Warren Buffett and Charlie Munger explain how to find successful investment ideas.
During the 2003 Berkshire Hathaway meeting, someone asked Buffett 1) how he finds a few excellent investing ideas that end up becoming really successful and 2) what are his investing steps.
If we want to be on a successful investing path, we should listen carefully to Buffett and Munger’s investing strategies here.
The audience member first asked, “how do you get a few excellent investment ideas to be so successful? Do you read any special newspapers or industry magazines? Or do you visit the headquarters or any subsidiaries of companies? And which sources of information, like books, for example, Value Line, Standard & Poor’s, Moody’s, databases like Reuters, Bloomberg, DataStream, annual reports, internet, and so on, do you use to get the right impression of a company?”
As if the first question wasn’t enough, he continued in his second question, “if you think that a company like The Washington Post, GEICO, or Gillette has a very competitive product, what are the steps before you ultimately decide to invest in the company? Which publications do you read to get the best knowledge of the product? And how important is the balance sheet and profit and loss account statement of the company?”
Ever the learning machine Buffett answered, “all of the above,” and “I mean we read a lot. And we read daily publications, we read weekly or monthly periodicals, we read annual reports, we read 10-Ks, we read 10-Qs.”
Basically you have to build “a knowledge base that’s useful forever,” and it’s important to “try to understand the business and not have any preconceived notions.”
Buffett would rather analyze than talk to the CEOs of companies, saying “the figures tell us more than a management does. So we do not spend any real amount of time talking to management.”
At the end of the video, I also suggested that one way you can judge CEO performance is by following Laura Rittenhouse’s guidelines as specified in her “Investing Between The Lines” book.
Charlie chimed in with how getting to know companies is like mastering chess, where you know everything that can happen on the chess board cold.
While Charlie wouldn’t want to give up the Wall Street Journal, Buffett said to also check out Fortune and the New York Times business section.
This is key, “You don’t have to be right on 20 percent of the companies in the world or 10 percent of the companies in the world or 5 percent. You only have to get one good idea every year or two.”
Buffett doesn’t even bother with predicting which S&P 500 company will do well, but his approach is successful because he said “maybe I can find one in there where I think I’m 9 in 10, 90 percent, in being right.”
This is the secret sauce to investing like Buffett: “It’s an enormous advantage in stocks, is that you only have to be right on a very, very few things in your lifetime as long as you never make any big mistakes.”
Charlie adds another key point, “very few people have this idea of searching for just a few opportunities.”
In using a baseball analogy, Buffett said “you wait for the fat pitch,” and that he’s “always said that the way to get a reputation for being a good businessman is to buy a good business. You know?”
Buffett and Munger answered a seemingly convoluted question with such simplicity in how to invest successfully. It’s that straightforward!
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
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