Warren Buffet Wisdom from the Worlds Richest Investor

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					Warren Buffet: Wisdom from the World's Richest Investor
In light of the dominant mindset overshadowing the market these days, a
breath of fresh air might be welcome. This month, we're devoting this
space to wisdom from Warren Buffett, the world's richest investor.
Buffett is a renowned value investor who follows Benjamin Graham's
timeworn principles, a standard not unlike our own focus. Alas, in times
like these, value investing has fallen out of favor; a sad situation, as
these times are ideal for value hunters. Buffett writes prolifically
every year in his company's annual report, and provides tidbits of long-
lasting wisdom. Here are some excerpts that may help bring perspective to
today's investor:
"2000. We purchased several companies whose earnings will almost
certainly decline from peaks they reached in 1999 and 2000. The declines
make no difference to us, given that we expect all of our businesses to
now and then have ups and downs. (Only in the sales presentations of
investments banks do earnings move forever upward.) We don't care about
the bumps; what matters are the overall results. But the decisions of
other people are sometimes affected by the near term outlook, which can
both spur sellers and temper the enthusiasm of purchasers who might
otherwise compete with us.
1990. The term "earnings" has a precise ring to it. And when an earnings
figure is accompanied by an unqualified auditor's certificate, a naïve
reader might think it comparable in certitude to pi, calculated to dozens
of decimal places. In reality, however, earnings can be as pliable as
putty when a charlatan heads the company reporting them. Eventually truth
will surface, but in the meantime a lot of money can change hands.
Indeed, some important American fortunes have been created b y the
monetization of accounting mirages. Funny business in accounting is not
new. For connoisseurs of chicanery, I have anunpublished satire on
accounting practices written by Ben Graham in 1936. Alas, excesses
similar to those he then lampooned have many times since found their way
into the financial statements of major American corporations and been
duly certified by big-name auditors. Clearly, investors must always keep
their guard up and use accounting numbers as a beginning, not an end, in
their attempts to calculate true "economic earnings" accruing to them.
2001. Two years ago, reporting on 1999, I said that we had experienced
both the worst absolute and relative performance in our history. I added
that "relative results are what concern us," a viewpoint I've had since
forming my first investment partnership on May 5, 1956. Meeting with my
seven founding limited partners that evening, I gave them a short paper
titled "The Ground Rules" that included this sentence: "Whether we do a
good job or a poor job is to be measured against the general experience
in securities. "We initially used the Dow Jones Industrials as our
benchmark, but shifted to the S&P 500 when that index became widely used.
Some people disagree with our focus on relative figures, argui ng that
"you can't eat relative performance." But if you expect? As Charlie
Munger, Berkshire's Vice Chairman, and I do? That owning the S&P 500 will
produce reasonably satisfactory results over time, it follows that, for
long-term investors, gaining small advantages annually over that index
must prove rewarding. Just as you can eat well throughout the year if you
own a profitable, but highly seasonal, business such as See's (which
loses considerable money during the summer months) so, too, can you
regularly feast on investment returns that beat the averages, however
variable the absolute numbers may be.
1994. Thirty years ago, no one could have foreseen the huge expansion of
the Vietnam War, wage and price controls, two oil shocks, the resignation
of a president, the dissolution of the Soviet Union, a one-day drop in
the Dow of 508 points, or treasury bill yields fluctuating between 2.8%
and 17.4%.
But, surprise none of these blockbuster events made the slightest dent in
Ben Graham's investment principles. Nor did they render unsound the
negotiated purchases of fine businesses at sensible prices. Imagine the
cost to us, then, if we had let a fear of unknowns cause us to defer or
alter the deployment of capital. Indeed, we have usually made our best
purchases when apprehensions about some macro event were at a peak. Fear
is the foe of the faddist, but the friend of the fundamentalist.
A different set of major shocks is sure to occur in the next 30 years. We
will neither try to predict these or to profit from them. If we can
identify businesses similar to those we have purchased in the past,
external surprises will have little effect on our long-term results.
Stock prices will continue to fluctuate sometimes sharply and the economy
will have its ups and down. Over time, we believe it highly probable that
the sort of businesses we own will continue to increase in value at a
satisfactory rate.
The future is never clear, you pay a very high price in the stock market
for a cheery consensus. Uncertainty actually is the friend of the buyer
of long-term values."
To send comments or to learn more about Scott Pearson's Investment
Advisor Services, visit
Scott Pearson is an investment advisor, writer, editor, instructor, and
business leader. As President and Chief Investment Officer of Value View
Financial Corp., he offers investment management services to a wide
variety of clients. His own newsletter, Investor's Value View, is
distributed worldwide and provides general money tips and investmen t
advice to readers both internationally, and in the U.S.

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