Warren Buffett's final term at the helm of Berkshire Hathaway is entering its countdown phase.
Looking back on his investment insights, beyond the brilliant shareholder letters and public speeches, there is an underrated lesson.
In March 1990, Buffett gave a guest lecture at Stanford Law School for a course titled 'Business Basics Every Lawyer Should Know,' conceived by Charlie Munger. Munger also funded a chair at Stanford and helped select his Harvard Law School classmate William Glikbarg to teach the course.
Buffett began by telling the students: business and investing are not two separate things but two sides of the same coin. The better you understand how companies make money, the more you know what is worth investing in; the deeper your understanding of investment principles, the clearer you see the essence of a business.
The underlying logic of his decades of experience can be distilled into one simple sentence: draw your circle of competence, and stay within it.
This lecture covered a wide range of topics.
For example, the concept of the circle of competence.
Buffett spoke about Mrs. B, who worked for him until she was 95, building a furniture store with an annual profit of $17 million starting from $500. Illiterate and unfamiliar with accounting, she succeeded by adhering to one principle: only do what you understand. Her grasp of the boundaries of her circle of competence was sharper than that of most MBAs.
For another example, why large companies often make poor acquisitions.
Buffett believed that many CEOs rise to their positions because they excel in areas like sales or operations, but they have never truly learned capital allocation. Once they step outside their area of expertise, they rely on staff departments or investment banks, which naturally diminishes their judgment, leading to subpar acquisition decisions.
For instance, why are good investment opportunities so rare?
Buffett said that if you only had 20 investment opportunities in your lifetime, you would actually perform better. Because what truly matters is not the number of decisions made, but making a few correct ones. This discipline of 'doing less' is perpetually at odds with Wall Street's culture of 'doing more,' yet it precisely explains Berkshire Hathaway’s consistently stable performance over the decades.
More than thirty years later, rereading the content of that day's lecture evokes a unique feeling: these principles have never been eroded by time; instead, they appear even more lucid compared to today’s markets.
Fortunately, thanks to the records from the Outstanding Investor Digest of that year (though incomplete, it preserved the essence of the key content), we can revisit this almost forgotten teaching today. Unparalleled admiration!
Below is the meticulously translated and organized content by Smart Investors, shared with everyone.
01. Business and investment are two sides of the same coin
Today, let’s talk about business and investment. Many people think these two fields are unrelated. But in fact, they share many similarities and influence each other.
The better you understand investing, the better you’ll know how to run a business; the more you understand how a business operates, the better you can invest.
I’ve been very fortunate to stand in both fields simultaneously all these years.
02. Investing isn’t quantum physics—the simpler, the better.
Investing seems easy. In fact, it really is. Many people like to complicate it unnecessarily, but there's no need for that.
You don’t need advanced mathematics, not even intermediate math, nor do you require deep technical insights.
Ultimately, what you need to understand are questions like this: Why do people love drinking Coca-Cola? Will they continue to in the future? What has happened to this company over the past hundred years? And what might happen in the next hundred months? It’s as simple as that.
You don't need to attend business school to become an excellent investor.
If you are in an easy industry, you will appear to be a genius; but if you are in a difficult industry, you will seem incompetent.
It took me twenty-three or twenty-four years to truly understand this principle, and then I exited the textile industry.
Want to make big money? Focus on “fishing in a barrel.”
Among American managers, probably 99% believe: If I am good at one thing, then I must be good at everything else too.
They are like ducks in a pond during the rain—the water level rises, and they float up with it. As a result, they mistakenly think it is their own abilities that are rising. But when they move to a place where it isn’t raining, they can only sit there helplessly, unable to accomplish anything.
Then, they usually fire their deputies or hire a consulting firm. Few realize that the root of the problem is: they have stepped outside their circle of competence.
Our company once had a lady, Mrs. Blumkin, who was still managing operations for us at the age of 95. This year she left us, and at 96 years old, she started her own business again, competing directly with us without hesitation. She drives a golf cart around the store every day, working tirelessly from morning to night, seven days a week, demonstrating remarkable strength.
