Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor QUOTES

3 " Operationally, a business can be improved in only three ways: (1) increase the level of sales; (2) reduce costs as a percent of sales; (3) reduce assets as a percentage of sales. The other factors, (4) increase leverage or (5) lower the tax rate, are the financial drivers of business value. These are the only ways a business can make itself more valuable. Buffett "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

4 " The results of these [investment] companies in some ways resemble the activity of a duck sitting on a pond. When the water (the market) rises, the duck rises; when it falls, back goes the duck. … I think the duck can only take the credit (or blame) for his own activities. The rise and fall of the lake is hardly something for him to quack about. The water level has been of great importance to BPL’s performance … however, we have also occasionally flapped our wings.”5 While "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

5 " You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. In many quarters the simultaneous occurrence of the two above factors is enough to make a course of action meet the test of conservatism. You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason. I "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

6 " We will not go into businesses where technology which is way over my head is crucial to the investment decision. I know about as much about semi-conductors or integrated circuits as I do of the mating habits of the chrzaszcz. (That’s a Polish May bug, students—if you have trouble pronouncing it, rhyme it with thrzaszcz.) Furthermore, "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

7 " Some of you may view your investment policies on a shorter term basis. For your convenience, we include our usual table indicating the gains from compounding $100,000 at various rates: This table indicates the financial advantages of: 1. A long life (in the erudite vocabulary of the financial sophisticate this is referred to as the Methuselah Technique) 2. A high compound rate 3. A combination of both (especially recommended by this author) To be observed are the enormous benefits produced by relatively small gains in the annual earnings rate. This explains our attitude which while hopeful of achieving a striking margin of superiority over average investment results, nevertheless, regards every percentage point of investment return above average as having real meaning. "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

8 " Take for example a $100,000 account earning 10% a year. The total return will be about 7% higher when the gains are reinvested rather than harvested after a 5-year period. Not that impressive. However, after 10 years, the account that reinvests its gains (let’s call this account the Compounder) will produce 30% more than one that doesn’t reinvest. Then the “pulse quickening”3 results start to get going by year 15. Now the Compounder is doing roughly 70% better. Compounding is exponential, it builds momentum as it goes; after 20 years, the advantage widens to 125%. There is nothing more powerful. Spending away your gains will diminish your total return significantly; as investors, we allow our gains to pile up upon themselves as the primary driver of our wealth creation. We do it patiently "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

9 " The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.10 "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

10 " we tend to concentrate on what should happen, not when it should happen. In "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

11 " I resurrect this “market-guessing” section only because after the Dow declined from 995 at the peak in February to about 865 in May, I received a few calls from partners suggesting that they thought stocks were going a lot lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 in May, why didn’t they let me in on it then; and, (2) if they didn’t know what was going to happen during the ensuing three months back in February, how do they know in May? There is also a voice or two after any hundred point or so decline suggesting we sell and wait until the future is clearer. Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you—or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn’t look so clear in retrospect. If "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

12 " If a 20% or 30% drop in the market value of your equity holdings (such as BPL) is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet—Harry Truman—“If you can’t stand the heat, stay out of the kitchen.” It is preferable, of course, to consider the problem before you enter the “kitchen. "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

13 " Graham paid up for quality when he bought the insurance company GEICO—he ended up making more profits from that single investment than he did from all his other activities combined.16 Tom "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

14 " Our job is to pile up yearly advantages over the performance of the Dow without worrying too much about whether the absolute results in a given year are a plus or a minus. I would consider a year in which we were down 15% and the Dow declined 25% to be much superior to a year when both the partnership and the Dow advanced 20%. I have stressed this point in talking with partners and have watched them nod their heads with varying degrees of enthusiasm. It is most important to me that you fully understand my reasoning in this regard and agree with me not only in your cerebral regions, but also down in the pit of your stomach. For "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

15 " You can gain great insights about investing from a careful study of Buffett’s Generals. He was constantly appraising the value of as many stocks as he could find, looking for the ones where he felt he had a reasonable ability to understand the business and come up with an estimate for its worth. With a prodigious memory and many years of intense study, he built up an expansive memory bank full of these appraisals and opinions on a huge number of companies. Then, when Mr. Market offered one at a sufficiently attractive discount to its appraised value, he bought it; he often concentrated heavily in a handful of the most attractive ones. Good valuation work and proper temperament have always been the two keys pillars of his success as an investor. Buffett "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

16 " Looking back, and continuing to think this problem through, I feel that if anything, I should have concentrated slightly more than I have in the past.” Stan "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

17 " Stan Druckenmiller, reflecting on his unbelievable success as an investor, said that the only way to make superior returns is to concentrate heavily. He thinks “diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. And if you look at great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it… . [T]he mistake I’d say 98 percent of the money managers and individuals make is they feel like they got to be playing in a bunch of stuff.”4 "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

18 " As Charlie Munger has said, “I think I’ve been in the top 5% of my age cohort almost my entire adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.” An example from FedEx is one of his favorite cases in point. As he explains, the integrity of the FedEx system relies heavily on the ability to unload and then quickly reload packages at one central location within an allotted time. Years ago, the company was having a terrible problem getting its workers to get all the boxes off and then back on the planes in time. They tried numerous different things that didn’t work, until someone had the brilliant idea of paying the workers by the shift as opposed to by the hour. Poof, the problem was solved.2 FedEx’s old pay-by-the-hour system rewarded those who took longer to get the job done. They were incentivized to take longer. By switching to pay-by-the-shift, workers were motivated to work faster and without error so they could go home, yet still earn the wages of a full shift. For the workers, finishing early amounted to a higher effective hourly wage. By aligning the business’s interests with the worker’s incentives, FedEx got the outcome it and its workers both desired. The "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

19 " about a new phenomenon that had emerged largely in this decade, the price/earnings (PE) ratio, which was calculated by dividing the price of a company’s shares by its earnings. The "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor

20 " The final, and most important, consideration concerns personal motivation. When I started the partnership I set the motor that regulated the treadmill at “ten points better than the DOW.” I was younger, poorer and probably more competitive. Even without the three previously discussed external factors making for poorer performance, I would still feel that changed personal conditions make it advisable to reduce the speed of the treadmill. I have observed many cases of habit patterns in all activities of life, particularly business, continuing (and becoming accentuated as years pass) long after they ceased making sense. Bertrand Russell has related the story of two Lithuanian girls who lived at his manor subsequent to World War I. Regularly each evening after the house was dark, they would sneak out and steal vegetables from the neighbors for hoarding in their rooms; this despite the fact that food was bountiful at the Russell table. Lord Russell explained to the girls that while such behavior may have made a great deal of sense in Lithuania during the war, it was somewhat out of place in the English countryside. He received assenting nods and continued stealing. He finally contented himself with the observation that their behavior, strange as it might seem to the neighbors, was really not so different from that of the elder Rockefeller. Elementary "

― , Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor