I had started investing when I was 11. I just dithered away until when I was 7 and 8 and 9. So unfortunately, I didn't get started until I was 11. But I bought my first stock when I was 11, and then I experimented with a whole bunch of things, the timing of stocks and charting and doing all these crazy things. It was a lot of fun, profitless, but a lot of fun. And I did that until I was 19. And I read all the books on investing in the public library and just, I ate it up.
It was fascinating to me, but I had no framework. I was just searching for something. I was hoping that little things on a chart would tell me something about what a stock was going to do.
It was kind of crazy, but everybody else was doing it, so I figured I'd do it too. Sometimes you turn the chart upside down, you know, it still wouldn't help. Then in 1949, I read The Intelligent Investor by Ben Graham.
I'd never heard of him up till then. And there are really only two chapters in that book that are the key to it. But they set my philosophical framework for investing in three ways. They're so basic and so simple.
It's hard to understand how they could be that important, but the Ten Commandments are simple. The first is that a stock is part of a business. I mean, you can't think of a stock as something different. You value a business, and then you divide by the shares outstanding. But what you have to think about is what kind of a business are you getting into, what are its economic characteristics, who are its competitors, what's its management like, all of these things that relate to a business instead of a little ticker symbol.
I used to know when I was 11 or 12, the ticker symbols of every... company virtually on the new york stock exchange i could mark the boards and pair us up you know but i didn't know anything i mean i could you know i knew that x was us steel and t was the a t and so on but i didn't i didn't know anything i didn't know what was behind him so i had to start looking at at these little symbols or these little names in the paper as businesses and decide how do you value a business what counts the second thing in that in the book is that graham gives you a marvelous set point in terms of how the investor should react to stock market fluctuations. He talks about his mythical Mr. Market in chapter eight.
There's been no better thing written in terms of the investor's attitude toward stock prices. Most people react the wrong way to stock prices. I mean, they feel good when their stocks go up, they feel bad when they go down.
They think the stock market is there to instruct them. And Mr. Market is this partner you have in investing. He's a remarkably obliging partner. This guy comes around every day and he tells you what he'll pay you for your interest in the business or what he'll sell you more at the same price.
Nobody ever does that in private business. If you and I owned a gas station together and I said every day I want you to come in and offer me your half interest in the station and I can either buy your half or sell you my half at the same price and you have to come in every day and do it, you'd be at a terrible disadvantage. And you'd be at a particular disadvantage if you're Mr. Market in the market, because Mr. Market, our friend in the market who obligingly gives you those figures every day, different figures at the end of the day, in the start of the day, but he's naming a price at which you'll either buy or sell. Beautiful thing about him is that this guy is an alcoholic manic depressive. I mean, I mean, he is as unsound as they come.
He wanders around all day, you know, and looks at the crazy things and he, you know, he's going to name all kinds of crazy prices. And you don't have to pay any attention to them, except when it's to your advantage to do so. If that's once a year, if it's once every five years, it's one stock out of 3,000.
All you have to do is sit there. You have no moral responsibility to this jerk. He is naming these numbers. You didn't ask him to, but he's doing it. And all you have to do is pick the one time when he is particularly depressed, or particularly manic, or particularly drunk, or whatever it may be.
And the market will be all of those things. And you take advantage of it. What's remarkable about stocks, if you think about it, is that if you look at the high and low on all of these American companies for the last year, you'll see case after case after case where the high is twice the low.
Now that's for sound American businesses running along, paying people, selling goods, and so on. If you go out and look at farmland 10 miles from here, there's no way in the world over a year that the farmland is going to range in value from X to 2x. It maybe go from X to 110% of X or vice versa. If you look at an apartment house near here and figures on essentially apartment houses like that over a year, it won't move 10% in a given year.
But here are the finest of American businesses and people just name these numbers that go all over the place. And you don't have to play except when you want to. That's the important thing and that's what Graham tells you. The market isn't there to instruct you, to tell you anything.
The market is there just basically to serve you when you want it to serve you. One of the most important things to remember in stocks, very hard to do, people have all these feelings about it. The stock doesn't know you own it.
You're sitting there with these certificates for Berkshire. The company doesn't even know you own it. And the stock doesn't.
It's trading now and they don't know you own it. So it has no feelings about you. I mean, you've got all these feelings about it, but it's just part of a business.
If Berkshire is worth 75,000 times a million and a half shares, roughly $110 billion or something like that. It's a good investment. If it isn't, it's a lousy investment. You have to value the business. And Graham, it's amazing, but people don't do that in Wall Street.
You hear price targets or that kind of thing, but you'd see no one write a paper that says, here is the nature of this business over the next 20 years. You know, what should that business sell for? Forget about what it's selling for.
In fact, one of the things I always like to do when I'm looking at investments is I like to look at them without knowing the price. Because if you see the price, it automatically has some influence on you. If you just sit down with the reports, if I get an idea about looking up a company, and I get the 10Ks and so on, I would rather not know the price, because I'd rather value it without knowing the price. When I used to handicap horses when I was a kid, one of the things I would do is I'd get the racing form ahead of time. And if there were nine horses in a race, we'll say, obviously the probabilities of each one winning the race had to add up to 100%.
I mean, one horse was going to win the race absent a dead heat or all of them dropping dead on the backstretch. So, if you went through the racing form and I would look at the third race at Hialeah, I would try to figure out the percentage chance of each horse winning the race and that had to add to 100%. Then I would compare those percentages to the odds. But first of all, I wouldn't look at the odds first.
I would look at the past performance and all that thing first. Stock market's the same way. Third thing in Graham's book is the margin of safety. If you come up to a bridge and it says capacity 10,000 pounds and you're driving a 9,800 pound truck, you drive down further and find another bridge.