She excels in one particular area. An immigrant from Russia, she arrived in Seattle, USA, wearing a name tag around her neck and not speaking a word of English. After living in the United States for 77 years, her English is still halting. When she used to advertise products, you might have needed subtitles to understand her speech, but she possessed an indomitable spirit.
She founded Nebraska Furniture Mart 52 years ago with $500, and today it generates $17 million in pre-tax profits annually. Although illiterate, she can understand numbers. She knows nothing about 'accrual accounting' and has virtually no knowledge of accounting principles.
But as soon as you tell her the dimensions of a room, even if it’s irregularly shaped, she can immediately estimate how many square yards of carpet are needed. Then she multiplies that by the unit price of $7.98, adds the sales tax, gives you a discount, and calculates everything accurately without error.
Of course, she is very intelligent, but what is even more remarkable is that she clearly understands her circle of competence.
If you try to sell her 2,300 side tables, within a minute she will know how much she can pay, how quickly she can deliver them, and what the profit margin will be—and then she will make the purchase.
She also knows exactly when to strike during your most vulnerable moments—such as when there's a snowstorm in Omaha and you’re in a rush to catch a flight without missing it… she will drive a very hard bargain.
She knows what she is capable of and what price she must pay, and she never makes a mistake—whether in real estate or credit investigations, she is always correct.
However, the moment something falls outside her circle of competence, such as stock trading, she wouldn’t invest even ten cents. She knows what she doesn’t understand and is fully aware of where that boundary lies.
She can assess a building worth $5 million with just her eyes, make the decision to buy it, and pay in cash. But she will never touch any business she does not fully comprehend.
This is what truly smart people are like. This is also why she can crush all her competitors. Starting from scratch, she has now squeezed most of her competitors out of the Omaha market.
Back in the day, they sued her in court four times for alleged 'unfair trade practices,' and every time, she defended herself.
She walked into the courtroom and said to the judge, 'Everyone sells this carpet for $7 a yard. My cost is only $3. I can make a profit selling it for $4. Just tell me how much more you want me to charge customers. If you want me to make an extra 98 cents, I'll sell it for $4.98. If you want me to make an extra $1.98, I'll sell it for $5.98.'
As a result, that judge immediately purchased $1,400 worth of carpets.
04, A real-life version of the 'Peter Principle' with several zeros added at the end.
Very few people can clearly define their own circle of competence. Look at the CEOs of major U.S. companies—most don't know where their limits lie, which is why they keep making foolish acquisitions.
They climbed to the top of their companies because they were excellent salespeople, outstanding operators, or excelled in some other area.
But one day, they suddenly find themselves running multi-billion-dollar enterprises, and their job becomes about capital allocation and acquiring companies. Yet, they have never bought a company in their entire lives and have no idea how to go about it.
So, they usually do one of two things: either they set up an internal department and hire a bunch of people who tell them what to do all day long.
Of course, these people also know that if they run out of work to do, they’ll lose their jobs, so you can imagine how busy they keep themselves. Alternatively, they turn to investment banks, which operate on a 'per-deal' fee structure.
There are many things I don't know how to do, so what?
We never touch businesses we don’t understand. We might make wrong judgments, but we would never buy a company simply because a consulting firm, such as Arthur D. Little, Booz Allen Hamilton, or McKinsey, tells us how great it is.
If we ourselves don’t understand it well enough, we won’t get involved at all. It’s as simple as that.
We never rely on others’ opinions; we always make decisions based solely on Charlie’s and my own judgment. This approach may be somewhat risky, as our ways of thinking are incredibly similar.
But we are perfectly happy to let go of 90% of the things in the world that we can’t evaluate. So what? I can’t play professional football either. There are plenty of things in this world that I don’t know how to do.
After all these years, our circle of competence hasn’t expanded much. So we are willing to wait. Waiting one year is fine, and waiting five years is no problem either.
Ultimately, Charlie and I can only understand a small number of businesses. The New York Stock Exchange has about 1,700 to 1,800 companies, and we don’t understand most of them.
Even if I spent a whole year studying IBM or General Motors, I might grasp some superficial information, but it still wouldn’t be enough for me to make a truly wise investment decision.
06. Draw your circle of competence and stay within it.
If we don’t understand a business ourselves, we won’t invest in it. I don’t even know what a personal computer is, nor can I tell which brand is the best. Even if you told me who’s the best right now, I couldn’t judge who will win three years from now.
