Warren Buffett: The Market Behaves Like A Crazy Drunk

In the market, you're going to have a partner named Mr. Market. And the beauty of him as your partner is that he's kind of a psychotic drunk. And he will do very weird things over time. And your job is to remember that he's there to serve you and not to advise you. And if you can keep that mental state that all those thousands of prices that Mr. Market is offering you every day on every major business in the world practically, that he is making lots of mistakes and he makes them for all kinds of weird reasons, and all you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day any given security. So it's built into the system that stocks get mispriced and Berkshire has been no exception to that. I think Berkshire generally speaking has come closer to selling around its intrinsic value over a 47-year period or so than most large companies. If you look at the range from our high to low in a given year and compare that to the range high and low on 100 other stocks, I think you'll find that our stock fluctuates somewhat less than most, which is a good sign. But I will tell you in the next 20 years Berkshire will someday be significantly overvalued and at some point significantly undervalued. And that will be true for Coca-Cola and Wells Fargo and IBM and all of the other securities that I just don't know in which order and at which times. But the important thing is that you make your decisions based on what you think the business is worth. And if you make your buy and sell decisions based on what you think a business is worth, and you stick with businesses that you think you've got good reason to think you can value, you simply have to do well in stocks. The stock market is the most obliging money-making place in the world because you don't have to do anything. You know, you sit there with thousands of businesses being priced at the same price for the buyer and the seller and it changes every day and you've got lots of information about most of those businesses and you don't have to do anything. You know, compare that to any other investment alternative you've got. I mean, you can't do that with farms. If you own a farm and the guy has the farm next to you and you kind of like to buy him out or something, he's not going to name a price every day at which he'll buy your farm or sell you his farm, but you can do that with, you know, you can do it with Berkshire Hathaway or IBM. It's a marvelous game. The rules are stacked in your favor if you don't turn those rules upside down and start behaving like the drunken psychotic instead of the guy that's there to take advantage of him. Charlie.

No, but it was a considerable sin.

No, no. I think business school education's improving.

Yes, I'd agree with that. In investing, I would say that probably the silliest stuff that we've seen taught at major business schools, probably has, maybe it's because it's the area that we operate in, but has been in the investment area. I mean, it is astounding to me how the schools have focused on sort of one fad after another in finance theory and it's usually been very mathematically based. When it's become very popular, it's almost impossible to resist if you hope to make progress in faculty advancement. Going against the revealed wisdom of your elders can be very dangerous to your career path at major business schools. And you know, really investing is not that complicated. I would have, you know, a couple of courses. I would have a course on how to value a business and I would have a course on how to think about markets. And I think if people grasp the basic principles in those two courses that they would be far better off than if they were exposed to a lot of things like modern portfolio theory or option pricing. I mean, who needs option pricing, you know, to be in an investment business? And you know, when Ray Kroc started McDonald's, I mean he was not thinking about the option value of what the McDonald's stock might be or something. He was thinking about whether people would buy hamburgers, you know, and what would cause him to come in and how to make those fries different than other people's and that sort of thing. It's totally drifted away the teaching of investments. I look at the books that are used sometimes and there's really nothing in there about valuing businesses, and that's what investing is all about. If you buy businesses for less than they're worth, you're going to make money. And if you know the difference between the businesses that you can value and the ones that you can't value, you know, which is key, you're going to make money. But they've tried to make it a lot more difficult. And of course that's what the high priests in any particular arena do. They have to convince the laity that the priests have to be listened to. Charlie.

Oh, I think you have all kinds of opportunities. I would probably do very much what I have done in life except I'd do it a little, I'd try and do it a little earlier and I would have tried to be a little bit better when I was running a partnership in terms of aggregating the money faster. I used to work with $5,000 contributions from partners and you know I would try to develop an audited record of performance as early as I could. I would try to attract some money and then when I'd build up a fair amount of money out of investing I would try to get into something much more interesting which would be buying businesses to keep. Now you mentioned private equity which very often is buying businesses to sell but I don't want to be buying and selling businesses. I mean if I establish relationships with people that come to me with their business and they want to join Berkshire, I want it to be for keeps and that's been enormously satisfying. But it takes some capital to get into that business and I didn't have any capital when I started out. So, I built it through managing money for myself and other people combined. And like I say, I would get us through that process as fast as I could and then into a game where I could buy businesses of significance and interest to me. And then I'd spend the rest of my life doing it just as I've done. Charlie.