Secrets to Warren Buffett's Success

The Motley Fool is heading to Omaha for Berkshire Hathaway’s 2015 Annual Shareholder Meeting! Click here for our latest coverage on all things Buffett, and be sure to check back on May 2 for up-to-date analysis and to take part in our live chat during the world-famous Q&A session with Warren Buffett and Charlie Munger.

This year, Warren Buffett's letter to shareholders marked the legendary investor's 50th anniversary at the helm of Berkshire Hathaway (BRK.A -0.70%) (BRK.B -0.99%). To celebrate the occasion, we picked 10 of our favorite Buffett quotes that reveal the kind of mindset that enabled the Oracle of Omaha to become, well, an investing oracle.

Listen to this episode of Motley Fool Answers (available for free on iTunes and Stitcher) to hear Buffett's words, as read in the dulcet tones of fellow Fool Chris Hill. Or read on at your leisure. For even more Buffettisms, snag a copy of our free e-book: Advice From the Oracle: 50 Warren Buffett Quotes That Will Make You a Better Investor.

 

Transcript

ALISON SOUTHWICK:

This is Motley Fool Answers. I'm Alison Southwick and, as always, I'm joined by the lovely Dayana Yochim ...

DAYANA YOCHIM:

Oh, well, thank you.

ALISON SOUTHWICK:

And the handsome Robert Brokamp.

ROBERT BROKAMP:

Well, thank you. I've got the face for podcasts, and I get to tell you what's in that.

ALISON SOUTHWICK:

I guess that would then lead us to believe that you have the voice for ...

ROBERT BROKAMP:

For mime. I think I have the voice for mime.

ALISON SOUTHWICK:

All right. Well, today we're actually going to talk about Warren Buffett, because he is the world's second wealthiest man, which equates to $74 billion -- and he did it through savvy investing.

So today we're going to reveal the secret to Buffett's success, and we're going to use his own words against him. We're going to share 10 Warren Buffett quotes, and by the end of the show, you'll know how to invest alongside the Oracle of Omaha.

For those of you who don't know who Warren Buffett is, he is adorable.

DAYANA YOCHIM:

Adorbs.

ALISON SOUTHWICK:

He is. He's also really good at investing. He was an entrepreneur and a businessman practically from birth. He bought his first stock at age 11, and he filed his first income tax return at age 14, wherein he deducted $35 for his bicycle and watch because it was part of his paper route.

DAYANA YOCHIM:

Brilliant!

ALISON SOUTHWICK:

I told you he was adorable.

ROBERT BROKAMP:

He is adorable.

DAYANA YOCHIM:

The IRS is now on notice. 

ALISON SOUTHWICK:

He lives an unassuming life in Omaha, Neb., at the head of his company, Berkshire Hathaway, and along with his lifelong partner in moneymaking, Charles Munger, they have done very well for themselves investing in publicly traded companies and taking ownership stakes in businesses as well. Do you guys want to guess what Berkshire's top four holdings are?

DAYANA YOCHIM:

Coca-Cola. That's one.

ROBERT BROKAMP:

IBM.

ALISON SOUTHWICK:

Yup. Two more.

DAYANA YOCHIM:

A railroad?

ALISON SOUTHWICK:

Nope. It's not a railroad ...

ROBERT BROKAMP:

Well, he does own a railroad ...

ALISON SOUTHWICK:

As every billion-dollar tycoon should.

DAYANA YOCHIM:

Yeah. But not one of his top holdings.

ALISON SOUTHWICK:

Think finance and banks.

ROBERT BROKAMP:

Wells Fargo.

ALISON SOUTHWICK:

Yup. And ...

DAYANA YOCHIM:

AmEx [American Express].

ALISON SOUTHWICK:

Yup. Heinz is another big one that people would know that he owns a lot of. But Coca-Cola is famous. Coca-Cola and Warren Buffett are practically synonymous.

ROBERT BROKAMP:

His dad was actually a Republican congressman and a stockbroker and suffered greatly during the Great Depression, so you'd think that would turn somebody like Warren Buffett off of investing, but it didn't.

ALISON SOUTHWICK:

But it probably helps make him very frugal, because as we're going to learn, he lives a very frugal life.

ROBERT BROKAMP:

He's actually now a Democrat, and Charlie Munger, his partner, is a Republican, so they have some interesting conversations.

ALISON SOUTHWICK:

Yes. A lot of the quotes that we're going to recite back to you are from his annual letters to shareholders. His 50th annual shareholder letter came out in February. You actually read through it, and you pulled some quotes from this recent letter.

ROBERT BROKAMP:

I did. I should disclose that I am a Berkshire Hathaway shareholder, so when it came out, I read it page to page.

ALISON SOUTHWICK:

You did?

ROBERT BROKAMP:

I did.

ALISON SOUTHWICK:

Then how come you weren't able to recite all four of their holdings off the top of your head?

DAYANA YOCHIM:

Mm-hm?

ROBERT BROKAMP:

I was obviously holding off for Dayana.

ALISON SOUTHWICK:

Oh, how sweet of you. So Berkshire Hathaway is also famous for having an annual shareholder event where tens of thousands of people descend on Omaha. Could you ever see yourself going, Robert?

ROBERT BROKAMP:

I went.

ALISON SOUTHWICK:

You did?

ROBERT BROKAMP:

In 2009, which is right at the bottom of the Great Recession, so it was an interesting time to be there. That's where I first met our colleague Morgan Housel, by the way.

DAYANA YOCHIM:

The meeting in Omaha -- it's more like a pilgrimage for people.

ROBERT BROKAMP:

It really is. It's crazy. You've got to get up early to get a seat, and a lot of people don't get it, so they have to, like, be in some other room, or it's telecast. It's crazy.

ALISON SOUTHWICK:

Yeah. They fill up the whole stadium ...

DAYANA YOCHIM:

The cult of Buffett and Berkshire.

ALISON SOUTHWICK:

But it is a cult. Well, it's not a cult. It's not a literal cult.

So Robert, just how successful of an investor is Warren Buffett?

ROBERT BROKAMP:

Well, as we talked about, a 50-year anniversary in the annual report. It actually shows the returns of the S&P 500, which, over the past 50 years, has averaged 9.9% a year. So if you invested a thousand dollars in there, you'd have about $112,000.

Berkshire Hathaway, at 21.6% a year -- so more than double -- you might think, "Well, then, that must have produced $300,000 or $400,000." No, $100,000 would be worth $17.6 million ...

And that is the power of earning even a little bit more. If you were earning instead of that 10% -- 12% or 14% -- the way it compounds over the long term is amazing. Absolutely amazing. So, yeah. That's how you become the second wealthiest man in the world.

ALISON SOUTHWICK:

Yeah. Oh, my goodness. That's insane.

ROBERT BROKAMP:

I should say that in the annual report, he tells everyone, "There's no way we're going to be able to do those returns in the future ..."

DAYANA YOCHIM:

Past performance is no indication of future results.

ROBERT BROKAMP:

There you go. Exactly.

ALISON SOUTHWICK:

Well, now it's time for us to show you how you can invest like Warren Buffett, and again, we're going to use his own words against him. We have a guest star today to dramatically read these selected Warren Buffett quotes. You may know him as the host of Motley Fool Money and MarketFoolery -- the daily podcast and weekly radio show -- hosted by our own Chris Hill.

Thanks, Chris Hill. All right, give us our first Warren Buffett quote.

CHRIS HILL:

1. Success in investing doesn't correlate with IQ. What you need is the temperament to control the urges that get other people into trouble in investing.

DAYANA YOCHIM:

This is a great quote and one my favorites, because IQ points and lucky socks are no help when your investment is down 50%. You can be the best stock picker in the world, but if you let emotions dictate your buying and selling decisions, you will never see great returns.

So having the temperament to be a successful investor means setting your investing strategy and decisions based on the underlying business story, not wavering in the short term when every cell in your body is telling you to run for the exit, or dive right in when everybody's super excited about this hot, new thing. You do your research, and you make your investing decisions based on that.

ALISON SOUTHWICK:

Didn't Buffett write, back in the doldrums of the market, an article in The Wall Street Journal about "Why I'm investing in America and I'm going shopping"?

DAYANA YOCHIM:

Yeah.

ALISON SOUTHWICK:

"I'm buying American." Because you think of so many people, who, at the bottom of the market, they check out because they're burned, and then they miss out. They missed out on so much wealth because they pulled out. All right, Chris. What's our next one?