But I know which chocolate bar will be the best-selling in the U.S. three years from now, and so do you. You might also know which computer will dominate for three years, but no matter how much you try to convince me, my certainty about computers will never be as high as it is for chocolate bars.
The key is to delineate your circle of competence, and if in doubt, add a 'margin of safety' to it, staying firmly within that boundary.
Take a look at the automobile industry. If you gathered all the CEOs of the world’s top five automakers in 1970, 1975, 1980, and 1985, gave them 'truth serum' (barbiturates), and asked them: Which company will be number one in the next five years? — or even in the next two to three years — none of them would have an answer. No one knows.
Some things are simply impossible to fully understand, so it’s futile to rely on such assessments to make money. We’d rather wait for a sure opportunity. Although there’s no such thing as absolute certainty, occasionally the market presents opportunities that are clear at first glance.
Our problem now is that we’ve grown too large in scale. With only $10 million or $100 million in capital, we’d encounter far more good opportunities. But given our current size, all we can do is patiently wait.
When I lecture at business schools, I always say this: If every student were handed a '20-slot punch card' upon graduation, with each investment decision punching out one slot, limiting them to just 20 decisions in their lifetime, they would surely make a great deal of money because every decision would be made with utmost care.
But today, the stock market operates daily, allowing you to buy AT&T, General Motors, U.S. Steel anytime, go long, short, or mix and match however you like. Because there are so many opportunities, people feel compelled to act, thinking, 'Since I can do something, I should do something.'
We don’t operate that way. We wait only for those opportunities that are glaringly obvious.
The problem is that Wall Street’s mechanisms are entirely the opposite, constantly shouting: 'Do something! Do something!' because active trading is where its bread and butter lies.
Many people, simply seeing the constantly fluctuating numbers on their screens, feel the need to take action.
I think that if the stock market were to close for a few days from time to time, people might actually be better off.
We prefer to leave the task of expanding territories to others.
We have a distinct advantage over many managers: we are willing to buy just a portion of a company. The typical professional manager wants to acquire an entire company or a business they can manage themselves. Therefore, they can only purchase what others are selling or initiate hostile takeovers.
We currently hold 7% of Coca-Cola Company’s shares. This means that in terms of the global soft drink market, Berkshire effectively holds a 3% market share. While no one may think about it this way, the fact remains that we are now the third-largest 'soft drink company' globally. Coca-Cola has a market share of 45%, and we own 7% of that.
The vast majority of managers would not buy Coca-Cola, even though it may be the best business in the world, because it offers no personal 'benefit' to them. They wouldn’t gain additional subordinates, their office wouldn’t get bigger, and on the surface, there would seem to be no sense of accomplishment—nothing to boost their sense of masculinity. So, they won’t buy this business, even if deep down they know it is the best.
As a result, they start looking at businesses currently for sale or those they can initiate hostile takeovers for. And what is a hostile takeover? Essentially, it is an auction where buyers from around the world compete against you. In such cases, they end up having to pay the highest price to acquire the company.
This way, they neither buy cheaply nor secure the best businesses. On the other hand, we can directly purchase the most outstanding companies in the world, albeit without acquiring full ownership. To me, this makes no difference.
I’d rather let others do the work. Think about it: what man would feel comfortable letting a 95-year-old woman work seven days a week for him?
I am more than happy to let Roberto Goizueta and Don Keough promote Coca-Cola worldwide on our behalf. Every day, they sell 600 million eight-ounce servings of soft drinks. With our 7% stake, that equates to 42 million bottles sold on our behalf daily.
If these beverages are distributed globally, it means that while I’m sleeping, 14 million people are consuming our products.
Moreover, such products have virtually no substitutes. In the United States, Pepsi and Coca-Cola are sometimes interchangeable, and they may even engage in price wars. However, in other parts of the world, Coca-Cola has no rivals. It ranks first in sales in 155 countries, and its market share continues to grow annually. Consumers are not looking for the cheapest beverage; that is not how reality works.
We can hold a portion of this company. We cannot buy it entirely, but I would rather purchase a stake in an excellent business at a reasonable price than pay a high price for a 'complete' yet mediocre company in a fiercely competitive auction. This is a significant advantage.
08. Berkshire Hathaway’s Preferred Investment Approach
In the United States, very few people are genuinely willing to invest their own money in businesses. Most people invest using other people's money.
However, at Berkshire Hathaway, both Charlie and I invest a substantial portion of our personal wealth. Across the United States, it is difficult to find another company whose managers are willing to invest such a proportion of their own funds in acquiring shares of other companies and holding them long-term without seeking control.
They essentially gain an additional shareholder who has 'put a significant amount of their own money on the line,' someone who truly cares about the company’s long-term success and is not bound by past decisions or constrained by conventional thinking.
This, in itself, can be highly valuable. To put it bluntly, if used correctly, they can benefit from the value of the dialogue between me and Charlie.
Charlie does not manage day-to-day affairs, but he remains the best 'evaluator' I could ever find. He puts his own money into Berkshire Hathaway (though it does not affect his judgment), and he will frankly tell me his honest opinion about an idea. He dislikes most ideas.
We can indeed add value to companies, particularly to some of them.
09. Our Preferred Transaction Method Is Most Beneficial to Ordinary Shareholders
The pre-tax return on these preferred shares we hold is about 9%, and after tax, it's slightly less than 8%. However, if Berkshire can only achieve an 8% post-tax return on capital, it would mean we are not doing well. Therefore, there must be a possibility that the company’s common stock will increase in value in the future.
We do have an advantage in terms of yield, and there is also a mandatory redemption clause of approximately ten years, which means that at that time, we will at least be able to exit at cost.
But apart from that, we actually have no control rights. These agreements include 'ownership cap' clauses that prevent us from acquiring a controlling stake. We neither control these companies nor wish to do so.
If the common stock does not rise, we will at least earn some extra returns; if the common stock rises, we won’t earn as much as common shareholders because convertible preferred shares can never outperform common stock. If we make money on common stock, common shareholders will earn more.
However, if I personally own 1% of a company’s shares and Charlie doesn’t invest alongside me, I would very much hope he holds our kind of preferred stock position. Because that means he would put in a lot of his own money and still have considerable voting power.
If I am a common shareholder and Charlie holds preferred stock, I would earn more when the price goes up; but when it falls, he has stronger protection—much stronger.
10. Times have indeed changed.
I’d like to share a small episode about Capital Cities’ initial public offering (IPO) in 1957. Although I haven’t fully confirmed it, to my recollection, this might have been Capital Cities’ only public offering.
They did raise some funds initially from Lowell Thomas and a few other individuals, and later took some from us during the ABC merger, but that IPO was their first real public financing.
What’s most interesting is that this $299,000 public offering was facilitated by two underwriters: one called Harold C. Shore, which sounds like a neighborhood name, and the other First Securities from Durham, North Carolina. More incredibly, the two firms collectively received only $6,500 in underwriting fees.
So, every day people criticize Wall Street's greedy investment banks, but at least when MetLife went public in 1957, the investment banks weren't that ruthless.
Looking back at the comparative data when MetLife went public in 1957: at that time, CBS's annual revenue was close to $400 million, while MetLife had not even reached $1 million. CBS had $46 million in its bank account, while MetLife only had $100,000.
CBS has a national television network and a number of television stations, and the first television station in the metropolis was in Albany, originally a place for nuns to retire. That prayer room was converted into a studio.
This place is in terrible shape. The board once forced CEO Tom Murphy to paint. He complied and actually painted before the next meeting, but only the side facing the road (laughs).
They only have one news vehicle, yet it has a sign that says "Vehicle No. 6," making it feel like they are acting.
11. About Television, CBS, and Tom Murphy
Television is destined to be a good business. For a long time, there were only three "electronic highways," which are the three major television networks. Anyone who wanted to convey information to the entire American public basically had to go through these three channels.
That was the golden age of the television industry. It's not as great now, but back then it was really fantastic.
Ultimately, television is just a distribution channel. The value of a distribution channel depends on how many pipes it has. If there is only one pipe, you can make a lot of money; if there are ten or twenty, it becomes very difficult to make a profit. The same logic applies to newspapers.
