Warren Buffett: The Easiest Way To Value Stocks
Summary
TLDRIn this insightful discussion, Jeff Colbert from Olathe, Kansas, seeks advice on improving business valuation skills. Warren Buffett emphasizes the importance of understanding a company's intrinsic value and applying a margin of safety, a principle he learned from Benjamin Graham. Charlie Munger adds that recognizing durable competitive advantages is key, but also acknowledges the value of avoiding competition. Both stress the significance of continuous learning and self-awareness in one's circle of competence. They highlight that businesses requiring minimal capital, such as consumer and service businesses, are particularly attractive, and touch upon the concept of businesses operating with negative capital. The conversation underscores the value of discipline, curiosity, and the pursuit of knowledge in the world of investing.
Takeaways
- π Jeff Colbert started investing in 1999, learned the hard way about valuing businesses and applying a margin of safety.
- π Warren Buffett emphasizes the importance of understanding a business's value and having a margin of safety, as taught by Benjamin Graham.
- π Charlie Munger highlights the value of a durable competitive advantage and a first-class business, but also acknowledges that many businesses are not well understood even by experts.
- π« The key is knowing the perimeter of your circle of competence; it's not about being an expert on many businesses, but understanding those you invest in.
- π€ Buffett suggests thinking about businesses in your own hometown, considering their economics, longevity, and competitive strength to enhance your valuation skills.
- π‘ Munger advises learning from observing businesses and asking questions about their operations and economics from a young age.
- π Buffett mentions that opportunities arise occasionally, and one should be ready to seize them, even in unfamiliar markets like Korean stocks, provided they meet the margin of safety criteria.
- π§ The importance of continuous learning and adapting to a changing world is stressed, as it's crucial to improve in a competitive field like investing.
- π Munger shares that success in business often comes to those who are disciplined, avoid trouble, and focus on doing things right, rather than those who are already wealthy.
- π¦ Buffett discusses the concept of businesses operating with negative capital, where customers pay in advance, which can be very profitable.
- π° The best businesses are those that require minimal capital to operate and can grow significantly, such as consumer businesses where customers pay upfront.
Q & A
What investment philosophy did Jeff Colbert initially adopt?
-Jeff Colbert initially adopted the 'Buy and Hold' philosophy, which involved not worrying about market price fluctuations and not applying a margin of safety or valuing a business.
What is the importance of understanding the value of a business and applying a margin of safety according to the transcript?
-Understanding the value of a business and applying a margin of safety is crucial as it helps investors avoid significant losses and make informed decisions, which can lead to more successful investments.
What did Warren Buffett learn from Ben Graham about valuing companies?
-Warren Buffett learned from Ben Graham a method to value a certain type of company that would prove successful, although the universe of those companies eventually dried up.
What concept did Charlie Munger teach Warren Buffett about businesses?
-Charlie Munger taught Warren Buffett about the value of a durable competitive advantage and the importance of investing in really first-class businesses.
Why is it important to know the perimeter of your circle of competence according to Warren Buffett?
-It's important to know the perimeter of your circle of competence because it helps investors understand their limitations and focus on businesses they truly understand, which is crucial for making sound investment decisions.
What is the significance of continuously learning and asking questions about businesses?
-Continuously learning and asking questions about businesses helps investors extend their knowledge over time, understand different types of businesses better, and make more informed investment decisions.
What did Warren Buffett consider when looking at Korean stocks?
-Warren Buffett considered the margin of safety test when looking at Korean stocks and diversified his investments because he didn't know much about any specific business but knew the package of 20 would work out well.
What is the key to getting better at something competitive according to the transcript?
-The key to getting better at something competitive is to think about it a lot, learn a lot, practice doing it a lot, and keep learning because the world and your competitors keep changing.
What did Charlie Munger learn from observing the businesses in Omaha as a child?
-Charlie Munger learned about the importance of avoiding competition, doing things right, and having discipline by observing businesses in Omaha, including how some businesses failed while others rose to success.
What is the difference between the capital necessary to run a business and what Berkshire might have paid for the business?
-The capital necessary to run a business refers to the actual capital required for the business operations, whereas what Berkshire might have paid for the business is the investment amount that determines whether it's a good investment.