CHRIS HILL:

2. Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments. Far riskier investments.

ALISON SOUTHWICK:

Robert? This is your quote ... and let me tell you. That's a fun one.

ROBERT BROKAMP:

The point here Buffett is making is that the stock market is volatile in the short term. He tells people not to buy Berkshire unless you can hold for five years. Actually, in 10 years, he often says in other places. So it's that short-term volatility.

But you're investing for a long-term investment goal, and you have to keep up with inflation with your money. He pointed out, in this year's annual letter, that something that cost 13 cents when he started managing Berkshire in 1965 costs a dollar now. You cannot maintain that purchasing power if you just stay in cash. That's real risk -- playing it too safe and having a portfolio that's not going to pay for anything in the future.

ALISON SOUTHWICK:

All right. How about another Buffett quote?

CHRIS HILL:

3. I'm a better investor because I'm a businessman, and a better businessman because I'm an investor.

DAYANA YOCHIM:

This is actually a quote we have painted on the wall in one of our conference rooms ...

ALISON SOUTHWICK:

It's practically tattooed on people's bodies here at The Motley Fool.

ROBERT BROKAMP:

Here, let me show you. I'm just kidding.

DAYANA YOCHIM:

So here he's reminding people to remember that when you invest, you're buying a business. You are not buying a ticker symbol. You are becoming a part owner of a company, so you own a sliver of that business and even have a say, albeit a small say, in how that business is run.

So when Warren Buffett invests, he is looking for businesses with strong brands, cash flow, and strong management teams. And that last part is super important. He's betting on the people that run those companies to make smart decisions with their money, and also his money or the investor's money.

So remember, a stock is only as good as the business behind it, and a business is only as good as the people who are running it.

ALISON SOUTHWICK:

You actually crammed a lot of Buffett principles into that -- good management. Buying a strong brand.

DAYANA YOCHIM:

Good cash flow.

ALISON SOUTHWICK:

Holding for the long term. I mean, there's a lot wrapped up in that one, there. All right, next quote. Chris Hill.

CHRIS HILL:

4. There are certain things that cannot be adequately explained to a virgin, either by words or pictures.

DAYANA YOCHIM:

Are we going to have to have an adult rating put on this podcast because of this?

ALISON SOUTHWICK:

Because we said the word "virgin"?

DAYANA YOCHIM:

I don't know where Robert's going to go with his answer.

ALISON SOUTHWICK:

Robert? Tread lightly.

ROBERT BROKAMP:

Tell the kids that it's that airline from England. This is actually a quote of a quote of a quote, because it's from a cartoon that appeared in Fred Schwed's classic book, Where Are the Customers' Yachts?

But the point Buffett is making is actually often tied to the point you just made, Dayana, in terms of actually running a business, and that to understand an investment, you actually have to run a business day to day. In fact recently, he has two investment managers working for him, Todd Combs and Ted Weschler, and he made them chairmen of two new companies that they bought to give them that experience of helping run an actual company.

When I go to [Panera Bread] with my kids, I say, "OK. How are they making money? What are they doing well? What would you change to make this better?" So you think as a businessperson, and it helps you as an investor.

DAYANA YOCHIM:

And here's a job application.

ROBERT BROKAMP:

That's right. "Go earn your keep and give me a bagel."

ALISON SOUTHWICK:

OK next quote.

CHRIS HILL:

5. If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.

DAYANA YOCHIM:

Don't even think about it.

ALISON SOUTHWICK:

Don't even think about it.

DAYANA YOCHIM:

What are you thinking? OK, this is also known as "buy stocks you're willing to hold on to for the long term or forever." Because truly great investors are marked by their long-term commitments to their investments. They are investors. They are not speculators. So when you buy to hold, you're committing to sticking it out for as long as it takes for your investing thesis to play out. We're talking three, five, 10 years, 20 years ... forever, sometimes.

So think of that money that you're investing as like you're sending it off on vacation to work for you. Your other money -- your short-term money -- is the stuff that you're using to pay your bills for near-term expenses, if you're saving up for a down payment on a home that you're going to buy in the next five years.

