Berkshire Hathaway 2003 Annual Meeting Audience Question # 23

How Warren gets his investment ideas

Warren Buffett:

Let’s start right in at number 1.

Audience Member:

Yes. My name is Oliver Graussa, and I’m from Vienna, Austria.

And my question has two parts. And so, the first part is, how do you get a few excellent investment ideas to be so successful? Do you read any special newspapers or industry magazines? Or do you visit the headquarters or any subsidiaries of companies?

And which sources of information, like books, for example, Value Line, Standard and Poor’s, Moody’s, databases like Reuters, Bloomberg, DataStream, annual reports, internet, and so on, do you use to get the right impression of a company?

And the second part, if you think that a company like The Washington Post, GEICO, or Gillette has a very competitive product, what are the steps before you ultimately decide to invest in the company?

Which publications do you read to get the best knowledge of the product? And how important is the balance sheet and profit and loss account statement of the company? Thank you very much.

Warren Buffett:

Thank you.

The answer to the first part is sort of… and maybe the second part… is sort of all of the above. I mean we… read a lot. And we read daily publications, we read weekly or monthly periodicals, we read annual reports, we read 10-Ks, we read 10-Qs.

And fortunately, the investment business is a business where knowledge cumulates. I mean, everything you learn when you’re 20 or 30… you may tweak some as you go along, but it all kind of builds into a knowledge base that’s useful forever.

And we… at least, you know, I read. Charlie used to read. May still read a fair amount.

But I read a lot of 10-Ks, read a lot of annual reports. Forty or 50 years ago I did a lot of talking to managements. I used to go out and take a trip every now and then and really drop in on maybe 15 or 20 companies. I haven’t done that for a long, long time.

I find… everything we do, pretty much, I find through public documents.

When I made an offer for Clayton Homes, I’d never visited the business. I’d never met the people. I’d done it over the phone. I’d read Jim Clayton’s book. I looked at the 10-Ks. I knew every company in the industry. I look at competitors.

And I try to understand the business and not have any preconceived notions. And there is adequate information out there to evaluate a great many businesses.

We do not find it particularly helpful to talk to managements. Managements frequently want to come to Omaha and talk to me, and they usually have a variety of reasons that they say they want to talk to me, but what they’re really hoping is we get interested in their stock. That never works.

You know, managements are not the best reporting parties in most cases. The figures tell us more than a management does. So we do not spend any real amount of time talking to management.

When we buy a business, we look at the record to determine what the management’s like, and then we want to size them up, personally, as I said earlier, whether they will keep working.

But we don’t give a hoot about anybody’s projections. We don’t even want to hear about them, in terms of what they’re going to do in the future. We’ve never found any value in anything like that.

But just a general business knowledge, you know, what we’ve seen work, what we’ve seen has not worked. There’s a lot you absorb over time. Charlie?

Charlie Munger:

Yeah. The more basic knowledge you have, I think the less new knowledge you have to get.

And the game is a lot like that fellow that plays chess blindfolded. He’s got a memory of the board and everything that happened before. And that enables him to do the next move in a way he never could if you just showed him the board midgame, cold.

And so there… and in terms of what publications, I don’t know, Warren. I would hate to give up The Wall Street Journal.

Warren Buffett:

Oh, you’d also hate to give up The Buffalo News.

Charlie Munger:

Yeah.

Warren Buffett:

But you could… well, you want to read lots of financial material as it comes along.

And actually, The New York Times has a far better business section than they had 25 years ago.

But you want to read Fortune, you know. You want to read lots of annual reports. You really want to have a database in your mind so that you can tell what kind of a business you’re looking at, in general, by looking at the figures.

It’s far overrated… we never look at any analyst reports. I mean I don’t think I’ve, you know, if I read one it was because the funny papers weren’t available, you know…

It just isn’t… I mean, it… I don’t understand why people do it.

But there’s a lot of data out there. And, you know, the beauty of it is… it’s really what makes the investment game great… is you don’t have to be right on everything.

You don’t have to be right on 20 percent of the companies in the world or 10 percent of the companies in the world or 5 percent.

You only have to get one good idea every year or two.

So it’s not something… you know, when… I used to be very interested in horse handicapping, and the old story was… and I hope Bob Dwyer is still here… that, you know, you could beat a race but you can’t beat the races. And you can come up with a very profitable decision on a single company.

I would hate to be measured… if somebody gave me all 500 stocks in the S&P and I had to make some prediction about how they would behave relative to the market over the next couple years, I don’t know how I would do.

But maybe I can find one in there where I think I’m 9 in 10, 90 percent, in being right.

It’s an enormous advantage in stocks, is that you only have to be right on a very, very few things in your lifetime as long as you never make any big mistakes.

Charlie Munger:

What’s interesting is that at least 90 percent of the professional investment management operations don’t think the way we do at all.

They just think, if they hire enough people, they can be better at determining whether Pfizer or Merck is going to do better over the next 20 years.

And they can do that, stock by stock, all through the 500 and have wide diversification. And at the end of 10 years they’ll be way ahead of other people, and, of course, they won’t.

Very few people have this idea of searching for just a few opportunities.

Warren Buffett:

Yeah. You wait for the fat pitch. Ted Williams wrote about that in a book called “The Science of Hitting.” He said the most important thing in being a good hitter, you know, is to wait for the pitch in the sweet spot, basically.

But, you know, I’ve always said that the way to get a reputation for being a good businessman is to buy a good business. You know?

It’s much easier than taking a lousy business, you know, and showing how wonderful you are at it, because I haven’t seen that done very often.

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