What type of businesses are considered to have the best return on capital?
-Businesses that require very little capital to operate and can grow large, such as consumer businesses where people pay in advance like magazines or insurance, are considered to have the best return on capital.
What does Charlie Munger believe is the key to gradually learning about businesses and investing?
-Charlie Munger believes that asking questions about reality, understanding why things work or fail, and having the right temperament to learn from experience are key to gradually learning about businesses and investing.
Outlines
π Learning from Failure and Valuing Businesses
Jeff Colbert from Olathe, Kansas, shares his experience starting in investing in 1999 before the tech bubble. He learned the hard way about the importance of valuing businesses and applying a margin of safety, as taught by Charlie Munger and Warren Buffett. The key to improving in valuing companies is to understand the types of businesses one is investing in, knowing one's circle of competence, and continuously learning. Buffett emphasizes the importance of recognizing limitations and learning from experience, including looking at businesses in one's hometown and considering their economic prospects over the long term. He also mentions his experience with Korean stocks, which taught him about finding opportunities with a margin of safety.
π Avoiding Competition and Learning from Early Influences
Charlie Munger reflects on his early experiences and how they shaped his approach to valuing businesses. He recalls an old man at the Omaha Club who prospered by avoiding competition, which sparked his curiosity about business. Munger and Buffett discuss the importance of discipline, doing things right, and avoiding trouble. They mention individuals like Pete Kiewit, who rose from small beginnings and were successful due to their approach to business. The conversation highlights the idea that success in business is not just about avoiding mistakes but also about having the right temperament and continuously learning from experiences, which is a gradual process.
π Capital Efficiency and the Quest for High Return Businesses
The discussion shifts to the concept of return on capital, with a question about which business has had the best return for Berkshire and in general. Buffett explains the difference between the capital necessary to run a business and the capital one might pay for it. He cites examples of businesses that operate with negative capital, such as magazines, and those that require very little capital, like Apple. The ideal business, according to Buffett, is one that can grow large without needing additional capital. Munger adds that businesses where customers pay in advance, using their capital, are particularly attractive. The conversation underscores the importance of capital efficiency and the competitive nature of the market for such businesses.
Mindmap
Keywords
π‘Investing
π‘Buy and Hold
π‘Margin of Safety
π‘Circle of Competence
π‘Durable Competitive Advantage
π‘Business Valuation
π‘Capital
π‘Return on Capital
π‘Monopoly
π‘Pricing Power
π‘Consumer Businesses
Highlights
Jeff Colbert from Olathe, Kansas, shares his early investing experience and the lessons learned from the tech bubble.
The importance of valuing a business and applying a margin of safety is emphasized by Charlie Munger.
Warren Buffett discusses the evolution of his approach to valuing companies, from learning under Benjamin Graham to understanding various business types.
The concept of 'circle of competence' is highlighted, stressing the need to know the perimeter of one's expertise.
Buffett advises on the approach to improving business valuation skills, suggesting self-reflection and discussion with others.
Munger shares anecdotes from his childhood that influenced his understanding of business and competition.
The value of discipline and doing things right is underscored as a key to success in business.
Buffett and Munger discuss the unpredictability of business success and the importance of individual character.
Munger's early business education and his father's influence on his understanding of business valuation.
The significance of avoiding obvious mistakes in business and investing is highlighted by Buffett.
Buffett explains the difference between the capital necessary to run a business and the capital paid for the business.
Examples of businesses that operate with negative capital, such as magazines and insurance companies, are given.
The desirability of businesses that require minimal capital, like Apple and See's Candies, is discussed.
Buffett and Munger agree on the importance of continuous learning and adapting in the business world.
The concept of pricing power and its relation to monopoly or near-monopoly businesses is explored.
Buffett and Munger avoid naming specific businesses with the best return on capital to prevent the appearance of promoting monopolies.
