Buffett Strategy

Over the years, Warren Buffett has provided us with countless nuggets of insightful investment advice, either in interviews or in stories recounted by biographers and journalists. Here are our favorites:

(please note that the best quotes from his annual shareholders letters can be found in a separate compilation at buffettportfolio.com).

The quote that best describes Warren Buffett is probably the one from Roger Lowenstein's book: "When it came to money, Buffett seemed to have twin personalities— it was nothing to him and it was everything".¹¹

Obviously, Buffett could have retired years ago, but he continues to personally allocate the majority of Berkshire Hathaway's capital (about half a trillion at last count). Now in his eighties, he enjoys the daily grind of finding the next great investment for his company. And yet, "Warren was so tight about money that when the couple had a daughter, they made a bed for her in a dresser drawer". And "Buffett was a billionaire who drove his own car, did his own taxes, and still lived in a home he had bought in 1958 for $31,500".¹¹Not to mention that he also still answers his own telephone at the office. He is thus a man of contradiction: money is an important metric for him to keep score in life, even though he spends very little of it.

Needless to say, Buffett is a legend in the business world, as evidenced by this quote:

"There are certain things in life you just don’t do," wrote one Motley Fool columnist. "You don’t spit into the wind. You don’t pull the mask off that ol’ Lone Ranger, and you definitely don’t short Warren Buffett".

Source: Richard Teitelbaum. The Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions. John Wiley & Sons, Inc, 2015. [B182]

Origin Story

How Berkshire Hathaway came into existence is an interesting story (though the accidental nature of this corporate creation isn't necessarily a satisfying answer to those who idealize Buffett):

In 1962, [Buffett owned shares in] a textile maker in New Bedford, Massachusetts, trading at one-third of its net current asset value. [He was willing to sell, but] the sum, 12½ cents per share less than Buffett and Seabury had agreed to, infuriated Buffett. He decided that, rather than sell his position back to Seabury and Berkshire Hathaway, he’d take it over.

Berkshire didn’t have any more puffs. [He later remarked:] "Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes)".

Source: Tobias E. Carlisle. Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations. John Wiley & Sons, 2014. [B061]

Buffett later recounted the story from his perspective in 2015, offering more details on merger of the two original entities and how he ended up getting stuck with them as his main investment vehicle:

[In 1955,] Berkshire Fine Spinning Associates and Hathaway Manufacturing – both with roots in the 19th Century – joined forces, taking the name we bear today. With its fourteen plants and 10,000 employees, the merged company became the giant of New England textiles. What the two managements viewed as a merger agreement, however, soon morphed into a suicide pact. [...] I purchased [Buffett Partnership Limited or] BPL’s first shares of Berkshire in December 1962 [when] the stock was then selling for $7.50, a wide discount from per-share working capital of $10.25 and book value of $20.20. Buying the stock at that price was like picking up a discarded cigar butt that had one puff remaining in it. Though the stub might be ugly and soggy, the puff would be free. [In 1964], a man named Seabury Stanton […] asked me at what price BPL would sell its holdings. I answered $11.50, and he said, "Fine, we have a deal." [But he then] sent a letter to [Berkshire Hathaway] shareholders offering to buy 225,000 shares of its stock for $11.375 per share. […] Instead, irritated by Stanton’s chiseling, I ignored his offer and began to aggressively buy more Berkshire shares. […] That was a monumentally stupid decision. […] The price that Stanton offered was 50% above the cost of our original purchases. [...] Through Seabury’s and my childish behavior – after all, what was an eighth of a point to either of us? [Instead] I found myself with more than 25% of BPL’s capital invested in a terrible business about which I knew very little. I became the dog who caught the car.

Undeterred by my first mistake of committing much of BPL’s resources to a dying business, I quickly compounded the error. [...] Early in 1967, I had Berkshire pay $8.6 million to buy National Indemnity Company (“NICO”), a small but promising Omaha-based insurer. [...] So why did I purchase NICO for Berkshire rather than for BPL? I’ve had 48 years to think about that question, and I’ve yet to come up with a good answer. I simply made a colossal mistake. If BPL had been the purchaser, my partners and I would have owned 100% of a fine business; [...] rather than being 39%-owned by the legacy shareholders of Berkshire, to whom we had no obligation. Despite these facts staring me in the face, I opted to marry 100% of an excellent business (NICO) to a 61%-owned terrible business (Berkshire Hathaway), a decision that eventually diverted $100 billion or so from BPL partners to a collection of strangers.

