WARRENBUFFETTINVESTS

LIKEAGIRLANDWHYYOUSHOULD,TOO

LOUANNLOFTONwithaforewordbyTomGardner

Dedication

Dedicatedtomymotherandtothememoryof

myfather

ContentsCoverTitlePageDedication

ForewordChapter1-WhyTemperamentMattersNowMore

ThanEverChapter2-TheScienceBehindtheGirlChapter3-AQuickIntrototheOracleChapter4-TradeLess,MakeMoreChapter5-ReinInOverconfidence

Chapter6-ShunRiskChapter7-FocusonthePositivesofPessimismChapter8-ResearchExtensivelyChapter9-IgnorePeerPressureChapter10-Learn

fromMistakesChapter11-EmbraceFeminineInfluencesChapter12-MaintainConsistent,PersistentResultsChapter13-ValuePeopleandRelationshipsChapter14-

QuestiontheMastersChapter15-ActFairlyandEthicallyChapter16-FoolishInvestingPrinciples101

AppendicesAQuickGuideRecappingthe

FemaleInvestor’sTemperamentandWhatBuffettCanTeachUsInterviewwithValueInvestorLisaO’DellRapuano,CFA,FounderofLaneFiveCapitalManagementInterviewwithValue

InvestorLaurenC.Templeton,FounderofLaurenTempletonCapitalManagementInterviewwithValueInvestorsCandaceKingWeirandAmeliaWeirofParadigmCapitalManagement

InterviewwithValueInvestorBillMannoftheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmericaFundFurtherReading:BooksforInvestorsofAllLevelsWhoWanttoLearnMore

(CourtesyofMotleyFoolInsideValue)AcknowledgementsNotesIndex

AbouttheAuthorsAlsofromtheMotleyFoolCredits

CopyrightAboutthePublisher

Foreword

Thisisabookforinvestorsaboutinvesting.Itfocusesonthefactorsthatwillbestdetermineifyouwillmakeorlosemoney,andwhether

you’llbeatthemarket.Youmightnaturally

assume,then,thatyou’llbereadingabouthowtopickstocks—sothatyoubuyGEICOinsteadofBankofAmerica.Howtoevaluateacompany’sprofitability—sothatyouinvestinSteveJobs’Apple,notDonaldTrump’sTrumpEntertainmentResorts.Howtodigdeepintoafinancialstatement.Howto

findthenextcompanypoisedtorise10,20,or100timesinvalue.

But,no.Instead,thisbookwill

analyzewhatwillmakeorbreakyourperformanceasaninvestor—yourbrain,youremotions,yourpersonality.Ifyouharnessthem,yourinvestmentreturnswillleadyoutofinancialfreedomintheFoolishfieldsof

opportunity.Butiftheyharnessyou,closeyoureyesbecausethechiliwon’tstophittingthefan.You’llsellwhenyoushould’vebeenbuying.You’llbelievewhatyoushouldhavedoubted.You’llshoutwhileyoushould’vebeenlearning.You’lltradewhenyoushouldalwayshavebeeninvesting.

Ifyouwanttosustainablymakemoreandmoremoney

inthemarket—usingcommonstocksormutualfunds—you’llhavetolearnhowtomasteryourtemperament.Afineplacetostartishere,inthesepages,asLouAnnLoftonrevealshowWarrenBuffettparlayedthesmallinvestmentsofateenagerintothelargestandgreatestinvestmentportfolioinhumanhistory.

It’saworthwhilecase

study!Butupuntilnow,the

master’sstudentshavelookedforhisvirtuositymostlyinthewrongplaces.They’vedreamedincomplexvariableswhiletryingtounearthBuffett’svaluationmodels.They’vequizzedtheinnercirclesofhisinnercircleand,withoutdiscretion,haverootedthroughthemostpersonalmaterialofhislife.

They’vespentdecadesoverlookingwhatmattersmostbut,hey,atleastthey’vetried!

OveronWallStreet,atthedesksofmachotradersandsalesmen,theyignoreBuffett.TheseguyshavedonetheirbesttotaketheTripleCrown:(1)destroyinginvestorportfolios,(2)sinkingthebalancesheetsoftheiremployers,and(3)

levelingtheworldeconomy.Andthey’vedoneitallinthenameofbigcommission-drivenbonuses.Theirgameisnotaboutinvesting,it’saboutscalpingprofitwhileyoutakealltherisk.

Ifyouwanttoknowhowtomakemillionsinvestinginstocks,justdotheexactoppositeofwhat’sonofferinthehigh-octaneworldofWallStreet,wheremenwillbe

men,rightupuntiltheyasktaxpayerstobailthemout.Turnthepage,dearFool,andyouwillseewhatmostoftheworldhasoverlookedorignored.It’ssimple,really:WarrenBuffettinvestslikeagirl.

—TomGardner,December2010

Chapter1Why

TemperamentMattersNow

MoreThanEver

September2008.BritneySpearspreppedforatriumphantreturntoMTV’sVideoMusicAwards,followingalackluster2007VMAperformance.CyclistLanceArmstrongannouncedhe’dcomeoutofretirementtocompeteinthenextTourdeFrance.HurricaneIkehadbecomethefifthhurricaneoftheAtlantichurricaneseason.DelegatesattheRepublican

NationalConventionnamedArizonasenatorJohnMcCainastheircandidatefortheNovemberpresidentialelections.ActorMickeyRourkewasbackinthespotlightthankstothemovieTheWrestler,whichpickeduptheawardforbestfilmattheVeniceFilmFestival.RogerFedererwonanastonishingfifthconsecutivetennistitleattheU.S.Open,

whileSerenaWilliamspickedupherthirdoverall,andfirstsince2002.BritishrapperM.I.A.hadahitonherhandswith“PaperPlanes,”asdidAtlanta’sownT.I.with“WhateverYouLike.”FansofNBC’sTheOfficeeagerlyawaitedthepremiereofthefifthseasontoseewhatkindofhijinkswouldensuewithMichaelScottandtherestoftheDunderMifflinteam.The

defendingSuperBowlchampionNewYorkGiantsbeattheWashingtonRedskins16–7intheNFL’sseasonopener.

Then,lessthantwoweeksintothemonth,theworldchanged.Forever.

Afinancialpanicengulfedstockmarkets,individualinvestors,andworldgovernmentsalike.Andpanicwasindeedthe

perfectwordforwhathappenedinthefallof2008.Writinginthenineteenthcenturyaboutmarketpanics,YaleprofessorWilliamGrahamSumnerdefinedoneas“awaveofemotion,apprehension,alarm.Itismoreorlessirrational.Itissuperinduceduponacrisis,whichisrealandinevitable,butitexaggerates,conjuresuppossibilities,takesaway

courageandenergy.”1We’dseenapreviewof

thismadnessearlierthatsameyear,asescalatingleverageandaslowinghousingmarketcrippleddebt-richcompanieslikeinvestmentbankingfirmBearStearns,whichwasforcedtosellitselfundermuchduresstoJPMorgan(whichhadthebackingandsupportofthefederalgovernmentforthepurchase)

inMarch2008forabargainprice.2Thehousingboom,fueledbysubprimeborrowingandbackedbybanksandWallStreetcompanieslookingtocashinonit,begantounravel.Andasitdidso,itquicklybecameclearthatthecreditmarkets,andthebalancesheetsofjustabouteverybankandfinancialfirmunderthesunandmoon,werefilledwith

horridloadsofbaddebt.Indeed,itwasa“realandinevitable”crisis.

BearStearns’demisespookedthemarketandinvestorsinMarch.Theworldthenwatchedasonetroubledbankandhedgefundafteranotherrevealedthatthey,too,weresufferingundertheweightofbadloans,leadinguslimpingintoSeptember,whenthe

bankruptcyfilingofthestoriedanddebt-ladenfinancialfirmLehmanBrothers(thegovernmentrefusedtostepinhereastheyhadwithBeartomakesureasaleofthefirmhappened)sentthemarketsoveracliff.Thecreditmarkets,bothbetweenbusinessesandbetweenbusinessesandindividuals,groundtoahalt.Nooneknewwhowashiding

whatintheirfinancialstatements.Nooneknewwhichbalancesheetsyoucouldtrust,andwhichyoucouldn’t.Itseemedsafertoassumetheworst,anditseemsthat’swhatjustabouteverybodydid.

Asonefamoussagehassaid,“Youonlylearnwhohasbeenswimmingnakedwhenthetidegoesout.”3Inthefallof2008,WallStreet

wasavirtualnudistcolony.Andpeople,itwasn’tpretty,asifIneedtoremindyou.

Stockmarketsdroppeddramatically,leavinginvestorstohangonfordearlife.Volatilitywasthewordoftheday,withtheso-called“fearindex”reachingnewheightsasthemarketsreachednewlows.Consumerconfidenceandinvestorsentimentplummetedright

alongsidestockprices.Theveryfutureoftheeconomywasuncertainfromoneminutetothenext,withoneestablishedfinancialcompanyafteranotherataprecipice,danglingovertheedge,notsurewhatwasahead.

Hello,panic.ByOctober6,2008,the

DowJonesIndustrialAveragefellbelow10,000

pointsforthefirsttimesince2004.Threedayslater,itwoulddropbelow8,600.Thatsameday,October9,theStandard&Poor’s500index(whichtracks500ofthelargestcompaniesintheUnitedStates)markeda42percentdeclineoverthepastyear,easilywipingawaygainsthathadtakenyearstobuild.Thismilestonecamelessthanfourshort,painful

weeksaftertheLehmanBrothersbankruptcy.

Itwasatimethattestedthemettleandtriedthenervesofeventhemostseasonedinvestor.Iwatched,wide-eyedandwithnosmallamountofhorror,asmyportfolio(containing,insomecases,sharesofcompaniesI’downedformorethantenyears)shranktojustawispofitself.Howlowcouldit

ultimatelygo?Well-runcompaniesthathadnothingtodowiththebanks’orfinancialinstitutions’troubleswereslaughteredrightalongsidethem.Youwouldhavethoughtpopularconsumerbrandandretailcompanieshadsuddenlystarteddabblinginmortgage-backedsecuritiesversussellingtheirsoftdrinksandleggings.

Flippingonthetelevisioneachmorningbecameanactofdesperationandadventure,inastrangesense.Ifeltcompelledtolook,toseewhathadhappenedovernight,toseewhatnewfreshawfulthingwasgoingtobeinflictedonusthatday.Tocompareittoacarwreck,whereyouhonestlydon’twanttolookbecauseyoufearwhatyou’llsee,butyouseem

unablenotto,isapt.Onlyinthiscase,there’s

acrucialdifference:Wewereallinthiscartogetherasitcrashed,leavingusinamangledheap.

Thehair-raisingdropsandsheerpanichadbreathlesscommentatorsstrugglingtokeepup.Newswasbreakingsofast,itwasnearlyimpossibletoknowthelatest,mostup-to-date

information.ImportantpeopleinfancycarsandfanciersuitsinplaceslikeManhattan,Washington,D.C.,andLondonwerecomingandgoingfrommeetings,theirentriesandexitsbroadcastontelevisionasiftheywerecelebrities.(Meanwhile,BritneydidjustfineattheVMAs,secondtimearound,thankyouverymuch.)

Throughitall,amansat

farremovedfromthehubbubofNewYorkCityandWashington,D.C.,intheMidwest,inquiet,placidOmaha,Nebraska.Hewatched,ashe’dwatchedsomanytimesbefore,astheworldwasseeminglycomingtoanend.HeheardtheshrillvoicesonTVandevenheprobablycouldn’tescapethedaily,evenhourly,delugeofphotographsofWallStreet

traderslookinghorrified,frazzled,orjustplainresignedtoitall.

Then,hedidwhatanyrationalpersonshouldhavedoneinthefaceofsomuchfear.Hetookadeepbreath,steadiedhimself,andstartedbuyingstocks,putting$20billiontoworkincompanieslikeGoldmanSachsandGeneralElectric.Ittookcourage,fortitude,andan

abilitytolookpastthecurrentcrisistotheeventualrecoveryofAmericanbusinessesandtheworldeconomy.

Ittooktherighttemperament.WarrenBuffett,ourmaninOmaha(andthe“famoussage”quotedearlier),didn’tpanicandsell.Heremainedcalm,andheassessedthesituation.Andwhenhedid,heactedfromaplaceofcertitude,backedup

byyearsofexperience.Heencouragedotherstodothesame,remindingthemthatwe’dbeenthroughtoughtimesbeforeandwe’dcomeoutaheadeachtime.Healsoremindedinvestorsthatthebesttimetobuystockswaswheneveryonewasfleeingthemarket,leavingbargainsgalorereadyforthetaking.

Tosaythatthiswasaneasymindsettoadoptduring

thisfrenziedtimeperiodisanunderstatementofcolossalproportions.It’sdemoralizingtowatchyour401(k)growsmallerbytheday,bythehoureven,forweeksonend.It’sexhaustingandincrediblydishearteningtowatchyournestegg,yourretirementaccount,orthekids’collegefundallevaporate.It’slikewewerealljustbeingbeatovertheheadrepeatedlyand

wecouldn’tescapeit.Thehits,theyjustkeptcomingandcoming.

ImanagedtobuckupandactuallybuysomemoresharesofafewcompaniesIalreadyownedontheTuesdayafterLehmanfiledforbankruptcy.AndIamnotexaggeratingwhenIsaythatwasoneofthehardestthingsininvestingI’deverdone.Actuallymakingthat

decision,thatchoicetowillinglypushmyselfbackintoamarketthatwasalready,evenatthatearlystage,leavingmebloodiedandbruised,wassodifficult.ItwasascarytimeandittookeveryounceofwillpowerIhadtoclickthelittle“buy”buttononmybroker’swebsite.Everythinginmybodywastellingmenotto.Luckily,myheadknewbetter

andoverruledthestarkfearcoursingthroughme.

OnceIboughtthoseshares,though,thepainreallybegan.Ihadnoideathatweeksandmonthsofawhipsawingmarketlayaheadofme,testingmyabilitytohunkerdownandholdon.Ineversold,though.Iwaiteditout.Andnow,lookingatthereturnsontwoofthethreestocksIboughtmoreofthat

day(AppleComputerandChipotleMexicanGrill),I’mhappyIdid.Asforthethird?Well,theycan’tallbewinnersnow,canthey?(Cough,ChesapeakeEnergy,cough.)

WarrenBuffetthasbuiltalongandenviablecareerinthefinancialbusiness,withatrackrecordmostinvestorsandmoneymanagerscanonlydreamof(andwould

probablykillfor).Fornearlyfivedecades,he’sbeenanalyzingcompanies,investinginthebestofthem,andbuildingwealth.Heisabsolutelywithoutparallel.Hisabilitytopickstocksandinvestincompaniesthatprofitandendureisnexttonone.AndyetwhattrulydefinesBuffett,whatmakeshimtheinvestorheistoday,whatseparateshimfrom

everyoneelse,fromallthoseotherinvestorsovertheyears,ishisremarkabletemperament.

TheAmericanHeritageDictionarydefinestemperamentas“themannerofthinking,behaving,orreactingcharacteristicofaparticularperson.”4Intheworldofinvesting,temperamentmanifestsitselfinwhetheryouareruledby

emotionswhenyoumakedecisions,causingyou,forexample,tobuyandthenfreakoutandsellbeforeyoushould.Whetheryoutakeontoomuchrisk.Whetheryou’refreneticallymovingintoandoutofstockswithouteverhavingaclueastowhatthebusinessbehindthemactuallydoes.Whetheryouletyourselfgetrattledbymarketmovementstoa

paralyzingpoint,orwhetheryoulookatdecliningpricesandseeopportunities.

Buffetthimselfhastalkedabouttheimportanceoftemperament,saying,“Themostimportantqualityforaninvestoristemperament,notintellect....Youneedatemperamentthatneitherderivesgreatpleasurefrombeingwiththecrowdoragainstthecrowd.”5

He’salsosaid,“Successininvestingdoesn’tcorrelatewithIQonceyou’reabovethelevelof125.Onceyouhaveordinaryintelligence,whatyouneedisthetemperamenttocontroltheurgesthatgetotherpeopleintotroubleininvesting.”6

Talkabout“trouble,”indeed.Wecansurelypointtotemperament—thewrongkind,thatis—whenlooking

forsomeoftherootcausesofthefinancialcrisis:

•Short-termthinkinginabundance•Risktakinginridiculousexcess•Debtlevelsthatwerecompletelybeyondreason•Theirrationalbeliefthatthegreed-filledmoneymakingwouldn’tstopanytimesoon

•Theinabilitytoseethelong-termconsequencesofsuchpoordecisionmaking•Thecynicalprofiteeringoffthenextrubearoundthecorner

Solongastherewassomeonefoolishenoughtoselltoatanever-higherprice,whetherwe’retalkinghousesorstocksorpackagesof

subprimeloanscouchedassafeinvestments,theraucouspartyjustkeptongoing.

Now,granted,lotsofotherfactorswerealsoinplayhere,leadinguptothefinancialcrisis.Wecan’tblameitfullyandsolelyontemperament.It’sanenormouslycomplexsituationthatbuiltupoveryearsandyears.Incentivesplayedasignificantrole,as

didtheregulatoryenvironmentandloosemonetarypolicy.CompetitionamongWallStreetfirmswassofiercethatinordertojustkeepupwithoneanother,tradersandfinanciersincreasinglywereunabletosaynotoanything.Ifafirmdidn’twanttohandleadealbecauseitwasworrieditwouldturnoutbadly,therewasalwaysanotherplace

downthestreetthatwould.However,temperamentdidindeedhavearole.

Lookingback,faultytemperamentscanbediscoveredatalllevelsoftheunfoldingcrisis,startingwiththosefolkslookingforasliceoftheAmericandream:thehomebuyersthemselves.Now,ofcourse,therewereresponsiblepeoplewhosomehowgotensnaredinthe

subprimemess,orworseyet,weretrickedintotakingonloanstheyneverhadasolidchanceofactuallymakinggoodon.Butmanyfolksdeliberatelytookonextremeamountsofdebttobuymorehousethantheyneededorcouldafford(and,insomecases,morehousesthantheyneededorcouldafford),oftenintheformofinterest-onlyoradjustableratemortgages,or

sometimescombinationsofboth.Itwasknownthatthesemortgageswouldeventuallyreset,possiblyatmuchhigherrates,meaningthepaymentsonthemcouldrisedramatically.Thehopeformanytakingonthisriskwasthatthehousingbubblewouldcontinuetoinflatewithoutpause,andthathomevalueswouldcontinuetoriseintothestratosphere,

allowingasafe,swiftexitbeforethemortgagerateresetbecameanissue.

Alas,itwasnottobe.Homevaluesstartedto

tumble,mortgagesbegantoresetatuntenablerates,andeventuallythemonthlyinterestpaymentsstartedchokingthosewhohadsoenthusiasticallytakenthemoninthefirstplace.Missedpaymentsledtodefaultsand

baddebtbegantorise.Thisgrowingtrendsuffocatedhomeowners,thenthebanksandfinancialinstitutions,thenthecreditmarketsandstockmarketbothhereandworldwide,infectingtheglobaleconomyfromthegroundup.Andallbecausenotenoughpeoplerealizedthatlong-termthinkingandprudentrisktakingarevirtues,notcurses.

Ontheothersideoftheaislestoodthebankersandthefinancialinstitutions—thetitansofWallStreet—dirtiedwithevenmoretemperamentalfilththantheshortsightedhomebuyer.Theymaynothavebeentheonestakingoutthesubprimeloans,buttheysureweremintingaprofitfromthemandencouragingtheirrationalbehaviorbehindthemto

continue.Andthankstotheirwillingnesstoleveragethemselvesatlevelsnoreasonablepersoncouldeversupportorunderstand,orhardlyevenfathom,theythenspreadtheproblemscreatedbyacollapsinghousingmarketfarandwide.

Questionsbegantoariseabouthowreliableandsolidthecollateralofanybankactuallywas,sinceeveryone

hadthistoxicstuffontheirbooks.That’swhatcausedthecreditmarketstostartseizingup.Nobankswantedtolendtooneanother,becausetheycouldn’ttrustthatthecounterpartywouldactuallybeabletopaythemback.Theycouldn’ttrustthattheirbooksdidn’thidedirtysecretslikeeveryoneelse’sdid.Whenlendingnearlystoppedbetweenfinancial

institutions,individualsweren’tfarbehind.

Panic,ouroldfriend.Onceagain,wesee

temperamentatthesceneofthecrime.ThewrongtemperamentwaspervasiveonWallStreetandwaslikegasolineonafire.Anysenseofacceptableriskwentrightoutthewindow,asthemoneykeptpouringin.Thecultureofthedaybecame

overburdenedwithmacho,me-first,make-money-no-matter-whatcutthroatattitudes.Tradersweremakingmillionsthankstomassiveoverleveragingandevermorecomplexderivatives,manyofwhichwerebasedonnotmuchmorethanlies.Risktaking,alackofconsequences,andshort-termthinkingruledtheday.

Evenmostofthevery

peoplepropellingthemessforwardknewitwouldn’tlastforever.Itsimplycouldn’t.Butinsteadofrealizingthatthegoodtimeswouldn’tlastandtakingsmartstepstoinvestwithalonger-termoutlook,theoverridingreactionbymostoftheplayerswastojustgetasmuchastheycouldwhiletheycould—whocaredabouttheconsequences?

Notonlywasflawedtemperamenttoblameinpart,then,fortheunfoldingcreditcrisis,thanksbothtohomebuyerstakingontoomuchdebtandWallStreetfollowingbehind,doingthesame,eagertomakeaquickbuck,butitalsomadetheresultantfinancialpanicthatmuchmorepronounced.Thestockmarketdropped,investorsfled,cashingout

theirstocksattheabsoluteworsttime;thestockmarketdroppedagain,investorsfled...Lather,rinse,repeat.Meanwhile,Buffettsatcalmly,waitingtomakehismove,waitingtobuysharesofgoodcompaniesatattractiveprices,averymodeloftherighttemperament—thatofaninvestorandnotaspeculator.

Here’sthegoodnewsfor

us—wecanlearntoadoptamorelong-term-focusedtemperament.Wecanbecomecalmerinvestors.Wecanshiftourselvesfromspeculatorstoaninvestmentmindset.Wecantampdownourrisktaking.Andifwedon’teverwanttoseethemistakesofthefinancialcrisisandpanicof2008repeatedagain,itseemssmarttodoso.

YourowninvestmentresultswillimproveasyoulearntocontrolyouremotionsandadoptaBuffett-liketemperament.WemightnotbeabletogeteverypersonworkingonWallStreettofocusonimprovingtheirtemperaments,althoughthatwouldundoubtedlymakeourfinancialsystemstrongerandlesserratic,butwecanstarthere,witheachother,

withourownbehavior.Now,here’swherethings

getevenmoreinteresting,foratleastonesegmentofreadersandinvestors.Wecanallworktoimproveourtemperaments,yes,butonegroupinparticularneedstoworkabithardertodoso.Andthey’retheoneswhoneeditthemost.

Men,I’mlookingatyou.Itmustbesaidthatthe

majorityoftradersonWallStreet,themajorityofboardmembersatfinancialcompanies,andthemajorityofexecutivesatinvestmentbanksshareoneverynotablequality—aYchromosome.WallStreet,atleastatthetop,atleastwhenitcomestodecisionmakingandthepowertoaffectthings,isstillaboys’club.7Andwhilehomebuyers,bothmaleand

female,sharetheblameforthefinancialcrisis,itwasprimarilymenrunningthebigmoneyonWallStreetwhoexportedtheproblemandmadethesituationexponentiallyworse.

Sure,therewereahandfulofwomentobefoundonWallStreetinpositionsofpower.ErinCallan,chieffinancialofficeratLehmanBrothersintheheadysummer

of2008,comestomind(althoughitmustbepointedoutthatshecameintothatpositioninSeptember2007,wellafterabigchunkoftheleverageatthefirmhadbeenpiledon).8Butbyandlarge,itwas,anditremains,aman’sworld

So-called“feminine”qualitieslikerelationshipbuilding,patience,andcollaborationweremarkedly

absentduringthemostrecentmarketmania.HadtherebeenmoreofthattemperamentaroundWallStreet,andindeedmorewomenonthetradingfloorsandintheboardrooms,it’spossiblethingswouldn’thaveturnedoutastheydid.Andifthingshadn’tturnedoutastheydid,wewouldallhavelargerportfoliosandfewersleeplessnightsbythispoint.

Men,you’vegotsome’splainin’todo.

Studieshaveshownthatwomenhaveadifferentapproachtoinvestingthanmendo.Theythinklong-termanddon’ttradeasmuch.Theyeschewriskmorethanmendo.They’rebetterabletothinkforthemselvesandnotbendtopeerpressure.Andtheyhavemuchlesstestosterone,whichaffects

marketsinwayswearestilldiscovering,thankstonewdevelopmentsinthefieldofneuroeconomics.Thewaythatwomentendtoapproachinvestingishealthierandcalmer,andit’sthewayweshouldallapproachinvesting,bothmenandwomenalike.

THE

CURIOUSCASEOFICELAND

Lotsofweirdthingswentdownduringthepanicof2008,butperhapsnonewasasstrange

aswhathappenedinthetinynationofIceland.Thecountry,just300,000citizensstrong,sawitselftransformed,nearlyovernight,fromasmall,humblefishingnation

intoahotbedofinternationalfinancialactivity.Formerfishermenweretradingderivatives,somethingthey’dprobablyneverevenheardofbefore2003.Thecountry’sdebt

gotsooutofhandthatatonepointitwasanastonishing850percentofitsgrossdomesticproduct.9Risktakinginexcess,carriedoutlargelybyaggressivemalebankers,drovethislittle

countryvirtuallystraightintobankruptcy,withnothingbutacollapsedcurrencyanddasheddreamstoshowfortheirtrouble.

So,whowascalledintosavetheday?

Yes,women.Tocorrectcourse,femaleIcelandicpoliticians,bankers,andbusinessmindstookchargeofthecountry’sfalteringeconomy.Afemaleprimeministerwas

elected,andwomeninprominentfinancialpositionsfoundnewaudiencesamongfrustratedIcelanderseagerforchange.

MostnotableamongthemareHalla

TómasdóttirandKristinPetursdóttir,whotogetherfoundedAudurCapitalin2007,beforetheeconomytherewenttopieces.Theircompanywasfoundedon“femininevalues”and

survivedtheIcelandicfinancialcrisisintact—arealfeat,lookingatthefinanciallandscapetheretoday.

Tómasdóttirdescribedherthinking,andAudur’svalues,inaFebruary

2009article:10“Wehave

fivecorefemininevalues.First,riskawareness:wewillnotinvestinthingswedon’tunderstand.Second,profitwithprinciples—welikea

widerdefinitionsoitisnotjusteconomicprofit,butapositivesocialandenvironmentalimpact.Third,emotionalcapital.Whenweinvest,wedoanemotionalduediligence—

orcheckonthecompany—welookatthepeople,atwhetherthecorporatecultureisanassetoraliability.Fourth,straighttalking.Webelievethelanguageoffinanceshould

beaccessible,andnotpartofthealienatingnatureofbankingculture.Fifth,independence.Wewouldliketoseewomenincreasinglyfinanciallyindependent,becausewith

thatcomesthegreatestfreedomtobewhoyouwanttobe,butalsounbiasedadvice.”

ThestoryofIcelandisstillunfolding,asthecountry’sfinancialwoescontinueto

hauntityearslater.Itfinallyemergedfromthe2008recessioninthethirdquarterof2010,thoughitstroublesaren’tcompletelyover.11Butcouldthistinynationleadthewayintoamore

enlightenedfinancialfuturefortheworldeconomy?Onecanonlyhope.

Luckilyforallofus,wehaveanoutstandingmodeltoguideusinthesearchforthedesiredinvestingtemperament:WarrenBuffett.

Whencomparedtotheresearchonmen’sandwomen’sinvestingstyles,andthedifferencesbetweenthem,Buffett’sinvestmentstylelooksverysimilartothosestrategiesemployedbywomen.Histemperament,thatwhichdefineshimandmakeshimthemasterinvestorheis,ismorefeminine,ifyouwill,thanmasculine.

Andifthere’sanydoubtastothevalidityofthisstyleandtemperamentversussomethingabitmore,say,macho,allowmetopointyouinthedirectionofhisreturnsversusthoseoftheinvestmenthousesonWallStreetin2008andbeyond.Buffett’sbeenBuffettfordecades,buildinghiswealthovertime,whiletheboysonWallStreetdestroyedtheirs

—andours,too!—injustseveralshortmonths.Buffett’scompoundedannualbookvaluegainhasbeenmorethandoublethereturnoftheS&P500formorethanfortyyears,whiletheydashedour401(k)sandsenttheeconomyintoaspiral.

Therecanbenoquestionastowhichisthemoresustainablepath,whichisthesmartestwaytocreatewealth

overthelongterm,whichisthebestwayforus—forallofus—toinvestforabrightfuture.It’stimeforachange.It’stimetoembracethefeminine.

It’stime,quitesimply,forallofustoinvestlikegirls,rightalongsidethegreatestinvestorofalltime,WarrenBuffett.

So,here’showthingswillgofromhere.We’llstartwith

alookattheresearchonthetopicofwomenandinvesting.(Youdidn’tthinkwe’dletthatjustslide,didyou?)Fromtherewe’llspendachunkoftimelookingathowWarrenBuffettexemplifiestheideal,feminineinvestingtemperament.We’llthenlearnsomeFoolishinvestmenttenetstohelpyouonyourwaytobecomingan

investor,ortoimprovingyourcurrentinvestmentreturnsifyou’realreadyinvestingonyourown.Andwe’llclosewithappendicesthatarenottobemissed:interviewswithseveralinvestorswhoaremodelsoftemperamentthemselves,alongwitharecapofwhatwelearned,andareadinglistforthoseofyouwhowanttolearnevenmore.

So,gatheryourthings,get

comfortable,grabadrink,andsettlein.Onceyou’redonereadingthisbook,youwillbereadytoinvestwithatemperamentthatwillhelpyoubesuccessful.Oh,andyou’llhavefunalongtheway.Investingshouldbefun,afterall.Buffetthimselfsayshetap-dancestoworkeachmorning.Bytheendofthis,you’llbetap-dancing,too.

Chapter2TheScience

BehindtheGirl

Followingthefinancialcrisisandpanicof2008,therole

andinfluenceofmeninoureconomyappearstobeshrinkingjustatthetimethatwomen’sroleandinfluenceisexpanding.Menwere,byandlarge,muchmoreaffectedbyjoblossesintherecentrecession.Alookattheindustriesattherootoftheproblem—housing/constructionandfinance—explainswhy.Womennowactuallymake

upthemajorityoftheUnitedStates’workforce,markingthefirsttimeinourcountry’shistorythatthat’sbeenthecase.1

Morewomenarealsobecomingmoreeducated,withwomenearningalmost60percentofundergraduatedegrees.Thatsamepercentage,60percent,holdsformaster’sdegreesaswell.2Andforthefirsttimeever,

womennarrowlyedgedoutmeninearningPhDsinthe2008–2009academicyear.3It’ssafetosay,then,thatwomen,morethanmen,areequippingthemselvestothriveandprosperintoday’seconomyandbeyond.

Willweseewomentakingovermorefinancialjobs,too?It’spossible.Womencurrentlyearn42percentofthecountry’s

MBAs.4Andlookingattheoverallshiftthatseemstobetakingholdafterthecrisis,andtheincreasedvaluethatwillcontinue(hopefully)tobeplacedoncalmertemperaments,it’sprobablethatmorewomenwillgravitatetoWallStreet.

Sothen,ifwebelievethatmenandwomenadoptingamore“feminine”attitudetowardinvestingcould

changetheworldoffinanceforthebetter,andatthesametimefattenourindividualbrokerageaccounts(it’snotallaboutmerephilosophizinghere),we’dbetterbackupourclaims,right?Afterall,basingourassumptionsonso-called“femaleintuition”wouldbedownrightsexist.

Luckyforus,academicresearchersandbehavioraleconomistshavebeenputting

inthelonghoursandhardworknecessarytoteaseoutthedifferencesbetweenhowmeninvestandhowwomeninvest.Thestudiesandsurveysgobackyearsandcovernearlyeveryaspectofinvesting—decisionmaking,riskassessment,tradingfrequency,andconsistencyofresults,justtonameafew.

Researchershavealsostudiedthedifferencesamong

professionalinvestors,bothmaleandfemale,highlightingthefactthatthesevariationsintemperamentaren’tlimitedjusttotheuniverseoftheindividualinvestor.Andsomeofthemostinterestingrecentstudieshavejustbeguntouncovertheroleoftestosteroneininvesting,risktaking,andtrading.You’renotshockedtohearithasone,areyou?

GIRLSWILLBEGIRLS

BradM.BarberandTerranceOdeanoftheUniversityofCalifornia(DavisandBerkeleycampuses,respectively)publishedwhatislikelythemostfamous(orinfamous,insomecircles)andgroundbreakingstudyongenderdifferencesininvestingwiththeirFebruary2001QuarterlyJournalof

Economicspaper,“BoysWillBeBoys:Gender,Overconfidence,andCommonStockInvestment.”5(Gottalovethattitle,right?)

Bysurveying35,000discountbrokerageaccountsoveranearlysix-yearperiod,BarberandOdeanfoundseveraldistinctdifferencesbothintemperamentandperformanceformenversuswomen.Theirpaperwas

predicatedonpriorresearch,whichhadshownthatmentendtobemoreoverconfidentthanwomeninso-called“manly”pursuits(ofwhich,wecanstill,sadlybutnotsurprisingly,countfinance).Putsimply,menthinktheyknowmorethantheydo.Womenaremorewillingtoadmitthattheyknowwhattheydon’tknow.They’remorewillingtoownuptothe

factthattheydon’tknoweverything.

So,howdoestheissueofoverconfidenceplayintoinvestingbehaviorandresults?Well,becauseoftheiroverconfidence,itwasassumed—correctly,asitturnedout—thatmenwouldtrademorethanwomendo.Andwhatdoesmorefrequenttradingdotoyourinvestmentresults?Itdragsthemdown,

runninguptransactioncostsandactingliketheproverbialalbatrossonwhatmightotherwisebesmartinvestmentdecisions.

BarberandOdeanfoundthatmentradedthestocks(alsoknownas“securities”)intheiraccounts45percentmorethanwomendid.Forty-fivepercent!Thisexcessiveflip-floppingofsecuritiesreducedtheirnetreturnsby

2.65percentagepoints,comparedtothe1.72percentagepointswomendingedtheiraccountsbytrading.Singlemenwereevenworseoffenders,trading67percentmorethansinglewomen.

Marriedmenfaredworsethanmarriedwomen,buttheyweren’tasbadoffasthesingleguys.Thiswasn’tsurprisingtoBarberand

Odean,giveneverythingtheyknewaboutoverconfidencestudies.It’spossiblethatwiveswereinfluencingtheirhusbandshere,helpingthemtonedowntheiroverconfidence,andthatinturnhelpedtheirinvestmentreturns.

Now,itshouldbenotedthatBarberandOdeanfoundthatbothsexeshurtthemselvesbytradingtoo

frequently—menjusthurtthemselvesmore.Unnecessarytradingistherealdevilhere.

Here’swhereoneofthemostinterestingoutcomesfromBarberandOdeancomesintoplayforourpurposes—women’soutperformanceoverthemenwasn’trelatedtobetterstockpickingortomarkettiming.Itwasn’tthatwomenwere

findingtheperfectstocksattheperfecttime.BarberandOdeanemphasizethisagainandagainintheirpaper.

