to tell you. That the…

You know, it’s… you keep asking those questions. And then you go to the guy they want to put the silver bullet through and find out who he wants to put the silver bullet through. It’s like who wakes up the bugler, you know, in the Irving Berlin song?

And that’s the way you approach it. You… and you’ll be learning all the time.

You can talk to current employees, ex-employees, vendors, supplies, distributors, retailers, I mean, there’s customers, all kinds of people and you’ll learn.

But it is a… it’s an investigative process. It’s a journalistic process. And in the end, you want to write the story. I mean, you’re doing a journalistic enterprise. And six months later, you want to say the XYZ Company is worth this amount because, and you just start in and write the story.

And some companies are easy to write stories about, and other companies are much tougher to write stories about. We try to look for the ones that are easy.

Charlie?

Charlie Munger:

Yeah. For the histories of the thousand biggest corporations laid out in digest form, I think Value Line is in a class by itself. That one volume really tells a lot about the histories of our best companies.

Warren Buffett:

Yeah. If you just look, there’s 1,700 of them. If you look at each page and you look at sort of what’s happened in terms of return on equity, in terms of sales growth, (this part of the audio is inaudible), all kinds of things.

And then you say, “Why did this happen? Who let it happen?” You know, “What’s that chart going to look the next 10 years?”

Because that’s what you’re really trying to figure out, not the price chart, but the chart about business operation.

You’re trying to print the next 10 years of Value Line in your head. And there’s some companies that you can do a reasonable job with, and there’s others that are just too tough. But that’s what the game is about.

And it can be a lot of… I mean, if you have some predilection toward it, it can be a lot of fun. I mean, the process is as much fun as the conclusion that you come to.

Charlie Munger:

Of course, what he’s saying there, when he talks about why… that’s the most important question of all. And it doesn’t apply just to investment. It applies to the whole human experience.

If you want to get smart, the question you’ve got to keep asking is: Why? Why? Why? Why?

And you have to relate the answers to a structure of deep theory. And you’ve got to know the main theories. And it’s mildly laborious, but it’s also a lot of fun.

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Q&A with Warren Buffett and Charlie Munger: A Compilation of All Shareholder Questions and Answers from The Berkshire Hathaway Annual Shareholder Meetings

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