Source: Warren Buffett and Max Olson. Berkshire Hathaway Letters to Shareholders 1965-2012. United States, Berkshire Hathaway, 2012. [B222]

Staying Within Your Circle Of Competence

Buffet on how technology bubbles form:

There is a “natural progression” for how good new ideas go wrong. It's the “three I’s” according to Buffett. First come the innovators, who see opportunities that others don’t. Then come the imitators, who copy what the innovators have done. And then come the idiots, whose avarice undoes the very innovations they are trying to use to get rich.

Source: https://hbr.org/2008/10/wisdom-of-warren-buffet-on-imi (citing a Charlie Rose interview).

Buffett reportedly "has a box on his desk. A ‘Too Hard’ box. He wants to put companies in the ‘Too Hard’ box. He’s dying for an excuse to throw things in the ‘Too Hard’ box".⁶

Buffett has a deadpan sense of humor:

Bill Gates once suggested to Buffett that he buy a computer (and by extension computer companies) because ‘they’re going to change everything.’ Buffett replied, ‘Will they change the way people chew gum?’

Source: Danielle Town and Phil Town. Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad); William Morrow; 2018. [B088]

On missing the next big thing, Buffett has never been particularly remorseful. This is the closest he came:

Buffett noted that Bezos laid out his vision in the 1997 annual report. Even knowing what his plans were, the successful execution of them would have been a long shot. [But] missing Google was worse. [...] Buffett agreed that they were very close-up on Google. They knew GEICO was paying $10 a click, and they were happy to do it. [...] The owners even came to see Buffett before the IPO. Buffett confessed: "I blew it."

Source: Daniel Pecaut and Corey Wrenn. University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting. United States, Pecaut, 2017. [B221]

Then again, Buffett isn't much for IPOs, as he claims "that he had not participated in an IPO since Ford in 1955".¹⁰

Flat Earth Society

Warren Buffett has loved to poke holes in the Efficient Market Theory. One particularly telling story:

In May 1984, Columbia Business School hosted a conference, [where] the organizers invited two speakers to debate: [Warren Buffett and Michael Jensen]. [Jensen went first:] "If I survey a field of untalented analysts, all of whom are doing nothing but flipping coins," Jensen said, “I expect to see some who have tossed two heads in a row and even some who have tossed ten heads in a row." This coin-flip analogy—popularized by Bill Sharpe at Stanford—had by this time become a staple of MBA education. After a few rounds, any group would produce a few apparent coin-flipping superstars. The implication was that the stock market worked pretty much the same way. Buffett was ready for this argument. [...] Buffett too described a coin-flipping contest. The entire nation would participate, with everyone staking a dollar on the first flip and the wagers rising with the winnings after that. After two hundred rounds of flipping, about 215 millionaires would remain. Many of these people would, Buffett said, become convinced of their own genius. Some would write books on the secrets of successful coin flipping; others would "start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, ‘If it can’t be done, why are there 215 of us?’".

The professors could retort that coin-flipping orangutans would have achieved the same result, Buffett said. But what if, Buffett wondered— jumping from humans to primates in a leap that made no narrative sense but worked rhetorically—one took a closer look at where those coin-flipping orangutan millionaires came from? [Buffett said:] "If you found that 40 came from a particular zoo in Omaha, you could be pretty sure you were on to something. So you would probably go out and ask the zookeeper about what he’s feeding them, whether they had special exercises, what books they read, and who knows what else." Buffett continued, “I think you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small village that could be called Graham-and-Doddsville," he said. He then went through a list of nine investors—some former Graham students, some not—who had achieved inordinate success by following more or less the same principle: They sought out individual stocks that seemed especially cheap given the earnings or assets of the company, and otherwise ignored the swings of the market. "There will continue to be wide discrepancies between price and value in the marketplace," he concluded, "and those who read their Graham & Dodd will continue to prosper."