Thekeyhereisthatwomen’stradinghurttheirperformancelessthanmen’s,thankstomen’sgreateroverconfidence.Thedifference,then,ismorerelatedtotemperamentthanitistoskill.Youcanbethesmartestsecuritiesanalyst

around,butnothavingthecorrectmindsetcanabsolutelysinkyouasaninvestor.Alltheknow-howintheworldcan’tcorrectforbadhabits.Temperamentmatters,plainandsimple.

BarberandOdeanalsopioneeredtheinsightthat“womentendtoholdlessriskypositionsthanmenintheircommonstockportfolios.”Priorsocial

scienceresearchhadshownthatwomen,onaverage,aremoreriskaversethanmen,butthis(accordingtotheauthorsthemselves)wasthefirstbitofdocumentedevidencethatwomenwerechoosingsafersecuritiesthanmenwere.

Thestudymeasured“risk”fortheinvestors’portfoliosmultipleways(wecanboilitdownto

“volatility”forourpurposeshere),andacrossthemall,menexposedthemselvestomoreriskthanwomendid,with(whoelse?)singlemenexposingthemselvestothemost.Higherriskexposureshouldresultinhigherreturns—that’swhatcompensatesinvestorsfortakingit,afterall.Ifyoudidn’tthinkyou’dberewardedforforgoingasurethingforalesssure

thing,youwouldn’tdoit,right?

Butherethat’snotthecase.Despitetheirwillingnesstogoforriskwithgusto,themaleinvestorsinBarberandOdean’sstudysimplytradedtheirprofitsaway.Onceagain,we’reface-to-facewithtemperament.

SofromBarberandOdeanwecanseethat

becausemenareoverconfidenttheytrademore(muchmore)thanwomendo,andasaresult,women’sreturnsarehigher.Wealsohavelearnedthatwomentendtoholdlessriskysecuritiesthanmendo.Tradeless,whiletakinglessrisk.Sofar,scoretwoforthegentlersex.

TAKETHEMONEYANDRUN

MutualfundpowerhouseVanguardanalyzedthemovementsin2.7millionofitsinvestors’IRAaccountsduringthefinancialpanicof2008and2009,andwhattheyfoundshouldn’tsurpriseanyonewhoknowsaboutBarberandOdean’sresults.6

Yesindeed,womenweremorelikelythanmentostayputduringtheherky-jerkymarketantics,nottouching

theirportfolios.Morementendedtofreakoutandselltheirstocksrightatpreciselythewrongtime—thebottom.Theylockedinundoubtedlyhugelosses,andontheflipsidelikelymissedoutonthemarket’srecoveryaswell.Men’soverconfidenceapparentlyledthemtotradewhentheyshouldn’thave,whenthebestcourseofactionwouldhavebeento

standpat.Remembertheharrowing

scenesIdescribedinchapter1,withthemarketcollapsingallaroundus?Itwasadifficulttimetobesteadyanddotherightthing,whichwas,ofcourse,tonotsell.Theabilitytobecalmandnotmakerashdecisionsinthefaceofsuchchaosisanincrediblyimportantcharacteristicofsuccessful

investorsoverthelongterm.It’salsooneofthemostdifficulttomaster.Atthetime,itfeelslikeabsolutehell.Trustme,Irememberhowitwasthatfall.Iremembermystomachturning,watchingasmyportfoliogotredderandredderdaybyday.ButIalsoknewthatI’dfeelworsewhenevertheworldfinallystoppedendingifI’dthrown

myhandsupintheairandsoldeverything,versusjusttakingadeepbreathandbeingstill.BasedonVanguard’sdataatleast,itappearsthatinthismostrecentinvestmentstorm,women,morethanmen,demonstratedthisvitalabilitytobepatientandwaititout.

WHENOPTIMISMISN’T

OPTIMAL

Sofarwe’velearnedthatwomentendtotradelessthanmen,takelessrisk,andaremorelikelynottosellattheworstpossibletime.Nowwe’lllookatapositiveaspectofpessimism,ascounterintuitiveasthatmightsound.

Inherpaper“FemaleInvestorsandSecurities

Fraud:IstheReasonableInvestoraWoman?”JoanMacLeodHeminwayoftheUniversityofTennesseeCollegeofLawpresentsaconcisehistoryofmuchoftheresearchonmaleversusfemaleinvestinghabits.7Oneinterestingpointshehighlightsisthatfemaleinvestorsmaybelessoptimisticthanmaleinvestors—andIthinkthat’sagood

thing.Whileoptimisminmost

partsofourlivesissomethingtostrivefor,ininvestingitcanpoisonyourjudgmentandoutlook.Optimiststendtooverstatetheirabilitiesandinvestmentacumen(hello“overconfidence”fromBarberandOdean),takemorerisks,andcansometimespayattentiononlytoinformationthatispositiveandsupports

conclusionsthey’vealreadycometo.Becauseoftheirsunnyoutlook,theytendtoassumeonlythebestcanhappentotheirstocks,andtheydon’twanttohearotherwise.

Pessimists,ontheotherhand,tendtobemorerealistic,andininvesting,clear-eyedrealismbeatspie-in-the-skyoptimismanydayoftheweek.Women,thanks

partlytothefactthattheylackthesameconfidencelevelsasmen,andalsoratetheirinvestingknowledgebelowwhatmenbelieveabouttheirowninvestingskill,tendtoreactmorerealistically.They’rebetterjudgesabouttheirpotentialreturnsandabilities,evenifthatmeanstheytendtodoubtthemselvesmore.Overconfidenceand

optimismcankillreturns,sointhiscase,alittleself-doubtcanactuallyworkinwomen’sfavor.

GIRLSJUSTWANTTOHAVEFUNDS

Weknownowthatfemaleindividualinvestorstendtobelessoptimistic,arelesslikelytopanicandsellwhen

themarket’scrashingaroundthem,andtendtotradelessandtakelessrisk.Butwhataboutprofessionalinvestorswhohappentobewomen?Dothesedifferencesstillhold?

StefanRuenziandAlexandraNiessenconductedastudyonthedifferencesbetweenmaleandfemalemutualfundmanagersthatverifiedsomepastfindings

anduncoverednewones.8ThepairanalyzedreturnsforallU.S.mutualfundsrunbyindividuals(versusteams)fortheperiodfromJanuary1994toDecember2006.Intheend,theauthorsstudied15,170funds;about10percentofthoseweremanagedbywomen.Whilethedifferencesforthissubsetofinvestorsweren’taspronouncedastheywerefor

retail(orindividual)investors,theynonethelesshighlightedkeytemperamentadvantagesforwomen.

Again,femaleinvestorswereshowntobemoreriskaversethanmaleinvestors.Thenewspinhereisthatthefemalefundmanagerschosetoinvestusing“significantlylessextremeinvestmentstyles”thandidthemalemanagers.Notonlythat,but

womenstucktotheirinvestmentgunsmorethanmen;theydidn’tseeaneedtobechangingupinvestmentstyleswilly-nilly.Andonceagain,femaleinvestorstradedlessfrequentlythanmalesdid.Yes,evenamongprofessionals,thatdifferencestillheld.

What’sinterestinghere,however,isthattherewasnotaperformanceadvantagefor

womenovermenthankstotheircalm,patienttemperaments.Performancebetweenthetwogroupswasaboutequal.Butperformanceisn’teverything.Consistencyand“performancepersistence”(ortheabilitytogeneratesteadyreturnsyearafteryear)matter,too.

RuenziandNiessendemonstratedthatthankstostayingtruetotheir

investmentprocessandphilosophyandnotswitchingupinvestmentstylestochasethenexthotthing,andthankstotheirseeminglynaturalwillingnesstoinvestusing“lessextremeinvestmentstyles,”thefemale-managedmutualfundsinthestudyachievedmoreconsistentreturnswithmorepersistentperformance.Inshort,therewerefewerwildperformance

swingsinthefemale-managedfundsthaninthemale-managedfunds.Toquotethestudy’sauthors,“Thesefindingsshowthatpastperformanceisabetterindicatoroffutureperformanceforfemalemanagedfundsthanformalemanagedfunds.”9

Whiletheremaynothavebeensignificantperformancedifferencesbetweenmaleand

femalemutualfundmanagers,recentstatisticsabouthedgefundmanagersrevealexactlytheopposite.Ahedgefundisaspecialtypeofinvestmentfundavailablealmostexclusivelytohigh-net-worthindividualsandinstitutionalinvestors.Typically,themanagersofthefunds“hedge”positionswithintheirportfolios,goingbothlongandshortstocks

(thatis,theyarebettingthatsomestockswillgoupinvalueandsomewillgodown).Inmanycases,ahedgefundcanberiskierthanyouraveragemutualfund.

HedgeFundResearch,Inc.,asourceofinformationanddataonthehedgefundindustry,trackedtheannualizedperformanceoffemale-managedhedgefundsfrom2000toMay2009.10

Theydiscoveredthatfundsmanagedbywomenhave,sinceinception,returnedanaverage9.06percent,comparedtojust5.82percentaveragedbyaweightedindexofotherhedgefunds.Asifthatoutperformanceweren’timpressiveenough,thegroupalsofoundthatduringthefinancialpanicof2008,thesewomen-managedfundsweren’thurtnearlyas

severelyastherestofthehedgefunduniverse,withthefundsdropping9.61percentcomparedtothe19.03percentsufferedbyotherfunds.So,theyperformedbetterontheupsideandlostlessonthedownside.Whilethisstudydidn’tgetintotheparticularsofthereasonsforthissuperiorperformance,wecantakeaguessthatitprobablyhadsomethingtodo

withwhatwe’veseenintheotherstudies.

PUTTINGPEERPRESSUREINITSPLACE

Allright,sofarwe’vebuiltanimageinourheadsofthefemaleinvestorasonewhotakeslessrisk,tradesless,tendstobemorerealistic,andwithstandswhipsawing

marketsbetterthanmaleinvestors.We’vealsolearnedthatfemaleinvestorstendtoproduceresultsthataremoreconsistent,andinthehedgefundworld,female-managedfundsperformbetteronboththeupsideandthedownsidethandomale-managedfunds.Butthere’smoretodiscoveryetaboutthetemperamentandtendenciesofwomenintheworldofinvesting.

ArecentreportoutfromtheNationalCouncilforResearchonWomen,11imploringthefinancialindustrytoaddmorewomentofund-managementpositions,highlightedmanyofthestudiesandsurveysaboutwomenandinvesting.Ofcourse,thecouncilhasastrongpointofview,andthereportseekstopersuadetheindustrythataddingmore

womenwillresultinbetterinvestmentreturns,lessrisktaking,andthebenefitsthatcomefromhavingdiversityofthought.Lookingatwhatwe’vealreadylearned,seemsthey’vegotapoint.

What’sinterestinghere,though,aretwospecificfindingshighlightedinthereport:Womenresearchtheirinvestmentdecisionsmorethoroughlythanmendo,and

second,theyarelesslikelytobendtopeerpressure.

Thereportpointstoa2002studyintheInternationalJournalofBankMarketingthatshowedthatwomendigdeeper,analyzemoreinformationanddetails,andaremorelikelytoconsiderallinformationrelatingtoapossibleinvestment,evenifitcontradictstheirinitial

research.Inshort,theywanttoknowasmuchastheycanandtheytakethetimetolearnit.Men,ontheotherhand,tendtotakeshortcutswithinformation,lookingatthebroadestfactorsandskippingdatathatgoesagainsttheirinitialthoughts.Inotherwords,menkeepitsimpleandmoveahead;womenliketogetintothenitty-grittyandtaketheir

time.Thismakessensewhenweconsiderthedifferingattitudestowardriskwe’vealreadydiscussed.

Thenextfindingisevenmorefascinating.A2008UniversityofCalifornia,SantaBarbara,studyfoundthatwhenmenarebeingobservedandjudgedbyothermentheyconsiderofequalstatus(or,theirpeers),theytendtomakeriskierdecisions

thannecessaryintimesofstrifeorloss,inanattempttoassertdominance.Worsestill,evenwhentheoutcomewouldhavebeenexactlythesamehadlessriskbeentaken,theguysstillchosetheriskierpath.

Womendidn’thavethissamereaction;theychosethesamepathregardlessofwhowasobservingthem.Theyseembetterabletoavoid

posturingandmakedecisionsbasedonthefactorsathand,versustryingtoone-upaperceivedcompetitor.Thinkingaboutthispeerpressureeffectinthecontextofthefinancialcrisis,wheretradingfloorsandboardroomswerefilledwithmentryingtooutdooneanother,isfascinating,andalsotroubling.Itjustgoestoshowthatpeerpressureisn’t

justanissueforthirteen-year-oldgirlsbattlingitoutonthemeanstreetsofthesuburbanjuniorhighschool(“Seriously?Shesaidwhataboutme?”).

YOUMUSTBEMISTAKEN

Helpingcharacterizeourfemaleinvestor,whomwe’vealreadydiscoveredtendsto

tradeless,takelessrisk,bemorerealistic,withstandthetemptationofpanickedmovesinmomentsofmarketmayhem,conductmorethoroughresearch,andresistpeerpressure,isthisbitofdataaboutlearningfrommistakes.MerrillLynchInvestmentManagers,nowapartofBlackRock,conductedanationwidetelephonepollin2004ofathousand

investors(500menand500women).12Yetagain,somekeydifferencesintemperamentbetweenfemaleinvestorsandmaleinvestorscroppedup.

TheMerrillsurveyfoundthatmenweremorelikelytobuya“hotinvestmentwithoutdoinganyresearch”(24percentversus13percent).Ofthemenwhoadmittedtothismistake,63

percentcoppedtodoingitmorethanonce.Forty-sevenpercentofwomenwhocommittedthesameerrordiditagain.Weshouldn’tbesurprisedtolearnthatmen,whenaskedinthesurveyaboutwhichemotionsplayedapartintheirinvestmenterrors,citedgreed,overconfidence,andimpatiencemuchmorethanwomendid.

Recognizingthatyou’vemadeamistakeandthentakingthestepstolearnfromitsothatyoudon’trepeatitisimportantforinvestors.Aswe’llseelater,WarrenBuffettisespeciallygoodatthis.Andatleastbasedonthissurvey,andgivenwhatwe’velearnedsofaraboutoverconfidenceandtheeffectitcanhaveonclearthinking,itappearsthatwomenhave

theedgehere,too.

BLAMEITONTHEHORMONES

Behavioraleconomicshasshownusthatwomenaremoreriskaversethanmen,thattheytradelessandtheirportfoliosperformbetter,thattheyaremorerealistic,thattheyaremoreconsistent

investors,andthattheytendtoengageinmorethoroughresearchandignorepeerpressure.ThankstoyearsofworkinbehavioraleconomicsandfinancebypeoplelikeTerranceOdeanandBradBarber,wehaveagoodgraspofwhatmakesfemaleinvestors’temperaments,onthewhole,moredesirable.

Recentstudiesfromtheemergingfieldof

neuroeconomicsshowussomethingelseentirely:Women’srelativelackoftestosteronecomparedtomenmeanstheymayactuallybehardwiredtobecalmer,moredisciplinedinvestors.(Sorry,guys.)Neuroeconomics(thetermwasreportedlycoinedbyProfessorPaulZakofClaremontGraduateUniversity)seekstocombine“methodsfromneuroscience

andeconomicstostudyhowpeoplemakedecisionsinvolvingrisk,aswellasstrategicdecisionsinvolvingrelationshipswithothers.”13Bylookingatthewaychemicalswithinthebodyaffectourbrainsandthinkingpatterns,thisexcitingareaofstudyopensupaworldofnewpossibilitiesforunderstandingfinancialdecisionmakingandrisk

taking.JohnM.Coates,ofthe

UniversityofCambridge,shooktheworldoffinancein2008whenhereleasedthepreliminaryresultsofastudyhedidinvolvingtestosterone,cortisol,andtradingprofits.14Coates,alongwithcoauthorJoeHerbert,gatheredsalivasamplesfromseventeentradersinLondontwiceadayforeightdays,andtracked

thetraders’testosteroneandcortisollevels.Coatesthenfolloweduphisearlierstudybycoauthoringanother,moredetailedstudy,basedonthefindingsinvolvingthoseseventeentradersandtheirtestosteroneandcortisollevels.15That’sthestudywe’lldigintohere.(Don’tbeafraid—sciencecanbefun,Ipromise.)

Thesetraderswere

involvedwithhighlyactivespeculation,holdingmostlyfuturescontractpositions(acomplexformoffinancialinstrumentthatinvolvesbettingonthefuturepriceofacommodityorstockindex),insomecasesformereseconds.Wearen’ttalkingaboutyourtypicalindividualstockinvestorshere,butnonetheless,thefindingsarefascinatingandhave

potentiallybroadimplications.

(Incaseyouneedahighschoolbiologyrefresher,testosteroneandcortisolarebothnaturalsteroids[atypeofhormone]thathelpourmindsandbodiesininstinctualsituationssuchasfightorflight,andpropelustomateaswellasstriveforsuccessandstatus.)

Relyingontwoprior

theoriesabouttestosterone,the“challenge”hypothesisandthe“winnereffect,”thescientistssetouttomeasurehowtestosteroneaffectsfinancialrisktaking.The“challenge”hypothesissuggeststhatinmales,testosteronelevelsinitiallyrisejustashighasareneededforsexualactivity;theyrisehigheronlywhenthemaleisconfrontedwithathreat,

creatingaggression.However,the“challenge”

hypothesishasbeeneasiertofindevidenceforinanimalstudiesthaninhumanstudies,owinginparttothefactthatourhighlydevelopedbrainscanovercomemoreoftheeffectsofhormonesthanotherspeciescan.Further,it’shardtopindownexactlywhateachstudymeansandhoweachstudymeasures

rathernebuloustopicslike“aggression.”ThisisonereasontheBritishscientistswereoptimisticabouttheirstudy—it’seasytoquantifyandmeasureatrader’sprofitsandlosses,forinstance.Notmuchwiggleroomthere.Also,whilemaletradersmaynotbecome“aggressive”tothepointofpickingfightsandgettingphysical,a“challenge”stillexistsfor

themintheformofcompetitionwithoneanotherforeverhigherreturns.(Remember,too,whatwelearnedearlierabouttheeffectsofpeerpressureonmen.)

The“winnereffect,”ontheotherhand,iswelldocumentedinboththeanimalkingdomandintheworldofsports.Basically,itdescribestheway

testosteronelevelsworkincompetitors,eitherinabattlebetweenanimals,orabattlebetweenathletesorsportsteams.Putsimply,testosteronelevelsriseinanticipationofaconfrontationorcompetition.Thewinninganimalorathlete,however,comesoutontheothersidewithhighertestosteronelevels,andtheloserwith,well,youguessed

it—lowertestosteronelevels(andundoubtedlyhistail,figurativelyorotherwise,betweenhislegs).What’sevenmoreintriguingisthatwinningleadstohighertestosterone,whichleadstomorewinning,whichcreatesafeedbackloopofvictoryandheightenedtestosteronelevels.Hencethe“winnereffect.”

Sobyframingtheir

researchwiththe“challenge”hypothesisandthe“winnereffect,”theauthorswantedtoseeiftherewasacorrelationbetweentestosteronelevelsandthetraders’mostprofitabledays.Theydiscoveredthatondayswhenthetraderswerethemostsuccessful,andmadethemostmoney,theyindeedexhibitedthehighestlevelsoftestosterone.

Visionsofbulgingneckveins,redfaces,andsweating,screamingtradersaside,thisresearchsuggeststhathigherlevelsoftestosteronemayhavehelpedthesetradersbettersortthroughlotsofinformationinaquickerperiodoftime.Italsolikelyhelpedthemmakefast,riskydecisions.Thestyleof“high-frequency”tradingtheseguyswere

engaginginwastheperfectexpressionoftestosterone’sbenefits.Theauthorssharedabeliefthatforother,moremeasuredstylesofinvesting,testosterone’sbenefitsmayactuallyhurtresults.Theyalsonotedthatthiskindoffrenetictradingactuallyhasaphysicalcomponenttoitaswell,whichmayalsohavebenefitedfromthepresenceofincreasedlevelsof

testosterone.Theotherhormonein

playhere,cortisol,risesinstressfulsituations.Thusthescientistsbelieveditwouldjumpwhentradersstartedlosingmoney.However,that’snotwhattheyfound,exactly.Cortisollevelsdidrise,butitwasn’trelatedtotraderslosingmoney.Instead,risesincortisolshowedacorrelationwithrisesin

marketvolatility.Cortisolhelpsusprepare

fortheunexpectedandtheuncertain,andmarketvolatilitycreatesscenariosthatarehighlyuncertain.Quotingfromthestudy,“Ourresultsraisethepossibilitythatwhiletestosteronecodesforeconomicreturn,cortisolcodesforrisk.”16Sowhenmarketsaregoinghaywire,andtradersaren’tsurewhat’s

comingnext,theircortisollevelsjump,preppingthemtobereadyfortheunknown.

Allright,soifweknowthathighlysuccessfultradershaveincreasedlevelsoftestosterone,andweknowthattheirbodiesrespondtomarketvolatilityanduncertaintybyproducingmoreofthestresshormonecortisol,what’sitallmeanforbothfemaleandmale

investorsandthefinancialmarketsatlarge?Well,it’stheflipsideofthesepositiveeffectsoftestosteroneandcortisolthatcanharmindividualresults,andpossibly,whenlookedatfromamacroperspective,evenharmourfinancialmarkets.

Takingalookatcortisolfirst,thestudyfindsthatwhencortisolreachescertain

levels,itcanactuallystarthurtingperformancebymakingtradersirrationallyriskaverse.Theyseedangerbehindeverymarketmovement,boogeymenbehindeverytickersymbolorflickeronthescreen.Whencortisollevelsaretooelevatedfortoolong,andtheconditionbecomeschronic,itcanbecomeanearlyself-fulfillingprophecy,with

tradersunwillingtoactevenwhenit’sthesmartthingtodo,andevenwhenit’sintheirbestinteresttodoso.Fearsettlesin,anxietytakeshold,andcortisol’sgripissecure.

Atamacrolevel,thismentalparalysiscanpossiblyresultinamarketdownturnbecomingmoreprotractedthanitotherwisewouldbe.Volatilitybegetscortisol

whichbegetsfearwhichbegetsevenmorevolatilityandonandon.Itcanpotentiallyaddtoanalreadyplummetingmarket,makingascarydropevenworse.

Testosterone,aswementionedearlier,canhelptraderstakerisksandmovefast,makingloadsofmoneyinthemeantime.Buttoomuchtestosteronefortoolongcanencouragetoomuch

risktaking,andtheprofitabletestosterone-ladentraderoftodaycanendupreversingcoursetomorrow.Throwinsomemarketvolatilityandwefindthatablazingrisktakercanquicklybecomenervousaboutrisk,effectivelythrowingthemarketonitshead.Thestudy’sconclusion,then,isnotnecessarilythatmarketbubblesandcrashesare

causedbyhormones,buttheydosuggestthat“hormonesmayexaggeratemovesonceunderway.”17

Further,theauthorssuggestthathavingmoregenderandagediversityinthefinancialmarketscouldgreatlyhelpmarketstability.Theypointoutthatwomenhaveonly5–10percentofthetestosteronelevelsthatmendo,and,aswe’vejust

learned,somestudiesshowthattheyarelesslikelytosuccumbtothestressandpeerpressurecreatedbycompetitivesituationsthanmen.There’sreasontobelieve,then,thataddingwomentotradingfloors,boardrooms,andothermale-heavystrongholdsinthefinancialworld(whichisstilljustaboutallofthem)would,thankstowomen’snaturally

occurringlackoftestosterone,“helpdampenhormonalswingsinthemarket.”18(Insertyourownjokehere.)

Sowouldtheworldwidefinancialpanicinthefallof2008havehappenedorbeenasseverehadmorewomenbeenmoreinvolvedintheworldofhighfinance,theirlackoftestosteronemediatingtheeffectsofthemale

hormone,lesseningthehighsandlows,calmingthetempest?Ofcoursenoonecansaywith100percentcertainty,butallindicationspointtoagreaterdiversityofnotonlygender,butofthought,experience,andworldview,potentiallyleadingtoadifferentoutcome.

PORTRAITOFAFEMALEINVESTOR

Thehardworkingscientistsandacademicsintheworldsofbehavioralfinanceandneuroeconomicswillundoubtedlycontinuetostudythedifferencesininvestmentbehavior,attitudes,andoutcomesbetweenmenandwomen.It’sneverdull,sometimescontroversial,andalways

enlightening.Puttingtogetherwhatwe’velearnedherepaintsapictureofwhatasuccessfulinvestmenttemperamentlookslike,andit’sawfullyfamiliar.ButbeforegettingintothetraitsfemaleinvestorssharewithWarrenBuffett,whatmakeshimthegreatestinvestorofalltime,andwhatwecouldalllearnfromhistemperament,let’srecap.

Femaleinvestorstendto:

1.Tradelessthanmendo2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,whilewomenaremorelikelytoknowwhattheydon’tknow

3.Shunriskmorethanmaleinvestorsdo

4.Belessoptimistic,and

thereforemorerealistic,thantheirmalecounterparts

5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangleanddetail,aswellasconsideringalternatepointsofview

6.Bemoreimmunetopeerpressureandtendtomakedecisionsthesameway

regardlessofwho’swatching

7.Learnfromtheirmistakes8.Havelesstestosteronethanmendo,makingthemlesswillingtotakeextremerisks,which,inturn,couldleadtolessextrememarketcycles

Asaresultoftheirdifferentapproachtoinvesting,andtheir

temperaments,femaleinvestorsalsoproduceresultsthataremoreconsistentandpersistent.Youcancounton’em.Andinthehedgefundworld,female-managedhedgefundsoutperformcomparablemale-managedhedgefunds,andtheirresultsdon’tsufferfrommarketdropsasseverely.

Theaboveeighttraitsrepresentaninvesting

mindsetthatallinvestors—menandwomenalike—shouldadopt.Andweallcan—it’spossible.Itwon’tbeeasy,it’lltakepracticeandhardwork,andwe’llslipupfromtimetotime,butit’spossible.We’remorelikelytoreachthesamesuperioroutcomesasfemaleinvestors—andWarrenBuffett,aswe’llsee—ifwedoso.

It’salsoimportantthatwe

try.WeneedtoburytheoldWallStreetattitudeofyore.Aswe’veseenwiththefinancialcrisis,eventuallyitallcatchesuptothoseinvolvedandeventhosewhoaren’t.Justabouteveryoneendsupthepoorerforit.Soreadonasweuncoverhowthegreatestinvestorofalltimeisactuallymoreintunewithhisfemininesidethanyoumighthaverealized,and

why,whenitcomestoinvesting,thisisaverygoodthing.

Chapter3AQuickIntroto

theOracle

Beforewediveintothedefiningcharacteristicsof

WarrenBuffett’s“feminine”temperamentasaninvestor,let’slearnalittlebackgroundonthemanwhommanydubthe“OracleofOmaha.”

WarrenEdwardBuffettwasbornAugust30,1930,inhisbeloved,bucolicOmaha,Nebraska.Notsurprisingly,givenallthatweknowaboutthemanhewastobecome,hewasaprecociouschild,showinganearlyinterestin

andaptitudefornumbers,details,andmoneymaking.Buffettwasclearlybrightanddriven,andmadehisfirstforayintotheworldofcommerceatagesix,sellingpacksofgum.1Hewentontomakemoneyallkindsofwaysasachild,fromsellingCokesatamarkuparoundtheneighborhood,tosellingusedgolfballstogolfersatalocalgolfcourse.

WhenBuffettwastwelve,hisfatherwaselectedtoCongress,forcingthefamilytomovefromOmahatoWashington,D.C.Buffettwasn’tthrilledwiththemove,andhadtroublemakingfriendsandfittinginathisnewschool.Hisloveforbusinessandhardworkwasrewarded,though,whenhestartedhisbelovedpaperroutedeliveringthe

WashingtonPost.Throughthisearlyexposuretothenewspaperbusiness,Buffettdevelopedaloveaffairwiththeprintedwordthatremainsstrongtothisday.

Inhighschool,Buffettcontinuedhispaperroutesuccess,andstartedadditionalbusinessesthankstothemoneyhemadedeliveringallthatnewstoallthoseWashingtonians.He

actuallyboughtaforty-acrefarminNebraska,aboutanhourawayfromOmaha,andletafarmerworktheland,splittingtheprofitswithhim.2(Remember,thisisahighschoolstudentwearetalkingabout!Rememberwhatyouweredoinginhighschool?Ibetitwasn’tbuyingfarmsinNebraska.)

Buffettfirstlearnedaboutstocksandinvestingfromhis

father,whowasastockbrokerinOmahabeforebecomingacongressman.Heboughthisfirststockatageeleven,investinginCitiesServicePreferred.HeboughtthreesharesforhimselfandthreeforhissisterDoris,at$38ashare.Unfortunately,ashortwhilelater,thestocktanked,dropping29percentto$27ashare.Buffettheld,buttheeleven-year-oldwasbothered

bythefactthathe’dlosthissistermoney.Hehatedlosingmoneyhimself,ofcourse,butknowingthathe’ddraggedhissisteralongforthedepressingridetroubledhim.WhenCitiesServiceroseagain,to$40,Buffettsold,takinga$5profitforthembothcombined.Then,naturally,CitiesServiceskyrocketedto$200ashare.3Fortheyoungeventualguru,

thisincident,andhisapparentlackofpatience,wasn’tsomethinghe’dsoonforget.

THEEARLYBIRDGETS

THERETURN

ThinkBuffett

startedinvestingyoung?Well,valueinvestorandownerofLaurenTempletonCapitalManagement,LaurenTempleton(great-nieceofrenowned

internationalvalueinvestorSirJohnTempleton),startedevenyounger.ShesaidinaSeptember2010interview:

“[B]ecauseIgrewupintheTempletonfamilyweare

reallyafamilyofvalueinvestors.IstartedbuyingstockswhenIwassevenoreightyearsold.MydadwouldallowmetobuyoneshareamonthofanystockIwanted.Hewouldbuyit

forme.Andthenhewouldtakethestockcertificate,becauseatthetimetheymailedyouanactualcertificate,andhewouldmatandframethestockcertificateandhangiton

thewallsofmyroom.SowhenIwasachild,myroomwasliterallywallpaperedwithstockcertificates.

“Atfirst,likeanychildwould,Iboughtveryfamiliarcompanies—

likeDisney,Wal-Mart,theGap...Itwasveryimportanttohavethesestockcertificateshangingonthewallsofmyroombecauseallofasudden,Ireallydid,asachild,thinkof

myselfasanownerofoneofthesecompanies.Icanremembertellingfriendsontheplaygroundthat,yes,IdidownpartofDisney.Andtheycouldn’tbelieveit.”4

Now,I’mnotsuggestingyou’resunkifyoudidn’tstartinvestingatelevenasBuffettdid,oreightasLaurenTempletondid,butstartingasearlyaspossibleisakeytoinvesting

success.Youmayhavemissedthepreteeninvestingboatyourself,butsurelyyouknowchildrenwhohaven’t,beitasonordaughter,anieceornephew,orthe

youngprogenyofafriend.Withoutadoubtit’sachallengetogetchildreninterestedininvesting,especiallygiventheridiculousnumberofdistractionsintheworldtoday,butit’swortha

try.Makeitfun

bypointingouttheproductsofcompaniesyou’veboughtsharesofatthegrocerystoreorshoppingmall.MotleyFoolcofoundersandbrothersDavidandTom

Gardnertalkaboutseeingchocolatepuddingatthegrocerystorewiththeirfatheraskidsandbeingtoldthattheyownedthecompanythatmadeit,astatementthatmadequitean

impressiononthem.Believeitornot,tyingtheesotericideaof“investing”tosomethingtangiblelikechocolatepuddingcanreallyhelpyourbuddingfinancialwhiz’sinvestingcareer

getofftoanearlybeginning.

AfterfinishinghisundergraduatedegreeattheUniversityofNebraska,BuffettsethiseyesonbusinessschoolatHarvard.However,fateintervened,andBuffettwasrejectedfromHarvard(inadecisionsortof

likeDeccaRecordsrejectingtheBeatlesin1961)andendedupatColumbiaBusinessSchool.Therehewouldmeetthemanwhowouldbecomehisbiggestinfluenceandmentor,themasterofvalueinvestinghimself,BenjaminGraham,whoatthattimewasaprofessoratColumbia.DavidDodd,whoco-wrotethetextbookoninvesting,

SecurityAnalysis,withGraham,wastheheadofColumbia’sdepartmentoffinanceandaprofessor.SoherewerebothGrahamandDodd,inonespot,atoneschool.ThiswastheplaceforBuffetttobecomeBuffett.

BuffetthadrecentlyreadGraham’ssecondbook,TheIntelligentInvestor,andinithefoundhiscallingasaninvestor—hewastobea

“value”guy.AndhewasabouttolearnfromGrahamhimself,anexperiencethatcan’tbeunderestimatedforBuffettandhisfuture.HadHarvardsaidyes,theworldstillwouldhavebeenblessedwithaquirkyintellectualnumbersguy,runningmyriadbusinesses,undoubtedlyinterestedinstocks,perhapsstillbecomingavalueinvestingdisciple.Butthanks

tohisowntemperament,hisexperienceatColumbia,andGraham’sdirectinfluenceonhim,wewereinsteadgiventhegreatestinvestorofalltime.

UpongraduatingfromColumbia,Buffett,whohadsoakedupeverybitofGrahamandDoddhepossiblycould,wantedevenmore,andthatmeantworkingforGraham’sinvestment

firm,Graham-NewmanCorporation.HeinterviewedwithGrahamandwasturneddowncold.Atthattime,thebigWallStreetinvestmenthousesdiscriminatedagainstJews,andGrahamlikedtokeepthefewspotsavailableathisfirmopenforthem.Buffettwassentpacking,backtoOmaha.

Oncehome,hegotajobathisfather’sbrokerage

house,wherehe,likeeveryotherstockbrokerworkingthereandelsewhere,calledpeopleupandtriedtoconvincethemtobuysharesofcertaincompanies.Thejobwasmoreaboutmarketingthanactualresearchandanalysis.Buffettwassuccessfulwiththepeopleheknew;afterall,hisfamilyandfriendsknewhowsmarthewasandtrustedhim.But

outsidethatgroup,hestruggled.5

BuffettstayedincontactwithGraham,andafewyearslaterwasindeedgivenhisshottoworkforhismentor.HeleftOmahaonceagain,movedtoNewYorkCity,andwenttoworkatGraham-Newman,analyzingcompaniesandsuggestingundervaluedonesforthefirmtoinvestin.Hewasmuch

happierasananalystthanhehadbeenas,essentially,asalesmanathisfather’sbrokerage.ThisplayedtoBuffett’sstrengthsandstudiousnature,allowinghimtoshine.

Buffett’sGraham-Newmanheydaydidn’tlastlong,though.In1956,afterBuffetthadbeenthereonlyabouttwoyears,Grahamdecidedtoleavehisfirmand

retire.ThatwasitforBuffettaswell.Despitebeingofferedtheopportunitytobecomeapartnerinthefirm,Buffettstruckoutonhisown.HestartedBuffettAssociates,Ltd.,aninvestmentpartnershipsimilartotheoneGrahamhadoperated.Inthebeginning,thepartnershiphadjustsevenpartners,amixoffamily,friends,andBuffetthimself.Theinitialstakes

were$100fromBuffettand$105,000fromtheothersixpartners.