ROBERT BROKAMP:

Right. That should be in cash, and Buffett says that all the time. Any money -- just keep it in cash, and they keep at least $20 billion in cash ...

ALISON SOUTHWICK:

Wow ...

ROBERT BROKAMP:

... so they don't have to worry about a market downturn affecting their business, and when the market does go down, they have enough money to buy some bargains.

CHRIS HILL:

6. Just making monthly investments in a low-cost index fund makes a lot of sense. Owning a piece of America, a diversified piece, bought over time, held for 30 or 40 years, it's bound to do well.

ROBERT BROKAMP:

This was actually advice that Buffett recently gave on CNBC to LeBron James.

ALISON SOUTHWICK:

What?

ROBERT BROKAMP:

The multi-millionaire basketball player. LeBron James said, "What should I invest in?" and this is what Buffett said. An index fund, by the way, just buys whatever is in a certain index, usually the S&P 500. But because they don't have management teams making those decisions, they're super-super super-duperty cheap. That's how cheap they are. They are duperty cheap.

Buffett thinks that 99% of people should invest this way, plus, as he explained in last year's annual letter, this is what he has put in his will for some of the money that is going to his wife. The directions are put 90% of it in an index fund and 10% of it in cash. So he really believes in it, because that's what he wants his family to do.

ALISON SOUTHWICK:

He's eating his own cooking.

ROBERT BROKAMP:

Right. Next quote?

CHRIS HILL:

7. A simple rule dictates my buying: be fearful when others are greedy and be greedy when others are fearful.

DAYANA YOCHIM:

What's interesting about this quote is evidently Warren said this when he was in his 20s.

ALISON SOUTHWICK:

Oh! Wow.

DAYANA YOCHIM:

Yeah. Smart from a young age. But he's right. Too many investors get shaken out of a great investment or robbed of enormous gains because they were too scared. They were too fearful to stick it out. But if you can keep your emotions in check, ignore the noise, you'll be able to hang in there and, as we said earlier, even back up the truck and load up on more ... rather than selling out at the worst times.

If you look back in history how investing fortunes were made, you'll find it wasn't by jumping in and out of the market, or in and out of stocks based on fear and greed, but by buying great businesses and investing in them over the long haul.

ROBERT BROKAMP:

Several studies show that most investors jump in right as the market is peaking. Then the market goes down and then they flee and go to cash. The market, at least historically, has rebounded. We're back at all-time highs after the Great Recession. So many people missed out on that because they got scared out of the market, and they didn't get back into the market until they're like, "OK. Two or three years later, the market's up. Now I believe in it." It's not too late, but they missed out on a lot.

CHRIS HILL:

8. It's the only industry I can think of where the professional's efforts subtract value from what the layman can do himself.

ROBERT BROKAMP:

This is similar to the index fund argument. On the whole, the financial-advice business does not give you market-beating returns. We've talked about this in the past. The average mutual fund underperforms the market by 1 to 2 percentage points.

DAYANA YOCHIM:

Actively managed funds ...

ROBERT BROKAMP:

Right. An actively managed fund has managers actively picking the stocks. Roughly speaking, they charge 1%-2% a year. It's almost completely explained by the costs. Buffett is a big fan of just saying, "Buy an index fund. You can do it on your own."

CHRIS HILL:

9. You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important. Knowing its boundaries, however, is vital.

DAYANA YOCHIM:

This is the whole "buy what you know" thing that we preach around here. Don't go looking for difficult investments. Buffett knows that there are great investments to be had in any industry, so he doesn't blindly pour money into the next hot company doing the new 3-D cellular printing, insert some gobbledy-gook here. Buffett knows there are great investments to be had in any industry, so why go outside of what you know and try and figure out whether 3-D Bioprinting Space Travel ...

ALISON SOUTHWICK:

[Laughs]

DAYANA YOCHIM:

... Corporation is a good business or not. So like he said about his and Charlie Munger's interest in space exploration, "We applaud the endeavor but prefer to skip the ride."

ALISON SOUTHWICK:

That's cute.

DAYANA YOCHIM:

And skipping the ride has been fine with him. He's notoriously not been heavily a tech guy -- where there were so many gains to be had. People have done really well in that, but that's not within his circle of competence.

So the lesson here is look for solid companies through old-fashioned fundamental research and find the ones that you want to go into business with as a stockholder and that you understand.