If the debate had been scored by those on hand at Columbia, Buffett would have been the clear winner. The audience was biased, of course, but Jensen too was impressed. "One of the things I came away from that with was Warren Buffett was one of the smartest people I’ve ever met, and wise," Jensen said. "He could play on my turf without making mistakes… It’s not by accident that he’s worth billions."

Source: Justin Fox. The myth of the rational market: a history of risk, reward, and delusion on Wall Street. Harriman House Limited, 2011. [B203]

Buffett might agree with the finance academics from the Chicago School on one thing: he recognizes that "a stock split is a non-event and he famously signed birthday cards, 'May you live until Berkshire shares split.' […] That’s why a single share of Berkshire is worth more than a Porsche".¹

But on everything else, like the definition of risk and volatility, academia and Buffett couldn't be further apart. After a purchase of the Washington Post, he opined that "had the stock fallen by half before his purchase, it would have been more volatile—and hence, to an Efficient Market Theorist, 'riskier'. Buffett tartly observed. 'I have never been able to figure out why it's riskier to buy something at $40 million than at $80 million'."¹¹

Buffett claimed "that PhDs who should know better got hooked on their fancy math, which may not be applicable to human behavior".⁹ Another time he pointed out "the danger of relying on historical statistics or formulas is that you end up betting on a 14-year-old horse with a great record but is now ready for the glue factory".⁹

Oracle of Omaha

His annual letters to shareholders are legendary. What most people miss is the amount of effort Buffett pours into them.

Warren Buffett works countless hours writing and rewriting his shareholder letters to present complex ideas simply. […] Buffett described his creative process: "I just sit down in late November and I dictate the whole thing very quickly. It reads like a bunch of garbage when I get it back, but at least it gets my train of thought in a logical formation. Then I clean it up, and I clean it up, and I clean it up. After that I send it to Carol Loomis [of Fortune magazine] for editing. When she sends it back, I almost have to start all over again. The last five percent of it takes about 95 percent of the time. That’s the way it works, […] there is always the right word. I believe that. Until you get the right word, forget about the rest. You’ve got to have the right word. If you can’t explain an idea, you haven’t got your own thinking correct yet. So you’re searching to get it just right."

Source: L. J. Rittenhouse. Investing between the lines: How to Make Smarter Decisions by Decoding CEO Communications. McGraw Hill Professional, 2013. [B157]

Throughout his career, Buffett produced a series of prescient warnings that turned out to be extremely accurate in retrospect:

In his 1998 letter, Buffett noted that managers rationalize potentially imprudent interpretations because: (1) everybody else is engaged in “accounting shenanigans” and (2) to do otherwise might depress the company’s stock price, its currency for doing deals.

Not to mention financial derivatives:

In his 2002 letter, Buffett warned investors about […] “financial weapons of mass destruction”. […] Only six years later, Buffett’s prophecy was realized: a cascading daisy chain of defaults in derivatives and derivative-based securities triggered a global financial meltdown.

Source: L. J. Rittenhouse. Investing between the lines: How to Make Smarter Decisions by Decoding CEO Communications. McGraw Hill Professional, 2013. [B157]

And Buffett wasn't a fan of internet stocks:

Warren Buffett wrote an extraordinary article that appeared in Fortune in late 1999 called “Mr. Buffett on the Stock Market.” It was extraordinary because Buffett rarely comments on the level of the market, preferring instead to focus on the individual companies that make up the market. [It was] published about five months before the peak of the dot-com bubble.

Source: Tobias E. Carlisle. Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations. John Wiley & Sons, 2014. [B061]

Buffett also warned investors of the lax mortgage standards prevalent in the industry in 2003:

At the time of the purchase [...] of Oakwood Homes, one of the industry’s largest companies, [...] I did not understand how atrocious consumer-financing practices had become throughout most of the manufactured housing industry. [...] Progress in design and construction was not matched, however, by progress in distribution and financing. Instead, as the years went by, the industry’s business model increasingly centered on the ability of both the retailer and manufacturer to unload terrible loans on naïve lenders. When “securitization” then became popular in the 1990s, further distancing the supplier of funds from the lending transaction, the industry’s conduct went from bad to worse. Much of its volume a few years back came from buyers who shouldn’t have bought, financed by lenders who shouldn’t have lent. [...] A different business model is required [in the housing market], one that eliminates the ability of the retailer and salesman to pocket substantial money up front by making sales financed by loans that are destined to default. Such transactions cause hardship to both buyer and lender and lead to a flood of repossessions that then undercut the sale of new units.

Source: Warren Buffett and Max Olson. Berkshire Hathaway Letters to Shareholders 1965-2012. United States, Berkshire Hathaway, 2012. [B222]

On the unpredictability of the market:

[Black Monday] was driven by portfolio insurance, which was a joke. It was a bunch of stop/loss orders, but done automatically, and the concept was heavily marketed. People paid a lot of money for people to teach them how to put in a stop/loss order. When a lot of institutions do this, the effect is like pouring gas on a fire. They created a doomsday machine that kept selling and selling. You can have the same thing today because you have fund operators with billions of dollars—in aggregate, trillions of dollars—who will all respond to the same stimulus. [...] They will sell for the same reasons. [...] Who had any idea that shooting an archduke would start World War I?

Regarding teaser rates that lead to historic levels of mortgage defaults during the financial crisis:

He called it "dumb lending" for lenders to make a high percentage of loans where people make tiny payments early on and hope to make it up with higher payments later. Someone who can only make 20–30% of a full payment now isn’t going to be able to make 110% payments in the future.

Investment Strategy

On what makes a successful investor, Buffett sets the record straight that it isn't necessarily about intelligence: “Success in investing doesn't correlate with IQ once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing".⁸And "even someone with an IQ of 140 can have a very different mind where they do poorly at investing. It takes a money mind to think well about money and investing".⁹

Warren Buffett and Charlie Munger say they "wouldn’t be so rich if smart people didn’t do so many stupid things".⁶ Buffett for instance "noted he has seen the stock [market] cut in half four times and that the beauty of stocks is that they can sell at silly prices sometimes".⁹

On short selling stock, Buffett said: "We like to sleep well, and you can’t sleep well if you’re short a lot of stocks"².

On interest rates, Buffett wrote that they "act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull".⁷Another time, "Buffett observed, 'Interest rates are to asset prices sort of like gravity is to the apple'. When there are very low interest rates, there is a not much of a gravitational pull on asset prices. [...] When the 30-year Treasury bond is 2.8%, it makes houses very attractive".⁹And when rates are negative: "Aesop’s rule of a bird in the hand is worth two in the bush is being re-written as a bird in the hand is worth 9/10 of a bird in the bush."⁹

Buffett once said that "if Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do".⁴

Buffett "said that he buys stocks on the basis that he would be happy if the stock market shut down for ten years"³.

Buffett's advice is for investors to "approach the stock market as if he had a lifetime punch card. Every time he bought a stock he punched a hole. When the card had twenty holes he was done—no more investing for life".¹¹

On Management

Buffett is a straight shooter and likes to own business run by managers who are equality trustworthy:

Buffett stressed the importance of integrity in running a business when he wrote, "In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you."

Source: L. J. Rittenhouse. Investing between the lines: How to Make Smarter Decisions by Decoding CEO Communications. McGraw Hill Professional, 2013. [B157]

Buffett is widely known for seeking out good management teams who are already in place: […] "Good jockeys will do well on good horses, but not on broken-down nags".⁵

Buffett likes to point out how the interests of management often differed from those of the owners:

My experience overwhelmingly has been that the boards of directors (there are exceptions) tend to go along with what management wants. [...] And managements are usually going to resist sale, no matter how attractive the price offered. They will advance all sorts of high-sounding reasons, backed up by legal and investment banking opinions, for rejection. But if you could administer sodium pentothal, you would find that they, like you or me, simply don't want to be dispossessed—no matter how attractive the offer might be for the owner of the property. Their personal equation is simply far different from that of the owners. If they can keep the keys to the store, they usually will.

Source: John Mihaljevic. The Manual of Ideas: The Proven Framework for Finding the Best Value Investments. John Wiley & Sons, 2013. [B108]

Buffett said "that you should only invest in a business an idiot could run, because one day an idiot will."⁹

Buffett might have been paraphrasing someone else, but this quote stuck with him: "To a man with a hammer, everything looks like a nail".⁸

Graham & Dodd

Buffett studied under Benjamin Graham, "having racked up the only A+ that Graham had awarded in twenty-two years at Columbia, Buffett made what seemed an irresistible offer: to work for Graham-Newman for free. But Graham turned him down".¹¹

On one matter, Buffett differed with his mentor Benjamin Graham (who himself loved owning cigar butt companies with only a few puffs left):

"Growth at a reasonable price” [...] means balancing low price with high quality. A Buffett disciple might drive a subcompact Kia Rio with manual windows and an AM radio but not a far cheaper Yugo ($3,999 new in 1985) that, while it seemed like a bargain, began falling apart almost as soon as you drove it off the lot.

Source: Spencer Jakab. Heads I Win, Tails I Win: Why Smart Investors Fail and How to Tilt the Odds in Your Favour. Penguin, 2016. [B171]

Buffett has been a proponent of the moat concept to denote a company's competitive position:

The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business.

Source: Wesley R. Gray and Tobias E. Carlisle. Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. John Wiley & Sons, 2012. [B102]

He frequently gives two examples:

If he "had $30 billion to knock the Coca-Cola brand off the shelf, he couldn’t do it. [...] Richard Branson’s Virgin Cola came and went".⁹
When he acquired 15% of the Harley Davidson notes, Buffett said "You have to like a business where the customers tattoo your name on their chests!"⁹

Learning From His Mistakes

For someone who insist on taking all the extra cash from the businesses he owns, Buffett is surprisingly unwilling to issue dividends to the Berkshire Hathaway shareholders, with one surprising exception in 1967, where he "paid out a meager ten-cent dividend […] Buffett later said 'I must have been in the bathroom' when the dividend was declared".¹¹

During his stint at Salomon, Buffett tried to clean up the mess the best he could.

He distributed his home telephone number to Salomon's top managers, with a letter instructing them to call him at any sign of further misconduct. [And he told the SEC] "Call us anytime someone doesn't give you what you want. You'll have a new person to deal with in twenty minutes." [His edict was] "Loose money for the firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless".

Source: Roger Lowenstein. Buffett: The making of an American capitalist. Random House, 2013. [B220]

Buffett still "sends a letter every other year to all the managers with that 'Salomon pledge'."⁹

Buffett claimed the culture at Salomon, and in investment banking in general, was (and still is) toxic. He gave this example: "If one guy received a bonus of $2 million and the next guy got $2.1 million, the first guy would be miserable for the next year. So it is envy, not greed, that is the dominant sin among investment bankers".⁹

Yet, Buffett learned a lot from his short time at Salomon. The scandal at Wells Fargo thirty years later echoed some of the same themes:

One error was to inadvertently incentivize bad behavior. In addition, as with any strong sales culture, there is a risk of pushing too hard. But the giant error here was that, when the program runs off the rails, the CEO must act. [During] the Salomon scandal, Paul Moser of Salomon was flim-flamming the Treasury auctions with phony bids. The then-CEO, John Gutfreund, got the news and said he’d take care of it. He didn’t. In fact, Gutfreund compared the infraction to a "traffic ticket." Then Moser did it again. The pyro-maniac had lit another fire. That’s when things imploded for Salomon. This "traffic ticket" nearly brought down the enterprise. [...] With Wells Fargo, the top brass underestimated the impact of fraudulent account openings.

On owning airline stocks:

Warren Buffett has repeatedly lamented the vast amounts of money airline investors – whom he once jokingly referred to as "aeroholics" – have lost over the decades. "If a capitalist had been present at Kittyhawk back in the early 1900s," he told the Telegraph newspaper, "he should have shot Orville Wright. He would have saved his progeny a lot of money."