AfterhelpingGrahamshutdownhisfirminNewYork,BuffettreturnedtoOmahaforgood,wherehecouldcreatethelifehewanted,workingfromhome,spendingallhistimereadingandresearchinginvestments.Grahamhimselfsuggestedtosomeofhisformerclients

thattheyinvestmoneywiththeyoungupstartinNebraska,theonenoone’deverheardof.Butthatanonymitywouldn’tlastlong.Withoutsizedreturns,andafeestructurethatrewardedBuffettonlywhenhemadehispartnersmoney,itwasjustamatteroftimebeforewordgotaroundthatsomethingspecialwashappeninginOmaha(ofall

places).Andspecialitwas.Atthe

timeofthepartnership’sclosingin1969,Buffett’spartnershadearneda32percentaverageannualreturnbeforefees.That’ssimplyunheard-of;itwasthenandremainssotoday.

In1962,BuffettbeganbuyingsharesforthepartnershipofasmallNewEnglandtextilemaker,

BerkshireHathaway,whichhebelievedwasundervalued.Buffetthopedthatthecompany’sthenpresidentwouldbuybackhisshares;he’dneverintendedtokeepthecompanyforgood.Afterall,thetextileindustrywasindecline,andBerkshirehadputupnineyearsoflosses.Buffettbelievedhecouldbuysharesonthecheapandthensellthembacktothe

companyatahigherprice.However,Berkshire’s

presidenthadadifferentidea,andafterasomewhatnastyaffairwhereinBuffettbelievedhe’dbeenpromisedonepriceforhissharesandthenofferedanother,he(Buffett)decidedheinfactwantedallofBerkshireHathaway.Andthoughhewouldlatercometoregretit,callingit“thedumbeststockI

everbought”andestimatingthatitcosthim$200billioninopportunitycost,heeventuallygotit.6

Aftertryingunsuccessfullytomakethecompanycompetitiveandprofitable,BuffettshutdownBerkshireHathaway’stextilebusinessin1985.Buthekepttheactualcompany,transformingitintotheinvestmentpowerhousewe

associatewithhimtoday.Alongwithhislongtimefriendandbusinesspartner,CharlieMunger,BuffetthasbeenabletoturnBerkshireHathawayintowhatisknownasaholdingcompany—thatis,itownswholebusinessesorpartsofbusinessesinanarrayofindustries,everythingfromCoca-ColatoGEICOInsurancetoSee’sCandiestoDairyQueentothe

WashingtonPostCompany.Buttherealoriginal

geniusofBerkshireHathawaycanbefoundintheconceptknownas“float,”aby-productoftheinsurancebusiness.Putsimply,whenyoupayaninsurancecompanyapremiumforyourcarorhome(forinstance),thecompanygetstokeepthatmoneyfromyou—andfromthemillionsofother

policyholderswhouseitsservices—untilithastopayoutforclaims.Thatmoneyisavailableforinvestment,andBuffettexploitsthissourceofexcesscashlikenoother,usingittotackonadditionalbusinesses,buystockinothercompanies,andgenerallyletthepowerofcompoundinterestworktohis,andhisshareholders’,advantage.

It’sworkedbeautifully.

From1965to2010,BerkshireHathaway’scompoundedannualgaininper-sharebookvaluehasbeenaremarkable20.2percentversustheS&P500’spaltry-by-comparison9.4percenttotalreturn,includingdividends.(ThereturnsforBerkshireareactuallyunderstated,becauseBuffettinsistsonreportingtheminBerkshire’sannualreportsasafter-tax,whilethe

S&Preturnsaregivenaspretaxfigures.)

NowthatwehavealittlebackgroundonBuffett,let’sgetintowhatcreatedthoseresults,andwhatmakeshisinvestingstyleandphilosophyso,well,girly.Butfirst,becauseit’llcomeinhandytokeeptheseinmindaswegoforward,aquickrefresheronthefeminineinvestingtraitswe

learnedaboutearlier:Femaleinvestorstendto:

1.Tradelessthanmendo2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,whilewomenaremorelikelytoknowwhattheydon’tknow

3.Shunriskmorethanmaleinvestorsdo

4.Belessoptimistic,andthereforemorerealistic,thantheirmalecounterparts

5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangleanddetail,aswellasconsideringalternatepointsofview

6.Bemoreimmunetopeerpressureandtendtomake

decisionsthesamewayregardlessofwho’swatching

7.Learnfromtheirmistakes8.Havelesstestosteronethanmendo,makingthemlesswillingtotakeextremerisks,which,inturn,couldleadtolessextrememarketcycles

Thankstotheseeighttraits,aswesawinchapter2,

womenproduceresultsthataremoreconsistentandpersistent.Aswe’llsee,Buffettmanagestoprovideuswithexamplesofallthesetraits,andwithatrackrecordlikehis,itwouldbesillyforallofusnottogetalittlegirlyrightalongsidehim.

(IfyounowhaveanimageinyourheadofWarrenBuffettputtingonlipstickandcarryingapurse,I’msorry.)

Chapter4TradeLess,Make

More

Famousforsayingthathis“favoriteholdingperiodis

forever,”Buffettreallyisthekingofthe“tradeless,”buy-and-holdschoolofthought.1Infact,heissovehementlyopposedtoshort-termtradingthatheonceadvocated(perhapssarcastically)foradrasticchangeintaxpolicy—onethatwouldtaxprofitsgainedfromshort-termtrades(definedasanyholdingboughtandsoldunderayear)at100percent.2Regardless

ofhisseriousnessaboutthe100percenttax,BuffettdidsignanAspenInstitutepetitioninSeptember2009callingforthetaxcodetorewardlong-terminvestmentversusshort-termspeculation.3ThisisanissuethatBuffett’sbeenpassionateaboutforyears.

HoldingontothecompaniesyouinvestinisimportanttoBuffettbecause

helikestoemphasizethatwhenyoubuyastock,youaren’tjustbuyingathree-or-four-letterticker,dancingacrossthescreenlikesomemythicalsecretcode.No,you’rebuyingapieceofaliving,breathingcompany.Understandingthis—thatyouarebuyingintoanactualbusiness—isaninvestingtruthBuffettlearnedandtooktoheartfromhismentorBen

Graham.There’snodifferencein

Buffett’seyes,norshouldtherebeinyours,betweeninvestinginapubliclytradedcompanyandbuyingoutright,forexample,thesandwichshopdownthestreet.Theyeachrepresentownershipofabusiness;thedifferencejustcomesdowntohowmuchyouown—thewholething,orapart.(Althoughperhapsas

theownerofthesandwichshop,you’dgetadiscountonthatdeliciousturkeysubyoulikesomuch—shareholdersaren’tguaranteedsuchspecialtreatment.Ontheotherhand,thatsandwichshopprobablywon’tpayyouadividend,whichalotofpubliccompanieswill.Everything’satrade-off,isn’tit?)

Owningstockinacompanyrepresentsan

importantdecision,andonethatshouldn’tbetakenlightly.TheimagewehaveinourheadsofWallStreettraders,yellingandfranticallymakingbuysandsells,flippinginandoutofonestockafteranother,ispreciselytheoppositeofthemanWarrenBuffettis—calculated,thoughtful,measured,andpatient.It’spossiblethatsomeofthose

traderscouldn’teventellyouanythingaboutthecompaniestheyjustchurnedintoandoutof,besidestheirtickersymbols.Theyprobablycouldn’ttellyouwhatindustrythecompany’sin,whatgoodorserviceitsells,howlongit’sbeenaround,orwhoitsexecutivesare.

Buffett,ontheotherhand,firstdiscoveredhisfondnessforinsurancecompany

GEICOwhenhewasingraduateschoolatColumbia.Heboughtsharesthen,andwouldeventuallybuythewholecompanyforBerkshireHathaway.SincehewasaboythrowingpapersinthemistyearlymorninghoursinD.C.,he’slovednewspapersandtheWashingtonPost(whichhe’sbeenalargeshareholderofsincethe1970s).He’sownedhis

sharesofsoftdrinkgiantCoca-Colasincethelate1980s.Buffettunderstandsthatheisanownerofanactualbusiness,andaffordsthisthegravityitdeserves.

Buffett’sfeelingsonthisextendtoBerkshireHathawayanditsshareholders,too.InBuffett’sso-called“Owner’sManual,”whichhewrotetoillustratehisandCharlieMunger’s

philosophiesfortheirshareholders,theveryfirstprinciplepreachestheimportanceofrealizingthatyouarea“partowner”ofanactualbusiness.Assuch,theyhopethatBerkshireshareholderswon’tselltheirstock,justasBerkshirewouldn’tabandonlongtimeholdingsCoca-ColaandAmericanExpress,twoexamplesBuffettgives.

QuotingfromtheManual,“Infact,wewouldnotcareintheleastifseveralyearswentbyinwhichtherewasnotrading,orquotationofprices,inthestocksofthosecompanies.”4

BerkshireshareholdersappeartohavegottenBuffett’smessage.TheturnoverinsharesofBerkshireisremarkablylow,withsomeshareholderseven

willingtheirsharestofuturegenerationsinanefforttokeeptheirheirsfromsellingafterthey’regone.Fromthegrave,even,itseemsBuffett’sadviceresonates.

Buffettalsolikestoencourageinvestorstothinkoftheirinvestmentdecisionsasrepresentedbyapunchcardcontaining“justtwentypunches”meanttolastalifetime.“Withevery

investmentdecisionhiscardispunched,andhehasonefeweravailablefortherestofhislife.”5Buffettadds,“You’llneveruseupall20punchesifyousavethemforgreatideas.”6

Thinkingofyourinvestmentdecisionsthiswayishelpful,althoughitcanbeabitunrealistic.InvestorswithoutBuffett’sseeminglyunlimitedamountofcash

mayhavetodecidetosellcertaincompaniesinordertobuyothers—decisionsBuffetthimselfwasfacedwithearlyoninhisinvestingcareer,and,indeed,continuestoencounterwhenmakinglargeacquisitions.There’snoshameinthat.However,thinkseriouslyaboutinvestingyourmoneyinacompany.Whatyouareessentiallysayingwhenyoupushthatlittle

“buy”buttononyouronlinebrokerageaccountscreenisthatthecompanyyouareinvestinginisthebestplaceatthatprecisemomentforyourmoney—otherwise,you’dinvestthemoneyelsewhere,right?AsBuffetthassaid,“Ifyouaren’twillingtoownastockfortenyears,don’teventhinkaboutowningitfortenminutes.”7

Inanemailinterview,

PremJain,professorattheGeorgetownUniversityMcDonoughSchoolofBusinessandauthorofBuffettBeyondValue:WhyBuffettLookstoGrowthandManagementWhenInvesting,saidofBuffett’suniquepointofview,“WarrenBuffett’smostimportantquality,Ibelieve,ishisfocusonthelongterm.Hedoesnotpaymuchattentiontowhatthe

so-calledexpertsarepredictingaboutthenextyearortwo.Mostpeopleinthemarketareseekingshort-termreturns.Whenthereissomebadnews,fartoomanypeoplereactnegativelyandthestockmarketgoesdown.Similarly,peoplebecomeeuphoricenmassefromtimetotime,whichoftenproducesbubbles.Buffett’slevelheadedtemperament

allowshimtoweatherthesefluctuations.

“Havingalong-termviewbecomesatremendousadvantageinaworldwheremostothersareshort-termoriented.Whentheherdofshort-terminvestorsmovesthemarket,theindependent-mindedlong-terminvestorscantaketheoppositesideandeventuallyearnsuperiorreturns.”8

Buffett’spatienceisanotherimportantcharacteristicthatdefineshisinvestingstyleandtemperament.He’swillingtowait,sittingatoppilesofcash,untilhefindstheperfectopportunitytoinvest.Thiscanmeanenduringfrustratingperiodsofwatchingthemarketscreamtoevernewheights,whileyousitontheproverbialsidelines,waiting

forgoodcompaniestobecomemorefairlyvalued,andwatchingyourpileofcashstruggletokeepupwithinflation.

Butyou’vegottohavethefortitudetodoit.Buffetthasslipped(hey,heishuman)acoupleoftimesinhishistory,investingincompaniesthatweren’tuptohisusualstandardsbecausethepickingswereotherwise

slim,andeachtimehecametoregretit.USAirways,whichBerkshireinvestedinin1989,isonenotableandnotoriousexampleofthis.(We’lltalkmoreaboutBuffett’sUSAirwaysdebacleinthechapteronmistakes.)

We’reallindangerofmakingmistakeslikethis,butifyoudo,justlearnfromitasBuffettdidandmoveon.Insteadofbeatingyourself

up,you’vegottofocusonlearningtobepatient,tostayput,andtowaituntilthemarketmakesitworthyourwhiletoinvestyourhard-earnedcashinacompany.AsBuffettsaidatBerkshire’sannualmeetingin1998(atimewhenhewasbeingcriticizedfornotparticipatinginthemarket’srise),“We’renotgoingtobuyanythingjusttobuyit.Wewillonlybuy

somethingifwethinkwe’regettingsomethingattractive....Youdon’tgetpaidforactivity.Yougetpaidforbeingright.”9

Buffettlikestotalkaboutwaitingforthe“fatpitch”tocomeandthefreedomthatgivesinvestorstoavoidmistakes.InaninterviewwiththeNewYorkTimesin2007,heexplainedhisthinkingthisway:“What’sniceabout

investingisyoudon’thavetoswingatpitches.Youcanwatchpitchescomeinoneinchaboveoronceinchbelowyournavel,andyoudon’thavetoswing.Noumpireisgoingtocallyouout.Youcanwaitforthepitchyouwant.”10

Luckilyforus,unlikebaseballplayersunderpressurefromcoachesandtheirfanstoswing,wehave

theluxuryofwaitingwithoutanyonegettingimpatientbutourselves—andthatimpatienceissomethingwecanlearntotackle.Itcanbetemptingtojumpinwhenyouseestocksrise(andthat’smadealltheworsebylisteningtofinancialmediahooplaandnonsense),butdon’t.Exerciserestraint.Yourportfoliowillbethericherforit.

RESISTINGTHEURGETO"DO

SOMETHING"Value

investorLisaRapuano,founderofLaneFiveCapitalManagement,

alsobelievesinandemploysthislong-termmindsetinherbusiness.AsshesaidinaSeptember2010interview,“Iamverygoodatignoringnoise,theday-to-daystuffjustisn’timportant,andI

willgomonthswithouttrading.I’mnotsurehowpeoplewhotradeeverydayandarelookingatshort-termtrendsandoptimizingtradingstrategiesandthingslikethat

sleepatnight.Forme,it’spatience,it’slowactivity,it’sthoughtful,it’smovingmoredeliberately.Idon’tknowwhyIhavebeenparticularlygoodatdoingthat,butIdo

knowthatit’sanadvantagethatIhaveoveralotofpeople.Ijustdon’tfeeltheneedto‘dosomething’alotoftimes.”11

Buffetthimselfwaspatientduringthelastseveral

years,lettingaround$44billionincash(yes,that’swithab)sitonBerkshire’sbalancesheetduring2004,2005,2006,and2007.12Buffettwaitedandwaitedforhisfatpitchandfinallyfounditwhenthemarketdroppedinthefallof2008amidthefinancialcrisis.Hejumpedin,spending$20billionsnatchinguppiecesofGeneralElectricand

GoldmanSachs,andencouragingotherstostaredownpanicandfearandtakeadvantageofthegreatopportunitiesthemarketwaspresentingthematthattime.Ashe’softenquotedassaying,inoneofhismostfamousandenduring(andendearing)turnsofphrase,“Begreedywhenothersarefearful,andfearfulwhenothersaregreedy.”

Patienceisalsoimportantonceyou’vemadetheleapandactuallyinvestedinacompany.Sometimesthingsgowrongandjustafteryou’vepurchasedyourstock,itfalls.It’sinevitablethatthiswillhappentoeveryinvestoratleastonce,immediatelymakingyoudoubtyourdecision-makingprocess.Perhapsthemarketasawholeswoons,orperhapsit’s

justyourparticularinvestmentthatseemstohaveforgottenthatyouboughtitsoitwouldincreaseinvalue,nottheotherwayaround.Eitherway,itcanbeincrediblydishearteningtowatchwhatyouweresurewasa,well,surethingturnoutseeminglyotherwise.

Butyoucan’tjustpanicandsell.Ifyoudoyourhomeworkandstandbyyour

investmentconvictions,you’vegottostickitout.You’vegottobepatient,andnotfallintoatrapoftradingawayanyshotyou’vegotatlong-termsuccess.

BuffettfacedasimilarsituationwhenBerkshirestartedbuyingsharesoftheWashingtonPostCompanyin1973.Rightoffthebat,inthemidstofahorriblebearmarketsecondonlytotheone

wejustendured,thestockdropped20percentandhoveredthereuntil1976—threewholeyears!Ittookuntil1981forthePosttoreachthevalueBuffettbelieveditdeserved.13

Andnow?Buffett’sheldontohissharesofthePostthroughrecessionsandrecoveriesandmorethanafewAmericanpresidenciesandit’soneofhismost

successfulinvestmentsofalltime—atrue“primary”holdingthatBuffettintendstokeep“permanently”forBerkshire.14Hadheboltedatthefirstsignofmarketturmoil,hewouldhavemissedoutonagiganticwinner.Patiencecanbepainful,butit’sworthitintheend.

Beingasuccessfulinvestorisn’teasy.Itrequires

fortitude,strength,preparation,andawillingnesstoavoidactingjustforthesakeof“doingsomething.”Togetthere,keepthefollowinginmind:

•Rememberyou’rebuyingapieceofanactualbusiness.•Takethelongview.•Bepatient.

Chapter5ReinIn

Overconfidence

Inadditiontohissolidlylong-termphilosophy,

anotherofBuffett’smostfamousanddefiningcharacteristicsishisinsistenceonstayingwithinhiscircleofcompetence—orknowingwhatheknowsandknowingwhathedoesn’tknow.ForBuffett,it’scriticalthatyouknowwhatitisyou’reinvestingin.You’reanownerofabusiness,afterall,andyouwouldn’tthinkofopeningupacompanyor

buyingapartofoneyoudidn’tfullyunderstand,right?

Buffett’smostnotoriousforhisavoidanceoftechnologycompanies,citingthemovertheyearsaslyingoutsidehis“sphereofunderstanding”(despitehisclosefriendshipwithMicrosoftcofounderBillGates).1Thoughhemaytrytoargueotherwise,it’snotsomuchthatBuffettlacksthe

abilityorinsighttounderstandwhateverytechnologycompanydoes,andhowtheymakemoney(ordon’t,asthecasemaybe).Sure,theremaybetheoddsupertechnicaladvancedmumbo-jumbocompanythatwouldbebeyondBuffett’scomprehension,butthat’snottherealissueforhimwithtech.

It’smorethathedoesn’t

considerhimselfabletopredictthecompetitivelandscapefortechnologycompanies.He’snotablewithenoughcertaintytomakehimselffeelcomfortable,togetagrasponthefutureeconomicsofthetechnologyindustry.Herecognizesitasfastmoving,everchanging,andpotentiallydeadlytotheaverage,orevenabove-

average,investor.Therearetoomanyvariablesinvolved,toomanyunknowns,thatcanrenderawell-thought-outinvestmentdeadandgoneinwhatseemslikemeremoments.

Rememberhottechnologycompaniesfromthelate1990sandearly2000likeWebVan,Pets.com,andBoo.com?Anyoneknowwheretheyarenow?The

landscapeforthesecompanieschanged,andchangedfast.BecauseBuffettcan’tpredicthowthecompetition’sgoingtolookforatechnologycompanyfiftyyearsfromnow,hewon’tbother.Therearelotsofothercompaniesouttherethathecanunderstandfully,feelingconfidentintheirprospects.

Twokeysto

understandinghowBuffettinvestsaretherelatedconceptsof“economicmoat”and“sustainablecompetitiveadvantage.”Thinkoftheideaofamoatjustasyouwouldthetraditionalfairy-talemoataroundacastle,keepingaprettylong-hairedgirlprotectedfromhungrydragonsandlustfulprinces.Amoat,inthebusinessworld,protectsthecompanyandits

profit-makingpotentialfromhungryandlustfulcompetitors.It’sanythingthatseparatesacompanyandgivesitanadvantageoveritscompetition,resultinginhigherprofitsforlongerperiodsoftime.

AcompanylikeCoca-Colaisprotectedbyitsbrand,forexample,givingitacompetitiveadvantageBuffettcanunderstandand

reliablycountoninthefuture.ItwouldbeincrediblydifficultforanupstartsodaoutfittocomeinandcompeteeffectivelyenoughwithCokeatthispointtoinflictseriousinjuryonit.Thecompany’smoatistoowide,itsreachtoofar,anditsproductsenjoyedbytoomanypeopletheworldover.Buffettcanlookahead150yearsinthefutureandhecanimaginepeople

teleportingallacrosstheglobe,downloadingmusicdirectlyintotheirbrain,andallthewhilehappilyputtinga$5billintoaVend-o-trontosynthesizeanddrinktheirfavoriteCokeproduct.ThestrengthinCoke’sbrandandbusinessmakesitso.

It’svital,too,thatthecompetitiveadvantagesbe“durable”or“sustainable.”QuotingBuffetthimself

talkingin1999aboutthestateofthestockmarketandtheinsanepricesfortechnologycompanies(whichhecomparedtootherrevolutionaryyetultimatelymoney-losingsocietaladvanceslikeautosandairplanes),“Thekeytoinvestingisnotassessinghowmuchanindustryisgoingtoaffectsociety,orhowmuchitwillgrow,butrather

determiningthecompetitiveadvantageofanygivencompanyand,aboveall,thedurabilityofthatadvantage.Theproductsorservicesthathavewide,sustainablemoatsaroundthemaretheonesthatdeliverrewardstoinvestors.”2

ThisiswhatislackingintheworldoftechnologyforBuffett.Hecan’tseethemoats,andhecan’tpredict

justwhichcompaniesaregoingtosurvive,muchlessthrive.Inotherwords,heknowswhatheknows,andwhathedoesn’tknow,andhestickstoit.

Buffett’saversiontoinvestingintechnologydidn’tjusthappeninthe1980sor1990s,though.HepassedonachancetoinvestincomputerprocessinggiantIntelinthe1960s,thenjusta

weestart-up,eventhoughheknewandtrustedoneofitsfounders.3Hesimplycouldn’tbesureheunderstoodthecompanyanditsprospectswellenoughtoputhismoneybehindit.(Itwasacostlychoice,buthisconvictiontostaywithinhiscircleofcompetenceisadmirable,nonetheless.)

Andinalettertohispartnersin1967,whenthe

marketaroundhimwasjumpingwithpopularnewtechnologyinvestments,leavingBuffettlookingforideashefeltcomfortableinvestingin,hestayedtruetohimself,saying,“Wewillnotgointobusinesseswheretechnologywhichiswayovermyheadiscrucialtotheinvestmentdecision.Iknowaboutasmuchaboutsemi-conductorsorintegrated

circuitsasIdoofthematinghabitsofthechrzaszcz.”4

Thelessonforinvestorshereisn’tnecessarilythatweshouldavoidtechnologyjustbecauseBuffettdoes,butratherthatweshouldunderstandandabidebyourowncirclesofcompetence.Maybeyouworkintheworldofhigh-tech,andarethereforeuniquelypositionedtohaveinsightsintothe

flashycompaniesBuffettwouldn’tevenentertaininvestingin.Orperhapsyou’reinthehealth-careindustry,anotherareathatcanbecomplicatedanddifficulttounderstand,andyoucanrattleoffthenamesandcompetitiveadvantagesofpharmaceuticalstocksgalore.Ifso,excellent—don’tbeafraidtousethatknowledge.Ifnot,though,don’tworry

aboutstickingtoyourknitting,thingsyouknowandunderstand.Buffettprovesyoucanmakeaprettygoodlivinginvestinginlesscomplexcompanies.

UNDERSTANDINGTHEKEYTOVALUATION

InaninterviewconductedinSeptember2010,valueinvestorLaurenTempletonagreedthatstayingwithinyourcircleofcompetenceisthesmartstrategy.She

said,“Asavalueinvestor,ifIcan’tvalueit,Ican’tinvestinit.Sothatkeptusoutofalotoffinancialstocksthatwereshowingupinourscreensduringthefinancialcrisis.Wecouldn’tget

ourarmsaroundthebalancesheetssowecouldn’tinvestinthem.Howdoyouvaluesomethingifyoureallydon’thaveatransparentviewofthebalancesheet?

Ofcoursethatkeepsusoutofbiotechandindustrieslikethatwherethere’sjustnogoodwayforustovaluethecompany.Soifwecan’tvalueit,wecan’tinvestinit.”5

Aslongashe’sbeeninvesting(andthat’sbeenquiteawhile—heboughthisfirststockwhenhewaseleven,remember?),Buffett’sfocusedoncompaniesandindustriesheunderstands.Infact,thingshelovedasachildsometimesshowupamonghisinvestmentideaslater,meaningthatinsomecasesheestablishedhiscircleofcompetencequiteearlyin

hislife.Heevensaidinhis1982shareholderletter,tonguenodoubtincheek,“nostalgiashouldbeweightedheavilyinstockselection,”citingGEICOandtheWashingtonPostCompany.6

SpeakingofthePost,asmentionedearlier,hedevelopedalovefornewspapersingeneral,andtheWashingtonPostinparticular,earlyinhislife.

Afterexercisinghisarmhurlingallthosenewspapersontoporchessolongago,henowownsabout20percentoftheWashingtonPostCompany,whichhestartedbuyingwaybackinthe1970s.He’salsoownedothernewspapersovertheyears,includingthenow-defunctOmahaSunandthestill-goingBuffaloNews.

Takerailroads,too.

Buffetthaslongbeenfascinatedwithrailroads,andhadasmallelectrictrainsetwhenhewasaboy.Heexpandedittoalargeroneinhisatticlateronandlovedshowingitofftofriendsandcolleagues.In2007,BerkshirebeganbuyingsharesoffreightrailcompanyBurlingtonNorthernSantaFe,andin2009madeasuccessfulbidtobuythe

companyoutright.NowBuffettcanbenefitfromwhatheseesasanenergy-efficient,low-costwaytoshipgoodsintheUnitedStatesandcanownarailroadthat’swaybeyondjustatoytrain.(Ah,everylittlebuddingcapitalist’sdream.)

ManyofBuffett’s,andBerkshire’s,investmentsovertheyearshavebeenconsumerbrandsthatareeasytofollow,

easytounderstand,andeasytoimagineenthusiasticallyowningapieceof.Insomecases,Berkshireownstheentirecompanyoutright;inothersitownssharesjustlikeanyotherinvestor(althoughnaturallyitownsmuch,muchmore).

BerkshireownsDairyQueen,See’sCandies,andFruitoftheLoomoutright,forexample.Sowe’re

lookingatburgersandBlizzards,chocolateandundies—alleasytograsp.BerkshirealsoownstheNebraskaFurnitureMartandBorsheim’sFineJewelry,addingagiantfurnitureretailerandafancybaublesshoptothelist.Andaswementionedearlier,BerkshireownsachunkofCoca-Cola,andatonetimeoranotherhasownedsharesofNike,

Costco,Wal-Mart,KraftFoods,andProcter&Gamble(makerofCresttoothpaste,Gilletterazors,Bountypapertowels,Duracellbatteries,andTidedetergent,justtonameafew).Thesearebig,recognizablecompanies,producinggoodsandprovidingservicesmostofushaveusedoratleastencounteredinourlifetime.

Allthesebusinessesare

signatureBuffett.Theyhavewidemoatsandstrongcompetitiveadvantages,makingiteasyforBuffetttoanalyzethemandpredicttheirfutures.They’reeasytounderstandandgetyourheadaround.And,whilelesstangible,ithastobesaidthatthey’refuntoownandfollow.Whodoesn’tlikeseeingOreosatthegrocerystore,forinstance,and

thinking,“Hey,IownsharesofKraft—thereforeIownthecompanymakingthosecookies!”Itmakesinvestingrelatablewhenyoucanlookaroundandseetheevidenceofyourmoneyatwork.Buffettenjoysthisaspectofinvesting,aswell.(Ontheflipside,it’sjustnotasjazzytosay,“Hey,Iownthecompanythatappliesthecoatingoftheoxidelayers

ontothealuminumelectrolyticcapacitorsofthisverycomputer’smotherboard!”)

Buffett’scircleofcompetencealsoincludesinsuranceandfinancialcompanies.GEICO,theinsurancecompanyperhapsbestknownforitsclevercommercials(doyoupreferthecavemenorthegecko?),isasignificantpartof

BerkshireHathaway,asareother,smallerinsurancecompanies.Aswetalkedaboutearlier,theyprovideBuffettwith“float”orexcesscashthathecanputtoworkinvesting.Berkshire’salsoownedsharesofAmericanExpressforyears,andhasinvestedinbankslikeWellsFargo,U.S.Bancorp,andGoldmanSachsaswell.

Maybeyourowncircleof

competencedoesn’tincludebanksandinsurancecompanies.That’snoproblem.Thekeylessonhereistorecognizewhatyoudoknowandunderstand,andtoleavetherestalone.Behonestwithyourselfandremembertheperilsofoverconfidence.Anotherpointtorememberisthatjustinvestingwithinyourcircleofcompetencewithoutdoing

anyfurtherresearchisn’tenough.Youstillhavetodoyourhomeworkonthecompaniestobesurethey’llmakegoodinvestmentsforthelongterm.BasinganinvestmentdecisiononlyonknowingthatyouloveStarbuckslatteswon’tfly,forinstance,butit’sagoodstartingpointforyourresearch.

Investingincompanies

youunderstandisimportant,soremember:

•Buffett’s“sphereofunderstanding”maybedifferentfromyourown.•Thinkaboutandlearnwhatyourowncircleofcompetencecovers.•Sticktoit,nomatterwhat.

Chapter6ShunRisk

Buffettbelievesthatlong-term-focusedinvestingwithinyourcircleofcompetence

willresultinwealthforsmartinvestors.Thisviewiscomplementedbyhisrisk-aversenature.Allinvestinginvolvesrisk,naturally.Thereareunknownsinherentinmakingthechoicetotradeyourmoneyforapieceofacompany—thefutureisnevercertain,afterall.ButBuffettbelievesthattobeassuccessfulaspossible,youshoulddoeverythingyoucan

tolimityourrisk,andthereforelessenthelikelihoodthatyou’llloseall-importantcapital(ormoneyyoucaninvest).Hebelievesintiltingthescalesasfaraspossibleawayfromspeculationandtowardanownership-mindedinvestingframework.

We’vealreadylearnedaboutmoatsandcompetitiveadvantages,sonow’sthetimetoembracetheconceptthat

Buffetthascalled“thecornerstoneofinvestmentsuccess.”1Thatimportantconceptiscalled“marginofsafety.”

Likemuchofhisinvestingphilosophy,BuffettlearnedabouttheideaofmarginofsafetyfromBenGraham.ThisprinciplewaskeytoGraham’svalueinvestingschoolofthought,andtheconceptevengetsits

veryownchapterinTheIntelligentInvestor.Withoutgettingtoomuchintofinancialnitty-grittyhere,amarginofsafetyrepresentstheleewayinvestorsgivethemselveswhenpurchasingsharesofacompany.Grahambelievedthatbecauseinvestorscan’twithprecisecertaintyknowhowmuchacompanyisactuallyworth(abestestimateisstilljustthat

—anestimate),youshouldreduceyourriskofbothbeingwrongandofbeingsubjectedtothemarket’svagariesbygivingyourselfanappropriatemarginofsafety.

Forexample,let’ssayyoubelieveABCcompanyisworth$100ashare,andit’scurrentlytradingat$75apop.Buyingsharesatthatpricewouldgiveyouamarginofsafetyof25percent

(somevalueinvestorsinsistonatleasta40–50percentmarginofsafety).Institutingamarginofsafetyforyourstockpurchasesisawayofmanagingtheriskinvolvedwithinvesting,andthewiderthemargin,themoreprotectionyougiveyourself.Youcanevenadjustyourrequiredmarginofsafetytobehigherwithcertainindustries,suchasmore

volatileorunpredictableones,andlowerwithbigger,moreestablishedandreliablecompanies.Thegoalistolimityourlosses,noteliminatethepossibilityofthemaltogether—thatwouldbeideal,ofcourse,yetimpossible.

ForBuffett,theconceptofmarginofsafetyisintegraltotheactofinvestingasawaytomanagerisk.He’s

oftenquotedassaying,“RuleNo.1:Neverlosemoney.RuleNo.2:NeverforgetRuleNo.1.”2It’sunfortunatelyacertaintythateveryinvestorisgoingtolosesomemoneyatsomepoint,butBuffett’spointhereistofocusondoingwhatyoucantoavoidlosingmorethanyouhaveto.Soundseasy,yes,butthetruthisthatmakinghastydecisionsandpayingmore

foracompanythanyoushouldcansaddleyourportfoliowithlossesthatcantakeyearstoundo,aswellasshrinkyourpreciouscapital.Preservingthecapitalyouhavetoinvestisofparamountimportance,andyoushoulddoeverythingyoucantoguardagainstthelossofthiscapital.Buyingwithamarginofsafetyinplacehelpslessenthispossibility.

Backinthe1970s,aswementionedbefore,BerkshirestartedbuyingsharesoftheWashingtonPostCompany.Afteranalyzingit,Buffettbelieveditsassetswereworthatleast$400million,yetthemarketwasgivingitapricetagoflessthan$100million.3Thisrepresentedamarginofsafetyof75percent—asteal!Berkshireboughtsharesandheldon,thoughBuffett

wasn’tinitiallyrewardedforhisprescience.Aswealsodiscussedearlier,rightafterBuffettinvestedinthePost,sharesdroppedandremainedbelowwhatBuffettthoughttheywereworthforthreeyears.

Thisillustratesanotherimportantpointaboutmarginofsafety—Buffetthaddonehishomeworkandwascertainthemarketwas

mispricingthePost,woefullyso,infact.Hecouldbecomfortablebeingpatientandholdingontohisshares.Hewasconfidentenoughinhisanalysisthathebelievedhewouldeventuallybeprovencorrect,andhe’dboughthimselfenoughwiggleroom(morethanenough,infact)towaitforthemarkettorewardhim.However,hadheboughtwithnomarginofsafety,

overpayingforhissharesofthePost,he’dbemuchlesscertainthatanyeventualreturnhemightearnontheshareswouldbethankstoanythingmorethanblindluck—orothersuckerswillingtopaymorethanhedid.Andthatwouldmakewaitingmuchmorenerve-racking.

Calculatingacompany’sintrinsicvalue,whichyouneedtodobeforeyoucan

startthinkingaboutwhetherthere’sanacceptablemarginofsafety,isacomplextask,andonethatwewon’ttacklehere.However,thereareampleresourcesavailableonwww.fool.comshouldyouwanttoinvestigatefurtherandlearnhowtoputthisintoaction.ThemainpointfornowistounderstandwhatitrepresentsandhowBuffettemploystheconceptof

marginofsafetytolimithisrisk.Advancedinvestorsandvaluehoundsdothesame.Perhapsyou’renowintriguedenoughtojointhem.

AnotherwaythatBuffettshunsriskisfoundinhisattitudetowarddebt.Givenhiscautiousnature,it’snotsurprisingthathe’snotabigproponentofdebt,whetherwe’retalkingaboutpersonaldebtordebtthatBerkshireor

othercompanieshaveontheirbooks,becauseoftherisktoomuchdebtcanbring.Theproblemwithdebtisthatitsoverusecanbedisastrouswhentimesgetrocky.Buyingstocksonmargin(thatis,usingborrowedmoneyfromyourbroker),forexample,cancreatetroublewhenstocksplummet,becauseyournervousbrokerisgoingtowantitsmoneyback.