Transcripts
hello my name is Jeff Colbert and I'm
from Olathe Kansas
I got started in investing in 1999 right
before the big Tech bubble and
unfortunately I learned Buy and Hold and
uh
don't fret about market price
fluctuations before I learned the
importance of valuing a business and
applying a margin of safety
so as Charlie said I got my feet wet
with huge failure right away
and we're in the club
thank you I don't feel so bad now
um
so that leads to my my question it seems
like to I've read all the Berkshire
reports and all the reading I can do
about you two and and I thank you for
these wonderful meetings but
it seems like it boils down to some
simple things valuing a business and
applying a margin of safety so my
question is what do you recommend for an
approach to getting better and better at
valuing companies
you know it's a very very good question
and in my own case
you know I started out without doing
anything about value in companies
and then Graham
taught me a way
to
value a certain type of company
that would prove successful
except the universe of those companies
dried up but nevertheless it it was
almost a guarantee against failure but
it wasn't it was not a guarantee that
these things would continue to be
available Charlie taught me about a lot
about the value of a durable competitive
advantage and and a really first class
business
but
over time
I've learned more about various types of
businesses but you do be amazed how many
businesses I don't feel that I
understand well
the biggest thing is not how big
your circle of competence is but knowing
where the perimeter is if you
you don't have to be an expert on ninety
percent of the businesses or 80 or 70 or
50. but you do have to know something
about the ones that you actually put
your money into and if that's a very
small part of the universe
that still is not a killer and
I I think if you think about what you
would pay for a McDonald's stand was you
think you would pay for you know think
about the businesses in your own
hometown of the Laughing uh
you know which would you like
to buy into which do you think you could
understand their economics which you
think will be around 10 or 20 years from
now which you think it would be very
tough to compete with just keep asking
yourself questions about businesses talk
about with other people about them you
will extend your knowledge over time and
always remember that margin of safety
and I think you basically have the right
attitude because you do you recognize
your limitations and that's enormously
important in this business you will find
things to do six or seven years ago
maybe not that long yeah six or seven
years ago when I was looking at Korean
stocks for example I never had any idea
that Korean stocks would be something
that I would be buying but I looked over
there and and I could see that there
were a number of businesses that met the
margin of safety test and there I
Diversified because I didn't know that
much about any specific one but I knew
that the package of 20 was going to work
out very well even if a crook might run
one of them and a couple of might run
into competition I didn't anticipate
because they were so cheap
and that was sort of the old Graham
approach uh you will find Opportunities
from time to time and the beauty of it
is you don't have to find very many of
them currently
well obviously if you want to get good
at something
which is competitive
you have to think about it a lot and
learn a lot and practice doing it a lot
and the way the world is constructed
in this field you have to keep learning
because the world keeps changing
and your competitors keep learning
so
you just have to get up each morning and
and
try and go to bed that night a little
wiser than you were when you got up and
if you keep doing that for a long time
and
and accumulate some experience good and
bad as you try and master what you're
trying to do
people do that almost never fail utterly
they may have a bad period
when luck goes against them or something
but very few people have ever failed
with that
with that uh if you have the right
temperament
you may rise slowly but you you're sure
to rise
Charlie did you take any business
courses in school no I took accounting
and
when did you start valuing businesses
and how did you go about it
when I was a little boy
I can remember I would come down to the
Omaha club and it was an Old Gentleman
who hit the Omaha Club about 10 30 every
morning he obviously did almost no work
and yet was quite prosperous
well but he made me very curious as a
little boy I said to my father how in
the hell does he do that
and he said Charlie he's in a business
where he enjoys practically no
competition he gathers up and renders
dead horses
well that was an example of avoiding
competition by one stratagem
and if you keep asking questions like
that of reality
starting at a young age you gradually
learn
and where you were doing the same thing
yeah thankfully he extrapolate he went
beyond his original
insight there but
I noticed it's rather interesting
you take the rulers of the
businesses when I was a little boy
a awful lot of those business in Omaha a
lot of those businesses went broke a lot
of them sold out at modest prices under
distress
and some of the people who Rose
like key Whit from Small Beginnings
nobody thought of as the great glories
of of that early time
and I think that's kind of the way life
is
it's hard to get anywhere near the top
and it's hard to hold any position once
you've attained it
uh
but
I think you could predict
the key what was likely to win
they cared more about doing it right