ALISON SOUTHWICK:

Well, he probably reads reams and reams and reams of paper about any given company before he invests in it, and he probably continues to read reams of paper about it after he invests in it. So naturally, if you are going to be reading that much about a company, you're naturally going to want to have some interest and some competency in that area. Otherwise you're just going to go crazy.

DAYANA YOCHIM:

Yeah, he'll build his competency in there and become an expert on it and really understands all parts of the business.

ROBERT BROKAMP:

Charlie Munger has said that both he and Warren read all the time, and Munger said, "I read so much, my kids growing up thought I was a book with legs attached to it."

ALISON SOUTHWICK:

We'll get to some more Charlie later. Charlie's a funny guy. Next Warren quote.

CHRIS HILL:

10. You're going to participate in what I call the Ovarian Lottery. You're going to get one ball out of there, and that is the most important thing that's ever going to happen to you in your life.

ROBERT BROKAMP:

So this takes a little setting up. This is a scenario that Buffett will use in front of students. He says, "It's 24 hours before your birth and a genie appears and says, 'You get to design everything about Earth -- economics, social, political, the whole thing. But there's a catch. Before you enter the world, you'll have to pick one ball out of a barrel of 7 billion (one representing each person on Earth) and you don't know which one you're going to take, but it will determine whether you're male or female. American, Zimbabwean. Above average, below average. How would you design the world?'"

Because one of Buffett's philosophies is you create a society that benefits everyone, regardless of your skills. He often talks about that Bill Gates says to him if he was born 300 years ago -- or a long time ago -- Buffett would have been eaten by some wild animal because he can't run fast and he can't climb trees. But he was born at this time where someone who can allocate capital does very well. And he thinks the world should be designed so that everyone benefits from growing resources and stuff like that.

And the other thing he will do is he'll tell these students, "Now, let's say I took out a hundred of those balls from that barrel. Would you trade with what you have and pick another ball?" And of course most of them say no -- because there's only a 5% chance you'd be in America. A 50-50 chance you'd be above-average intelligence or below-average intelligence. And what he's saying to U.S. students is you've got it really good. You're very lucky. So what you should be doing with your life should benefit other people.

ALISON SOUTHWICK:

And he is also one of those billionaires, like Bill Gates, that has promised to give most of his money away.

ROBERT BROKAMP:

Almost all of it. That's why the will says "invest this cash in index funds," because he is going to give his actual Berkshire stock away to charity.

ALISON SOUTHWICK:

Which is cool.

ROBERT BROKAMP:

Good guy, that Warren Buffett.

ROBERT BROKAMP:

I think it's all going to the Gates foundation, in fact. I think that's where he's leaving most of his money. His daughter is very into the Girl Scouts foundation, so a lot of money will go to ...

DAYANA YOCHIM:

... a lot of Thin Mints.

ROBERT BROKAMP:

A lot of Thin Mints.

ALISON SOUTHWICK:

All right, well, these aren't the only great things Buffett has said, and if you want to get even more Buffett, just send an email to [email protected]. That's W-A-R-R-E-N at Fool.com to get a copy of our free e-book, 50 Warren Buffett Quotes That Will Make You a Better Investor. Doesn't that sound like fun?

ROBERT BROKAMP:

It does.

DAYANA YOCHIM:

It's a great book.

ALISON SOUTHWICK:

I forgot to say my favorite Warren Buffett quote, which is the one he just said. When he was asked how is it that he has lived so long, he said, "I checked the actuarial tables, and the lowest death rate is among 6-year-olds, so I decided to eat like a 6-year-old." Which he does. He drinks nothing but Coca-Cola and he eats ice cream ...

DAYANA YOCHIM:

And Goldfish ...

ROBERT BROKAMP:

For breakfast.

ALISON SOUTHWICK:

Hey, he's still alive ....

This has been another episode of Motley Fool Answers. Again, be sure to snag a free copy of our e-book, 50 Warren Buffett Quotes That Will Make You a Better Investor, because 10 is not enough. You can also send us your questions to [email protected]. Don't forget to tell your friends to subscribe to this podcast for free at iTunes and Stitcher.

For Robert Brokamp and Dayana Yochim, I'm Alison Southwick. Fool on!