Thinkaboutcreditcarddebt—theprinciple’sthesame.Whentimesareflush,youcanuseyourcreditcardsensibly,youhavenotroublekeepingupwithyourpayments,andyoucanusethecreditasitwasintended—asatoolbutnotacrutch.However,onelostjoborbiguncoveredmedicalbilllater,andit’seasytogetbehindifyou’veoverreliedoncredit

andrunupanunwieldyamountbuyingfaux-minkneckwarmers,goldcoffeetables,andafleetofhot-airballoons.Itcanturnabadsituationintoamuchworseone(butatleastyouhaveyourneckwarmersto,youknow,keepyouwarm).

Thesamegoesforbusinessesthatborrowmoney,whethertofinancenewventures,buildor

improvebuildingsorplants,orpaytemporaryoperatingcosts.Alittledebt,managedwell,normallywon’tcreatehavoc.Butbewarepilingiton.Darktimescanmeanmissedpayments,whichforacompanyneedingloansinthefuturecanmeandoubtsaboutitscreditworthiness.Andthosedoubtsregisterwithinvestors,too,whomayfleedebt-ladencompaniesfor

othermorecash-richoutfits.Buffettlikestokeep

Berkshireascashrichaspossible.Inhis2008lettertoshareholders,hewrote,repeatingthoughtshe’dsharedbefore,“However,Ihavepledged—toyou,theratingagenciesandmyself—toalwaysrunBerkshirewithmorethanamplecash.Weneverwanttocountonthekindnessofstrangersinorder

tomeettomorrow’sobligations.Whenforcedtochoose,Iwillnottradeevenanight’ssleepforthechanceofextraprofits.”4

It’stellingthatamasterinvestorsuchasBuffettrefusestoallowBerkshiretotakeonsignificantamountsofdebt.Ifhedoesn’ttrustit—andwearetalkingaboutthegreatestinvestorofalltimehere,amathematical

mastermindlikenoother—thenhowshouldtherestofusbeapproachingthequestionofdebt?It,withoutadoubt,raisesyourrisk.Thesafestthingtodo,whenpracticable,istoavoiditlikeBuffettdoes.

Buffettalsolimitshisriskexposurebystayingwithinhisso-called“sphereofunderstanding,”aswediscussedinanearlier

chapter.Bystickingtowhatheknows,Buffettlowershisriskofapoordecisionbasedonfaultyknowledgeandassumptions.That’snottosaythemannevermakesmistakes(we’llgettosomeofhismostnotableoneslateron),buthedoeswhathecantomakeasfewaspossible.

BuffettfurthermanageshisriskbyinvestingmostlyincompaniesbasedinAmerica

versusbuyingforeignstocks.Berkshire’sownedsharesofvariousinternationalcompaniesovertheyears,includingtheIrishbeerbusinessGuinness,theChineseoilcompanyPetroChina,andacoupleofIrishbanks.BerkshirealsoownstheIsraeliautomatedtoolmakerIscaroutright,andhasrecentlyownedsharesofBYD,aChinesecompany

thatmakesbatteries,electriccars,andmobilephones.Butforthemostpart,Buffetthasstuckclosetohome.

Therearegreatadvantagestoinvestingoverseas—youcanownsharesofnewer,faster-growingcompaniesinnewmarkets,foronething.Buttherearerisks,too.Knowingthegeopoliticalclimatebehindeverymarket,aswell

asdifferingaccountingrules,addsalayerofcomplexitytoinvestmentdecisions.ForBuffett,forthemostpart,that’sariskhe’schosentopasson.

Allinvestinginvolvesrisk.Thequickeryougetusedtoandcomfortablewiththisfact,thebetter.However,there’snoneedtotakeonmoreriskthanisnecessary.FollowBuffett’sleadhere:

•Insistonanappropriatemarginofsafety.•Avoiddebtasmuchaspossible.•Staywithinyourcircleofcompetence.•Doyourhomeworkbeforeinvestingoverseas.

Chapter7FocusonthePositivesofPessimism

Buffett’snotoriouslyoptimisticaboutAmerica,ourabilitytoovercomehardships,andourfuture.Whenthemarketswereroilinginthefallof2008,andfearandpanicwereattheirheight,Buffettbecamesomethingofanationalcheerleader.Hewroteanop-edfortheNewYorkTimescalled“BuyAmerican.IAm,”inOctober2008.Inthe

article,hewrotethatamidthechaos,goodAmericancompaniesweresellingforsuchinexpensivepricesthathewouldbebuyingthemforhisownpersonalportfolio—notBerkshire’sportfolio,mindyou,whichalreadyheldmanygreatAmericancompanies,buthisownaccount,wherebeforethishe’downedonlygovernmentbonds.1

WhywouldBuffettsoboldlydeclarethis“BuyAmerican”sentimentatsuchaperiloustime?Becausehebelieved,inhiswords,that“fearsregardingthelong-termprosperityofthenation’smanysoundcompaniesmakenosense.”2Buffettwasdecidedlynotmakinga“marketcall,”norpredictingthatthestockmarketwasgoingtoturn

aroundanytimesoon.Heveryclearlyindicatedthathehadnoideawhenthemarketwouldturnaround,onlythat,eventually,itwould.Andwhenitdidyouwantedtobeamongthebraveinvestorswhoboughtwhentimeslookedbleakest.

Buffettiswithoutadoubtanoptimistatheart,buthe’ssmartlyrecognizedandexploitedthefactthat

pessimistictimescancreatescenariosthatleadtogreatwealthforinvestorsinthelongterm.ThatwilllikelyturnouttobethecaseforinvestorswholistenedtoBuffett’sadviceandboughtstockswhenitseemedthewholeworldwasfallingapartaroundtheminthefallof2008(andIcertainlyhopetobeinthatnumber).AshesaidinhisNewYorkTimespiece,

echoingthoughtshe’ssharedbefore,“badnewsisaninvestor’sbestfriend.ItletsyoubuyasliceofAmerica’sfutureatamarked-downprice.”3He’salsosaid,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”4

Inhis2009lettertoshareholders,Buffetthammeredthispointagain,writing,“Aclimateoffearis

their[investors’]bestfriend.Thosewhoinvestonlywhencommentatorsareupbeatenduppayingaheavypriceformeaninglessreassurance.Intheend,whatcountsininvestingiswhatyoupayforabusiness—throughthepurchaseofasmallpieceofitinthestockmarket—andwhatthatbusinessearnsinthesucceedingdecadeortwo.”5

Buffett’scarefulnottolethisinherentoptimismcloudhisjudgment.Heremainseven-temperedabouthisinvestments,andaboutthemarket’supsanddowns.HismentorBenGrahamtalkedandwroteaboutafictionalcharacternamed“Mr.Market,”whowasavailabletodobusinesswithyoueachday,offeringtobuyyoursharesfromyouorsellyou

newones,atvaryingprices.6Ifyousaidnotohimoneday,itwasnoproblem—he’djustreturntomorrowwithyetanotheroffer.Buffettlikesthisanalogyandhasshareditovertheyears,remindinginvestorsthattheyremaininchargeofMr.Market—nottheotherwayaround.Youcan’tgettooworkedupabouthiswishy-washymovementsonewayortheother.

ThisattitudeisalsowhatletsBuffettavoidperiodsofhypeandhysteria,likethe1990stechnologyboom.TheunlimitedoptimismthatinvestorssawintechnologyatthattimeescapedBuffett.Ashewroteina1979articleinForbes,“Thefutureisneverclear.Youpayaveryhighpriceinthestockmarketforacheeryconsensus.Uncertaintyactuallyisthe

friendofthebuyeroflong-termvalues.”7

THEPOWEROF

PESSIMISMDuringan

interviewconductedinSeptember

2010,BillMannoftheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmericaFundtouchedontheissueofoptimismandpessimismasitappliestovalueinvestors:

“Whenyoulookedatacompany[tovalueit],yousaid,‘Well,itearnedadollarthisyearandIamgoingtomuddleitoutat10percentgrowthgoingonforXperiodoftime.’

WheneverIwasdoingsomething,therewassomethinginthebackofmymindthatalwayssaid,butwhatifitdoesn’t?Ithinkthatthatisoneofthecoreattributesof

valueinvestors.“Ifyou

thinkaboutthestockmarket,thestockmarketisanexerciseinoptimism.Itisalmostanirrationaloptimismbecauseyouaresaying

wheneveryoubuysomething,thatyouaresmarterthantherestofthemarket.Youknowmore.Youhavebetterinsightthan100millionpeoplewhoarewillingtobuyorsellstocks.Ithink

thatisaprettyboldstatementforalotofpeople.Itisaboldstatementforeverybody.

“Sotocomeintowhatisanoptimisticpursuitandbepessimisticaboutwhateveryouarelooking

at,Ithinkitisaprettyinterestingmindset,butIdon’tknowthatIhaveseentoomanypeopleinthestockmarketgetintroublebybeingtoopessimistic.Generally

speaking,youseetheothersideofthecoin.Peoplesay,‘Well,thiscompanyisgrowingat40percent,itisgoingtokeepgrowingat40percent,orifIwanttobeconservative

aboutit,itisgoingtojustgrowat36percent.’Wellyouknow,whatifitdoesn’t?Whathappensthen?Whatisyourprotection?

“Ithinkthatthatisreallytheessenceofa

valueinvestor—someonewhoentersintosituationswherehesees,evenifhehappenstobewrongbecauseit’snotlikevalueinvestorshavesomegreaterinsightonthefuture,butthey

seesomesortofdefensivestance,beitjustintheutterlylowlevelofthestockprice,orthereissomethingaboutthecompanythattheythinkpeoplearemissing.But

youstillgothroughtheprocessofbeingapessimisticoptimist,Iguesswouldbetheleastawfulwaytoputit.”8

Graham’sinvesting

philosophywasactuallybuiltonpessimism,somethingthatBuffettmovedslowlyawayfromovertheyears.Dubbed“cigarbutt”investing,theideawastofindthecheapeststockpossible(say,acompanysellingforbelowwhatallofitsassetswouldfetchintheopenmarket),andbuysharesinit,hopingtosnagafewfinalpuffsfromitasyoumightadiscarded

cigaryoucameacrossonthestreet.(Yes,yuck.)Thisschoolofthoughtdidn’ttakeintoaccountthequalityofmanagement,orthecompany’sfutureprospects,orthestrengthofitsbrandorcompetitiveadvantage.Itwasstrictlyabout“marginofsafety,”aswetalkedaboutinthepreviouschapter.

Graham’sstylewaspessimisticinthesensethat

youweren’tlookingforbusinessestoinvestinfortherestoftheirlives,andyourlife,benefitingfromtheirmoatsandappreciatingtheirabilitytoflourish.No,insteadyouweremerelywalkingaroundwithyourheaddown,lookingforonepuffhereandonepuffthere,withnoeyetothefuture,nohopeforthebusinesstomorrowandthefollowingday.

Thanksinparttotheinfluenceofhisbusinesspartner,CharlieMunger(we’lldelveintothismoreinalaterchapter),Buffettbeganlookingpastthispessimism,andlookingforbusinessesthatwerestrongenterpriseswithbrightfutures.Nonetheless,hedidnotallowhimselftobecomeblindedbyoptimism.Heremainssteadfastlyrealisticwhen

analyzingcompanies,hopingforneitherpiesinthesky,norcigarbuttsinthegutterwithoneremainingpuffinthem.

Tomakesureyoudon’tgetcaughtupinunwarrantedoptimism,remember:

•Belevelheadedaboutyourinvestmentsandthemarketatlarge.Learnnottobeexcitedbymarketswingstotheupsideor

devastatedbymarketdrops.•You’reinchargeofMr.Market.Don’tlethimbossyouaround.•QuotingBuffett,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”

Chapter8ResearchExtensively

The“cocktailparty”stocktipissomethingwe’veallheard

about,andmaybeevenexperiencedourselves,deliciouspig-in-blanketinhand.OrperhapsyourGreat-UncleIrvisalwayswhisperinginyourearaboutthat“surething”heheardaboutfromhisbrokerwhilefittingineighteenholesattheclub.Andthere’scertainlyneverashortageofexpertlycoiffed,smartlydressed,andsometimessmart-sounding

guysandgalsontelevisiontellingyouwhattheythinkyoushouldbeinvestingin.Whileitmaybetemptingtolistentoanyorallofthemandjumpintoastockyouknowlittletonothingabout(whenhasUncleIrveversteeredyouwrong?),resist!

Buffettbelieves,andyoushould,too,thatyouneedtoputinampleresearchtimebeforebuyingsharesofa

company.It’snotenoughjusttoknowatickersymbol;youneedtounderstandwhatthecompanydoes,howitmakesitsmoney,andjustwhoisrunningtheshow.Thislevelofreconnaissanceisaproductivemeansforfiguringoutifyou’relookingatanenterprisewithadurablecompetitiveadvantageandstrongmoat,orjustanotherhere-today-gone-tomorrow

pretender.Youcan’tknowallthatwithoutdoingthework,folks.(Asasidenote,it’samusingtothinkabouthowmuchresearchsomeonewilldobeforebuyinganewcomputerorcarorrefrigerator,butwhenitcomestoinvestingtheirhard-earnedmoneyinpubliccompanies—inbuyingapartofabusiness,remember—manypeoplearecontentto

listentoothersanddoaslittleaspossiblethemselves.)

Luckily,we’vegotthingsawholeloteasierthanBuffettdidbackwhenhefirststartedreadingaboutandresearchingcompanies.ThankstotheInternet,thequick,largelyfreeaccesswehavetodaytofinancialinformationisseeminglylimitless.BuffetthadtogoinpersontotheSecuritiesandExchange

Commissiontoseecompanyfilings.“Thatwastheonlywaytogetthem,”he’ssaid.1ItwasasimilarstoryforsomeMoody’sandStandard&Poor’sreports.He’dhavetoshowupandrequestthedocumentshewantedonspecificcompaniesfromtheirlibrary,andthensit,goingthroughthembitbybit,takingnotesforhimself.Hedidn’tevenhavethebenefit

ofacopymachine!2Whenhewasn’thanging

outatMoody’s,Standard&Poor’s,ortheSecuritiesandExchangeCommissioninperson,BuffettwashaulingaroundthosegiantMoody’sandStandard&Poor’smanuals.HestartedthishabitwhenhewasinbusinessschoolatColumbia,learningfromhismentorBenGrahamtodigforpotential

investments.Thesearen’t100-page

paperbackswe’retalkingabout,either.Think10,000pagesforthehardcoverMoody’sManuals,coveringjustabouteverypubliccompanyunderthesunandmoon.BuffetthassaidhewentthroughalltheMoody’sManualstwice—all10,000pages—whenhewasworkingasastockbrokerathis

father’sOmahafirm,lookingateachandeverybusiness.3

Buffettalsowasn’tabovevisitingcompaniesinpersontolearnmoreaboutthemandtalktomanagementface-to-face.HefirstdidthiswithGEICO(nowownedinfullbyBerkshireHathaway)whenhewasagraduatestudent.HavingheardthatGraham’sinvestmentfirmlikedthecompany,Buffett

decidedtoinvestigatefurther.HeshowedupatGEICO’scorporateofficesonaSaturdayandbeforelong,foundhimselfquizzingavicepresidentaboutthecompany’sfinancialsandprospects.Shortlythereafter,BuffettinvestedasubstantialchunkofhismoneyinGEICO’sstock.

Buffett’sinsatiabledesiretolearneverythingandread

everythinghecangethishandsonislegendary.He’sanabsolutesponge,soakingupfarmoreinformationthanseemshumanlypossible.Hedevoursannualreports,businessmagazines,andbooksaplenty.Hereportedlyreadsatleastfivenewspapersaday,andhasbeenreadingtheWallStreetJournaldailysincehewasincollege.4Infact,oncehewaslivingand

workingbackinOmahahearrangedtohavetheJournaldeliveredearlytohisofficeeachmorning,sohe’dhaveajumponeveryoneelsewhenitcametothelatestfinancialnews.5

Buffett’sdaysinhismodestOmahaofficeareusuallyspentreading,fromthetimehegetsinuntilthetimeheheadshome.Hereadsaboutsevenhundredannual

reportsayear,takingforty-fiveminutestoreadeachonecovertocover.Talkaboutusingyourtimewisely!Hehasoptimizedthistime-consumingprocessperfectly.Giventhathe’smostlyjustsittingaroundreadingallday,he’stalkedbeforeabouthowboringhistimeattheofficewouldlooktoanoutsider.(AlthoughIhavetosay,assomeonewhoabsolutely

lovestoread,thissoundsprettyheavenlytome.)

Hisnightstypicallyaren’tthatdifferent.Histhreeadultchildrenhavetalkedabouttheirfather’sreadinghabitswhentheyweregrowingup;he’dgouptohisstudyupstairsaftersupperandreaduntilhewenttosleep—theyknewnottodisturbhimunlessabsolutelynecessary.6Buffettissimplydrivento

absorbasmuchknowledgeandinformationashecan.

Onebenefitfromthisisthathecanoftenmakecomplexfinancialdecisionsfasterthanmostofus—mathwhizzesorno—wouldfeelcomfortabledoing.Becausehe’sspentsomuchtimelearningindetailaboutthefinancialsofnearlyeverycompanyhemightfeasiblybeinterestedinowning,hecan

quicklyassesspotentialdeals.Abouthisongoingprepwork,Buffetthasreportedlysaid,“NoahdidnotstartbuildingtheArkwhenitwasraining.”7BuffettreadstostayreadyfornewbusinesspropositionsinadditiontokeepingupwiththefinancialsofBerkshire’scurrentholdings.

Buffett’smindisrazorsharpandhispowertorecall

informationisastonishing.AndrewKilpatrick,authorofOfPermanentValue:TheStoryofWarrenBuffett,saysthat“heisinfactageniusandtherestofusmortalscan’trelatetothat.Ifyoutellpeoplehecanreadandabsorbabookinonesitting,peopledon’tbelieveitbecausetheycan’tdoit.”8

Butwhileitcertainlyhelps,youdon’thaveto

possesshisremarkableintellectandnear-perfectmemorytosucceedasaninvestor.(Thankgoodness!Mostofuswouldbesadlyoutofluckwerethesetraitsnonnegotiablerequirements.Andremember,too,whatBuffetthimselfsaidabouttemperamenttrumpingIQininvesting.)

Youdoneedtocraveknowledgeashedoes,

though.It’snotnecessarytorequestearlydeliveryoftheWallStreetJournal,orreadfivenewspapersaday,orspendyoureveningsathomeholedupwithastackofannualreports.You’velikelygototherthingstoattendto,right?Buttobecomeabetterinvestor,you’vegottobecomealoverofbusinessesandabetterscholar.

You’vegottolearnthe

basicsofaccounting,soyou’llknowyourwayaroundabalancesheet,forinstance,andwon’tbeflummoxedwhensomeone’stalkingaboutaccountsreceivableorgoodwill.You’vegottoreadaboutdifferentbusinessmodels,tounderstandhowtheymakemoney.

HowisdiscountgiantWal-Mart’sapproachdifferentfromjewelrystore

Tiffany’s,forexample?They’rebothretailers,buttheypracticeverydifferentapproachestobusiness.Theanswer?Wal-Martsellsawholelotofthingswithverylittlemarkup,ahighvolume/lowmarginstrategy,whileTiffanychoosestosellfewer,higher-qualityitemsbutmakesmoremoneyoffeachone.(Oh,andnaturally,there’sthefactthatWal-Mart

doesn’tusethosecutelittlerobin’seggblueboxesanddoesn’thavealegendarymoviewithitsnameinthetitlestarringtheoneandonlyAudreyHepburn.ButIdigress.)

You’vegottobecomecomfortablewiththepeculiarlanguageofbusiness,andtogetthere,you’vegottoembracereadingaboutit.Havingahealthycuriosity

abouttheworldaroundyouhelps.Buffett’seternallycurious,andthisisahugeassetforhim.Youcanneverbesurewhereyournextgreatinvestmentideaorpossibilityisgoingtocomefrom.Beingopentolearningaboutanythingandeverythingprovidesyouwiththementalmakeuptoembracenewideas.

THEBENEFITSOF

BEINGCURIOUSANDWELL-

READLisa

Rapuano,founderofLaneFiveCapital

Management,hasasoneofherfirm’scorevalues,“Learnandreadwidely.”InaSeptember2010interview,sheelaboratedonwhythisissoimportant:

“Itmattersbecausethe

worldiscomplexandtheworldisadaptive.Idon’tknowwhythisis,Idon’thaveatheologicalorepistemologicalfoundationforthis,butithascometomyattentiontime

andtimeagainthattherearepatternsintheworldthatrepeatacrossseeminglyunrelatedsystems.Sotherearethingsaboutthemarketsthatappeartometobeverysimilar

tothewaythatbiologicalsystemswork.Orthereareanalogies,therearerecurringpatternsthataresimilar,andwesureknowalotmoreaboutbiologicalsystemsthanwedoaboutthe

markets,andsoifIcanstudybiologicalsystemsandtheycangivemeanylittleinsightintohowthisworks,that’shelpful.Andit’sreallyindirect,soIdon’twanttomakeitsound

like,‘WellIstudynervesystemsandIfigureoutthatthisworksthatway.’It’sreallyveryindirectandveryamorphous.

“There’salsotheelementofhistoricalpatterns,not

justsystems,butevents,suchasthewaythatwarshappen,thewaythatculturesevolve,thewaythatdemographicshaveaffectedcountries,thewaythatnaturaleventshaveaffected

countries—again,amorphous,indirect,buttheyprovidegreaterconnectionsinyourbrain,yourbrainbecomesmorerobust,andthepatternrecognitionmachine

becomesbetter.Youmakeconnectionsthatotherpeoplemightnotmake.That’sataverybroadlevel.

“Atamorepracticallevel,acuriouspersonismorelikelytouncoverthe

pieceofinformationthatwillbetheevidenceyouneedtohavehigherconfidencethanthenextguythatisnotcuriousenoughtoberesourceful.Youknow,

someonewho’sbasicallylike,‘Igetthis.Iunderstandhowthisworks.Idon’tneedtothinkaboutitallthatmuch.’Whereassomeonelikeme,orthepeoplewhoworkforme,

arealwaysasking,‘HowelsecanIthinkofthat?WhatamImissing?Whatelseishappening?WhatelsecouldIdo?HowelsecouldIturnthisonitshead?WhatelsecouldIresearchto

figureoutifthisisrightornot?’

“Now,youhavetobecarefulwiththat,becauseyoucouldworkononethingtwelvehoursadayfortherestofyourlifeandstillnothave100percent

information.Butit’sthedrivetobecurious,andthepersonwhonaturallywantstolearnandreadwidelyismorelikelytobeabetteranalyst.Then,secondly,theactofreading

widelyandbroadlyprovidesyouwithamorerobustsetofpatternsandconnectionsandnetworksthat,atthemargin,Ithinkhelpyouunderstandhowtheworldworks.”9

Now,thisisn’ttosaythatBuffett’sgoingtospendalotoftime—norshouldyou—readingaboutandfollowingindetailthecompaniesthatlieoutsidehiscircleofcompetence.Aswetalkedaboutearlier,heveryclearlydefineswhichindustriesandtypesofcompaniesfallintohiscircleandthenhesticksto

it.Thankstohiscuriosity,it’snotastretchtoimaginehimkeepingupwithsomecompaniesthatfalloutsidehiscircleinaperipheralkindofway,butnotwiththesamedepthandintensityhedevotestothecompanieshefullyunderstands.

Aswefoundearlier,becauseofthefast-movingandever-changingnatureoftechnology,forexample,

Buffettdoesn’tfeelcomfortabletryingtopredicttheirfuturecashflows.It’sunlikely,then,thathe’sspendingasignificantamountoftimereadingabouttechcompanies,outsideofsomeofthebiggiesthatweknowfascinatehimlikeMicrosoftandGoogle.Hisresearchtimeandbrainpowerarebetterfocusedelsewhere.Thisisalessonforus,as

well.Unlessyouarecertainthatdivingdeepintonewareasisgoingtobringthemwithinyourcircleofcompetence,youareprobablybetterservedbycontinuingtolearnasmuchasyoucananddeepeningyourknowledgeabouttheindustriesandcompaniesyouarealreadycomfortablewith.

AnotherkeyassetforBuffettishisabilitytoavoid

what’sknownas“confirmationbias,”theveryhumantendencytoseekoutonlyinformationthatconfirmsaconclusionwe’vearrivedat,versuschallengingit.10We’rebiasedtowardnewsthatpleasesus;questionus,andnotsomuch.It’sthegrown-upequivalentofstickingyourfingersinyourearsandyellingnonsensewhenyoudon’twanttohear

whatsomeone’stellingyou.However,avoiding

negativeinformationcanbedeadlyforinvestors.Lettingconfirmationbiasruleyourinvestmentdecisionscancompoundmistakes,becauseitcanmakeyouunwillingtoadmityoumadeoneinthefirstplace.Aswe’llseelaterinourchapteronmistakes,Buffettisuncannilygoodatadmittinghe’smadethem.It

mayhurthisego,itmayupsethim,butwhennewinformationpresentsitselfthatdisprovessomethinghebelieved,heanalyzesitandacceptsit.WritingaboutapurchasehemadeofoilcompanyConocoPhillipswhenoilpricesweresky-highandthensubsequentlyplummeted,hesays,“sofarIhavebeendeadwrong.Evenifpricesshouldrise,

moreover,theterribletimingofmypurchasehascostBerkshireseveralbilliondollars.”11

Whenyoudon’ttakethetimetoquestionyourthinking,toconsiderwhatcouldgowrong,tonoodleonwhatyoucouldbemissinginyouranalysis,youautomaticallyincreaseyourrisk.AndweknowthatBuffettbelievesyoushould

doeverythingyoupossiblycantoreduceyourrisk.Makingsureyou’veconsideredalternatepointsofviewhelpsyoudothis.Youwon’tbeperfectatit;nooneis.Buttryingtothinkaboutallpointsofview—notjusttheonesthatindicateyou’reright—istremendouslyhelpful.

Writinginhis2008lettertoBerkshireHathawayshare-

holdersaboutthehumaninclinationtowantapprovalforone’sinvestmentideas,Buffettsaid,“Approval,though,isnotthegoalofinvesting.Infact,approvalisoftencounter-productivebecauseitsedatesthebrainandmakesitlessreceptivetonewfactsorare-examinationofconclusionsformedearlier.Bewaretheinvestmentactivitythatproduces

applause;thegreatmovesareusuallygreetedbyyawns.”12

So,inordertogetthemostoutofthetimeyouspendresearching(arealnecessitytobecomingagreatinvestor):

•Read,read,read.(Youcanchecktheappendixinthebackforalistofbooks,ifyouwantaplacetostart.)

•Don’tforgetaboutyourcircleofcompetence.•Avoidconfirmationbias—activelyseekoutinformationthatcontradictsyourconclusions,notonlyinformationthatreinforcesthem.

Chapter9IgnorePeerPressure

Buffett’sprimaryinvestmentprinciplesweresolidified

earlyinlife,thankstohismentorBenGraham.ThoughBuffettevolvedhisthinkingsomewhatovertheyears,incorporatingideasaboutmorequalitativeinvestingfrombusinesspartnerCharlieMungerandgrowthinvestingpioneerPhilipFisher(we’llgetintothisfurtherlateron),oncehe’dformedhisphilosophicalfoundation,heneverwaveredfromit.

Buffettwouldencountertryingperiodsforhisintellectualstrengthandpsychologicalfortitudeinjustabouteverydecadehe’sbeeninvestingin.He’sbeenseenas“outofstep”(hisownwordsina1967lettertohispartners)orpasthisprime,timeandtimeagain.1Punditshavederidedhisoppositiontotechnologyinvestments,declaringhimwashedup,his

styleofinvestingnolongersuccessful.

Beforehewasthewell-knownBuffettofmagazinecoversandbooktitles(ahem),hefacedpricey,irrationalmarketsthatlefthimlittlechoicebuttowaitwithcashburningaholeinhisproverbialpocket.Throughitall,throughthecriticism,throughthefrustrationofseeinggoodcompanies

simplysellingfortoohighaprice,Buffettstayedtruetohimself,certaininhisbeliefs.HedidnotabandonhisGraham-basedideology,andhedidnotdoubtthatthewayhewasinvestingwasthebestandmostsensiblewaytogoaboutthings.

InatelevisedNovember2009CNBCinterviewBuffettparticipatedin(alongwithBillGates)atColumbia

University,hesaid,“Havingsoundprinciplestakesyouthrougheverything.AndthebedrockprinciplesthatreallyIlearnedfromGrahamandDodd,Ihaven’thadtodoanythingwiththem.Theytakemethroughgoodperiods,theytakemethroughbadperiods.Intheend,Idon’tworryaboutthembecauseIknowtheywork.”2

TheBuffettpartnership

beganin1956,andhequicklyandeasilyfoundundervaluedplacestoinvesthispartners’money.However,asthe1960sprogressed,dubbedthe“Go-Go”yearsbymarkethotshotsmakingfast,easymoney,Buffettfoundhimselffrustrated,withtoomuchmoneytoinvestandtoofewopportunitiestodoso.Indeed,in1966heclosedhispartnershiptonewinvestors.

Atthetime,predatinganothertechbubblethatwouldseeBuffett’slogicquestioned,investorsweresnappinguptechnologyandelectronicscompanieswithoutpausingtoaskexactlywhatthesecompaniesdidorhowtheymademoney.

Buffettrefusedtoparticipateinthemadness,tellinghispartnersintheaforementioned1967letterto

them,“Whenthegameisnolongerbeingplayedyourway,itisonlyhumantosaythenewapproachisallwrong,boundtoleadtotrouble,etc.Ihavebeenscornfulofsuchbehaviorbyothersinthepast.Ihavealsoseenthepenaltiesincurredbythosewhoevaluateconditionsastheywere—notastheyare.Essentially,Iamoutofstepwithpresentconditions.On

onepoint,however,Iamclear.IwillnotabandonapreviousapproachwhoselogicIunderstandeventhoughitmaymeanforgoinglarge,andapparentlyeasy,profitstoembraceanapproachwhichIdon’tfullyunderstand,havenotpracticedsuccessfullyandwhich,possibly,couldleadtosubstantialpermanentlossofcapital.”3(Itshouldbe

pointedout,however,thatthankstohisearlierpurchases,thepartnershipperformedverywellinthe1960s.Heclosedthepartnershipin1969,havinggivenhisluckypartnersa32percentaverageannualreturnbeforefees.)

Fromthispointearlyinhiscareer,Buffetthadtobestrongandnotbendtomobrule.Sure,hecouldhave

followedalltheother“investors”(Buffettlikelywouldn’tagreewiththatcharacterizationofthem)intothemarket,hoppingintostocksthathedidn’tunderstandbutwereneverthelessgoingupbecauseeveryoneelsewasinafrenzy,butthatisnotwhoheisorhowheoperates.Hebelievesinbeingsystematicandhavingasetapproach,a

framework,andonceyouknowwhoyouareasaninvestorandwhatyou’relookingfor,yousticktoit.ChangingwitheverymarketwhimandspeculativewindthatblowsthroughWallStreetisnotthewaytobuildwealthoverthelongterm.

Buffettwouldbetestedagainintheearly1970s,asmutualfundmanagerspouredmoneyintoagroupofbig

companiesknownasthe“NiftyFifty.”ThefactthateveryonewasdoingitwasnotenoughreasonforBuffetttojointhem,andhesetoutonhisown,snappingupcheapsharesofcompaniesotherinvestorswereignoring.Thestockmarketswoonedin1973–74,anddespitehiscurrentinvestmentslosingvalue,Buffettwasexcitedaboutthechancetopickup

companieshebelievedinforever-lowerprices.Themoredismalthestockmarketbecame,thehappieritmadeBuffett.

The1960sandthe1970swere,together,periodsthatexemplifiedoneofBuffett’smostfamoussayings:“Befearfulwhenothersaregreedy,andgreedywhenothersarefearful.”Inthe1960s,therehadbeen

euphoriaandgreedgalore,andBuffettpatientlywaitedonthesidelines,hesitanttojointhesure-to-endparty.Then,asthemarketcollapsedinthemid-1970s,andmostinvestorswereallfilledupwithfear,Buffettwasgreedilyaddingtohisfavoritepositionsandinitiatingnewones.

WheninterviewedbyForbesmagazinein1974,

andaskedhowhefeltaboutthestockmarketatthatparticulartime,Buffettsaid,“Likeanoversexedguyinaharem.Thisisthetimetostartinvesting.”(OK,soclearlyBuffettdoeshavesometracesoftestosterone.)Headded,“Nowisthetimetoinvestandgetrich.”4Thisattitudeandabilitytoremaincoolinthefaceofpanicandmarketdeclinesisatraitthat

separatesBuffett;it’salsosomethingyou’vegottolearntodevelopinordertobeabetterinvestor.

SpeakingofBuffettandhisremarkabletemperament,RogerLowenstein,authorofBuffett:TheMakingofanAmericanCapitalist,andmorerecently,TheEndofWallStreet,saidinaninterviewpublishedonFool.com,“Howmanytimes

haveweheardhe’sthrough?Weheardthatinthedot.comeraandwehearditinthemortgageeraagain.Justbubbleafterbubble,hestandsonthesidelinesandletsotherpeopletakewhatseemtobeeasygainsuntiltheycomecrashingdown.Itsoundseasyinretrospect,butitjusttakesanawfullotofself-confidence.”5

Lowensteinalsosaid,

“Thekeytohistemperamentisthatheiscomfortablefollowinghisowninstinctsandjudgmentandignoring(whenhedisagreeswithit)thatoftheconsensus.Thishasenabledhimtoavoidmany,manyinvestmentfadsandperilsoverthecourseofhiscareer,fromtheGo-Gostocksofthe’60stotheNiftyFiftyoftheearly’70s,tothedot.comsofthelate’90sand

themortgagebubbleofrecentyears.”6

Itcanbeincrediblyscarytogoagainstwhatotherinvestorsaredoing.Tobecontrarianissodifficult.Theconvictioninyourownanalysisandbeliefsisparamount.Otherwise,youmightaswellgivein,giveup,andresignyourselftoafuturefollowingtheso-calledherd,investinginwhat

everyoneelseis,destinedtodoonlyaswellastheydo.

DON'TWAVER

FROMYOURCONVICTIONS

Inaninterview,valueinvestorand

founderofParadigmCapitalManagementCandaceKingWeirsaidofthechallengeofstayingtruetoyourself,“youhavetohaveacertainsetcourageofyourown

convictions,becauseoftenyoucanbewrongforweeksormonths.It’snotthatyoureallywerewrong,butyouappeartobewrong....Soyoudohavetohavethecourageofyour

convictions,Ithinktobegood.Youreallyhavetobegrounded.

