In the previous article in the series, we discussed the
master's 1989 letter and got to know his views on growth rates in a finite
world and the mischief being played by investment bankers and promoters in
order to justify a rather 'difficult to service' fund raising.
As the years have gone by, we have noticed that the master's letters have
become lengthier and have come packed with even more investment wisdom. This
has however, made it difficult to incorporate all the wisdom from one
particular year in a single article. Thus henceforth, in cases where we feel
necessary, we might divide the letter from the same year into two or maybe
even three different articles. The letter for the year 1989 is we feel, one of
such letters and hence, the following few paragraphs contain some additional
investment wisdom from the 1989 letter.
In a section titled 'Mistakes of the First Twenty-five Years', the master has
reviewed some of the major investment related mistakes that he has made in the
twenty-five years preceding the year 1989. Let us go through those and try our
best to avoid them if similar situations play themselves out before us:
"It's far better to buy a wonderful company at a fair price than a fair
company at a wonderful price. Charlie (Buffett's business partner) understood
this early; I was a slow learner. But now, when buying companies or common
stocks, we look for first-class businesses accompanied by first-class
"Good jockeys will do well on good horses, but not on broken-down nags.
The same managers employed in a business with good economic characteristics
would have achieved fine records. But they were never going to make any
progress while running in quicksand."
It should be worth pointing out that in the early years of his career, the
master bought into businesses based on statistical cheapness rather than
qualitative cheapness. While he experienced success using this approach, the
difficult time faced by the textile business made him realize the virtue of a
good business i.e. businesses with worthwhile returns and profit margins and
run by exceptional people. According to him, while one may make decent profits
in an ordinary business purchased at very low prices, lot of time may elapse
before such profits can be made. Hence, he feels that it is always better to
stick with wonderful company at a fair price, as according to him, time is the
friend of a good business and an enemy of a bad business.
"Easy does it. After 25 years of buying and supervising a great variety
of businesses, Charlie and I have not learned how to solve difficult business
problems. What we have learned is to avoid them. To the extent we have been
successful, it is because we concentrated on identifying one-foot hurdles that
we could step over rather than because we acquired any ability to clear
The master's reluctance to invest in tech stocks during the tech boom is
legendary and perfectly sums up what he intends to convey from the above
paragraph. Invest in companies whose businesses are within your circle of
competence and keep it easy and simple. According to him, human beings have
this perverse tendency of making easy things difficult and one must not fall
into such a trap.
The list of mistakes has a few more important points, which we would discuss
in the next article in the series.
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