I mean, you know, nobody knows exactly what that capacity is and it may have been, sign may have been put up three years ago. So you always leave a margin of safety. You don't try to cut things that close.
You wait till something kind of shouts at you in the stock market. And with those three principles, you can build all kinds of structures on that, but that's the foundation. And if you've got that in mind, and that's in the intelligent investor, I've never found anything that remotely compares with it.
All three of the ones I just, you can't get rid of one leg of the three-legged stool and still have a good investment philosophy. But I would say that the most important thing over a long period and working with big money is to understand the business. Let's just say for the moment that you were given a million dollars or whatever sum was necessary. And you could... Look around Knoxville or look around all of Tennessee if you want and buy into any three businesses you know between now and a week from now.
Private businesses, not trading or anything of the sort. You've got a week to do it or you have to give the money back. What will you be doing during the next week? I mean you can look at all these companies, some of them you're quite familiar with, some of them you're less familiar with, some of them you know by reputation, some of them you know the management, some of them you don't.
You know their competitive situation. What will you be thinking about? During that seven-day period, how will you actually be screening these companies out?
I think you'll look for three businesses, and you can't trade them after you buy them. You're just going to own them the rest of your life. You're going to be looking for businesses that have enduring competitive advantage.
You don't want to buy a Burger King franchise just because nobody's come within 10 miles of it yet because you know Wendy's and Donald's and all of those will be there pretty soon. I mean it isn't necessarily who's earning the most money now. You're going to look for something with enduring competitive advantage. Now that takes a business with some kind of a moat around it because capitalism by definition is a system where every time somebody has an economic castle somebody else is going to come after it.
It's just the nature. If you open a restaurant that's successful here in town You know, somebody's going to take your menu, probably take your chef, maybe cut your price, maybe offer a little more parking, maybe be a better, better, okay, whatever. I mean, capitalism consists of going after the other guy's castle.
If that's the case, you want a castle with a big motor around it. There's a lot of ways you can have a motor on something. You could have it by patent protection.
You could have it by location in certain, certain areas. I mean, if you have something in people's mind, like Coca-Cola, 6 billion people in the world, practically all of them have something in their mind about Coca-Cola, largely favorable. They don't have anything in their mind about RC Cola.
And if RC Cola spent a billion dollars advertising, they wouldn't have anything in their mind about RC Cola. They've got something in their mind about Coke, and generally it's favorable. That's why Coke wants to be where people are happy. Because they want to be at the theater.
They want to be at Disney World. They want to be at the World Series. They want to always have you drinking that drink of Coca-Cola, while at the same time experiencing happiness. And if they do that, they're going to sell a lot of Coca-Cola.
And it won't make any difference if somebody is a half a cent less on some serving. the coat. So that's an enduring competitive advantage.
And you want it run by honest, enabled people. You don't want to go in with a crook and you don't want to go in with a dope. Now, the best businesses to buy are the ones where you could have a dope in there.
I mean, Peter Lynch says, you know, buy a business that's so good that an idiot can run it because sooner or later one will. And there's some merit to that. In fact, I got a question the other day from a student group and they said, you know, what's going to happen to Berkshire when you go to Agar? And I said, well, Berkshire's so good that I can go gaga.
In fact, I may even be. Those are the kind of businesses to own. But you want a management that's able and honest. And then you want a price that's sensible.
And that's what you'd look for. You'd go around Tennessee, got a week to do it, and you'd immediately screen out a whole bunch of things. You'd just know that they weren't a fertile area.
That's an important thing to be able to do, to just get rid of all kinds of things. There was a great article in The New Yorker 30 years ago when Bobby Fischer was playing Sposky. famous chess match which drew attention around the world and they examined how the mind could with billions and billions and billions of possibilities how it could group things so it immediately cast it down to where you had like four options and of course when the humans play something like deep thought you know or whatever the latest version is The computer on that, that computer is making maybe 700,000 or a million calculations a second.
And the human mind is competing against that. But the computer is checking every possibility. And the human mind somehow has this ability to cast out 99.999% of those things that the computer has to go through in order to focus on the three or four possibilities that really make sense.
And investing is a lot like that. It's not that tough because there aren't that many companies, but you want to cast out. all kinds of things.
If somebody told me that my life depended on picking among the Dow Jones stocks a group of 10 that would be the best performers or outperform the index as a whole, I would spend my time thinking of the worst-off companies in there. I would cast out things, and then I would figure I left those behind. And that's an easier way to approach the problem, actually, than trying to pick the 10 best.
If you were thinking about the state of Tennessee, you know, there's a whole lot of things you wouldn't examine. You just figure they're too tough. You might decide, you know, car dealerships were too tough. It's always going to be competitive. Who knows whether Ford or General Motors are going to be selling more cars five years from now, or whether there's going to be tariffs on foreign cars.
Who knows? So you just say, I'll give up on car dealers. I'll think about something else.
And that approach that you use there is the same approach you really want to bring to the stock market. You've got 3,000 companies tonight you can look at on the New York Stock Exchange. There's a valuation on every one of them.
It'll change tomorrow. You don't have to play. Once a year, if you have 20 good ideas, if you have five good ideas in your lifetime, you get very rich.
You know, I tell students sometimes they'd be better off if they had a punch card when they got out of school with only 20 punches on it. Because then, instead of listening to somebody at a cocktail party and then going out the next morning and buying some share, they'd really think about every punch. That's all the punches you get.
20 punches is plenty. You just have to make sure that you don't do any of them for frivolous reasons. We never want to buy anything small at Berkshire. It just doesn't make any difference. You know, we want to think about things that can move the needle, and that gets tougher as the capital gets greater.
But that's the way to focus on investments.