“Ithinkwehadaprettyfabulousyearin’09,justbecausewestucktoourknittingwhenotherpeople

werejustfrozenintheground.We’djustcomeinandwe’dtalktoourcompaniesandifwethoughtthatthingswerereallyoutrageouslyoutofwhack,thenwewouldbuyalittle

more,butfundamentallyweareverydisciplined.Ithinkdisciplineisreallycritical,too.Youdohavetoshowupeveryday,nomatterthedaysyouhateit.Yousay,‘Ican’tbearit.’You

can’tbeartoloseanymoremoney.Itakeitverypersonallyalways,butifyoudon’tshowup,youdon’tgettoplaythegameandeventuallyyouarejustoutofthegame.”7

Let’snotfoolourselves.Overcomingthistendencyisridiculouslyhard.Recentresearchevenshowsthatwhenweconform,theareasofourbrainthatareactivatedarethesameonesassociatedwithpleasure.8So,truly,pilinginbehindotherinvestors,andhavingthempileinbehindus,actually,literallyfeelsreallygood.Butremember,asBuffetthas

said,“Approval...isnotthegoalofinvesting.”9

Instead,acarefullycalculatedweighingofthefacts,andofyouranalysisofthecompany’sfutureprospects,iscalledfor.Wheneveryoneinthemarketbelievessomething’strue,askyourselfwhatthey’remissing.Questiontheconclusionsofpundits.Don’tassumethattheyknowmore

thanyoudo,orknowsomethingyoudon’t.Thebestplacetolookforpromisinginvestmentsisoftentheveryplacemostinvestorshaveturnedtheirbackson.Lookwhereothersaren’tlooking.

WhenBuffettwasjustayounggraduatestudentandvisitedtheWashington,D.C.,headquartersofGEICOinpersonandendedup

investingthree-quartersofhisportfoliointhecompany,hedidsobasedonhisownanalysisofthecompany.Hedidn’tlistentoanyoneelse.EvenhismentorBenGrahamwouldhavebelievedhewasoverpaying,andyetBuffettsotrustedhimselfthatheforgedahead.10Hedidn’tletself-doubttakeover.

Developingthisabilitytocontrolyouremotionstakes

timeandwork.ForBuffett,itseemstobeinnate,thoughhe’shadtoendureridiculetimeandagainformissingoutonbigmarketmovements.Thedramaticlate1990s–early2000riseinthemarketatlarge,andintechnologyandInternetcompaniesinparticular,wasonesuchtime.

In1999alone,theDowJonesIndustrialAveragerose

25percent,whilethetech-heavyNasdaqrocketedaheadaremarkable86percent.Meanwhile,Buffettsatonthesidelines,certainthatthemarket’srisewasfoundedonnothingmorethanunicorns,rainbows,andthatlittlepuppydogsockpuppetfromPets.com.HemostcertainlydidnotpurchasesharesofInternetcompaniesforBerkshire,leavingtheeasy

moneytoeveryoneelse,andhewasquestionedforit.Buffettendureddoubtsabouthisinvestingabilitiesandmethodforseveralyearsduringthisperiod.Berkshire’sstockpricesuffered,too,givingevenmoreammunitiontothemediaproclaimingBuffett’sbestdaysbehindhim.Thecriticismwasloudandunrelenting.

It’snoteasybeingmisunderstood,orworse,mocked,buttheOraclestoodstrong.Talkinginaninterviewaboutthattime,Buffettsaid,“Youcan’tdowellininvestingunlessyouthinkindependently.Andthetruthis,youareneitherrightnorwrongbecausepeopleagreewithyou.You’rerightbecauseyourfactsandreasoningareright.Inthe

end,that’swhatcounts.”11And,ofcourse,intheend

Buffettwasright.Investinghadn’tchangedovernight.Valuestillmattered.Thewaytobuildwealthoverthelongtermwasn’t,infact,foundbythrowingmoneyatanythingandeverythingendingina“.com.”ButitwasmostlikelytryingforBuffetttohearandabsorbtheblows.Itwillbetryingforyou,too,at

times,butifyou’vedevelopedyourinvestingphilosophyappropriately,you’vegottoalsodeveloptheself-confidence—andthickskin—tostickwithit.

STAYTRUETO

YOURSELF

LisaRapuano,founderofLaneFiveCapitalManagement,understandshowdifficultitcanbeforinvestorstoshutoutcriticism.InaSeptember2010interview,she

said,“Whenyou’renotdoingwell,intheshorterterm,whichcanhappentoanyone,sometimesit’sbecauseyou’remakingmistakes,sometimesit’sbecauseyou’re

notapplyingyourprocesscorrectly,butsometimesyouareandyoustillaren’tdoingwell.Youhavetocombinethesetwothingsofbeingadaptive,open-minded,andbeingalearning

machinewithalsonotchangingyourstripesorchasingthelatesttrend.It’sareallyfineline,areallydifficultlinetowalk.”12

Buffetthasdemonstratedhisabilitytowithstandpeerpressureatothertimes,too.Duringthemarket’s22.6percentone-daycrashinOctober1987,Buffettdidn’tbowtofearandrunawayfromstocks.Thesamegoesfortheperiodinlate2001andearly2002whennewsofthemassiveaccountingfraudatEnronandothercompaniesbroke,creatinginvestors’

distrustinmanagementandreportedfinancialresults.Suddenlyeverypubliccompanyandexecutivewassuspect.Buffettlookedattheconditionscreatedbyallthatnervousnessandtookadvantageofit.He’ssaid,“Cashcombinedwithcourageinacrisisispriceless.”13

Morerecently,andaswetalkedaboutearlier,Buffettagainshowedhiscouragein

thepanic-riddenfallof2008asthemarket,andseeminglytheworld,tumbledaroundhim.Hebecamethereassuringvoiceinthedarknightthatinvestorsneeded,publishinghisNewYorkTimeseditorialtoencourageotherstobebraveandtakeastandashewas.14Buffettwouldfollowthroughonhiswords,too,investinginGoldmanSachsandGeneral

Electricatthistime,althoughitmustbesaidthathedidnegotiateveryfavorabledealswhenhemadethesetwoinvestments,settingthemupaspreferredstockdealsthatensuredBerkshireacertainreturn.Mostinvestorscouldn’thavegottenthedealsonthesecompaniesthatBuffettdid(indeedit’shardtoimagineanyonebutBuffettexactingthetermshedid),

butthatdoesn’tdiminishthefactthathewasactingasamodelofinvestmenttemperamentatthetime.

It’spossibletopracticebeing“greedywhenothersarefearfulandfearfulwhenothersaregreedy”bothwhenthemarketasawholeisindecline,andattheindividualcompanylevel.Buffetthasdoneitbothways,targetingcompaniesthatare

temporarilydownbecauseinvestorsmisunderstandordoubttheirfutureearningpotential(ashedidwhenhepickedupsharesoftheWashingtonPostinthe1970swithagenerousmarginofsafety)orjumpingintothemarketandsnappingupsharesofmanydesirablebusinesseswheneveryoneelseseemstohaverunoff,leavingcheapstocksscattered

aboutlikeabandonedtoys.AnotherwaythatBuffett

assertshisindependenceandwon’tbowtopeerpressureishisstanceondividendsandstocksplits.Asidefromone$0.10persharedividendpaidbyBerkshirewaybackin1967(Buffettjoked“Imusthavebeeninthebathroom”whenthedecisionwasmadetopayadividend),15Buffetthasdeniedpayinganything

outtoBerkshirestockholders.Thereason’ssimple:HebelievesthatBerkshireshareholdersarebetterservedbyhimhangingontothemoneyandinvestingitbackintoBerkshire’sstableofwhollyownedandpartiallyownedcompaniesversuspayingthemoutadividend.Therearealsotaximplicationswithpayingdividends,bothatthe

companylevelandattheindividualshareholderlevel,butthat’snotBuffett’sprimaryconcern.

ToBuffett,thewayabusinesschoosestoallocateitscapitalisthemostimportantthing.Ifyoucanefficientlyandeffectivelyallocateyourcapitalintoprofitablenewlinesofbusinessorinimprovingexistingbusinesslines,then

youshouldn’tbepayingadividend.Butthat’sabigif.Ifabusinessismatureandnotgrowingrapidly,andmanagement’sabilitytoallocatecapitalisconstrained,shareholdersdeservetohavethatmoneypaidouttothemtocompensateforthelikelylackofgrowthinthestockprice.

InBerkshire’scase,though,wecanagreethat

Buffettisamastercapitalallocator,andit’saprettysafebetthathecandomorewiththeexcessmoneygeneratedbythecompany’sinsuranceoperationsthanhisshareholderscould.Heis,afterall,WarrenBuffett.Nevertheless,certaininvestorsandsegmentsofthemarketcravedividendsforincomeandhavebeendisappointedwithBuffett’s

stance.It’slogical,though,andisfullyconsistentwithhisbeliefs.

Ofcourse,thereisalwaysthepossibilitythatBerkshire’simmensesizewilltrulycatchupwithitandcreateasituationwherepayingoutadividendactuallydoesmakemoresensethanretainingalltheearnings,butsofar,thathasn’thappened.Buffett’s

beenwarningaboutthedragBerkshire’ssizehasonitsresultsforyears,andatsomepointthatcouldmakehiscurrentstandondividendsmoredifficulttorationallydefend.We’llsee.

Buffetthasalsolongheldthebeliefthatstocksplitsarepointlessandawasteoftime,money,andenergy.Inastocksplit,theoverallamountyoursharesareworthdoesn’t

change,butthenumberofsharesyouowndoes.So,forinstance,ifyouowned5sharesat$4eachofBigAl’sCorndogEmporiumandthecompanysplitsitsstock2-for-1,you’dthenown10sharesat$2pershare.Eitherway,yourinvestmentisworth$20(andthosedarndogsaresodeliciousit’slikelytokeepgoingup).

Companiessplittheir

stockforallsortsofreasons,noneofwhichareparticularlycompellingtoBuffett.Somesayit’stohelpcreatemore“liquidity”andmakeiteasierformoreinvestorstopurchasethecompany’sshares.ThishascertainlybeenanargumentpresentedasareasonBuffettshouldsplitthe“A”sharesofBerkshireHathaway.Tradingatapriceofaroundorabove

$100,000foroneshare(!)ofstock,Berkshireisoutofthereasonablepricerangeformanyinvestors.

Buffett,though,doesn’tbelievesplittingBerkshire’sstockwouldhaveanypositiveeffectonthecompanyoritsownersandindeed,couldevencreateagroupofshareholdersthathedeemsundesirable.BuffettwantsBerkshiretohavelong-

term-focusedshareholders(hereferstothemas“partners”),andhewantsBerkshire’spricetoreflectthecompany’sintrinsicvalueascloselyaspossible.Splittingthestockwouldcreatethepotentialforirrationalstockmovementscausedbynewspeculativeshareholdersfocusedontheshortterm.

However,Buffett’shand

wasforcedonthestocksplitissueinthemid-1990s.Investmenthouses,wisetothefactthatmorepeoplewantedtoownapieceofBerkshireHathawaythancouldaffordone,plannedtobuysharesofBerkshireanddivvythemup,sellingthemassmallerunitstothepublic,andchargingfatfeesfortheprivilege.Toavoidwhathesawasanexpensiveand

unfairwaytoprofitfromBerkshire’ssuccessattheexpenseofsmallinvestors,BuffettcreatedasecondclassofBerkshiresharesin1996,the“B”shares,whichwerevaluedat1/30ofan“A”shareandhadvotingrightsof1/200ofan“A”share.

TheBerkshire“B”shares,however,wereactuallysplit50-to-1inearly2010,tohelpshareholdersofBurlington

Northern,whichBerkshireannounceditintendedtopurchaseinfullattheendof2009.BurlingtonshareholderscouldchooseeithercashorBerkshirestock,sobymakingthesharepricelowerforthem,Buffettmadeiteasierforthemtochoosethestockversusthecash(andavoidanynastytaximplications).ThismovealsoopenedthedoorforBerkshire

toreplaceBurlingtonNorthernintheS&P500(canyoubelieveitwasn’talreadyinthere?).

Youhavetobelieve,though,thatBuffett’sthinkingonthesillinessofstocksplitshasn’tchanged.UnusualcircumstancesforcedhimtobothcreatetheBsharesbackinthe1990sandthensplitthemmorerecently.Hisdesiretohavelong-term

shareholders/partnersremainsasrealtodayasever.HedidwhathedidwiththeBsharesbecausehewaslookingoutforthebestinterestsofsmall,individualinvestors,notbecausehesuddenlydecidedeveryonewasrightaboutstocksplits.

ReputationisasignificantmatterforBuffett,whichisanotherreasonheisunlikelytobendtopeerpressure.If

there’sariskitcouldsullyhisreputation,Buffettwon’thaveanypartofit.Heoncefamouslytoldhisoldestson,“Ittakestwentyyearstobuildareputationandfiveminutestoruinit.Ifyouthinkaboutthatyou’lldothingsdifferently.”16

Buffettbelievesinsomethinghe’sdubbedthe“InnerScorecard.”17Essentially,it’saframework

forlivingyourlifeaccordingtoyourownrulesandyourownbeliefs,andnotactingaccordingtowhetherornototherpeoplewillapproveofyou.ForBuffett,naturally,thisencompassesfinancialdecisionmaking.YouhavetobeabletotuneouttheworldandlivebyyourInnerScorecard.

Tobeagreatinvestor,you’vegottogoitalone,at

leasttoacertainextent.Youcanlearnfromthemasters,asBuffettdid(and,well,asyouarenowdoingreadingthisverybook),butintheend,you’vegottodevelopyourownsystemforinvesting.Andthenyou’vegottosticktoit.Don’tabandonyourbeliefswhentimesgetharrowing.Askthehardquestions.Askthenextquestion.Andthenact,or

don’tact,asappropriate.Buffett’shadalongtime

toperfectthispartofhistemperament,anditiskeytowhathasmadehimassuccessfulashe’sbeen.Sokeepatit,staystrong,andgoyourownway.Keepthefollowinginmindasyoucommenceyourjourney:

•Bewillingtobecontrarian,as

uncomfortableasitmaybe.•TakeBuffett’swordstoheart:“Begreedywhenothersarefearful,andfearfulwhenothersaregreedy.”•LivebyyourownInnerScorecard.

Chapter10LearnfromMistakes

Buffettislegendary,withoutadoubt,buthe’salsonot

perfect.Hemakesmistakesjustliketherestofus,andhe’sremarkablygoodaboutadmittingthemandanalyzingthemafterthefacttoseewhatcanbelearned(typicallyinhisownveryfunnyandself-effacingwayinhisannualshareholderletters).He’sabletosetegoasideforarationallookatwhatwentwrong.

Thistraitisinvaluableforinvestors;knowingwhatyou

didwronganddoingeverythingyoucantoavoidrepeatingithelpspreservepreciouscapitalandimproveyourreturnsoverthelongterm.Therearetimeswhereyou’regoingtodoyouranalysis,makeyourdecision,andeithersomethingchangesthatrendersyourconclusionnull,oryouwillhavesimplymadeamistakesomewhereinyourthinking.Ithappensto

everyone.Likerisk,mistakesareanunavoidablepartofinvesting,soit’sbesttolearntoembracethelessonsthatcancomefromthem.

Buffettbreaksdownhismistakesintomistakesofcommission,meaningactionshetookthatdidn’tturnoutashe’dhoped,andmistakesofomission,oractionsthatheregrettednottaking.Buffetthassaidthathe’smore

botheredbyhismistakesofomissionthanthemistakeshe’sactuallymade,however.

OnemistakeofomissionBuffetthascoppedtoinvolvesretailgiantWal-Mart.Inthe1990s,becausehewantedtobuysharesofWal-Martataparticularpriceanddidn’twanttobudgefromthat,heletaone-eighth-of-a-pointuptickinthecompany’sstockprice

preventhimfrompurchasingit.Overthelongrun,heestimatesthatonemistakecosthim$10billioninpotentialprofits.1Ouch.That’squiteanexpensiveomissionindeed.

BuffetthassaidthatthefirstmistakeofhisinvestingcareerwastheactualpurchaseofBerkshireHathawayitself.Whenhefirststartedbuyingsharesof

thecompanywaybackin1962,itwasatextilemill,hangingontoitslastgaspsasafunctioningenterprise.Affectedasmanymanufacturerswerebycheapoverseascompetition,Buffettwouldtryunsuccessfullytoturnthebusinessaround,untilhefinallycloseditstextileoperationsaltogetherin1985.Bythatpoint,he’dalreadybegunhisstrategyofbuying

insurancecompaniesandusingtheassociatedfloattoinvest,undertheumbrellaofBerkshire,sothetransformationofthecompanywaswellonitsway,despitetheflounderingmanufacturingbusiness.

ThefrustrationBuffettmayhavefeltaboutBerkshire,andtheopportunitycostofhavinghismoneytiedupintryingto

savealosingenterprise,areunfortunate,butthisisonemistakethatheendedupmakingright.Berkshiremaynothavebeenprovidingmuchinthewayofsuitlinings(oneofitsmainofferings)bythetimeBuffettcamealong,butitendedupprovidinghim,andhisshareholders,aninvestingvehiclethatremainsunparalleled.Andbesides,the

namesWarrenBuffettandBerkshireHathawayjustfitsowelltogether,don’tthey?Canyouimagineitanyotherway?

AnotherofBuffett’smostfamouserrorsisonethatprovideshimthechanceinhisshareholderlettersandininterviewstofloghimselfforhis“Air-aholism.”ThatmistakeisinvestingintheairlineUSAirways.Buffett

investedinthecompanyin1989,buyingwhatareknownas“convertiblepreferredshares.”Basically,thismeansthatBerkshirewaspromisedafatdividend,andcouldconvertitspreferredsharesintocommonstockifitsochoseatacertainprice.Atthetimeoftheinvestment,USAirwayswasthreatenedbyatakeoverattempt,soBerkshiresteppinginand

investingmoneyinthecompanywasseenasaformofprotectionforit.

However,nearlyfromtheget-goUSAirways(whichwasofficiallynamedjust“USAir”until1996)plaguedBuffett.Hewasbluntabouthismistakeinhisletterstoshareholdersovertheyearshewasinvestedinit,callinghisanalysisofit“superficialandwrong”2andreferringto

hisdecisiontoinvestasan“unforcederror.”

Buffetthaswrittenoftheinvestment,“Beforethispurchase,Isimplyfailedtofocusontheproblemsthatwouldinevitablybesetacarrierwhosecostswerebothhighandextremelydifficulttolower.”3Andhe“overlookedthecrucialpoint:USAir’srevenueswouldincreasinglyfeeltheeffectsof

anunregulated,fiercelycompetitivemarketwhereitscoststructurewasaholdoverfromthedayswhenregulationprotectedprofits.Thesecosts,ifleftunchecked,portendeddisaster,howeverreassuringtheairline’spastrecordmightbe.”4

ThereareseveralinterestingthingsaboutBerkshire’s,andBuffett’s,

investmentinUSAirways.OneisthatitcameaboutatatimewhenBuffettwashavingtroublefindingotheropportunities,sohemadethemistakeofessentiallyloweringhisstandardstoinvestinit.5Onemistakebegatanother,youcouldsay.

Next,whiletheinvestmenttroubledhimandworriedhim,Berkshireactuallyendedupmaking

moneyonthedeal,thanksbothtothereturnfromthedividendsandthefactthatsharesofUSAirwayseventuallygotbacktoaboutwherehe’dinvested,sohecashedout.Now,granted,hadBuffettchosentodeployhiscapitalelsewhere,hemightwellhaveearnedahigherreturn,butUSAirwaysdidnot,intheend,turnouttobethesupreme

disasteritlookedlikeitmightbe.

AnadditionalandimportantpointforushereisthatdespitethefactthatBuffettultimatelymademoneyonUSAirways,hestillrecognizesitasamistake.Hisoutcomemightnothavebeenbad,buthisthinkingandhisdecision-makingprocesswere.Heisable,then,toseparatethe

“outcome”fromthe“decision.”Manyinvestorsstrugglewiththis,believing,forexample,thattheirworst-performingstocksrepresenttheirworstdecisions,andviceversa.Butabaddecisiondoesnotalwaysturnintoabadoutcome,andsometimesgoodoutcomesareactuallybornofbaddecisionmaking.BuffettneverfooledhimselfintobelievingthatUS

Airwayswasanythingotherthanamistake,goodoutcomeorno.

Finally,whileBerkshireHathawayisnolongerinvestedinUSAirways,itstillhasapieceoftheairtravelindustrywithitswhollyownedsubsidiaryNetJets.NetJetsallowspeopletobuyapartofaprivatejet(knownas“fractionalownership”)sothatyougetthebenefitof

havingaplanealltoyourselfwithoutthecostof,well,maintainingaplaneallbyyourself.However,NetJetshasn’tproventobeabigwinnerforBuffett,andhe’swrittenaboutitmuchashedidUSAirways,notingthatheshouldhavecalledthe“Air-aholicshotline”beforeinvestinginit.He’salsosaid,hilariously,thatsomeonewouldhavedonecapitalistsa

favorifthey’djustshotdowntheWrightbrothersinKittyHawkthatfatefulday(becauseoveritshistorytheairlineindustryhasreportedzeroprofitsintheaggregate).6Inhis2009shareholderletter,heagainrevisitedthetopic,expressinghisfrustrationwithNetJetsbutpointingoutthathe’dmadeamanagementchangeatthetophewasoptimistic

couldcorrectcourseforthetroubledcompanyandturnarounditsyearsoflosses.7

OnelessonherefortherestofusisthatevensomeoneastalentedasBuffettnotonlymakesmistakes,butsometimesmakesthemmorethanonce.Whenitcomestothisparticularone,Buffetthassaid,“IfonlywomencouldbeCEOsofcompaniesthat

flewplanesIthinkitwouldbealotbetter,”afterhecametotheconclusionthattestosteronewasresponsiblefor“Air-aholism.”8

InBuffett’searlydays,hepartneredwithCharlieMungertobuyaBaltimoredepartmentstorethathadseenbettertimes.ThestorewascalledHochschild-Kohn,andreturningittoitsformerglorywasanexpensiveand

likelyimpossibletask.AswithUSAirways,Buffettinvestedinthisbusinesswhenhewassittingoncash,impatientlylookingforstockstobuyinamarketthatwasrunningawayfromhim.9Prettyquickly,bothBuffettandMungerrealizedthatthey’dmadeamistakeandthatretailwasnoeasyfeat.Afterthreeyearsofgivingitago,theysubsequentlysold

Hochschild-Kohntoanotherbuyerforroughlywhattheyhadpaid,torelievethemselvesoftheburden.WhileBuffettandMunger’sfirstdealtogetherlookedlikeaninauspiciousbeginning,they’vecertainlymanagedtoovercomethisearlystumblewithimpressiveforce.

TheUSAirwaysmistakeandtheHochschild-Kohnonehavetwothingsincommon.

First,asmentioned,Buffettinvestedinbothofthesecompaniesduringperiodswherehewashavingtroublefindinggoodcompaniessellingatreasonablepricesthathewantedtobuy.Insteadofbeingpatient,helethistriggerfingergetthebestofhim,andsoheendedupjumpingintobusinessesheotherwiseshouldhaveavoided.Itcanbechallenging

evenforhimtodotherightthing,whichistowaititout.

NOBODYESCAPESMISTAKES

Yes,evensuccessfulvalueinvestorslikeLisaRapuano

makemistakes.Wealldo.It’sjustpartandparcelofinvesting.It’ssomethingyou’vegottolearntodealwithinordertobesuccessful.

InaSeptember2010interviewabout

thelessonsshelearnedfromone2008tradegonebadinvolvinganautocompany,Rapuanosaid,“ThetwothingsIdidinthatmistakethatabsolutelydrivemetodistractionare

No.1,Inormallysavemyselffrommassiveerrorslikebankruptcyandthingslikethatbyavoidingbusinesseslikecarbusinesses.Iwilldoturnarounds,Iwilldomessythings,butI

don’tusuallydothat.AsIlookbackonit,Ithinkprobablybecausethingsthatappearedcheaptomeatthatpointwerefewandfarbetween,atthebeginningof’08,Ioverdiditonthisone.I

putwaytoomuchofmyportfolioinitbecauseitwassocheapanditwassoeasilyexplainable.Soitwasputtingtoomuchinit,inabusinessthatwasn’tagoodbusiness,sowhenyouare

wrongyoudon’tgetsavedbythegoodnessofthebusiness.

“Andhere’stheadditionallesson—probablytheonethat’sgoingtobetheeasiestnevertorepeatagain—Igotsomuchpositive

feedbackonthisone.Everyonesaiditwasbrilliant.IpresenteditattheValueInvestingCongressandthewholeworldwaslike,‘OhmyGod,that’sthebestidea.’I’dtalkaboutit

inclientmeetingsandthey’dbelike,‘Ohit’ssogreat.It’ssowonderful.You’regoingtomakealotofmoneyonthis.’Itwastooeasybyhalf.

“Lettingyourconfidence

beaffectedbyotherpeople’sreactiontoitshouldhavebeenagiantredflagbecausenormallywhenIinvestinsomething,especiallyatthebeginning,notafteritstartsworking,

everyonethinksI’mwrong.Nooneevertellsmehowgreatitis.

“There’salotoflittlelessonsinthere,butthebigoneIthinkisthatexternalreinforcementoftheidea

doesn’tmakeitbetter.AndthereforeIprobablydidn’trecognizetheimperfectionsofit.Igotoverconfident.Andwejustdidterribly.Itwasawful.Evenifithadn’tbeengoinginto2008

—solet’stakethatpieceoutofit,whichisawhole’nothercanofworms—[therewas]theoverconfidenceinabadbusinessandtoolargeaposition.Partofourprocessisavoidingthe

thingswhereifyou’rewrong,thebusinessdoesn’thelpyou,andactuallyhurtsyou,thenatureofthebusinessitselfhurtsyou.Itwasjuststupid.”10

AsBerkshirehasgrowninsizeatanastoundingrate,Buffett’sbeenfacedmoreandmorewiththisproblem—heoftenhastoomuchcashandtoofewplacestoputit.(Oh,weshouldallbesotortured,eh?)Themarket’soverallbehavioractuallydoesn’tevenmatterthatmuchforBerkshireatthispoint.Certainlyit’sbetterforBuffettifstocksaretrading

forrationalprices,butit’sBerkshire’scashcoffersthatmakeitdifficultforhimtoinvestwhenandwherehewants.Berkshire’sjusttoobigforhimtobuymeaningfulamountsofstockinanycompaniesbuttheverylargestonesatthispoint,becauseforthemtohaveanyeffectonoverallresults,hecan’tjustnibblehereandthere.

Asasidepoint,thisisanenormousadvantagethatyou,asanindividualinvestorwithouttheburdenofbillionsofdollarsinyourbankaccountandonyourbalancesheet,haveoverWarrenBuffett.Youcanfindthesmall,undiscovered,undercovercompaniesthatBuffettwouldn’tbeabletotouch,andyoucanpurchaseasmanysharesofthemas

youwant.Youcangoplaceshecan’tinthemarketandlookatopportunitiesheonlywisheshecouldownapartof.So,see,beingabillionaireandholdingaspotonForbes’srichestpeopleintheworldlist(atop5spot,toboot)isn’tallthatgreatafterall.(Ha.)

ButbacktoBuffett’smistakes.ThesecondthingthatUSAirwaysand

Hochschild-Kohnhaveincommonisthatneitheroneseemsparticularly“Buffett-like.”NeitheroneseemstohavethetraitsweassociatewithBuffetttodayandhavealreadytalkedabouthere.There’snomoattospeakofineithertheairlinebusiness(canyousay“theverydefinitionofcommodity”?)orthedepartmentstorebusiness.Therearenosustainable

competitiveadvantageswitheitherone.USAirwayswasalsoaverycapital-intensivebusiness,andwhileHochschild-Kohnwaslessso,whenBuffettandMungerinvesteditstillneededlotsofimprovementstoitsstorestohaveanyhopeofremainingrelevantandcompetitive.Bothofthebusinessescanbedescribedascash-hungry,notcash-producing.AndBuffett

isallaboutthecash-producingcompaniesintheworld.

Sowhenhewasimpatient,andwantingtoinvesthismoneysomewhere,Buffettbothloweredhisstandardsandhechose,inthesetwocases,companiesoutsidewhatwethinkofasidealBuffettinvestments.USAirwaysandHochschild-KohnarehardlyCoca-Cola

orGEICOorSee’sCandiesorAmericanExpress.Stayingpatientandwaitingforthefamed“fatpitch”issoimportant.ButevenBuffettisfalliblehere.Shouldyoumakeasimilarmistake,don’tpanic.Remembertorecognizethatyouactedwhenyoushouldn’thaveandthendoyourbesttosticktoavownottodoitagain.

Buffettmadetwomore

recentmistakes,bothofwhichcouldbeconsiderederrorsinhisanalysisofthecompaniesandtheircurrentandfutureprospects,andbothofwhichcostBerkshiremoney.Aswementionedearlier,in2008heinvestedinoilgiantConocoPhillips,thinkingthatthepriceofoilwouldrise.Instead,thanksinparttothefinancialpaniclaterinthatsameyear,the

priceofoildropped,andalongwithit,ConocoPhillips’stockprice,whichwasdown37percentattheendof2008fromwhereBuffettpurchasedshares.11

AroundthesametimethatBerkshireinvestedinConocoPhillips,italsoboughtsharesoftwoIrishbanks.Buffettneverdisclosedpubliclypreciselywhichoneswerepurchased,

buthisthinkingbackthenwaslikelythatIrishbanksweren’texposedtoasmuchsubprimemortgageriskasU.S.bankswere,andsotheyweresaferbetsatatimewhenmanyAmericanbanksweregoingtopieces.Buffettwaswrong,andmanyIrishbankswereabsolutelyslaughteredinthemarket,withtheIrishgovernmentevennationalizingsomeof

them.Hefesseduptohisshareholdersaboutit,disclosingthatBerkshirehadtowritedownthevalueofthosetwotradestothetuneofan89percentloss.12(ImyselfsuccumbedtothefaultythinkingaboutIrishbanksaroundthissametime,andwatchedasthesharesIpurchasedinoneofthem—perhapsoneoftheveryonesBuffettbought—plummeted

aboutthesameamountBerkshire’sdid.Blimey!)

HerewehavetwocasesofthemacroeconomicpicturechangingsoquicklythatBuffett’sanalysiswasturnedonitshead.Sometimesyourthinking,analysis,andobjectivelookatthefacts,andyourprojectionsforthecompany’sfuture,canberight,butyourinvestmentscanstillturnoutwrong.

That’sdisheartening,yes,butit’salsojustarealityofinvestingyouneedtoprepareyourselffor.Youwon’talwaysbeperfect,evenifyouranalysisis.Youcan’tknoweverysinglethingthereistoknowaboutacompany,andyoucan’tpredictthefuturewithabsolutecertainty—notevenBuffettcan.(Theworld’sjustacold,cruelplace,isn’tit?)

WritingofhislearningcurveinanannuallettertoBerkshireshareholders,Buffettsaid,“It’sfarbettertobuyawonderfulcompanyatafairpricethanafaircompanyatawonderfulprice.Charlie[Munger]understoodthisearly;Iwasaslowlearner.Butnow,whenbuyingcompaniesorcommonstocks,welookforfirst-classbusinesses

accompaniedbyfirst-classmanagements.Thatleadsrighttoarelatedlesson:Goodjockeyswilldowellongoodhorsesbutnotonbroken-downnags.”13

EvenBuffetthadtolearnfromhismistakesovertheyears,andhe’sstilllearningtoday.Thelearningneverstops,ofcourse.Togetthemostoutofyourmistakes,anddoyourbesttoensure

theywon’thappenagain,remember:

•You’regoingtomakemistakes.Wealldo.Sodon’tbeatyourselfupwhenyouslipup.•Assesswhathappened.Didyoumisssomething?Ordidmarketconditionschange?•Thinkaboutwhatyoucanreasonablydodifferently

inthefuture.Ifyouboughtstockinacompanyyoudidn’ttrulyunderstand,forexample,vownottodothatagain.

Chapter11EmbraceFeminineInfluences

Welearnedinchapter2aboutthescientificstudiesshowingthedifferencesinthewaywomenandmenapproachinvesting,andwediscoveredthatthereareevendifferencesattributabletotestosterone,ortherelativelackthereof.Thislackoftestosteronetendstomakewomenlesswillingtotakeextremerisks,whiletheherdbehavioroftestosterone-ladenmencanpossiblymake

dropsinthestockmarketevenmorepronounced.

ItmayseemastretchtoclaimBuffetthasthetestosteronelevelsofawomanandnotaman(rememberthe“oversexedguyinaharem”comment?).And,well,asmuchasbreakingthenewsthatBuffett’sactuallyawomanmightbefun,we’vegottoadmitheis,infact,aman

completewith,yes,testosterone.(And,we’recertainlynotgoingtogoaboutthevariouspossiblewaystoverifythis,that’sforsure.)However,itistruethathe’ssurroundedhimselfwithacadreofsmart,strongwomenovertheyears.Perhapstheinfluenceofthosewomenhasresultedinhisfemininesideshiningforth,aswe’veseen.Let’sget

acquaintedwithsomeofthemostimportantones.

ThelateSusanBuffett(knownasSusietoherfamilyandfriends)washisfirstwifeandoneofthebiggestinfluencesonBuffett’sadultyears.TheymetwhenBuffettwasayoungman,andshewasthereforthebeginningofallthatwouldbecomelegend—Buffett’searlyjobwithhisidolBenGrahaminNew

York,hisreturntohisbelovedhometownofOmaha,thestartofthepartnership,thepurchaseandsubsequenttransformationofBerkshireHathaway,andtheriseofherhusbandtotheranksoftherichandpowerful.

Throughitall,Susiewashisprotectorandtirelesssupporter.Shemadeitsothathecouldfocusonwhathe

wantedto,asmuchashewantedto.Notsurprisingly,forBuffettthatmeantstudyingannualreportsandreadingupinhisstudyeverynight,whileSusielookedaftertheirthreechildren.Buffettdependedonher,andshe’sundoubtedlyabigpartofthereasonhewasabletobecomethemanheistoday.Sadly,shepassedawayin2004ofastrokefollowinga

boutwithcancer.JournalistCarolLoomis

andbridgechampionSharonOsbergarebothclosetoBuffett,forverydifferentreasons.Loomishasbeenalongtimefriendofhis,sincemeetinghiminthe1960s,whenshewasaninvestingcolumnistforFortune(sheremainsassociatedwithFortunetoday,asaneditor-at-large).Buffett’sreferredto

Loomisashis“bestfriend,”otherthanCharlieMunger,ofcourse.1

BuffettandLoomishititoffandbecamefastfriends.AndwehaveLoomistothank,inpart,fortheclarityandwitBuffetthasdemonstratedovertheyearsinhisletterstoshareholders.Theearliestlettershewrotehadbeenmorelikebare-bonesfinancialreportingand

muchlessliketheexpansive,expressive,folksylettersweenjoytoday.In1978,though,Buffettdecidedhewantedtostartusingtheletterstoeducatehispartnersontheimportantbusinessissuesoftheday,aswellasteachthemtimelessinvestinglessons.

BuffetttappedLoomisforthejobofhelpinghimediteachyear’soffering,andthelettersremaintodayan

incrediblyusefulresourceforanyonewantingtolearnaboutinvestingfromthemanhimself.Hisvoice,temperament,andhomespunwisdomshinethroughineachandeveryone.Inwhichothergiantpubliclytradedinsurance-basedholdingcompany’sannuallettertoshareholdersareyougoingtobegracedwithquotesfromthelikesofMaeWest,

WoodyAllen,andjustabouteveryoneinbetween?Whichotherexecutiveswilltakethetimetoteachyou,andwillbehumbleenoughtoadmittheirmistakesyearafteryear,inclearlanguage?Justone,folks—Buffett.Ifyouhaven’tyettakenthetimetoreadhisshareholderletters,makethetimeforit.Youwillnotbedisappointed.(Afteryoufinishthisbookfirst,of

course!)BridgechampionSharon

OsbergmetBuffettthroughCarolLoomisin1993atabridgetournamentandbecameanotherclosefriendofhis,aswellasoneofhisfavoritebridgepartners.(Inadditiontohisvoraciousreading,oneofBuffett’sotherlovesinlifeisthecardgamebridge.)ThroughplayingwithOsberg,

Buffett’sgameimproved,andhisadorationofthegame,andofher,deepened.HerrelationshipwithBuffetthasblossomedwellbeyondthecardgame,andsheisatrustedfriendandally,aloyalmemberofhistight-knitgroupoffriends.Osberghassaidofhim,“WarrenBuffettismybestfriend.Wetalkeveryday.”2ADecember2009profileofBuffettand

Osbergagainconfirmedthattheyremainclose,talkingseveraltimesaday,oftenwhileplayingbridgeonline.3

BuffettmetKatharineGraham,thewidowedowneroftheWashingtonPostCompany,in1973,whenhefirstbecameinterestedininvestinginit.Grahamwasinchargeofrunningthebusinessfollowingherhusband’sdeath,andshewas

tentativeinitiallyaboutBuffett’sintentions.Shedidnotcomefromabusinessbackgroundandwasnervousaboutlosingthebusiness,orjustgenerallyaboutmakingmistakeswhileshewasincharge.