You see, CBS and Metropolis were both on the same good track back then, one having all the resources, and the other having almost nothing. One was like setting sail on the "Queen Elizabeth II" from London; the other was like rowing a leaky little boat. But a few years later, both arrived in New York. And the one in the little boat arrived first and carried more cargo.
It is hard to find a better manager than Tom Murphy anywhere in the world. He is the best of the best. He has achieved remarkable success in an excellent industry.
12. What are the limits of price competition?
When we bought See's Candy in 1972, it was priced at $2 per pound. Today, it sells for $8 per pound.
Can you imagine coming home on Valentine’s Day and saying to your wife: 'Dear, here’s the chocolate I bought for you. I found the lowest price, only $2.85 per pound, bought in a back alley. You’d better wipe it before eating.' Do you still want to save your marriage?
In the context of gift-giving, there are hardly any price competitors that can penetrate this market.
Would you walk into a pharmacy and buy a plainly packaged item labeled simply as 'chocolate bar' just because it’s a few cents cheaper? No. What you want to buy is a brand like Hershey. If they don’t sell Hershey, I would rather cross the street.
Distribution is not an issue. I could launch 'Buffett Chocolate Bars,' but no one would buy them.
Hershey’s market barriers are unbreakable. Look at the most popular candies today and compare them with those from 20 years ago—they are almost identical.
Of course, everyone is trying to challenge each other. Mars has been working on ways to defeat Hershey, and Hershey is studying how to counter Mars. Cadbury has even crossed the ocean to enter the U.S., attempting to shake up this market. It’s not that no one has tried; it’s just that no one has succeeded in changing this landscape.
13. The best businesses require little capital investment.
About a year and a half ago, the three brands—Daily Racing Form, TV Guide, and Seventeen magazine—were sold for $3 billion. They had almost no tangible assets.
But each of them possessed a castle and a moat: the Racing Form was a small castle with a wide moat, while TV Guide was a large castle with an even wider moat.
The value of a business depends on the size of its castle as well as the width and depth of its moat. It has nothing to do with technology or the Super Bowl.
Interestingly, this concept is somewhat counterintuitive: if two companies can earn the same profits under otherwise equal conditions, the one with fewer assets is actually more valuable. You won't learn this in an accounting class.
The truly desirable business is one that requires no capital infusion—it has already been proven that no matter how much money you pour in, it’s impossible to gain a foothold in that industry. That’s what makes a business great.
In an exceptionally outstanding business, you almost never need to invest any capital…
14. Risk Arbitrage: The Core Lies in Assessing Probability and Outcomes
I have been engaged in risk arbitrage for 40 years, and my teacher Benjamin Graham did it for 30 years. As long as there are two markets in the world, arbitrage will exist.
For example, in the past, both Omaha and Chicago had wheat markets, and arbitrage would occur when prices diverged. This is pure arbitrage, which still exists today in currencies and commodities.
Risk arbitrage, on the other hand, involves arbitrage based on publicly announced corporate events. Before coming here today, I received several calls from our company regarding ongoing arbitrage trades we’re handling, all related to publicly announced events. My job is to assess the probability of these events occurring and the potential profit-to-loss ratio.
For example, if a trade has a 90% probability of success with an expected gain of 3 points and a 10% probability of failure with a potential loss of 9 points, the expected return on this trade is 90% × 3 = $2.70, while 10% × 9 = $0.90. Thus, the net expected return is $1.80. Then we consider the holding period.
The mathematics is not complex; the key lies in how you assess probabilities and your ability to estimate the upside and downside potential.
This represents an investment activity, but not the traditional kind that involves 'researching the value of assets over the next decade.' Instead, it is based on short-term event announcements to evaluate the current price.
We only participate when we are confident. Throughout the year, only about a dozen opportunities meet our criteria. In my early years, when I had less capital, I might have reviewed up to a hundred such cases annually.
(Note: Berkshire Hathaway later filed a 13-D form disclosing its stake in Rorer Group (a pharmaceutical company that was facing an acquisition through a stock swap, which had already been announced), considered a typical arbitrage transaction.)
Borsheim's Jewelry is like the University of Nebraska football team.
My wife, Susan, can explain why Borsheim's is our best investment.
It hardly requires any effort from me. The time I spend on it is purely because I enjoy it, not because it actually needs me—just as the University of Nebraska football team doesn’t need me on Saturdays either—absolutely not.
It does not distract me from other priorities, nor does it take away from the time or resources I allocate to Coca-Cola.
Size and attention are enemies of investment.
When we invested in Coca-Cola back then, the biggest constraint was how much we could buy while the stock price was still attractive to us.
We generally try to time our purchases better, building as large a position as possible before public disclosure becomes necessary.
We’ve bought up to near our target position. If I could have continued buying at the earlier prices, I would have bought more, but not to an exaggerated extent.
We started buying in June and finished by the following March, spending a full 8 to 9 months to acquire a 7% stake. During the same period, Coca-Cola itself was also repurchasing shares.
So during that time, combined with the company’s repurchases, it amounted to purchasing 12% of the company. It’s astonishing to think about.
The larger size, along with market attention, has indeed made things more difficult. But fortunately, it hasn’t affected my personal life.
However, there is no doubt that 'free-riding' behavior has increased. But compared to market attention, scale remains the bigger issue.
You can never be smarter than your dumbest competitor.
Berkshire Hathaway's annualized expenditures on corporate jets doubled—not because the planes appreciated in value, but because my tastes changed. The one we bought for $850,000 was later sold for $1 million—that was the market price. This current one simply reflects my greater willingness to indulge myself.
The aviation industry is an absolutely terrible sector. If you had asked 25 years ago whether air transportation would grow faster or a few small-town newspapers in Council Bluffs, Iowa, would grow faster, you’d definitely have said aviation.
Indeed, the aviation industry has grown much faster in terms of unit sales, which have increased many times over. However, from a profitability perspective, it is almost the worst business imaginable.
TWA, one of the oldest airlines in the United States, hasn’t made a profit in the past 40 years. Neither has Pan Am or Eastern Airlines. This isn’t because they distributed profits; rather, they simply didn’t make any, despite increasing passenger volumes year after year.
The airline industry is an extremely challenging sector—capital-intensive, labor-intensive, and with highly homogenized products. It’s hard to imagine a worse description of an industry. All you do is burn money continuously without any respite.
Moreover, competition inevitably turns into price wars. If one player starts offering frequent flyer points, ten others will follow suit the next day; if someone offers double points, another ten will match it. In this kind of industry, you are forced to respond to your competitors’ moves—no matter how irrational they may be.
It’s like the four gas stations on a street corner: if one lowers its prices, the other three have to follow within five minutes. In commoditized industries, you can never outsmart your most foolish competitor.
I learned this lesson early on in business school—one of the few things they actually got right.
18. We certainly don’t like aimless折腾 (disturbances).
When I really want to buy something, my natural reaction is to bet everything I own on it. That’s always been our mindset. Only by doing so can you make truly big money. There aren’t many ideas that can pass through such a stringent filter.
If you compare our 'big ideas' versus 'small ideas' over the past forty years in terms of portfolio allocation and ultimate outcomes, the difference is staggering—big ideas are far more profitable.
That’s why I often say: your life investment card should only allow for 20 punches.
I am often asked, "Should I take a small gamble on this opportunity? Should I give that one a try?" I never answer. The response is always: Don't do it.
Only do things you are willing to invest a significant amount of money into. If you aren't willing to put in a large sum, then it's not a good idea—just don't do it; it's as simple as that!
Apart from certain specific arbitrage situations, I never buy anything I wouldn’t be willing to bet 10% of my net worth on. If I’m not willing to make that commitment, then it’s not worth my time.
19. Why am I unwilling to pay 80 cents for $1? Here’s why.
You might ask: If you’re willing to pay 50 cents for $1, why not buy at 80 cents?
Because you know there’s a high probability you’ll still be able to buy at 50 cents in the future, whether it's the same $1 or some other asset.
You should set yourself a very wide margin of safety—especially when you are preparing to deploy new capital. What you buy must be sufficiently cheap; but deciding when to sell doesn’t follow the same logic. There are other considerations, but this is the core economic principle.
You can’t assume that just because something is worth $1 and you can buy it for 50 cents, you need to rush to sell when it reaches 51 cents and then go find another bargain priced at 50 cents. Investing isn’t such a precise game—unless you’re simply comparing government bonds with different maturities and interest rates.
Assets will fluctuate within a broad range, and as long as you know what you’re buying is below its intrinsic value, and if you believe that value will continue to appreciate, you’ll still feel comfortable. It’s just that the price may no longer be low enough for you to want to use 'new money' to buy more.
20. Are cheaper assets more dangerous? Nonsense.
Neither Charlie nor I find any merit in the Modern Portfolio Theory (MPT). We think its logic is largely nonsensical. We have never considered ourselves to be taking risks, yet MPT equates 'stock price volatility' with risk.
In 1974, when we purchased The Washington Post Company, our valuation was $80 million. However, on that very same night, if you had sought buyers, it could have been sold for $400 million, and there would indeed have been five buyers willing to pay cash immediately.
At that time, if you had asked 100 analysts about the company's value, not a single one would have denied it was worth $400 million.
But their reason for selling was simple: the stock wouldn’t rise next week or the following month, so they might as well sell it off.
Within a month or two, we acquired nearly 10% of the company at an $80 million valuation.
According to the logic of Modern Portfolio Theory and beta, buying stock for $40 million would be considered 'riskier' than purchasing it for $80 million, even though the company was clearly worth $400 million. At this point, I simply gave up.
Of course, there are situations where risk and return are correlated. But if what you buy is cheap enough, then even if it continues to decline, it actually becomes safer.
Buying The Washington Post for $80 million is safer than paying $120 million; buying it for $40 million is even safer.
Of course, this assumes one crucial thing — you truly know what you’re doing.
The default assumption of Modern Portfolio Theory, however, is that you don’t know what you’re doing. That’s why it tells you how to diversify investments and calculate beta.
I have always been curious about how they can fill an entire course. Because they assume markets are efficient and everything is priced correctly. So what else is there to teach? I really can't figure it out.
21. The worst competition comes from overseas.
Generally speaking, I don’t like entering industries with 'global competition,' for the same reasons I mentioned earlier — I don’t even want to deal with domestic competition, let alone on a global scale.
And global competition is only tougher. Why do some manufacturing businesses relocate to Taiwan or other countries? Often, there are long-term structural advantages at play. For example, they might have fewer lawyers over there. Here, as soon as litigation arises, costs skyrocket, making even small parts more expensive.
In the long run, all these cost differences could work against us.
22. I have a painful reminder: Overseas risks are very real.
I personally prefer companies registered in the U.S. Susan and I each still hold one share of stock that I bought in 1955. At the time, it seemed incredibly safe and was a great stock.
But there was one issue: The company’s assets were in Havana and were confiscated by Castro. We couldn’t reclaim ownership. Those properties are still there now, and we’ve filed substantial claims with the government, but they will never be worth anything again.
I keep that stock certificate as a reminder to myself: In other countries, the rules can change overnight.
23. We never engage in hostile takeovers.
We only buy into companies that welcome us. I often tell management in advance: I will only buy up to the point where you feel comfortable.
For instance, when we bought shares of The Washington Post, Kay Graham felt uneasy when our stake approached 9%, so I said, 'Alright, we won’t buy another share.' It was as simple as that.
I want management to feel at ease. Otherwise, they may make many foolish decisions out of anxiety, such as issuing additional shares at too low a price. I want them to make smart choices.
Typically, we buy close to that 'comfort level,' and I always communicate this clearly with them beforehand.
24. Berkshire Hathaway’s Negotiation Style
Our negotiation approach is entirely different from others.
When we acquired See’s Candies, I only spent an hour there. Almost all the businesses we’ve purchased were finalized over a single phone call.
When buying Borsheim's Jewelry, I visited Ike Friedman’s home for half an hour. He showed me unaudited figures scribbled in pencil on pieces of paper, and that was it.
If a deal requires bringing in a horde of lawyers and accountants, it’s definitely not a good one. We never haggle repeatedly over terms; that’s simply not our style.
If people want to drag out negotiations into something long and complicated right from the start, I prefer not to deal with such individuals. It would only complicate my life, so we just walk away.
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