they cared more about avoiding trouble
they put more discipline on themselves
if you knew the individual well you
would have you would have been right
what if you knew the individual
Peterson I would not have bet on any of
the people I knew who were already
wealthy
but I would have bet on Pete Kiewit his
sister taught me math
and and
no half Dutch half German you know this
is a tough culture and there's your
there you've just heard it folks half
Dutch half German
go out looking for him
well the man was recommending this is
named monger and anyway the uh
uh no I I don't think it's that but if
you're
I was just automatically doing it what
was working
what was failing why was it working why
was it failing if you have that
temperament
you are gradually going to learn
and and uh if you don't have that
temperament
I can't help you
if you'd followed Peak human around for
10 years you never would have seen him
do anything dumb right
yeah and so
it it's avoiding the dumb thing you
don't it really don't have to be
brilliant but yeah you know you have to
avoid just sort of what almost seemed
the obvious mistakes but I would say
that you're on the right track back
there on the in in terms of
having the basic fundamentals knowing
your limitations but still seeking to
learn more about various kinds of
businesses surely
I think when he practiced law
any client that came in Charlie was
thinking about that businesses if he
owned the place
and he probably generally felt he knew
more about the place and the guy that
actually owned it who was his client who
was the client but but I remember
talking to him
you know 50 years ago and he would start
talking about caterpillar dealerships in
Bakersfield or something of the sort it
was it was incapable of looking at a
business without thinking about the
fundamental economics of it
how'd that guy do with the caterpillar
well
he sold it for appropriately ridiculous
price to a dumb oil company
it wasn't worth half what he got for it
yeah
but they had a concept they had a
concept in the strategy and no doubt
they had Consultants
all right
Becky
this question comes from Carson Mitchell
in Aberdeen South Dakota who asked both
of you what business has had the best
return on capital for Berkshire and what
business of any on Earth has had the
best return on Capital and he adds PS I
would have come by rail but there are no
seats in the grain rail cars
they
there's two ways of looking at it if you
talk about the capital necessary to run
the business as opposed to what we might
have paid for the business I mean the if
we buy a wonderful business you could
run the Coca-Cola Company assuming you
had the bottling systems ever you could
run it with no capital
yet now
if you buy it for a hundred billion
dollars I mean you can look at that as
your capital or you can look at the
basic Capital we when we look at what's
a good business we're defining it in
terms of the capital actually needed in
the business whether it's a good
investment for us depends on how much we
pay for that in the end
there are a number of businesses
that operate on negative capital
uh
Carol's with Fortune Magazine you know
any any of the great magazines
and
operate with negative capital I mean
they the subscribers pay in advance
there are no fixed assets to speak of
and and the receivables are not that
much the inventory is nothing so
a magazine business my guess is that
People magazine operates or Sports
illustrate Opera Sports illustrator
operate with negative capital
and
particularly people make a lot of money
so there are certain businesses well we
had a company called Blue Chip Stamps
that that where we got the float ahead
of time and operated with
really substantial negative Capital uh
but there are a lot of great businesses
uh
that need very very little Capital Apple
doesn't need that much Capital that you
know that uh
the best ones of course are the ones
that get very large while needing no
Capital C's is a wonderful business
needs very little capital
but it we can't get people eating 10
pounds of of boxed chocolates every day
except here we want to
uh
generally the great consumer businesses
need relatively little Capital uh
um
the the businesses where people pay you
in advance you know magazines of
Christians being a case Insurance being
a case
uh you know you're using you're using
your customers capital
uh and we like those kind of businesses
but of course so does the rest of the
world so they can become very
competitive and and buying them we have
a business for example this won't run
wonderfully uh like Catherine Kathy
Baron Tamara is called Business Wire
Business Wire does not require a lot of
capital it has receivables and
everything but it is a service type
business and many of the service type
businesses and consumer type businesses
require a little capital and when they
get to be successful
you know they can really be something uh
Charlie
I've got nothing to add but
at any rate they
the formula never changes
if you get on if you get on one business
in the world what would it be Charlie
I hope I already own them myself
you and I got in trouble by addressing
such a subject many decades that's right
I don't think I'll come back to it okay
number 13. if you name some business
that has incredible pricing power you're
talking about a business that's a
monopoly or near Monopoly sure and I
don't think it's very smart for us to
sit up here
naming is our most admired business is
something that other people regard as a
monopoly okay we'll move right along
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