Buffetthadnotaboneofillwillinhisbody,though,andsetaboutteachingGrahamaboutbusinessandfinances,helpingherlearn

andshowingherthatshehadtheabilityandself-confidencetodoagreatjobandbeaneffectiveleader.Remember,too,hischildhoodpaperroute,deliveringtheWashingtonPostintheD.C.areawhilehisfatherwasinCongress.He’dlonglovedthecompany,andhadnothingbutadmirationforit,andforGraham.Theybecamedearfriendsandwerecloseuntil

herdeathin2001.InGraham’sPulitzer

Prize–winningautobiography,PersonalHistory,shewritesofBuffett’sinfluenceonherintheearlydaysofherleadershipatthePost:“Mybusinesseducationbeganinearnest—heliterallytookmetobusinessschool,whichwasjustwhatIneeded.HowluckyIwastobeeducated—

totheextentpossible—byWarrenBuffett,andhowmanypeoplewouldhavegivenanythingforthesameexperience.Itwashardworkforbothofus—WarrenadmittedIneededwhathecalled‘alittleremedialwork’—butabsolutelyvitalforme.”4

Forallthoseyears,since1973,Berkshire’sownedachunkoftheWashingtonPost

(about20percentatlastglance),currentlymakingBuffett’scompanythelargestshareholderofthevenerablenewspaperandmediaoutfit.Buffettalsoservedsince1974onthePost’sboardofdirectors(minusaneight-yearperiodwhenhewasservingonCapitalCities’board),markingdecadesofservicetotheorganization.ThePostannouncedinJanuary2011

thatBuffettwouldberetiringfromtheboardandwouldnotbenotseekingreelectionforhisseatwhenhistermexpiredinMay2011.5Hehasacknowledgedinrecenttimesthatthenewspaperbusinessisdifficultinthiscurrentageofreadilyavailablefreeonlinecontent,sayinghewouldn’tinvestinanotherone,buthisdevotiontothePostandtotheGrahamfamilyare

steadfast.6HisretirementfromthePost’sboardshouldnotbereadashisloyaltywavering,butasamovetosimplifyhislifeandfocusexclusivelyonrunningBerkshireHathaway.Infact,inclassicBuffettform,hesaid(atthetimeoftheannouncement)ofBerkshire’sinvestmentintheWashingtonPostCompany,“We’regoingtokeepevery

shareofstockwehave.IwouldneversellashareofthePost.”7

AnotherwomanwhoinfluencedBuffetttremendouslywasentrepreneurRoseBlumkin,adiminutiveRussianimmigrantwhoarrivedinAmericaattwenty-threein1917speakingnoEnglishandhavingnoformaleducationofanysort(wearen’ttalking

nocollegeeducationhere—wearetalkingnoeducationofanykind,ever,period,fullstop).Despitewhatlookedlikelongodds,shestartedandrantheNebraskaFurnitureMartinOmaha,buildinganempirefrom$500.8

Withaninnatebusinesssense,andafocusonvalueandneverspendingevenacentmorethanshehadto,

Mrs.B,asshewasknowntoeveryoneinOmahaandeventuallytoeveryBerkshireHathawayshareholder,endearedherselftoBuffett.WhenhetalksaboutMrs.BintheBerkshireshareholderletters,it’smuchlikethelowlypupilordisciplerespectingthemaster.Youcantellthathisadmirationandrespectforheraresimplyimmense.Hespeaks

frequentlyofherhardworkanddedication,sayingyearafteryearthatshewasinthestore“sevendaysaweek,fromopeningtoclose.”9Andthiswaswhenshewasinhernineties!Imaginehowshemusthavebeenforthedecadesanddecadespriortothat.It’seasytoseewhyBuffettwasinspiredbyher,andit’simpossiblenottobeinspiredourselves.

In1983,heboughtherbusinesswithouteverdemandinganauditorinsistingonseeinganinventorycount.Thismayseemcounterintuitive,giventhatweknowBuffettresearchessodeeply,butitinfactreflectstherespecthehadforMrs.B.Hejusttrustedherword,plainandsimple;shehadthatmuchintegrity.Shewasalsoafiery

personalityandfiercecompetitor,withthemotto“Sellcheapandtellthetruth.”Mrs.Bworkedwellpasttheagewhenmostofuswouldconsiderretiringbecause,likeBuffett,shetrulylovedandwasobsessedwithrunningherbusiness.Shediedatage104in1998.

TwocurrentfemalebusinessleadersBuffetthasrecentlysharedhisadmiration

for(choosing,asheoftendoes,theBerkshireshareholderletterashisvehicleforlavishingpraise)areSusanJacquesofBorsheim’sandCathyBaronTamrazofBusinessWire,bothsubsidiariesofBerkshireHathaway.OfJacques,Buffettsaid,“SusancametoBorsheim’s25yearsagoasa$4-an-hoursaleswoman.Thoughshelackeda

managerialbackground,IdidnothesitatetomakeherCEOin1994.She’ssmart,shelovesthebusiness,andshelovesherassociates.ThatbeatshavinganMBAdegreeanytime.”10

HefollowedupwithhisthoughtsonTamraz,saying,“AnotherofourgreatmanagersisCathyBaronTamraz,whohassignificantlyincreased

BusinessWire’searningssincewepurchaseditearlyin2006.Sheisanowner’sdream.Cathy,itshouldbenoted,beganhercareerasacabdriver.”11

Allofthesewomen’sinfluenceonBuffettisasvariedastheirrolesinhislife.Heappreciatesandrespectsthem,though,whetherit’sfortheirbusinesssense,theirjournalistic

acumen,theircompetitivespiritatthebridgetableandonthefloorofthefurniturestore,ortheirlovingandgivingnature.Wecan’tsayforcertainthatBuffettwouldnotbetheinvestorheistodaywithoutknowingandhavingrelationshipswiththem,butitisasafebetthathe’sahappiermanforit.

Whilereadersofthisbook,bothmaleandfemale,

probablydon’thavethebenefitofknowingthesewomenasBuffetthas,wecanstilllearnfromtheirexamplesaswell.Whodoesn’treadaboutMrs.Bandmarvelatherabilitytoovercomeobstacles,workhard,andbuildastore—andalegacy—thatendures?OrthinkhowimpressiveitisthatKatharineGraham,goingintoadifficultanduncertainsituation

withouttheknowledgesheneeded,startedfromthegrounduptolearnaboutbusiness,andeventuallygrewintoamightyfigureinthepublishingworld?Anyonewho’sreadBuffett’sshareholderlettersmustbegratefultoCarolLoomisforhelpinghimfind,define,andtweakhisremarkableanduniquevoiceovertheyears.Thesewereinfluencesfor

Buffett—andviceversa,naturally—butwecan,andshould,alsoembracetheirstories,appreciatingwhatthey’vemeanttohimovertheyears.

Chapter12MaintainConsistent,

PersistentResults

Thisisn’tatraitoffemaleinvestorsandtheirtemperaments,butit’sanimportantoutcome,andonewe’dberemissnottotalkabout.Afterall,withoutsomethingtoshowforallthatdisciplineandcalmfocus,what’sthepoint,right?

WarrenBuffett’sbeeninvestingsincehewasamereelevenyearsoldandmanagingmoney

professionallyonhisownsince1956(whenhewasjusttwenty-fiveyearsold).Duringthetimewecanmosteasilytrackhisresults(thatwouldbetheBuffettpartnershipandBerkshireHathaway),he’sputtogetheranimpressiverecord,oneuntouchablebyanyoneelseoverthatlengthoftime.DuringtheyearsBuffettwasrunningthepartnership,from

1956to1969,herackedupanastounding32percentaverageannualreturnbeforefees.Thatmeansforevery$10,000someluckyand/orprescientpersoninvestedwithBuffettatthebeginningofthatperiod,heorshehadroughly$300,000whenheclosedthepartnershipdown.1

Lookingatwhathe’sdonewithBerkshire,thecompoundedannualgainin

per-sharebookvaluefrom1965to2010is20.2percent.Um,nottooshabby.That’sforty-fouryearsofevidence,forty-fouryearsthatBuffett’sbeensuccessful,throughrecessionsandheedlessmomentsofmarketeuphoria,throughwars,throughnineU.S.presidents,throughdisco,punkrock,newwave,hairmetal,grunge,boybands,andallflavorsofhip-

hop,throughbell-bottomsandplatformsthefirst,second,andthirdtimesaround,throughFonzie,J.R.Ewing,ALF,theFreshPrince,andcountlessridiculousreality“stars.”

HadyouinsteadchosentojustinvestyourmoneyinanindexfundtrackingtheS&P500,youraveragereturnwouldhavebeen9.4percent,orlessthanhalfofBuffett’s

averageyear.TheoverallgainforBerkshire’sbookvaluefrom1964to2009is490,409percentcomparedtotheS&P’s6,262percent.No,that’snotatypo.Itreallyis490,409percent.

GivenhowremarkablygoodBuffetthasbeenatallocatingcapitalformorethanfortyyears,it’stoughtoarguethathe’sbeenanythingbutconsistentandpersistent,

thathe’sabletodosomethingspecial.Andyet,beginninginthe1970sandcontinuingintothe1980s(andeventoday),that’spreciselywhatsomeacademicstriedtoargue,dogmaticallyteachingthatBuffettisamereanomaly,andthatthemarketcan’tbebeaten.Theprevailingtheoryatthetime,bouncingalongthehallsofbusinessschoolsnearandfar,isknownasthe

“efficientmarkettheory.”Withoutgettingtooprofessorialaboutthings(althoughthetweedcoatandleatherelbowpatchescancertainlybeadorable):Thetheoryholdsthatthemarketfullypricesinallavailableinformation.That,inturn,meansthatastock’sfullvalueisalwaysreflectedinitsprice,andthereforethereisnosuchthingasabargain,or

anunderpricedormispricedsecurity.

Thatalsosuggests,ontheflipside,thatsupposedmarket“bubbles”reallyaren’t.Ifinformationisalwaysperfectandpricesarealwaysright,thatmeansthatsharesofInternetcompanyYahoo!,forinstance,tradingatasplit-adjustedhighof$108.17inthefinalweekof1999(comparedtothemid-

teensbothoneyearandtenyearslater),wasappropriateandrational.Um,OK.

So,then,theyearsthatBuffett,andGrahambeforehim,spentsearchingforcompaniessellingatareasonablemarginofsafetywerejustfutileefforts,accordingtothebelieversoftheefficientmarkettheory.Howsillyforthemtothinkthatthemarket—whichis,

don’tforget,drivenbyhumansandalltheirvariousemotions,alongwithsomegiantsupercomputersprogrammedandcontrolledbyhumans—couldeverbewrong,couldeveroverreact.Infact,youmightaswelljustthrowdartsatapagefromtheWallStreetJournaltackeduponyourwallthanwasteanothermomentanalyzingacompany.Themarkethadno

inefficiencies,sotherewasnopointintryingtodiscoverandexploitthem.

ButwhatofthefactthatBuffetthadproducedyearsuponyearsofmarket-beatingreturns,thatheobviouslyknewhowtofindcompaniesthatwereundervalued,thathe’dimplementedalogicalsystemforfindingthem,andthathewassodarnsuccessful?Ohhim.He’sjust

afluke,theacademicsargued.He’slucky.Nothingtoseehere...movealong.

BuffetttookgreatjoyduringthattimeinrefutingtheEMTtheorists.Hegavealegendaryspeechin1984athisbusinessschoolalmamaterColumbia,whereinheskeweredtheefficientmarkettheoryproponentsbyprovidingexampleafterexampleofsuccessful

investorswho’dbuiltstrongtrackrecordsusingaBenGrahamandDavidDodd–likeapproachtoanalyzingcompanies.Naturally,heincludedhimselfinthisnumber,dubbingthemall“TheSuperinvestorsofGraham-and-Doddsville.”2

Inthespeech,whichwasreprintedinHermes,themagazineforColumbia’sbusinessschool,hesaid,“I’m

convincedthereismuchinefficiencyinthemarket.TheseGraham-and-Doddsvilleinvestorshavesuccessfullyexploitedgapsbetweenpriceandvalue.Whenthepriceofastockcanbeinfluencedbya‘herd’onWallStreetwithpricessetatthemarginbythemostemotionalperson,orthegreediestperson,orthemostdepressedperson,itishardto

arguethatthemarketalwayspricesrationally.Infact,themarketpricesarefrequentlynonsensical.”3

Theefficientmarketdebatecontinues,althoughthegrowingfieldofbehavioralfinanceisunderminingthetheory’svaliditybitbybitbyshowingthatmanytimes(orperhapsmosttimes),marketactionsaren’tdrivenbyrational

peoplemakingrationaldecisions.Itissafetosay,though,thatthemarketis,infact,moreefficientthanitwaswhenBuffettstartedout.It’snotperfectlyefficient,butit’scloser,thankstotwocomplementaryfactors.First,thesheeravailabilityofinformationonlinetodaymakesitmuch,mucheasierforsmallinvestorstodigthroughfinancialstatements

fromtheirownstudiesandhomeoffices,huntingforundervaluedcompanies.AndthepopularityofsomeonelikeBuffettmeansthatmoreinvestors,youngandold,arelearningabouthismethodsandputtingthemintoplayinthemarkets.Soyou’vegotallthesefolkslookingforsimilartypesofstocksandsituations,usinglotsofthesamereadilyavailableinformation.

Therewillcontinuetobemispricedstocks,andtherewillbesuperiormoneymanagersandinvestorslikeBuffett;it’sjustgoingtotakealittlebitmoreefforttogetthere.LuckilyfortheGraham-and-Doddsvilleinvestorsofthefuture,there’salsonoshortageof“smart”peopleonWallStreetfindingthenextnew“surefire”waytoinvest,tellingtherestofus

that“it’sdifferentthistime.”Buffetthasalsopointedouttheupsideofteachingefficientmarkettheorytosomanystudents,sayinginhis1988lettertoBerkshireshareholders,“Inanysortofcontest—financial,mental,orphysical—it’sanenormousadvantagetohaveopponentswhohavebeentaughtthatit’suselesstoeventry.Fromaselfishpointofview,

GrahamitesshouldprobablyendowchairstoensuretheperpetualteachingofEMT.”4

Now,weknowBuffett’sperformedwell,loggingincrediblegainsoverhiscareer,butit’salsointerestingtonotethatBerkshireHathawayhas,duringtimesofmarketdeclines,performedbetterthantheS&P500.Thatis,itsshareshaven’tfallenasmuch,percentagewise,asthe

S&Pdidduringthoseperiods.ThisqualitymakesBerkshire’sresultsevenmorecompelling.

Buffettpointedthisoutinhis2009lettertoshareholders,writing,“wehaveneverhadanyfive-yearperiodbeginningwith1965–69andendingwith2005–09—andtherehavebeen41ofthese—duringwhichourgaininbookvaluedidnotexceed

theS&P’sgain.Second,thoughwehavelaggedtheS&Pinsomeyearsthatwerepositiveforthemarket,wehaveconsistentlydonebetterthantheS&Pintheelevenyearsduringwhichitdeliverednegativeresults.Inotherwords,ourdefensehasbeenbetterthanouroffense,andthat’slikelytocontinue.”5

So,keepthefollowing

factsinmindwhenthinkingaboutperformance:

•Ignoreanyonewhotellsyouthrowingdartsatanewspaperisthesameasintelligentanalysis.•Agooddefenseisjustasvaluableasagoodoffense.•Sticktoasystemthat’slogicalandworks,andyou,too,couldbuilda

lengthyandimpressivetrackrecord.

Chapter13ValuePeopleandRelationships

Buffettexemplifiestheeighttraitswegleanedfromthe

researchaboutfemaleversusmaleinvestorsexceptionallywell,andhecertainlyisashiningexampleofmarket-beatingperformance.Butwecan’tsumhimupthateasily.We’vegottoaddthreeadditionalprinciplestofullyunderstandwhatmakesBuffettBuffett,whatmakeshimtick,whatmakeshimspecial,andwhatmakeshimthemasterinvestorheis.

Afterall,ifwearetobecomebetterinvestorsourselves,andthat’scertainlythegoalhere,weneedtoknoweverythingwecanaboutwhatmakesBuffettdothethingshedoesandactthewayheacts.

OurfirstBuffett-centricprinciple,then,istovalueandcultivateyourrelationshipswithpeople.ThisissomethingBuffettconsiders

vitaltogoodbusiness.Buildinglastingrelationshipswiththepeopleyouareworkingwith,orinvestingyourmoneywith,orgoingintobusinesswith,isimportantforlong-termsuccess.Buffettplacesapremiumonpeople,evensometimesputtingthemaheadofthepotentialformoreprofit,andhespeaksproudlyofthisfact.

Inalettertohispartnerswaybackin1968,Buffettsaid,“WhenIamdealingwithpeopleIlikeinbusinessesIfindstimulating(whatbusinessisn’t?),andachievingworthwhileoverallreturnsoncapitalemployed(say,tentotwelvepercent),itseemsfoolishtorushfromsituationtosituationtoearnafewmorepercentagepoints.Italsodoesnotseemsensible

tometotradeknownpleasantpersonalrelationshipswithhigh-gradepeople,atadecentrateofreturn,forpossibleirritation,aggravation,orworseatpotentiallyhigherreturns.”1

Andinhis1989Berkshirelettertoshareholders,Buffettechoedthisthought,saying,“Wehavefoundsplendidbusinessrelationshipstobesorareandsoenjoyablethat

wewanttoretainallwedevelop.Thisdecisionisparticularlyeasyforusbecausewefeelthattheserelationshipswillproducegood—thoughperhapsnotoptimal—financialresults.Consideringthat,wethinkitmakeslittlesenseforustogiveuptimewithpeopleweknowtobeinterestingandadmirablefortimewithotherswedonotknowand

whoarelikelytohavehumanqualitiesfarclosertoaverage.”2

GiventhatweknowBuffettisconcernedwithallocatinghiscapitalthemostefficientwayhecan,thefactthatheplacesahighenoughvalueonhisrelationshipstoforgothepotentialforhigher-profitendeavorsinfavorofcontinuingtoworkwithpeopleheknows,likes,and

trustsshowsushowmeaningfulthisistohim.Now,granted,heundoubtedlyhopesandwishesthatthistrade-offwon’tbenecessary,andhe’llideallyfindsituationswherehe’sbothmakingasmuchmoneyashepossiblycanandlikesthefolkshe’sdoingitwith.Andinfact,Buffett’sbeenadeptatfindingthismixoverhislongcareer.

SpeakingofBuffett’sfocusonthe“people”sideofinvesting,NellMinow,editorandcofounderofTheCorporateLibrary,anorganizationthatfocusesoncorporategovernance,said,“Ithinkoneofthemostimpressivethingsabouthimisnotthewayhelooksatstocks,althoughgoshknowsheisverygoodatmath,butthewayhelooksatpeople.

Hehasbeenanexcellentjudgeofpeopleallthewayalong.”3

LookatsomeonelikeRoseBlumkin,whomwetalkedaboutearlier.ShewasasdedicatedtorunningNebraskaFurnitureMartasBuffettistoinvesting.Headmiredherandcountedheramongthegreatestbusinessmindshe’deverknown.Heknewhedidn’tneedtohelp

Mrs.Brunherstore;sheknewquitewellwhattodo.Inturn,shekeptworkinghardforhim,growingherbusinessasifshe’dneversolditinthefirstplace.Andthat’sexactlyasBuffettwantsit.

WhenBuffettbuysacompanyforBerkshire,unlikemanyotheracquirers,hedoesn’trunrightinandstartimplementingnewrules,

changingmanagement,andgenerallystirringuptrouble.Hebuysacompanywhenhebelievesintheexistingmanagementandwiththecurrentwayacompany’sbeingrun—otherwise,he’dlookelsewhereforopportunities.Buffettdoesaslittleaspossibletoupsetthestatusquo,leavingthemanagementteamalonetokeepdoingwhatthey’re

doing.Heprovidesguidanceandsupportasneeded,buthemostlyjuststaysoutoftheway.

Hefeelscomfortableoperatingthiswaybecauseofthevalueheplacesonworkingwithgood,smart,motivatedpeople.Itmakesiteasiertosleepatnightwhenyoutrustthepeopleyou’reinbusinesswith,whetherthatmeansbuyinganentire

companyoutright,orinvestinginsharesofone.ForBuffett,quitesimply,peoplematter.

WritingintheBerkshire“Owner’sManual,”BuffettsaysofthemanagersofBerkshire’ssubsidiarybusinesses,“Mostofourmanagersareindependentlywealthy,andit’sthereforeuptoustocreateaclimatethatencouragesthemtochoose

workingwithBerkshireovergolfingorfishing.Thisleavesusneedingtotreatthemfairlyandinthemannerthatwewouldwishtobetreatedifourpositionswerereversed.”4

Forus,wemaynotbethinkingaboutbuyingwholebusinessesoutright(yet),butthepeoplefactorstillisimportant.Knowingwho’sinchargeofacompanyyou’re

thinkingaboutbuyingsharesofiseverybitascrucialasitiswhenBuffettgetstoknowthepeoplerunningabusinesshewantstoown.

Now,obviously,it’salittlebiteasierforBuffetttogetfacetimewiththosepeoplethanitwouldbeforusto,say,callameetingwiththefolksinchargeofCoca-Cola.Butyoucanstilldoresearchandlearnasmuchas

youcanaboutjustwhoitisyou’reentrustingwithyourmoney.Andthatisthebestwaytothinkaboutit.Ithelpskeeptheimportanceofhavingsolid,trustworthymanagementfrontandcenter.

KEYSTOASSESSING

MANAGEMENTInanemail

interview,PremJain,professorattheGeorgetownUniversityMcDonoughSchoolofBusinessandauthorofBuffettBeyondValue:Why

BuffettLookstoGrowthandManagementWhenInvesting,offersthefollowingsuggestionsforindividualinvestorstryingtoassessthequalityofmanagementontheirown:

“EvaluatingcompanymanagementoraCEOisnoteasybecausedifferentindividualqualitiescanengendersuccessindifferentcircumstances.ButIcan

certainlytellyoutwofundamentalquestionstoask.First,arethemanagementteamandthecurrentCEOcompetent?Second,aremanagementincentives

properlyalignedwithshareholderinterests?

“Toanswerthefirstquestion,Ireviewthecompany’sperformanceoverseveralyears.Forexample,when

IevaluatedJohnson&Johnsonanditsmanagement,Iexaminedthecompany’searnings,thereturnonequity,andtheallocationofcashflowsformorethan25years.Iprefer

evaluatingacompany’sperformanceoveralongperiodtodiscoverwhethermanagementteamscandeliverpositiveresultsunderdifferentCEOs.Whileitis

importanttoevaluateseveralmetrics,acarefullycomputedreturnonequityratioisprobablythemostimportantmetricfordeterminingmanagementcompetence.I

foundconsistentlygoodperformanceovertheentireperiod,andIdidnotspotanyincongruentacquisitions,largeequityissuances,oregregiousethical

violations.Tome,theresultsreflecteddisciplinedmanagement.IalsoreadalloftheCEOWilliamWeldon’sletterstoshareholderssincehewasappointedin

2002.“Toanswer

thesecondquestion,IcheckthenumberofsharesheldbytheCEOandothertopmanagersinthecompany.IamsuspiciousofCEOswhoare

awardedalargenumberofstockoptionsbutholdonlyasmallnumberofshares.Inaddition,IpreferCEOswhohavebeenwiththecompanyforalongtimeandarepromoted

fromwithin.Theyshouldattheveryleasthaveexperienceinthesameindustry.Finally,Itrytolearnabouttheirlifestyle.ACEOwithanextravagantlifestyleislesslikelytobe

prudentwithshareholders’moneythanaCEOwholivesmoremodestly.

“SincethereisnoexactsciencetoevaluatingmanagementteamsorCEOs,itisimportanttogiveyourself

alotofpractice.Todevelopyourevaluationskills,IrecommendfindingseveralinarguablygoodCEOsandstudyingthemandtheircompanies.BeyondWarrenBuffett,Ihave

benefitedfromreadingarticlesaboutandwrittenbyAlfredSloan,JackWelch,SamWalton,JimSinegal,andseveralothers.AninvestorcanevaluateaCEOorthe

managementteamproperlyonlyifheorshehasfirststudiedmanyCEOsandmanagementregimesthatareknowntobesuccessful.Thegoodnewsisthatbecausethereis

considerableamountofartinevaluatingmanagement,theevaluatorgetsbetterwithtime.”5

It’seasytofindoutthenamesofthetopexecutivesatacompanyyou’re

consideringinvestingin.Fromthere,belikeBuffettandreadallyoucanaboutthem.Ifthecompanyhasawebsite,checkitouttoseeiftherearebiosavailableforthetopbrass.Googlethenamestoseewhatyoucancomeupwith.Readinterviewswiththemifyoucanfindany,orarticleswrittenaboutthemorthecompany.Fool.comisagood

placetostart.You’relookingtofindouthowlongthey’vebeenwiththecompany,whattheirhistorythereis,howmuchstockofthecompanythey’rerunningtheyown,andjustgenerallywhetheryoucangetafeelforwhattypeofperson’sincharge.

ThedesiredqualitiesinmanagementarethesameonesweseepersonifiedinBuffett—honesty,humility,a

passionforbusiness,loyalty,asenseoffairness,anownership-mindedoutlook,andevenasenseofhumor,ifyoucangetit.SomeonelikeJimSinegal(whomPremJainalsosingledout;seethesidebar),Costco’scofounderandchiefexecutiveofficer,isaperfectexample.Buffett’sownedsharesofwarehouseretailerCostcoforBerkshire,andit’seasytoseewhy.Not

onlyisthebusinessstrong,butit’ssmartlyrunbyaguywho’scutfromthesamemoldthatBuffettis.

Sinegalhasnopretenseabouthim.Hespeaksclearlyabouthisbusinesstoshareholdersandthemediaalike.He’shumbleandevenanswershisownphone—thisatacompanywithamarketcapnorthof$25billion.(Yes,hereallydoesanswerit!But

leavethemanalone.He’sgotabusinesstorun,forPete’ssake.)He’spassionateaboutCostcoanditsemployees,too,meaningthatpeoplealsomattertohimastheydotoBuffett.He’scommittedtotreatinghisemployeesbetterthanaverage,providingthemhealthinsurance,andpayingthemabove-marketwages.Hebelievesthatalltheinvolvedconstituenciesina

business—shareholders,employees,andcustomersalike—canwin.

Youwouldn’tevenhavetoknowthatBerkshireownedsharesofCostcotofigureanyofthisout.JustreadinginterviewswithSinegalandlearningaboutthemanhimselfwouldshowyouthathe’ssomeoneyoucanbelieveinandtrustwithyourmoney.He’snevercagey,andCostco

doesn’tplayanyaccountingshenanigans.Everysingletubeinthathundred-packofAquafreshisaccountedforandnoted.It’sastraightforwardcompanyrunbyasimilarlystraightforwardguy.

HOWTHE

PROSJUDGEMANAGEMENT

ValueinvestorsLisaRapuano,ofLaneFiveCapitalManagement,andAmeliaWeir,ofParadigmCapital

Management,alsobelievethathavingqualitymanagementinplacewhentheyinvestinacompanyiskeytosuccess.Andtheysympathizewiththeplightofsmallinvestorstryingtofigureoutif

thepeoplerunningabusinessareforrealornot.

Rapuanosays,“I’vefoundthatjustbecausesomebody’sareallysmartguyorgirl,thatdoesn’tmeanthey’reagreat

managerofacompany.SowhatI’massessingonthatsideisalmostalwaysjustwhethertheyareverygoodatcapitalallocation.That’snotjustwhetherornotyoubuyback

stockorwhatkindofdebtyouuse.That’salsowhatR&Dyoufund,howyouchoosetogrow,doyouunderstandearningexcessreturnsinyourbusiness,anddoyouunderstand

whenit’sappropriatenottoinvest.SoIjudgethequalityofmanagementalmostexclusivelyonwhethertheygetthatcapitalallocationpieceofthepie.

“Foran

averageinvestor,theycandothemathematicalthingthatIdo,whichislookattheirhistoryofcapitalallocation.That’ssomethingthatanyonecando,becauseyou

justneedthe10-Kstodothat.Buttheobjectivejudgmentofamanagementteamismuchtougher.Youcan’treallytellfromseeingaguyonCNBCifyoucantrusthimornot.

“Youcanlearnalotfromtheconferencecalls,though.Youcanlearnalotfromhowtheyanswerthequestions,whethertheyanswerthemstraightforwardlyandhowtheyframetheir

answers,whetherthey’reaggressiveorconciliatory.Butyouarealittlebitoutofluck,asanindividual,nothavingaccessnecessarilytothem.Andfrankly,evenasasmallfirm,I

don’talwayshaveaccesstoCEOsandCFOs.IusuallyhavetowinmywayintotheirheartsbyprovingthatI’vedoneallthework,andthatoftentakesalongperiodoftime.

EventuallyIgetin.Sometimesittakesalotofphonecalls,though,askingquestionsthattheIR[investorrelations]personcan’tanswer,todemonstratemyinterestandmyintegrityand

theworkthatwe’vedonebeforefinallygettingtheCEOortheCFOtopayattention.”6

Weiralsothinkstheconferencecallsareasourceofgoodinformationforindividual

investors,saying,“Toyourpointaboutindividualinvestors,ifitisacompanythatIeitherdon’tknowwellordon’tfeellikeIreallyhavemyarmsaround,andthisissomethingthatI

thinkdoesmatterfortherandompersononthestreetwhowantstoinvest,youcanlistentothereplayoftheconferencecalloryoucanreadthetranscript.Ialwaysfinditmuchmore

usefultolistentotheconferencecall.Becauseatranscriptisatranscript,ifyouarejustlookingforsomenumbersorclarification,butyoukindofwanttohearwhatthetoneis

inmanagement’svoice.YouwanttohearthemduringtheQ&Aperiod.Sometimessomeoftheanalystsaremoreaggressiveornot,butyouwanttohearwhatthat

dialogueislikeandaretheydefensiveoraretheyalittlevagueoraretheyreallyhelpful?Ithinkthatnoneofthatisanexactscience,butIthinkagain,itlendsadditionalinformationif

youarewillingtogothroughthatefforttolistentoit.”7

Inadditiontoplacingimportanceonthepeoplehedoesbusinesswith,whetherhe’sbuyingtheircompanyorinvestinginit,Buffetthasalsomaintainedclose

relationshipswithcertainpeopleforyears.Heissteadfastlyloyaltothoseclosetohim.CharlieMunger,whoservesasBerkshire’svicechairmanandBuffett’sright-handman,isthefirstandprimarypersonwhocomestomind.HeisasclosetoBuffettasanyonehaslikelyeverbeenandislikelyevertoget.

BuffettandMunger(who,

asithappens,wasalsoraisedinOmahaandevenworkedinBuffett’sgrandfather’sgrocerystoreasateenager)metin1959,andfromthebeginning,thiswasafriendshipdestinedtoendure.8Apairofbrainybookworms,theywerebothinterestedininvestingandquicklyfellintotalkingforhoursonthephone(MungerwaslivinginCalifornia,

whileBuffettwas,ofcourse,inNebraska)andseeingeachotherinpersonwhentheycould.9

Beforelong,BuffettandMungerwereinvestingtogether,doingdealsinconcert,startingwiththeaforementionedHochschild-Kohninvestmentin1966.Fromtherethey(thankfully)movedontoother,moresuccessfulventures,untilthey

finallycombinedforcesofficially.In1982MungerbecamevicechairmanofBerkshireHathaway.10TryingtoimagineBuffettwithoutMungerisliketryingtoimagineanyfamousduothroughouttimewithoutbothpartners.It’sLewiswithoutClark.CaptainwithoutTennille.HanselwithoutGretel.Chocolatewithoutpeanutbutter.

Inotherwords,BuffettwithnoMungerwouldmeanaverydifferentfutureandscenarioforbothmentoday.Itisn’tonlythatthey’repals,either.MungerhashadatremendousinfluenceonBuffett,helpingthewayhethinksaboutinvestingevolvebeyondthestrictGrahamiancigarbuttschoolofthought.We’llgetfurtherintoMunger’sinfluenceon

Buffettinournextchapter.Anotherpersonwhom

Buffettcountsasaclosefriendmightsurpriseyou,givenBuffett’spublicaversiontotechnology—that’sBillGates,cofounderofcomputersoftwaregiantMicrosoft.Thetwo,whohavesincevolleyedbackandforthinrankingsontheForbeslistofrichestpeopleintheworld,metin1991.

Theyformedaquickfriendship,builtonmutualrespectandappreciationforoneanother.BuffettgotGatestotakeuphisfavoritepastime,bridge,andevenhelpedoutwhenGateswasaskingforhiswife’shandinmarriage.(BuffettandGatestrickedMelinda,hisbetrothed,intocomingtoOmahaandthenopenedupBorsheim’s,alocaljewelry

storeBerkshireHathawayowns,forhertochooseherengagementring.)11

Thoughitbeganasafriendship,ithasgrownintoabusinessrelationship,withBuffettaskingGatestoserveontheboardofdirectorsofBerkshirein2004.InJune2006Buffettannouncedthathewouldbedonating85percentofhisBerkshireHathawaystockovertimeto

charitableorganizations,withthebulkofthatgoingtotheBill&MelindaGatesFoundation.12Morerecently,BuffettandGateshavestartedacampaigntogethertoencourageotherbillionairestodonatehalftheirmoneytocharity.13

Buffettisloyaltohisinnercircleoffriends,choosingtoworkwithandinteractwiththesamecore

groupforyears.InadditiontoMungerandGates,he’stightwithTomMurphy,whowasinchargeofCapitalCities,thecompanythateventuallyboughtthetelevisionnetworkABC,andthenwouldselltoDisney.BerkshireownedsharesofABCatthetimeitwassold,andBuffettactuallycountsnotinvestinginanearlierTVdealthatMurphywassellinghimonasoneof

hisbiggestmistakesofomission.