Source: Scott Fearon and Jesse Powell. Dead Companies Walking: How a Hedge Fund Manager Finds Opportunity in Unexpected Places. Macmillan, 2015. [B018]

Money-Shufflers & The Bezzle

Buffett doesn't have much admiration from Wall Street traders and investment bankers:

Buffett suggested that we imagine that the annual meeting was being held on a tour boat that was blown off course and wrecked on a deserted island. We might elect Buffett to be chairman of the island with a mandate to maximize life on the island. He would probably set half of the shareholders to work raising food, some to building shelter and an inventive few to creating tools and new technologies for the future. Now imagine that an IQ test was given so that Buffett could take 30 or 40 of the best and brightest, give them each a Quotron terminal and have them trade futures on the output of the food producers. It’s absurd, of course.

And:

With the hedge funds, you get average less the terrific expenses. [They are] a tax on the system. [...] If the consultants just say, 'Buy an S&P 500 Index fund and sit for 50 years', they wouldn’t be able to charge much.

See Also: The Gotrocks and The Helpers analogy in his 2005 letter to shareholders.

As Warren Buffett is quoted as saying: "Anyone who says that size does not hurt investment performance is selling".⁶

Buffett is wary of insiders:

What the Internet really did, asserted Buffett, is give promoters the chance to monetize the hopes and greed of millions of investors through venture capital markets. A lot of money transferred from the gullible to the promoters. Very little real wealth has been created.

And he's not too keen on the amount of leverage banks are willing to extend to those tech founders:

To illustrate the craziness [of Internet stocks], Buffett said that a company may have a market cap of $10 billion but would be unable to borrow even $100 million at the bank. Yet the owners may be able to borrow many, many times that amount. [...] Some banks eager to get IPO fees have reportedly been lending to dot-com owners with dot-com stock as collateral.

Buffett claims that most stock buybacks are attempts by the CEO to turbocharge the value of their options:

Back in the 1970s and 1980s, stocks were cheap—clearly well-below intrinsic value—and very few corporations repurchased shares. Then, during the last 10 years, buying stock became the thing to do. [...] Buffett estimated that 90% of the buyback activity in the last five years was mostly herd behavior. Now, with stock prices dramatically marked down, many at less than half the prices at which repurchases were made, there are few buybacks going on.

Life Advice

Buffett is certainly not a health guru, but his analogy for the human body is an apt one:

Imagine a genie comes to a 17 year old and offers to get him any car he wants. However, there is one catch—whatever car he chooses he must make it last a lifetime. Well, you can imagine that the young man would read the owner’s manual 10 times, would change the oil twice as often as suggested, etc. to help that car last 50 years. In the same way, Buffett continued, we each receive one body and one mind for a lifetime. You cannot repair them at age 60. You must maintain them.

On the value of a college education, he "believes that a good school system is like virginity: it can be preserved but not restored".⁹

And yet "for too many schools, the purpose of the endowment is to make a bigger endowment".⁹

Buffet, blunt as always:

When asked how he would teach business students, Buffett said, "For the final exam, I would take an Internet company and say ‘How much is this worth?’ And anybody that gave me an answer, I would flunk."

Above all else, Buffett is humble. It's a trait that can win over some of his toughest adversaries:

In the early 1980s, the Buffalo News and the Courier-Express were in a kind of death struggle. Thus, dealing with the union became a game of chicken because if the paper closed down, everyone would lose his job. [...] Buffett took the position with the union that if you come back in a day, we’re competitive. If you come back in a year, we’re out of business. If you’re smart enough to figure out exactly how far you can push us where we still have a business and you still have a job, you’re smarter than I am, so you go home and figure it out. [...] The Buffalo News’ weakness proved to be its bargaining strength [with the union]. Eventually, the Courier-Express folded.

Frugal Management

Berkshire Hathaway pays Warren Buffett an annual salary of $100,000 for arguably the finest capital allocation skills in the world. Buffett receives no bonus, no stock options, and no restricted stock, let alone hedge-fund-style performance fees⁵.

Regarding Mrs. B.'s Furniture Mart in Omaha:

The Mart was the biggest furniture store in the country, with $100 million in annual sales. In Omaha, it accounted for an astounding two-thirds of all furniture sales. […] Indeed, department store chains like Dillard's ($4 billion in annual sales) refused to sell furniture in Omaha because Mrs. B was too tough a competitor.

Buffett paid Mrs. B. $300,000 a year (much more than his own salary). Buffett was in awe of her competitive spirit:

If somebody else advertises Maytag washers she tears out their ad and puts it on her Maytag washer. [...] In her nineties, she continued to work every day of the year, ten to twelve hours a day. [...] When the Omaha World-Herald inquired as to her favorite movie, Mrs. B replied, "Too busy." Her favorite cocktail? "None. Drinkers go broke." Her hobby, then? Driving around and spying on competitors.

Source: Roger Lowenstein. Buffett: The making of an American capitalist. Random House, 2013. [B220]

Buffett recounted that in 1967, the owner of the insurance company National Indemnity "was 10 minutes late for the meeting because he was looking for a parking meter with a few minutes left on it. Buffett joked, 'That’s when I knew he was my kind of guy'."⁹

Buffett keeps a lot of cash on hand. He like to say "we want to be ready to run outside carrying a washtub when it’s raining gold".⁹

Adding that "'any calls you get on Sunday, you’re going to make money'. Those rare calls are the best since they are inevitably from seriously distressed sellers".⁹ He continued: "Berkshire is the 800 number when there is a panic in the markets."⁹

Assorted

Warren Buffett said "that if you cannot understand the footnotes, it is because management does not want you to"¹².

More memorable quotes from the book University of Berkshire Hathaway⁹:

Buffett also noted that book value is seldom meaningful in analyzing the value of a business. Book value simply records what was put into the business. The key to calculating value is determining what will come out of the business.
[Buffett] wryly observed that if you were going to buy a parachute, you wouldn’t necessarily take the low bid.
Buffett said he would be an idiot to jump in a NetJet and say to the pilot, “I’m in a big hurry to get to New York.” To rush the pilot through his safety procedures would be dumb. Yet companies have done this sort of thing time after time with compensation systems that incentivize the wrong things.
It isn’t cash flow if it’s all flowing out.
Buffett called [Fannie Mae and Freddie Mac] “too big to figure out!”

His annual meeting of shareholders has turned into a huge event, commonly dubbed the 'Woodstock of Capitalism'. Some notable topics of conversation over the years (mostly from the question and answer sessions he holds with the audience):

Talking about the margin of safety, Buffett said "When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it".⁹
Buffett warned against false precision: "if you have to carry it out to three decimal places, it is too complicated. [...] Or as Keynes said, 'I would rather be vaguely right than precisely wrong'."⁹ Likewise, he likes "to keep things simple ('I’d rather multiply by three than by pi.')".⁹Buffett retorts that "the meticulous preparation of most projections tells you it is simply a ritual to justify what an executive wants to do anyway".⁹
Commenting on the failure to tighten monetary policy in the late 1990's, Buffett quipped that "part of [the Federal Reserve’s] job is 'to take away the punch bowl at the party'."⁹
Regarding taxes and the wealthy people "who feel unfairly burdened, Buffett suggested transporting them to Bangladesh, so the rich could find out how much of their wealth is them and how much is society."⁹ He likes to repeat this saying "the pond you choose is far more important than how well you swim".⁹
Buffett warned "that you cannot let the market think for you — 'you cannot get rich with a weathervane.' [In fact] Buffett claimed that in 40 years, he has never gotten an idea from a Wall Street report".⁹
Buffett likes to remind people that "a stock does not know you own it, the price you paid [...] the stock does not give a damn".⁹ Indeed, he "he said he bought his first stock in 1942, when we were losing the war", as he remarked that "there is always going to be bad news out there."⁹
Buffett recommends holding fairly concentrated positions: "To buy number one on your list equally with number 37 strikes us as madness. Diversification is a protection against ignorance, a confession that you do not know the businesses you own."⁹
"It is illegal to buy life insurance on people you don’t know as it creates a moral hazard (if they die, you get rich)".⁹ And yet, it is perfectly legal to buy a credit default swap!
Regarding the risk of a mass casualty event that would impact his insurance holdings, Buffett is a realist: "A given percentage of the world’s 6.5 billion people will be psychotic. Thousands of years ago, the worst the demented few could do was to throw rocks. With the advance of technology came bows and arrows, then guns and cannons and, today, nuclear devices".⁹
Regarding the dangers of inflation and printing money for deficit spending, Buffett note that "a one dollar bill [should say] 'In Government We Trust.' [...] The point is that any currency investment is a bet on how government will behave".⁹
Buffett always has time for a good joke, claiming for instance "that lowering expectations was how he got married—'My wife lowered her expectations'."⁹
According to Buffett, "the role of the chief risk officer (CRO) must not be delegated. He has seen risk management group reports ignored too many times".⁹ On the other hand, Buffett has also said that "a chief risk officer is an employee that makes you feel good while you do dumb things".⁹
Buffett isn't always right. A few years ago, he "was reminded of a 1999 Fortune article where he wrote that one would have to be wildly optimistic to think that corporate profits as a percentage of GDP could be much above 6% for a sustained period. Today, corporate profits are greater than 10% of GDP".⁹
Buffett has invested in railroads, rightly observing "that no one will ever build another railroad" (meaning the existing market presents insane barriers to entry). Also, Buffett has shown today's railroads to be are vastly different than the money-loosing propositions of the past, noting "that the railroad business after World War II had 1.6 million people employed in the business, and it was a lousy, undercapitalized industry. Today, the rail industry has less than 200,000 employees, and the industry is much larger, more efficient and far safer".⁹
Buffett likes to observe that "he finds it interesting when he gets asked questions about investments Berkshire owns and that people think he would want to talk them up. [If you want to buy] more shares in the future, so why would they want the price to go up?"⁹
On the importance of having an attentive regulator even in good times: "You can change the profitability of banking totally with capital requirements. With a 100% capital requirement, you could not make any money. With a 1% capital requirement, you add too much risk to the system".⁹
Buffett is plain-spoken: "A full wallet is like a full bladder. One could get the urge very quickly to pee it away."⁹
Buffett likes to praise capitalism as a powerful engine for innovation: "America is a story of constantly finding better ways to do things". The march of progress is undeniable, despite the economic disruptions it can cause. For instance, Buffett stresses that he doesn't "miss the elevator operator".⁹

Sources

¹: Gary Smith. Standard Deviations: Flawed Assumptions, Tortured Data, and Other Ways to Lie with Statistics. United States, Harry N. Abrams, 2015. [B038]

²: Amit Kumar. Short Selling: Finding Uncommon Short Ideas. Columbia University Press, 2015. [B013]

³: John Kay. Other People's Money: The Real Business of Finance. PublicAffairs, 2015. [B175]

⁴: Christopher W. Mayer. 100 Baggers: Stocks That Return 100-to-1 and How To Find Them. 2015. [B089]

⁵: John Mihaljevic. The Manual of Ideas: The Proven Framework for Finding the Best Value Investments. John Wiley & Sons, 2013. [B108]

⁶: Danielle Town and Phil Town. Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad); William Morrow; 2018. [B088]

⁷: Tobias E. Carlisle. Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations. John Wiley & Sons, 2014. [B061]

⁸: Wesley R. Gray and Tobias E. Carlisle. Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. John Wiley & Sons, 2012. [B102]

⁹: Daniel Pecaut and Corey Wrenn. University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting. United States, Pecaut, 2017. [B221]

¹⁰: Nitin K. Sacheti. Downside Protection: Process and Tenets for Short Selling in All Market Environments. United States, Papyrus Capital LP, 2019. [B011]

¹¹: Roger Lowenstein. Buffett: The making of an American capitalist. Random House, 2013. [B220]

¹²: Martin S. Fridson and Fernando Alvarez. Financial statement analysis: a practitioner's guide. John Wiley & Sons, 2011. [B155]

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