ThroughtheyearshewasalsoclosefriendswiththelateBillRuane,atalentedfundmanagerBuffettmetatColumbia.ItwasactuallyRuane’snewlyformedSequoiafundthatBuffettsuggestedhispartnersinvestinwhenheshutdownhispartnershipin1969.14BuffettmetWalterSchloss,another

giantofthevalueinvestingworld,atthefirstannualmeetingheeverattended,whilehewasatColumbia.15BuffettfeaturedbothRuaneandSchloss,alongwithMunger,inhis“GrahamandDoddsville”speechatColumbiaasexamplesofinvestorslikehimselfwhoselongtrackrecordsofsuccessatpickingstocksmadetheefficientmarkettheorylook

likehogwash.Buffettrealizesthatthe

peopleyouchoosetodobusinesswithandassociatewithcanhaveahugeeffectonyouroutcome.Healsoknowsthatgoodbusinessesdobetterwithgoodpeopleincharge,peopleyoucantrusttobehaveethicallyandhonestly.Themostperfectbusinessintheworld,withalarge,well-protectedmoat,

amplecashflows,andafatmarginofsafetywon’tcompelhimtoinvestunlessthepeopleportionoftheequationisjustasstrong.Andoncehe’scommittedtoabusinesswithmanagementhelikes,heisloyalandsticksbythem.

Writinginhis1986lettertoshareholders,Buffettsaid,“Weintendtocontinueourpracticeofworkingonlywith

peoplewhomwelikeandadmire.Thispolicynotonlymaximizedourchancesforgoodresults,italsoensuresusanextraordinarilygoodtime.Ontheotherhand,workingwithpeoplewhocauseyourstomachtochurnseemsmuchlikemarryingformoney—probablyabadideaunderanycircumstances,butabsolutemadnessifyouarealreadyrich.”16

Forus,thisissomethingwecanalsoputintoplayinourinvestinglives,andweshould.Keepthefollowinginmind:

•Abusinessisonlyasstrongasthepeoplerunningit.•Readuponthemanagementofcompaniesyouareconsideringinvestingin.

Lookforsmart,open,loyal,fairexecutivesyoucanadmire.•Don’tbeafraidtoputpeoplebeforeprofit;Buffettisn’t.

Chapter14QuestiontheMasters

Noteveryoneisluckyenoughtostudyunderacertified

guru,andtheireventualmentor,ingraduateschool,butWarrenBuffettdidjustthatwhenhewenttoColumbia,hometoBenGrahamandDavidDodd,thepowerfultwosomewho’dliterallywrittenthebookonvalueinvesting.Buffettwasquicklythrustintoaworldthatwasheaventohim.Analyzingcompanies,readingeverythinghecould

gethishandson,andhavingthechancetositinclassroomsandhavediscussionsanddebateswithGrahamwaslikecominghomeforBuffett.

Hesoakedupeverythinghecouldwhilehewasthere,andmadeconnectionswithGrahamandotherlike-mindedstudentsthatwouldcarryonlongpasttheclosingschoolbell.FromGraham,he

builtthecoreofhisinvestingphilosophy:Alwaysbuywithamarginofsafety.Aswetalkedaboutearlier,inthechapteronrisk,Buffettconsidersthesethreewords—“marginofsafety”—tobethe“cornerstoneofsuccessfulinvesting.”1

BuffettalsolearnedthebasicsofvalueinvestingfromGraham.Helearnedaboutcalculatingintrinsicvalue,

figuringouthowmuchacompanywascurrentlyworth,andhowmuchitshouldbeworthinthefuture.Helearnedaboutthevagariesofthemarket,especiallythecharacterGrahamlovedtotalkabout,Mr.Market,andallhisassociatedcapriciousness.

Buffett,it’ssafetosay,idolizedBenGrahamandmostlikelycontinuesto

idolizehimtothisveryday.Buffettwouldn’thavebecometheinvestorheistodaywithoutGraham’sfoundation.

Andyet,Buffett,ashebeganhisinvestingcareerandstartedlearningmoreaboutbusinessandwhatmakescompaniessuccessful,slowlystartedshiftinghisorientation.Hewasstillsolidlyinthevaluecamp

(althoughhe’sactuallyarguedinhisshareholderlettersthatthevalue-versus-growthdistinctionisameaninglessone,asyouneedbothinorderforacompanytoturnintoawinninginvestment),buthebeganlookingatmorequalitativefactors,asopposedtothestrictlyquantitativeonesGrahamfocusedon.

Yousee,forGraham,it

wasallaboutthenumbers.Itdidn’tevenmattermuchwhatthecompanydid,orwhowasonitsexecutiveteam,orwhatitsfutureprospectsheld.Whilehefirmlybelievedinthefactthatbuyingastockwasbuyingapieceofanactual,livingandbreathingcompany,hewasalsomoreconcernedwithtallyingupacompany’sassetsandliabilitiesandseeingwhatthe

wholeshebangwasworth,andthenseeingwhatitwastradingforinthemarket.

Thiswasthe“cigarbutt”schoolofinvestingwecoveredearlier.Thegoalwastostumbleacrossacigarthathadjustonemorepuffinit,andtakeadvantageofthat.Buffett,however,wasdestinedtobecomesomethingmorethanamerecigarbuttaficionado.Hewas

toseethatjustbecausesomething’sexceedinglycheap,thatdoesn’tbydefaultmakeitgood.

ThefirstpersontoopenBuffett’seyestothiswasCharlieMunger.Mungertookmorenebulousfactorsintoconsiderationwhenheinvested.Whilehealsodidn’tlikeoverpayingforbusinesses,thefactthatsomethingwascheaperthan

dirtwasnotthebe-allandend-allforhim.Thatinandofitselfwasnotenoughofareasontobuy.

Hebelievedthatmanagementmattered,thathavingacompetitiveadvantagemattered,andthatsometimesyouhadtopayalittlebitmorethanyouwouldhavelikedtoownapieceofapromisingbusiness.Insteadofhuntingaroundfornasty

oldcigarbuttstosuckonelastpufffrom,Munger’sphilosophywas,essentially,“Whydon’twelookforgreatbusinessesrunbygoodfolksandbuythose?”2

ForBuffett,thiswassomethingofarevelation.HeslowlybegantoseethatMungerwasright,andthathecouldtakethebestofGrahamandaddinsomemorequalitativefactorstocomeup

withacomprehensiveinvestingphilosophythatwashisown.

TheworkofinvestmentwriterPhilipFisherwasalsoimportanthere.Fisherwroteahighlyinfluentialbook,CommonStocksandUncommonProfits,wherehelaidouthisapproachtoinvesting.Thisinvolvedsomethinghedubbed“scuttlebutt,”whichmeant

theresearchintoacompany’sprospectsaninvestorcouldengageinonhisown.3Itcouldmeantalkingtomanagement,oracompany’ssuppliers,oritscustomers,oritsemployees,orjustgenerallybeingalerttopickingupnewinformation.

ThisfitbeautifullywithBuffett’sfeelingsthatresearchwassomethingyounevergotenoughof.And

he’dalreadyengagedinscuttlebutthimselfbythatpoint.ShowingupasagradstudentatGEICO’sofficesonaSaturdayandtalkingtoavicepresidentjumpsrighttomind.(Scuttlebutt’ssomethingyoucando,too.It’sanexcellentwaytolearnmoreaboutyourinvestments.)

Inadditiontogivingtheworldscuttlebutt(which,

incidentally,isalsothenameofa“gentlemen’sclub”inSlidell,Louisiana),Fisher’sinvestingmasterpiecealsofocused,inlargepart,onthemorequalitativefactorsBuffettwaspickingupfromMunger.Fisher’sbookprovidedafifteen-pointlistofthingstolookforwhenanalyzingacompany.Amongthemwereseveralpointsdevotedtotheimportanceof

havingopen,honestmanagement,aswellasquestionsaboutthestrengthofthecompany’sproductlineanditsviabilityversusitscompetitors.

By1989,Buffetthadfullyturnedthephilosophicalcornerandinhislettertoshareholdersthatyearsaid,“Acigarbuttfoundonthestreetthathasonlyonepuffleftinitmaynotoffermuch

ofasmoke,butthe‘bargainpurchase’willmakethatpuffallprofit.Unlessyouarealiquidator,thatkindofapproachtobuyingbusinessesisfoolish.”4

HewentontotalkabouthisexperiencewiththeBaltimoredepartmentstoreheandMungerbought,Hochschild-Kohn,whichgavethemsuchfits.Itwascheapascheapcouldbewhen

heboughtit.Itevenhadgoodpeoplerunningit.Butthosefinefolksweren’tenoughtoovercomeplainoldbadeconomics.Asanexampleofwhypurecigarbuttinvestingdidn’twork,thatwasagoodone.

BuffettalsodifferedfromGrahamontheissueofdiversification.Grahamownedlotsandlotsofcompanies,whileBuffett

believesinfocusingonjustafew.Hebelievesthatowninglotsofstocksisasignthatyoudon’tfullyunderstandwhatyou’redoing,whileGrahambelieved(asdowehereatTheMotleyFool)thatitreducesyourrisk.

Writinginthe1993lettertoBerkshireshareholders,Buffettaddressedthispoint,saying,“CharlieandIdecidedlongagothatinan

investmentlifetimeit’stoohardtomakehundredsofsmartdecisions....Thereforeweadoptedastrategythatrequiredourbeingsmart—andnottoosmartatthat—onlyafewtimes....Thestrategywe’veadoptedprecludesourfollowingstandarddiversificationdogma.Manypunditswouldthereforesaythestrategymustberiskier

thanthatemployedbymoreconventionalinvestors.Wedisagree.Webelievethatapolicyofportfolioconcentrationmaywelldecreaseriskifitraises,asitshould,boththeintensitywithwhichaninvestorthinksaboutabusinessandthecomfort-levelhemustfeelwithitseconomiccharacteristicsbeforebuyingintoit.Instatingthisopinion,

wedefinerisk,usingdictionaryterms,as‘thepossibilityoflossorinjury.’”5

Buffett’sinvestmentinGEICOwhenhewasagradstudent,andafterhewentdowninpersontothecompany’sD.C.-basedoffice(scuttlebutt!),providesagoodexampleofthedifferencebetweenGrahamandBuffettontheissueofdiversification.

WhileGrahamownedsmallstakesofmanycompanies,BuffettwassuchaprofoundbelieverinGEICOalreadythattheyoungstudentinvestedthree-quartersofhisportfolioinit.6ConcentratinglikethisinonestockispureBuffett.

So,whileit’simportanttolearnfromthosewho’vegonebeforeyou,don’tbeafraidtoaskifthewaytheyaregoing

aboutthingsisthebestwaypossible.Remember:

•Thelearningneverstops,soevenafteryouthinkyou’vefiguredoutthebestwaytoinvest,keepstudying.•Justbecausesomeone’sanacknowledgedinvestmentguruormasterdoesn’tmeanthereisn’tabetterway.

•Youaren’tcommittingblasphemywhenyouquestionanybody,WarrenBuffettincluded.

Chapter15ActFairlyandEthically

OurfinalBuffett-relatedprincipleissomethingwe

touchedonearlierwhenwetalkedaboutwhattolookforwhenevaluatingmanagement—andthat’sfindingpeoplewhoareethicalandfair.Buffetthasalwaysconductedhimselfthisway,nearlytoafault,aswe’llsee,andit’stragicbuttruethatinthisdayandagethat’sprettyunusual.However,asBuffettdemonstrates,successcan,infact,cometothosewhoplay

nice.(Andthat’sthewayitshouldbe!)

OnesignificantwaythatBuffettembodiesthisideaoffairnessishisbeliefthatallshareholders,nomatterhowbigtheirstakeorhowtiny,deservetobeupdatedatthesametimeandinthesamemanner.Thismaysoundlikeanobvioustenet,andonenotparticulartoBuffett,butinfact,thingsonWallStreet

weren’talwaysthisway.Manycompaniesovertheyearshavegivenprecedencetothelarge,institutionalshareholdersoftheirstock,ortotheanalystsontheStreetfollowingtheircompany,essentiallyslammingthedoorinthefaceofthesmallindividualinvestor,anow-illegalpracticeknownas“selectivedisclosure.”

Infact,ArthurLevitt,

thenchairmanoftheSecuritiesandExchangeCommission,commendedTheMotleyFoolforouradvocacythatthisshadypracticeshouldbestopped.1WiththepassageofRegulationFairDisclosure,inAugust2000,itfinallywas.Theplayingfieldwas,astheysay,levelatlast.Buffettcalledselectivedisclosure“corrupt”andsaid,“Thefact

thatthisreformcameaboutbecauseofcoercionratherthanconscienceshouldbeamatterofshameforCEOsandtheirinvestorrelationsdepartments.”2

ThiswasneverthecasewithBuffettandBerkshire,however.Buffettbelievesstronglyinnotgivingadvantagestoonegroupofshareholdersoveranother.Everyoneshouldbetreated

equallyandfairly.WritingintheBerkshire“Owner’sManual,”Buffettsays,“Inallofourcommunications,wetrytomakesurethatnosingleshareholdergetsanedge:Wedonotfollowtheusualpracticeofgivingearnings‘guidance’toanalystsorlargeshareholders.Ourgoalistohaveallofourownersupdatedatthesametime.”3

Inadditiontomakingsureeveryonegetsthesameinformationsimultaneously,BuffettalsoworkshardtogivehisshareholdersjustasmuchinfoonhowBerkshire’sperformingashewouldwantwereheintheirshoes.Andhedoesitwithclearlanguageandanopennesstorevealingasmuchashefeasiblycan(withoutgivinganything

awaytocompetitors).Writingagaininthe

Owner’sManual,Buffettsays,“Wewillbecandidinourreportingtoyou,emphasizingtheplusesandminusesimportantinappraisingbusinessvalue.Ourguidelineistotellyouthebusinessfactsthatwewouldwanttoknowifourpositionswerereversed.Weoweyounoless....Wealso

believecandorbenefitsusasmanagers:TheCEOwhomisleadsothersinpublicmayeventuallymisleadhimselfinprivate.”4

Buffettholdsthenotionthathisshareholdersaremorelikefamilythanacquaintances,socommunicatingeffectivelywiththemisapriorityforhim.Whenhereferstothemashis“partners”inBerkshire

Hathaway,hemeansit.He’snotjustgivingthatidealipservice.Itgoeshandinhandwithhisstrongbeliefthatwhenyoubuysharesinacompany,youarebuyingapieceofabusiness,andyouaretrulyanownerofthatbusiness.Rememberthatanddon’tallowyourselftobetreatedasanythingless.Demandthatalltheexecutiveteamsrunningyour

companies—andtheyareyourcompanies—speakhonestlyandclearlywithyouandyourfellowshareholders.Allinvestors,bigandsmall,deservethat.

Buffett’sfoundthatbeingfaircanraisesomeeyebrows,withheandMungeroncehavingtodefendthemselvestotheSecuritiesandExchangeCommissionforoverpayingforacompany

thattheywantedtobuy.Yes,youreadthatright—BuffettandMungerwereonceinvestigatedforwillinglypayingtoomuchforacompanytheyweretryingtopurchaseinfull.Notsurprisingly,thefirmthatBuffettandMungerweretryingtobuywasn’ttheoneraisingafussabouthowmuchtheywantedtopay.Itwasanothercompany,which

wassupposedtomergewiththeirtargetforamuchcheaperprice,thatcalledfoulonthem.

Wesco,whichisnowafullyownedsubsidiaryofBerkshireandrunbyCharlieMunger,isthecompanyinquestion.Waybackinthe1970s,beforethey’dfullyjoinedforces,BuffettandMungerwereinvestingtogetherusingdifferent

companiestobuysharesofothers.Throughoneofthesecomboefforts,BlueChipStamps,they’dboughtsomesharesofWesco,whichwasaCaliforniasavingsandloanfirm.

Notlongaftertheystartedbuyingshares,WescoannounceditwasmergingwithanotherCaliforniabank,butBuffettandMungerdidn’tlikeorapproveofthe

price.Theybothbelievedthecompanywaslettingitselfgofortoolittle.Whiletheymetwithandgottoknowsomeoftheexecutivesatthecompany,theystartedbuyingWescosharesatabovewhatthestockmarketwaspricingthemat.Becausetheoriginaldealhadapparentlyfallenapart,investorsweredrivingWescosharesdown,andBuffettandMungerdidnot

wanttotakeadvantageofthisfact,especiallysinceinasense,they’dcausedit.Eventually,theyboughttherestofthecompany,alsoforabovewhatsharesweretradingatatthetime.

GovernmentinvestigatorswereconfusedastowhytwosmartandablemoneymanagerslikeBuffettandMungerwouldwillinglydothis.Munger’sentreatythatit

wasthe“rightthing”tododidn’tpersuadethem.Itwasjustunfathomablethatinvestorswoulddecidetopaymorethantheyhadto,toacquireacompanytheywanted.Intheend,luckily,BuffettandMungerescapedvirtuallyunscathedfromthelegalmorass.TheywereabletobuyWescooutright,asthey’dwantedallalong,atapricethattothemrepresented

whatwasfair.Earlierinhiscareer,

Buffetthadalsochosentostandupforwhathesawwasrightandfair.In1964,asmallsubsidiaryofAmericanExpresswasinvolvedinascandalthatcostsomebanksthathadloaneditmoneymillionsofdollars,butdidnotultimatelyaffecttheoverallstrengthofthecompany’sbrand,main

businessline,orfutureprospects.Themarketsoldthestockoff,andBuffett,everthebravesoultostepinwhereotherswouldnot,startingbuyingsharesofitforthepartnership.Tryingtomovebeyondthescandal,AmericanExpresswasponyingupmoneytosettlethebanks’claims,butsomeshareholderssued,arguingthatinsteadofpayingup,the

companyshoulddefenditself.Buffettcameoutstrongly

onthesideofAmericanExpressdoingtherightthing,whichwas,ashesawit,makinggoodbypayingthebanksoff.Hebelievedthecompanywouldbe“worthverysubstantiallymore”ifitdidrightbythebanksversusfightingthem.5AmericanExpresslistened,anditturnedoutthatBuffettwasright.

Thestockrecoveredmorethan40percentfromitslows,andremainsasignificantBerkshireHathawayholdingtoday.

OnefinalincidentrepresentsBuffett’sfeelingsabouttheimportanceofethicsinbusiness.Intheearly1990s,aroguebondtraderatSalomonBrothers,thenowlong-goneWallStreetinvestmenthouse,createda

scandalforthecompanybyengagingindubiouspracticeswhenitcametotheTreasurybondmarket.Essentially,hewascreatingfakeaccountstocornerthemarketandbuymorethanSalomon’sfairshareofbondsfromthegovernmentforresale.

BerkshireownedachunkofSalomonatthetime,althoughBuffettknewnothingaboutthemisdeedsat

thecompany.Thetopguysinchargeresigned,andBuffettwasaskedtostepinandserveasinterimchairman.Thiswasarolehedidnotrelish,buthemadethetoughchoiceandagreedtodoit.HeshookSalomontoitscorewithhisopenattitudesandwillingnesstobehonestwiththemediaandothers.

Buffettagreed,naturally,tocooperatewiththe

government’sinquiryintoSalomon’sdoings.Anditwashis1991congressionaltestimonyontheSalomonBrothersscandalthatallowedhimtoexpresshisfeelingsontheimportanceofethicsmostclearly:“Aftertheyfirstobeyallrules,Ithenwantemployeestoaskthemselveswhethertheyarewillingtohaveanycontemplatedactappearthenextdayonthe

frontpageoftheirlocalpaper,tobereadbytheirspouses,childrenandfriends,withthereportingdonebyaninformedandcriticalreporter.Iftheyfollowthistest,theyneednotfearmyothermessagetothem:LosemoneyforthefirmandIwillbeunderstanding.LoseashredofreputationforthefirmandIwillberuthless.”6

WarrenBuffetttakes

doingtherightthingveryseriously,andoverthelongterm,theevidencefromhimbearsoutthatinadditiontosimplybeingthemostkarma-friendlywaytogo,italsoleadstowealth.Doingrightbyotherpeople,beingfair,andhavingtheattitudethateveryonecanwinisagreatframeworkwithwhichtoapproachinvesting.Itallowsyoutolookforopportunities

thatcanbothmakeyoufeelgoodandmakeyourich.

So,remember:

•Youcanbegoodandberich;onedoesn’tprecludetheother.•It’spossibletofindcompanieswhereemployees,shareholders,andcustomersallwin,andthosecanmakeforwinninginvestments.

•Lookforcompaniesthatcommunicateinanopen,honestway.You,asanowner,deservetobetreatedthisway.

.

Chapter16FoolishInvestingPrinciples101

OK,nowthatyouknowjustabouteverythingthereisto

knowaboutWarrenBuffettandhis“feminine”temperament,let’stakeaminutetorecapthelessonswe’velearnedfromeachoftheeightfeminineinvestingtraitsaswellasourthree“Buffett-esque”principles.Thenwe’lltalkabouthowtotakealltheknowledgewe’velearnedsofarandapplyittoaFoolishinvestmentphilosophy.

Femaleinvestorstendto:

1.Tradelessthanmendo•Rememberyou’rebuyingapieceofanactualbusiness.

•Takethelongview.•Bepatient.

2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,while

womenaremorelikelytoknowwhattheydon’tknow•Buffett’s“sphereofunderstanding”maybedifferentfromyourown.

•Thinkaboutandlearnwhatyourowncircleofcompetencecovers.

•Sticktoit,nomatterwhat.

3.Shunriskmorethanmaleinvestorsdo•Insistonanappropriatemarginofsafety.

•Avoiddebtasmuchaspossible.

•Staywithinyourcircleofcompetence.

•Doyourhomeworkbeforeinvestingoverseas.

4.Belessoptimistic,and

thereforemorerealistic,thantheirmalecounterparts•Belevelheadedaboutyourinvestmentsandthemarketatlarge.Learnnottobeexcitedbymarketswingstotheupsideordevastatedbymarketdrops.

•You’reinchargeofMr.Market.Don’tlethimbossyouaround.

•QuotingBuffett,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”

5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangleanddetail,aswellasconsideringalternatepointsofview•Read,read,read.

•Don’tforgetaboutyourcircleofcompetence.

•Avoidconfirmationbias—seekoutinformationthatcontradictsyourconclusions,notjustinformationthatreinforcesthem.

6.Bemoreimmunetopeerpressureandtendtomakedecisionsthesamewayregardlessofwho’s

watching•Bewillingtobecontrarian,asuncomfortableasitmaybe.

•TakeBuffett’swordstoheart:“Begreedywhenothersarefearful,andfearfulwhenothersaregreedy.”

•LivebyyourownInnerScorecard.

7.Learnfromtheirmistakes•You’regoingtomakemistakes.Wealldo.Sodon’tbeatyourselfupwhenyouslipup.

•Assesswhathappened.Didyoumisssomething?Ordidmarketconditionschange?

•Thinkaboutwhatyoucanreasonablydodifferentlyinthefuture.

Ifyouboughtstockinacompanyyoudidn’ttrulyunderstand,forexample,vownottodothatagain.

8.Thankstogoodoldbiology,havelesstestosteronethanmendo,makingthemlessswillingtotakeextremerisks,which,inturn,couldleadtolessextrememarket

cycles.

Whilenotatraitofthefemaleinvestingtemperament,theoutcomeofthisinvestingstyleisimportant.Therefore,rememberthatfemaleinvestorsproduceresultsthataremoreconsistentandpersistent.Andinthehedgefundworld,female-managedhedgefundsoutperform

comparablemale-managedhedgefunds,andtheydon’tsufferfrommarketdropsasseverely.

•Ignoreanyonewhotellsyouthrowingdartsatanewspaperisthesameasintelligentanalysis.

•Agooddefenseisjustasvaluableasagoodoffense.

•Sticktoasystemthat’s

logicalandworks,andyou,too,couldbuildalengthyandimpressivetrackrecord.

AndourthreeBuffett-centricprinciples:

1.Valueandcultivateyourrelationshipswithpeople•Abusinessisonlyasstrongasthepeoplerunningit.

•Readuponthemanagementofcompaniesyouareconsideringinvestingin.Lookforsmart,open,loyal,fairexecutivesyoucanadmire.

•Don’tbeafraidtoputpeoplebeforeprofit;Buffettisn’t.

2.Learnfromthemasters,

butbewillingtoquestionthem•Thelearningneverstops,soevenafteryouthinkyou’vefiguredoutthebestwaytoinvest,keepstudying.

•Justbecausesomeone’sanacknowledgedinvestmentguruormasterdoesn’tmeanthereisn’tabetterway.

•Youaren’tcommitting

blasphemywhenyouquestionanybody,WarrenBuffettincluded.

3.Befairandoperateinanethicalmanner•Youcanbegoodandberich;onedoesn’tprecludetheother.

•It’spossibletofindcompanieswhereemployees,

shareholders,andcustomersallwin,andthosecanmakeforwinninginvestments.

•Lookforcompaniesthatcommunicateinanopen,honestway.You,asanowner,deservetobetreatedthisway.

Nowthatwe’vebrokendownthequalitiesandtemperamentthatmake

WarrenBuffetttheinvestorheis,andwe’vediscoveredtheinvestingtraitsthatfemaleinvestorstendtoshare(andusetoedgeouttheboys),whatmoreistheretoit?Well,lotsactually.TheMotleyFoolhasspentyearseducating,amusing,andenrichinginvestorsallovertheworld,andwhileyou’realreadywellonyourwaytobeingasuccessfulinvestor,

you’vestillgotmoretolearn.So,let’sjumprightin.Thefirstfewprincipleswillbefamiliartoyouatthispoint,butthey’reimportantenoughtotouchonagain.

•Buyastock,buyabusiness.•Buywhatyouknow.•Long-termbuy-to-holdisthewaytogo.•Compoundinterestisa

miraculousthing.•Savetogrow.•Investnow?•Getyourassetsallocated.•Diversify.Yes,diversify.•What,mesell?

BUYASTOCK,BUYABUSINESS.

Aswelearnedearlier,whenyoubuyashareofstock,you

areinvestinginanactualbusiness.Keepingthisfactinmindhelpsseparatethemerespeculators(boo,hiss)fromthebonafideinvestors(wildapplause).Consideryourselfabusinessowner,whetheryou’vejustponiedupfor100sharesofHersheyor10,000sharesofTarget.

TheMotleyFoolholdsthistenetnearanddear,andit’sthefoundationforour

entireinvestingphilosophy,asitisforBuffett.Don’tyouforgetit,either.Youaren’tjusttypinginthreeorfourrandomlettersintoyouronlinebroker’swebsiteandthenpushing“submit.”Youarebuyingapartofabusiness,justasifyouwentoutandboughtthelemonadestandfromthosecutekidsonthecorner(canyoubelievehowmuchtheychargefor

thatstuff?).Keytakeaway:You

aren’tbuyingsomethingabstractwhenyouinvest.You’rebecomingabusinessowner.

BUYWHATYOUKNOW.

Wealsobelieve,asdoesBuffett,instayingwithinyourcircleofcompetence.

Anotherfamousinvestmentmind,PeterLynch,whorantheincrediblysuccessfulMagellanFundforFidelityforyears,popularizedthephrase“Buywhatyouknow,”andthatworkshere,too.

Essentially,youwanttobeabletounderstandwhatyou’reinvestingin.Itfollowsbehindwhatwejusttalkedabout—ifyoubelieveyouarebuyingapieceofanactual

business(andyouare),thenyoushouldbeabletoexplainwhatthatbusinessdoes,andunderstandhowitmakesmoney.Forbeginninginvestors,thisoftenmeansbuyingsharesofcompaniesthatsellproductsyouuseorknowwell.Lookaroundyou—thereareinvestmentopportunitiesandpossibilitiesallaround.

Thedangerofgoingtoo

farafieldofwhatyoucanreasonablyunderstandraisesthechancethatyou’llinvestinsomethingyoucan’tadequatelyfollowandfeelcomfortableowningoverthelongterm.Andthat’swhatthisisallabout—long-termstockownership.

Keytakeaway:Understandwhatyou’reinvestingin.Itlowersyourriskwhenyoudoso.

LONG-TERMBUY-TO-HOLDISTHEWAYTOGO.

Speakingofthelongterm,thisisanotherfacetofBuffett’sinvestingphilosophythatwestronglybelieveinatTheMotleyFool.Buyingastockonlytosellitdayslater,orworse,minutesorhourslater,doesnotinterestus.That’sasmall-ffoolishwaytoinvest.Whenyou’rethinkinglikea

businessowner,youarethinkinglong-term.

Individualinvestorsalsohaveatremendousadvantagewhenitcomestobeingabletoeffectivelystayputandavoidtrading.Unlikemutualfundsorbiginstitutionalinvestors,whichareconstantlydealingwithwithdrawalsandarethereforeoftenforcedtosellinordertogeneratecash,thelittleguys

andgalslikeuscan,instead,affordtohunkerdownwithourstocks,keepingthemnearanddearforyearsonend.Don’tletthisimportantadvantagepassyouby.

Additionally,whenyoubuyandsellmorethanyoushould,yourackuptradingcostsandtaxbills.Evensupposingyouweregiftedwithanuncannyabilitytobeahotshotshort-termtrader,

thebitethatthosecostswouldtakefromyourreturnswouldbepainful.It’soneofthereasonswomentendtoshowbetterresultsthanmendo(sincetheytradelessthanmen).

Webelieveinlong-termbuy-to-hold.Thatdoesn’tmeanyoubuystocksandthenneverlookatthemeveragain.Wearen’tsuggestingthat.Butwiththeproper

mindsetthatyouarebuyingapieceofabusinessthatyouwilllikelyownforyears,webelieveyoushouldinsteadmonitoryourinvestmentstokeepaneyeonthemandmakesurenothingdrastichaschanged.

Ahelpfultipforputtingthisintopracticeistowritedownallthereasonsyouboughtastockatthetimeyouboughtit.Document,

document,document.Thinkaboutwhatfactorscouldleadyoutosell,andjotthosedown,too.It’sinevitablethatyouwillsellstocksinyourlifetime.Buffettdoesit;everyonedoesit.Theimportantthingisnottodoitforthewrongreasons.Therewillbetimeswhenacompany’soutlookandcircumstanceschangeenoughthatyoudecideit’stimeto

partwithyourshares,forexample.Butitcanbedifficulttorememberwhatexactlycompelledyoutobuythecompanyinthefirstplace.Ifyouhavearecordofyourthinking,youhaveaframeworktostartfrom.

Checkinonyourcompaniesatleastquarterly.Readuponhowthey’redoingandassesswhat’sgoingonwiththemversus

yourdocumentedreasonsforbuyinginthefirstplace.Ourgoal,hope,andwish,likeBuffett’s,istoholdastockforever,butthatdoesn’tmeanyoushouldcompletelyignoreitonceyouownit.Yourmoney,yourcapital,isprecious,andit’suptoyoutoensurethatit’sinvestedinthebestpossibleplaces.

Keytakeaway:Don’tinvestandthenneverglance

yourstocks’wayagain.Keepupwiththebusinessperformanceofthem—butdon’tobsessonthestockprice.That’snowaytojudgeacompany’sprogress.

COMPOUNDINTERESTISAMIRACULOUSTHING.

Anotherreasontobelong-termfocusedistheamazing

powerofcompoundinterest.Likekudzuorbacteria,compoundinterestjustkeepsgrowingovertime.Theconcept’snotcomplicated,forsomethingsopowerful.Whenyouhavemoneyinvestedandyou’reearningarateofreturnonit(so,say,yourstockportfoliogoesup6percentayear),andthenyouthinkaboutthelengthoftimeyouhaveyourmoneyearning

that,eachandeveryyeartheamountyouhaveisgrowing—sothebaseamountyouhaveforthefollowingyearisevengreater!

OK,somaybethatiscomplicated.Let’stryatable.Let’sassumeyoustartedoffwith$1,200investedfourdifferentwaysoveraperiodofyears.

Savings Money Certificate

Account(0.5%)

MarketFund(2%)

ofDeposit(5%)

Initialinvestment

$1,200 $1,200 $1,200

5years $1,230 $1,325 $1,53210years $1,261 $1,463 $1,95515years $1,293 $1,615 $2,49520years $1,326 $1,783 $3,18425years $1,359 $1,969 $4,06430years $1,394 $2,174 $5,18635years $1,429 $2,400 $6,619

35years $1,429 $2,400 $6,61940years $1,465 $2,650 $8,448*Basedonthestockmarket’shistoricalreturn

Remember,that’s$1,200youdidnothingelsewith.Youdidn’taddanymoneyovertheyears,anditgrewallonitsownto$37,691over40years.

(Thistablebringsupanothergoodpoint—

investinginstocksoverthelongtermwillbringyouamuchbetterreturnthanothervehicleslikesavingsaccountsormoneymarketfunds.Giventhatyou’rereadingabookaboutinvestinginthestockmarket,thisprobablyisn’tnewstoyou,butit’sworthpointingoutnonetheless.)

Nowlet’slookatanotherscenariothatdemonstratesthe

powerofcompoundinterest.Let’ssayyoustartwith$1,200inyourfirstyearofsavingandtheneachandeveryyear,youadd$1,200toyouroriginalstash.Wheredoyouendupnow?

SavingsAccount(0.5%)

MoneyMarketFund(2%)

CertificateofDeposit

Initial $1,200 $1,200 $1,200

Investment5years $6,091 $6,370 $6,962

10years $12,335$13,402 $15,848

15years$

18,737$

21,167$27,189

20years$

25,301$29,740 $41,663

25years $32,030$39,205 $60,136

30years $38,930$49,655 $83,713

35years $46,003$

61,193$113,804

40years $53,256$73,932 $152,208

*Basedonthestockmarket’shistoricalreturn

Wooooo,nowthat’smorelikeit!Andtoimproveuponthatcool$441,950,youcould

sockawaymorethan$1,200ayearoverthatperiod.Morethandoubleittostartingwith$2,800ayearandadding$2,800ayearandyou’relookingatamillionbucksafter40years.

Onceyoucometoappreciatethefullpowerofcompoundinterest,you’llseewhyit’ssmarttobeinvestedoverthelonghaul.Youneedtimetomakecompound

interestreallyworkforyou.Thepowerithastobuildandbuildandbuildbecomesmagnifiedonlywithtime.

Keytakeaway:Takeadvantageofthefullpowerofcompoundinterestbygivingyourinvestmentstimetogrow.

SAVETOGROW.

Inordertohavemoneytoinvestinstocks,andthusbeginbenefitingfromthejoysofcompoundinginterest,you’vegottosavesomeup.Andifyou’recarryingaroundcreditcarddebt,likesomanyAmericans(atlastchecktheaveragecreditcarddebtperpersonwasnearly$5,000),you’regoingtoneedtoaddressthatlittleissuebeforeyoustartinvesting.Yes,it

canhurt,becauseweknowyou’reitchingtobecometomorrow’sBuffett,butyouneedtogetyourfinancialhouseinorderfirst.

Thereasonwhyisthis:Theinterestrateonyourcreditcarddebtisalmostcertainlyhigherthanthereturnyoucouldearninthestockmarket.Youcouldverywellbepaying17percentinterestonyourcreditcard

debtwhileyou’retryingtoearn9percentinthestockmarket,forinstance.Thatmakesnosense.(Note:Considerinvestinginoneofthosecreditcardcompanies,becausethosefolksarerakingitin!)Andbecausejusttokeepyourdebtatbayyou’repayingoutmoreininteresteachmonththanyou’dbemakinginthemarket,you’restagnatingorevenfalling

behindoverall.Thesoundestcourseof

actionhereistocomeupwithaplantopaymorethantheminimumbalanceonyourdebteachandeverymonthuntilyougetridofthatsucker.Then,andonlythen,shouldyouconsiderinvestinginthemarket.Heck,evenifyou’renotquitereadytoinvestonyourown,payingoffyourcreditcarddebtis

stillaworthyendeavor.Thatinterestwilleatyoualive,makingthethingsyoupurchased(didyoureallyneedthatsecondpairofUggs?didyouevenneedthatfirstpair?)costwaymorethantheyshouldhave.

RememberwhatwelearnedaboutBuffett—he’snotafanofdebt.Listentohim.Heknowswhathe’stalkingabout.Out-of-hand

debtcansaddleyourprosperousfinancialfuture,makingitsomuchharderthanithastobe.

Onefinalwordonsavings—onceyou’vegotyourdebtsituationallsquaredaway(yay,you!),setsomemoneyasideinasafeplaceasan“emergencyfund.”Stuff,astheysay,happens,andyouwanttobereadyforitwhenitdoes.Broken-downcars,

homerepairs,last-minuteflightandticketstoseeU2inDublin(ahem)...allthingsthatareunanticipatedandcanbepricey.Sosavesomemoneyandkeepithandy,justincase.

Keytakeaway:There’ssometruthtothatoldsaw,“Ittakesmoneytomakemoney.”Thingis,youneedtomakesureyourmoneyisn’tbeingheldhostageby

creditcardinterestratesbeforeyoucanputittoworkforyou.

INVESTNOW?

OK,soyou’veclearedoutanycreditcarddebt,savedenoughforanemergencyfund(oh,Bono),andhavecometolove,appreciate,andrespectyournewbestfriend,

compoundinterest.You’reready,youunderstandyou’rebuyingapieceofanactualbusiness,andyouareinthisthingforthelonghaul.

Orareyou?Askyourselfhowquickly

you’regoingtoneedaccesstothemoneyyouhavesavedupandwanttoinvest.Lookingtobuyahouseintwoyearsandneedthiscashforadownpayment?Don’t

investitinthestockmarket,then.KidgoingofftogetanIvyLeagueeducation(orevenajunior-college-in-the-next-town-overeducation)nextfall?Don’tinvest.TryingtobuytheRVofyourdreamsinafewyears?Don’tinvest.

Sorrytobesonegative,butthisone’simportant—onlyinvestmoneyinthestockmarketwhenyouwon’t

needitforatleastfiveyearsormore.RememberthenatureofBenGraham’sfabledMr.Marketcharacter?Hecanbedepressedforyears,thenhappyforacoupleofmonths,thensadagain.He’sallovertheplace,thisguy.Youdonotwantanymoneyyouneedintheshorttermtobeathismercy.Don’tdoit.

Overtime,thestock

marketiswhereit’sat,butthekeyhereisthatyouhavetobecommittedtolettingyourmoneybeyankedaboutbyMr.Marketintheshortterm.Ifyouneedthatmoneysoon,stickitinasavingsaccountorotherlessriskyvehiclesomewhere,likeacertificateofdepositormoneymarketfund.

Takingthelongview,Mr.Marketlookslesscrazy.The

bumpsandcurvesandcryingfits(hecanbesoannoyingwhenhe’slikethat)allsmoothout,butittakestime.Forlongperiods,thestockmarketreallyisthebestplacetobeinvested.Youjusthavetobereadyandabletotakethebadalongwiththegood.

Keytakeaway:Don’teventhinkaboutinvestingmoneyinthemarketthatyouneedinlessthanfiveyears.

Seriously,don’teventhinkaboutit.

JUSTSTARTING

OUT?LISTENUP!

Herearesomesagewordsofadvice

forbeginninginvestors,frompeoplewho’vebeenthere:

“Don’tborrowmoney.Debtisthefour-letterwordthatcanundoalotofgoodwork.Buffetthassaidonlyinvestinwhat

youunderstand.Besurethecompanyhasdurablecompetitiveadvantagesandbesurethemanagementistop-notch.Thinkforyourself.”1

—AndrewKilpatrick,author

ofOfPermanentValue:TheStoryof

WarrenBuffett

“Don’twatchCNBC.That’ssortofflip,buttherealmessageis,‘Youhavetofindyourownstrategy.’Youcan’tcopyorreacttoother

people.It’saveryself-analyticalprocess.Focusonwhatyoudowellandwhatyourskillsetisanddon’tworryaboutwhateverybodyelseisdoing.”2—LisaRapuano,

founder,LaneFive

CapitalManagement

“Asabeginninginvestor,Iwouldsaystartwhereyouhavesomekindofcomfortzone,sometouchstonethatmakesyouthinkthis

makessensetoyou.Maybeitisbuyingsharesinthelocalbank,ifyouhavealwaysdoneyourbankingthereorbuyingtensharesofNikebecauseyoulikeNike’srunningshoes

andyouthinkitisagoodcompany.Gosomewherewhereyouhavesomerealtangiblethoughtaboutthecompanyandnot,‘So-and-sosaidtobuythisstockbecauseitisgoingtogo

upnextmonth.’”3

—CandaceKingWeir,founder,

ParadigmCapitalManagement

“TheysaythatsomanyguitarplayersreallyburnoutbecausetheytrytoemulateJimiHendrixandso

manydrummersburnoutbecausetheytrytoemulateNeilPeart,andIthinkthatthereissomethingtobesaidaboutnottryingtobesomeoneelse.Tobeingtruetoyourselfandnottryingto

emulateevensomeonewhoisasspectacularasWarrenBuffett.Hecandividecomplexfractionsinhishead.Heisreallyatalentwithoutcompare.Heiskindofanislandunto

himself.“Ithinka

lotofpeoplejustreallytrytobethenextBuffettinsteadoftryingtobethefirstwhoevertheyare.Investingishardenoughwithoutsaying,‘Well,my

instinctsaysX,butWarrenBuffettsaysY,soIamgoingtodoY.’Ithinkthatisaveryimportantthingforpeoplewhoarejuststartingout.

“Mysecondpieceofadvicewouldbeto

takeyourtime.Thereisnorush.Somanytimeswithbeginninginvestorstheygetawfullyexcitedaboutitandbeforetheyhavestudieditforsixmonths,theyown20differentthings

with95percentoftheirmoney,andthatisscary.Itisscarybecausetheymightnotthinkitisscary.Sotakeyourtime,beyourself.Thatsoundslikeanafter-schoolspecial,butitapplies.”4

—BillMann,portfoliomanager,

MotleyFoolIndependenceFund

andMotleyFoolGreatAmerica

Fund

GETYOURASSETSALLOCATED.

Allright,soyou’verid

yourselfofcreditcarddebt,youhaveyouremergencycashsafelystashed,andthemoneyyou’reinvestingismoneyyoudon’tneedaccesstoforfiveyearsormore.There’soneadditionaltime-basedfactoryouneedtoconsider,andthat’swhat’scalledyourtimehorizon.Thinkofitasthetimeyouhavestretchedoutbeforeyoutobeinvested.Howmuch

timeyouhaveaheadofyoudetermines,inpart,howmuchofyourportfolioshouldbeinstocks.

Let’ssayyou’refreshoutofcollegeandhaveyourfirstreal“grown-up”job.AsidefromgettingusedtobeingupearlyeverydayanddressingupbeyondsomepatternedPJpantsandan“ironic”SavedbytheBellT-shirt,youshouldalsotakethis

opportunitytoinvest.Youhaveyearsandyearsandyearsofearningpotentialaheadofyou,somakethemostofit!Youcanaffordtotakemoreriskthanolderinvestorscan,whichmeansyoushouldhaveallofyourportfolio(whichislikelystillhumbleatthispoint,butthat’scool—rememberthepowerofcompounding!)instocks.Youhavethetimeto

putupwiththemarket’supsanddowns,sostartinvestingearlytotakeadvantageofyouryouth.

Orhowaboutsomeoneinherlate30sorearly40s?She’sbeenworkingforagood15–20yearsorso,savingandinvestingalongtheway.Shemayhaveachildortwo,soshe’ssockingmoneyawayfortheirfuture,aswell.Shouldshestillbe

investedinstocks?Youbet.Sheprobablywouldn’twanttohaveherentireportfolioinriskyhigh-flyinggrowthstocks(suchasthoseinemergingindustrieslikebiotechnology)evenifsheworksinthefieldandcanfullyunderstandthem.Balancingthemoutwithsomesafer,biggercompaniesmakessense.Anditprobablyalsomakessenseheretostart

consideringassetclassesotherthanequitiestobetterbalanceherrisk.Butsheshouldabsolutelystillbeinstocks.

Someoneclosertoretirementage,oralreadyretired,shouldstartshiftingmoreoftheirassetstosafer,butslower-growing,assetslikebonds.You’regoingtostartneedingtocountonthatmoneysoonerthanourfresh-

out-of-collegekid,soyou’regoingtowantittoseekshelterfromMr.Market’smania.Still,wedon’tbelieveyoushouldeverbeallthewayoutofstocks.Atthispointstartlookingforestablisheddividend-payers.Thebenefitsaretwofold:They’relesslikelytobevolatile,andyou’llgetincomefromyourdividendsinretirement.

There’sonemoreimportantpointtothinkabouthere,andthatinvolvesmakingsureyoucansleepatnight.No,wearen’ttalkingaboutinstitutinganightlysnackofmilkandcookies(mmmm,peanutbutterandchocolatechip).Instead,youneedtoconsiderhowmuchriskyoucantolerate—howmuchyoucanstandtoseeyourstocksgodown.Be

honestabouthowmuchpsychologicaldistressyouwouldbeinifyourstocksdropped10percenttomorrow,or20percentoverthenextfewweeks,or40percentnextyear(astheyactuallydidin2008).

Aswediscussedearlier,allinvestinginvolvesrisk,andit’sinevitablethatyouwilllosemoney.Youneedtobeaspreparedforthatreality

aspossible.Now,ifyouareabletokeepthefreakoutstoaminimumandmoreimportantlydon’tsell,youwon’tlockinthoselosses,butyouhavetobeabletowithstandthepressure.

AuthorWilliamJ.Bernstein,inhisbookTheFourPillarsofInvesting,providesausefultableforfiguringouthowmuchofyourportfolioshouldbein

stocksbasedonhowmuchdownsideyoucouldtolerate:5

Icantoleratelosing____%ofmyportfoliointhecourseofearninghigher

returns

Recommended%ofportfolioinvestedinstocks

35% 80%30% 70%25% 60%

20% 50%15% 40%10% 30%5% 20%0% 10%

Soifyoucan’ttakelosing20percentormoreofyourmoney,thennomorethanhalfofyourportfolioshouldbemadeupofstocks.Using

thisasaguide,alongwithyourtimehorizon,willhelpyoufigureoutthebestwaytoallocateyourassets.

Keytakeaway:Knowinghowlongyou’vegottoinvest,andhowwellyourstomachandsleeppatternscanhandlerisk,willhelpyoufigureouthowmuchofyourportfoliotoinvestinstocks.

DIVERSIFY.YES,DIVERSIFY.

OntheissueofdiversificationwedifferfromBuffett’sopinion.WhereasBuffetthaslongbelievedthatyouneedtoownjustafewstocks,andownawholelotofeachofthem,webelieveinspreadingthingsoutabitmore.Inthisway,wetendtobealittlemorelikePeterLynchorBenGrahamthanBuffett.

We’renotsuggestingyourunoutandbuysharesof1,000companies(that’showmanyLynchleftbehindinhisMagellanFundoncehe’dretired!),oreven100.There’dbenowayyoucouldkeepupwithallthosecompanies.Butwedobelievethataportfolioofatleast15–20companiesreducestheriskthatsomethinghorriblewillhappenwithoneofthemthat

couldsinkyourentireportfolio.

Buffettbelievesthatbyconcentratingonjustafewstocks,versusbuyingmany,youactuallyreduceyourriskbecauseyouaremorelikelytobuystocksyouknowalotaboutandbelieveinmorefully.Westillwantyoutobuycompaniesyouunderstandandknowasmuchaspossibleabout.We

justbelievethatit’seasiertoprotectyourpreciouscapitalwhenyoudon’thaveitsittinginsofewplaces.Thingsgowrongallthetimewithcompanies,ortheeconomy,orsomespecificindustryorsegmentofthemarket.Havingyourmoneyspreadoutamongmanyinvestmentsmeansthatifoneofthemgoesbust,theothersshould(hopefully)beabletooffset

it.Oneeasywaytoget

instantdiversificationissomethingBuffettdoesstronglyadvocate,though,andthat’sinvestinginanindexfund.Anindexfundisamutualfundthatexactlyfollowsanindexofstocks.So,forexample,anindexfundthattrackstheS&P500willincludeall500ofthevariouscompaniesheldinthe

index.Whenyoubuysharesinanindexfund,it’slikeowningasliceofallthosecompanies,andtherefore,allthosevariousindustriesandbusinesstypesandsoforth.Yougetthebenefitofbeingexposedtomanycompaniesinoneeasytransaction.

Now,themanagersofanindexfundwillnottryto“beattheindex”or“beatthemarket.”Instead,theiraimis

tomatchit.Thatmaysoundlikeayawn,butconsiderthefactthataccordingtoMotleyFoolresearchonly42percentofactivelymanagedfundsbeattheS&P500throughthefifteenyearsendingJanuary2009.Notonlythat,butindexfundsaretypicallyverylowcost,whichmeansyousavemoneyversusinvestinginanactivelymanagedfund.Soyoumakemoreandsave

morewhengoingwithanindexfund.Forsomethingthatonlyseekstomatchthemarket’saveragereturn,that’snotbad.Averageneverlookedsogood,infact.

Webelieveyoushouldsticksomemoneyinanindexfund,inadditiontoinvestinginindividualstocks.Evenifit’sjustthroughyourcompany’sretirementplan(what?youaren’tinvestingin

your401[k]?what’swrongwithyou?),anindexfundistheperfectfoundationforyourentireinvestmentstrategy.Buffettthinksso,andsodowe.

Keytakeaway:Diversification,boththroughowning15–20individualstocksandthroughowningsharesofanindexfund,isaverygoodthing.Ithelpsreduceyourriskandprotect

yourportfolio.

WHAT,MESELL?

We’vejustspentmanywordsandmanyminutesofyourtimetellingyoutoneversell,basically.Andthat’sstillgreatadvice.Buffett’sfavoriteholdingperiodisforeverandsoisours.

Butthedirtylittletruthis

thatsometimesyousimplymust.Itcanbepainfultosaygoodbyetoacompanyyou’vetakenthetimetogettoknow,butsometimesyoujusthaveto.Andherearesomesituationswherethatmakessense.

First,youwill,fromtimetotime,comeacrossbetteropportunities.Yourgoalasaninvestoristohaveeachandeverydollarmaximizedand

investedinthebestpossibleplace.Ifthatmeanssellingacurrentholding,evenforaloss,tomakethathappen,youjusthavetodoit.Sometimesyouneedtofreeupmoneyforabetteropportunity,andsellingsomethingyoucurrentlyowntoraisethecashtodosoisyourbestoption.

EvenBuffetthashadtopartwithstockshelikestobe

abletoinvestinnewopportunities.Hedidthisin2009whenhesoldsharesofJohnson&JohnsonandProcter&GambletoraisemoneyforhishugeBurlingtonNorthernacquisition.6There’snoshameinthat.Yourresourcesarefinite,afterall,sodowhatyoumusttodeploythemefficiently.

Next,youmayneedto

considersellingthankstochangesatacompanyyou’veinvestedin.Unfortunately,there’sjustnowayaroundit:Businesseschange,andsometimessignificantly.Wecouldbetalkingaboutamajoracquisition,achangeinmanagement,ashiftinthecompetitivelandscape,orachangeinthecompany’sdirectionorfocus.Whenthishappens,incorporatethenew

informationandreevaluatetoseeifthereasonsyouboughtthecompanyinthefirstplacestillholdtrue.Rememberhowwetalkedearlieraboutwritingdownthereasonsyouboughtastockinthefirstplace?That’swherethisdocumentationwillcomeinhandyforyou.PulloutthatraggedyoldnotebookwithSpongeBobSquarePantsonthecovertohelpremind

yourselfwhyyouboughtthiscompany,andtoseeifthingshavechangeddramaticallyforit.

Whenyou’rethinkingaboutthecompany,considersellingif:

•Itsabilitytocrankoutprofitsisdamagedorclearlyfading.•Managementundergoessignificantchangesor

makesquestionabledecisions.•Anewcompetitivethreatemergesorcompetitorsperformbetterthanexpected.

Youshouldalsotakeintoaccountunfavorabledevelopmentsinacompany’sindustry.Hereit’simportanttodelineatebetweentemporaryandpermanent

changes.Inadownturn,thefinancialresultsofeventhebest-runcompaniesmaysuffer.What’simportantishowthesebusinessestakeadvantageoftheeffectsontheirindustrytoimprovetheircompetitiveposition.

Thethirdreasonyoumayconsidersellingastockisforvaluationreasons.Now,granted,we’reallforlong-termbuy-to-hold,but

sometimesMr.Marketjustshowsourstocktoomuchlove.(Ourstockisshyanddoesn’tlikeallthatattention!)Whenthathappens,considersellingifthestockpricehasrunuptoapointwhereitnolongerreflectstheunderlyingvalueofthebusiness.

Ourfourthreasonstartswithawhoops.Hey,everyonemakesmistakes,as

we’veseen—evenBuffett.Sometimes,you’lljustplainmisssomething.You’llgetsomethingwrong,you’llbetooexcitedabouttheheadyprospectsforthe“nextbigthing,”oryou’lljustgenerallyslipupinsomeotherway.Ithappens.Whenitdoes,youshouldseriouslyconsidersellingifitturnsoutyourrationaleforbuyingthestockwasflawed,ifyour

valuationwastoooptimistic,orifyouunderestimatedtherisks.

Thefinalreasontothinkaboutsellingastockiswhatit’sdoingtoyourabilitytosleepwellatnight.Wetalkedearlierabouthowmuchriskyou’recomfortabletakingon,andsometimesyoucanoverestimatethat.It’stoughtoputadollarvalueonyourpeaceofmind.Ifyouhavean

investmentwhosefatehasflippedthiswayandfloppedthatwaysuchthatitnowcausesyoutolosesleep,thatcouldbeagreatcuetomoveyourdollarselsewhere.Wesaveandinvesttoimproveourqualityoflife,afterall,nottodevelopulcers.Addinginsulttoinjury,stressingaboutastockmightcauseyoutolosefocusandmakerashdecisionselsewhereinyour

portfolio.Remember,there’snotrophyorprizefortakingonriskininvesting.Stickwithwhatyou’recomfywith.7

Keytakeaway:Sometimes,youjusthavetosellastockyou’vebought.That’sOK,solongasyou’redoingitfortherightreasons.

AWORLDOFMENAND

WOMEN,INVESTINGTOGETHER.

Finally,awordofadviceforallofusinvestors,menandwomenalike.Let’stakethischancetolearnfromoneanother.

Forwomen,youcanlearnfrommentotakeaction,ratherthanwaitingtostartinvesting.We’veallheardthestatistics,right?Womenoutlivemenby5–10years

andearnlessthanmendoduringtheirworkinglife,sotheyneedtobesavingmorefortheirretirement.Notonlyarewomenstartingoutfurtherbehind,butwe’vegottomakedowithless.Andourrisk-aversenaturecanmeanweoftendon’tinvestasaggressivelyasweneedto.Soitiscriticalthatmorewomentakecontroloftheirfinancialfuturesandstart

investingontheirown.Menaremorewillingtojumpinthanweare,andweneedtoremedythat.We’vejustseenthatwomenarewiredforinvestingsuccess,sotakeadvantageofthatfact!

Now,ofcourse,we’renotsayingyoushouldstartinvestingandbegintradinglikeamadwoman.Butyou’vegottomakethemovesnecessarytogetinthe

investinggame.Findingandopeningadiscountbrokerageaccountisn’tdifficult.Therearemanythatofferlowminimumbalancesandcheaptrades.YoucancheckoutFool.com’sBrokerCenterforcomparisontablesandlinkstothem.Onceyoufindoneyoulike,ittakesonlyminutesonlinetofillouttheforms.Honestly.You’venoexcusenottodoit.

Afteryouopenyouraccount,startbybuyingoneshareofastock.Yes,justone.Makeitsomethingyou’reinterestedin,acompanyyouknowwellandcanhavefunfollowing.Thinkaboutconsumerbrandsorretailcompanies,tostart.HandbagcompanyCoach,forinstance,hasbeenastellarperformer,eventhroughtherecentrecessionarytimes.Or

warehousestoregiantCostco,whichwediscussedearlier,isanoutstandingcompany.Therearetonsofexamplesallaroundyou.Findoneyoulike—anddoit.Takeaction.

Onceyoumakeyourmove,keepreadingeverythingyoucanaboutthecompany.Trackitsquarterlyresultsandbusinessperformance.Noticehowamazingitfeelstoowna

shareofabusiness.Itcan,andshould,befun!

Now,don’tstopwithone.Keepongoing.Buildyourportfolio.Followyourholdings.Remembertokeepthepropertemperament.Andsmile.Youareaninvestor.You’vetakenholdofyourfinancialfuture,andyoushouldbeproudofthat.

Now,mencanlearnsomethingfromwomen,too.

Aswe’vetalkedaboutthroughthisentirebook,themostimportantfactorinlong-terminvestingsuccessishavingtherighttemperament.Andmen,whiletheyarelikelytotakeaction,arethenlikelytotaketoomuchofit,andsabotagetheirverychances.Men,tradeless.Takelessrisk.Tonedownyouroverconfidence.It’saffectingyourdecision

makingandcouldpossiblyevenbecausingtroubleforthefinancialworldatlarge.Youmaynotbeabletoridyourselfoftestosterone,buttrytoovercomeitswin-at-any-costeffects.Themarketswingsandbingesofthepastwillhopefullybecomelesslikelyinthefuture,ifonlymencouldlearnalittlesomethingfromthefairersex.

Ladies,you’renotoffthe

hook,though.Youcan’tjustsitbackandrestonyourgoodtemperament’slaurels.You’vegottostartinvesting,andputtingyourexcellenttemperamentstoworkforyou.Afterall,whileWarrenBuffettmaynot,infact,beawoman,hedoesinvestlikeone,aswe’venowseen.You’vegotthenaturalinclinationtofollowinhisfootsteps.Andyoucanbuild

theskillstodoso.Don’twastethisopportunity.Oneday,perhapswe’llbereadingabookaboutyourinvestingprowessandyournamewillsitalongsidetheOracle’s.It’spossible,butnotuntilyoustartinvesting.Makethatdaytoday.

Appendices

AQuickGuideRecappingtheFemaleInvestor’sTemperamentandWhatBuffettCanTeachUs

InterviewwithValueInvestor

LisaO’DellRapuano,CFA,FounderofLaneFiveCapitalManagement

InterviewwithValueInvestorLaurenC.Templeton,FounderofLaurenTempletonCapitalManagement

InterviewwithValueInvestorsCandaceKingWeirandAmeliaWeirofParadigmCapitalManagement

InterviewwithValueInvestorBillMannoftheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmericaFund

FurtherReading:BooksforInvestorsofAllLevelsWhoWanttoLearnMore(CourtesyofMotleyFoolInsideValue)

AQuickGuideRecappingthe

FemaleInvestor’sTemperamentandWhatBuffettCan

TeachUs

Femaleinvestorstendto:

1.Tradelessthanmendo•Rememberyou’rebuyingapieceofanactualbusiness.

•Takethelongview.•Bepatient.

2.Exhibitlessoverconfidence:menthinktheyknowmorethantheydo,whilewomenaremorelikelytoknowwhattheydon’tknow•Buffett’s“sphereofunderstanding”maybedifferentfromyourown.

•Thinkaboutandlearnwhatyourowncircleof

competencecovers.•Sticktoit,nomatterwhat.

3.Shunriskmorethanmaleinvestorsdo•Insistonanappropriatemarginofsafety.

•Avoiddebtasmuchaspossible.

•Staywithinyourcircleofcompetence.

•Doyourhomework

beforeinvestingoverseas.

4.Belessoptimistic,andthereforemorerealistic,thantheirmalecounterparts•Belevelheadedaboutyourinvestmentsandthemarketatlarge.Learnnottobeexcitedbymarketswingstotheupsideordevastatedby

marketdrops.•You’reinchargeofMr.Market.Don’tlethimbossyouaround.

•QuotingBuffett,“Wheninvesting,pessimismisyourfriend,euphoriatheenemy.”

5.Putinmoretimeandeffortresearchingpossibleinvestments,consideringeveryangle

anddetail,aswellasconsideringalternatepointsofview•Read,read,read.•Don’tforgetaboutyourcircleofcompetence.

•Avoidconfirmationbias—seekoutinformationthatcontradictsyourconclusions,notjustinformationthatreinforcesthem.

6.Bemoreimmunetopeerpressureandtendtomakedecisionsthesamewayregardlessofwho’swatching•Bewillingtobecontrarian,asuncomfortableasitmaybe.

•TakeBuffett’swordstoheart:“Begreedywhenothersarefearful,andfearfulwhenothersare

greedy.”•LivebyyourownInnerScorecard.

7.Learnfromtheirmistakes•You’regoingtomakemistakes.Wealldo.Sodon’tbeatyourselfupwhenyouslipup.

•Assesswhathappened.Didyoumisssomething?Ordidmarketconditions

change?•Thinkaboutwhatyoucanreasonablydodifferentlyinthefuture.Ifyouboughtstockinacompanyyoudidn’ttrulyunderstand,forexample,vownottodothatagain.

8.Havelesstestosteronethanmendo,makingthemlesswillingtotake

extremerisks,whichinturncouldleadtolessextrememarketcycles.Whilenotatraitofthe

femaleinvestingtemperament,theoutcomeofthisinvestingstyleisimportant.Therefore,rememberthatfemaleinvestorsproduceresultsthataremoreconsistentandpersistent.Andinthehedge

fundworld,female-managedhedgefundsoutperformcomparablemale-managedhedgefunds,andtheydon’tsufferfrommarketdropsasseverely.

•Ignoreanyonewhotellsyouthrowingdartsatanewspaperisthesameasintelligentanalysis.

•Agooddefenseisjustasvaluableasagood

offense.•Sticktoasystemthat’slogicalandworks,andyou,too,couldbuildalengthyandimpressivetrackrecord.

AndourthreeBuffett-centricprinciples:

1.Valueandcultivateyourrelationshipswithpeople•Abusinessisonlyas

strongasthepeoplerunningit.

•Readuponthemanagementofcompaniesyouareconsideringinvestingin.Lookforsmart,open,loyal,fairexecutivesyoucanadmire.

•Don’tbeafraidtoputpeoplebeforeprofit;Buffettisn’t.

2.Learnfromthemasters,butbewillingtoquestionthem•Thelearningneverstops,soevenafteryouthinkyou’vefiguredoutthebestwaytoinvest,keepstudying.

•Justbecausesomeone’sanacknowledgedinvestmentguruormasterdoesn’tmeanthereisn’tabetterway.

•Youaren’tcommittingblasphemywhenyouquestionanybody,WarrenBuffettincluded.

3.Befairandoperateinanethicalmanner•Youcanbegoodandberich;onedoesn’tprecludetheother.

•It’spossibletofindcompanieswhere

employees,shareholders,andcustomersallwin,andthosecanmakeforwinninginvestments.

•Lookforcompaniesthatcommunicateinanopen,honestway.You,asanowner,deservetobetreatedthisway.

InterviewwithValueInvestorLisaO’Dell

Rapuano,CFA,FounderofLane

FiveCapitalManagement

LisaRapuanofoundedLaneFiveCapitalManagementinJanuary2007,afteryearsspentatthelegendaryvalueshopLeggMasonCapitalManagement.BasedoutofTowson,Maryland,herfirm’s

sevencorevaluesevokeatrueBuffett-liketemperamentandoutlook.Wediscusssomeofthosevalues,andmuchmore,intheinterviewthatfollows,whichIconductedwithLisaonSeptember10,2010.Ithasbeenpublishedastranscribed.

TellmealittlebitaboutLaneFiveCapitalManagementandwhatyou

andyourteamareworkingtoachievethere.

LaneFiveisaninvestmentpartnership.We’restructuredasahedgefundbutwedon’treallyhedgemuch.Wehavethecapabilitytoshortandwedon’treallyshortmuch.WhatI’vetriedtodoiscreateafirmthathasthefreedomtodotruelong-termvalueinvesting.Whilethatsounds

silly,becauseisn’tthatwhatwe’realltryingtodo,I’vebeenthroughanumberofiterationsandit’shardtocreatetheinstitutionalfreedomtodoittherightway.Andthepressuretomanagetoanindexortonotholdcashortotradearoundeventsortomanagemonth-to-monthreturnsortonothavetrackingerrorisendless.It’sreallyhardtobuilda

businesswithoutplayingthatgame.I’mattempting,then,tocreateafirmthatcancarveoutalittlebitoffreedomawayfromsomeoftheseinstitutionalconstraintssothatwecanpracticeourcraft.That’swhythestructureofourfirmisthewaythatitis.

Thereareacoupleofotheritems,suchas,IpersonallydecidedatsomepointinmylifethatIdidn’t

wanttomanage$25billionwhenIgrewupandthattheprocessofassetgatheringandalsoofjustmeetingtheneedsofthatmuchmoneyandinvestingdirectlywiththatmuchmoneywasmorethanIcouldhandle.So,LaneFiveisasmallfirm.Wehavethecapacitytobemanytimesthesizethatweare,butevenifweweremanytimesthesizethatweare,wewouldstillbe

asmallfirm.Sothisideaofbeingasmallpartnershipissortofdesignedsothatwecanbesuccessfulwhilestillstayingsmallandinvestingtherightwaytoinvest.

Howdidyouendupasavalueinvestor?Didyouexploreotherinvestmentstylesbefore“seeingthelight”?

Ididn’treallythinkaboutthedefinitionofwhatIamuntilmycareerwaswellunderway.Theguywhofirsthiredme,hedidn’tevenhiremetobearesearchanalyst.ItwasthislittlefirmcalledFranklinStreetPartnersinChapelHill[NorthCarolina]andtheguywasBobEubanks.Iwasthethirdemployee.Hisfirmwasastart-upandhehiredmetowritethebrochure.Ialso

builtthecomputersystem—itwasastart-up,soIdidwhateverneededtobedone.Hehadaninterestingstyle.Therewasavaluecomponenttoitbutitwasmuchmorestorydriven,heusedalotofcharts,hecaredalotaboutgrowth.Hewaslookingforstocksthatgoup,basically.Thatwasmyfirstexposuretoinvesting.Overtime,Istarteddoingresearchforhim.

WhenIleftthereandstartedworkingforBillMiller[atLeggMason],thatwas1993.So,in1993,Billwasnotfamous,notwell-knownyet.IcameinthereandIlearnedfromBillamorevaluation-centricanddrivenpartofthesamewayoflookingatthings.Let’sdifferentiatevaluationfromvalue—valuationwasacentralpartofthestrategyat

FranklinStreetthatIlearnedfromBob.Itwasn’tsomuch,“Isitavaluestock?”Itwasmore,“Where’sittrading,whatisthevaluation,andwhereshoulditbe?”whichis,infact,valueinvestingbutitdoesn’tnecessarilygoaboutitthewaythat,“Let’slookatwhatGrahamandDodddid.Let’slookatwhatBuffettdoes.Let’sstructurethisphilosophicallyfromthe

bottomup.”Itapproacheditalittlebitdifferently.

Thenyoufast-forwardtotheBillyears,whichisreallywhereIbecameamorematureinvestor.Weweretotallygroundedinvaluation,butIdidn’tevenreadBenGrahamuntil1997.Sowhat’sinterestingaboutitisthatIdon’thavethatbackgroundofsomanyothervalueinvestors.

OneoftheguysIjusthiredjustcamefromColumbiaandBuffettandGrahamareeverything.Everything.Thebasisoftheuniverse.Icometosomeofthesameconclusionsandpracticesbutwithoutthemoralgrounding,IguessisthewayIwouldsayit.Forme,it’snot“ThisisthewaythatBuffettdoesit.ThisisthewaythatGrahamdidit.

ThisisthewaythatI’mgoingtodoit,damnit!”

Valuationwasreally,reallyimportantandwasthedrivingfactorofwhatwedidatLeggMasonbutouroutcomesandwhatweendedupdoingwereverydifferentthanwhatotherpeoplewhocalledthemselvesvalueinvestorsweredoing.JustlikeIdon’tspendalotoftimethinkingaboutwhat

animalwe’rein—bull,bear,duck,whatever—Idon’tspendalotoftimethinkingabout“I’mavalueinvestor.”ThevaluationisallthatmattersandIlearnedthatfromcominginfromadifferentdirection.Itdoesn’tmatterwhatitdoes,whoitis,whorunsit.Allthatmattersis,isitmispriced?Andtheonlywaytofigureoutifit’smispricedistousevaluation.

So,Icameatitalittlebackwards.

ThemostappropriateBuffettquotethatIlearnedafterwardsisthatallinvestingisvalueinvesting,because,bydefinition,nothingisgoingtogoupmorethanthemarketifit’snotmispricedattheinitialposition.

WarrenBuffett’sbeenquotedassaying

temperament—notintellect—isthemostimportantqualityaninvestorcanhave.Howdoyouthinkyourowntemperamenthasplayedintoyoursuccessasaninvestor?

Ithinkthere’sacouplethings.LetmestartbytalkingabouttheportfolioattributesI’vechosen.Youchoosetomanagemoneythewaythat

youthinkyoucanmakeadifference,thatfitsyourtemperamentandyourstyle.Iamverygoodatignoringnoise,theday-to-daystuffjustisn’timportant,andIwillgomonthswithouttrading.I’mnotsurehowpeoplewhotradeeverydayandarelookingatshort-termtrendsandoptimizingtradingstrategiesandthingslikethatsleepatnight.Forme,it’s

patience,it’slowactivity,it’sthoughtful,it’smovingmoredeliberately.Idon’tknowwhyIhavebeenparticularlygoodatdoingthat,butIdoknowthatit’sanadvantagethatIhaveoveralotofpeople.Ijustdon’tfeeltheneedto“dosomething”alotoftimes.

Now,Idon’tknowifthat’salearnedbehaviororaninherentbehavior.Ithink

it’sprobablyalittlebitofboth,becauseI’mnotthemellowestpersonintheworldwhojustsitsaroundand,youknow,listenstotheGratefulDead.I’mactuallyextraordinarilycompetitiveandI’malsoasprinter—notevenalong-distancerunner,whichwouldseemtomakemoresense.Butthatrequiresagreatdealofpatienceanddisciplineandwork,even

thoughyourraceisonlytwenty-threeorsometimestwenty-foursecondslong.SoIthinkthatit’ssimplythattome,thatisthebestwaytomanageyourownemotions,thatisthebestwaytoloweryournumberofmistakes,anditsimplymakessensetome.SoIcan’tsaythatthelow-activity,long-term-thinkingthingisapersonalitytraitbutIdefinitelyadopteditbecause

Ithinkit’stheonethatworks.Anotherthing,andIthink

thisisprobablymoretemperamentthanlearnedbehavior,IcarealotaboutfiguringoutsomethingandverylittleaboutwhatotherpeoplethinkandsoI’vealwaysbeenalittlebitunconventional.Sothatpieceofmypersonalityandthatpieceofmytemperamentissuitedtothelong-termvalue

investingway.OnceIfiguresomethingoutandIputsomethingtogetherandIhavealotofconfidenceIcanignorewhateveryoneelsehastosay—Idon’tignoreevidence—butIcanignorethenoiseandtheopinionsofpeopleandcontinuetobuildmyconfidence.That’snothardforme.That’ssomethingIfindtobeveryeasy.Thatcouldcomefrom

trainingasahistorymajor,lookingforlong-termtrendsandthreadsoftruth.

Buffetttalksaboutjudginghimselfstrictlybyaninnerscorecard,notanouter,meaninghedoesn’tcarewhatanyoneelsethinks.Isn’tithardattimestooperatethatway,though?

Whenyou’renotdoingwell,

intheshorterterm,whichcanhappentoanyone,sometimesit’sbecauseyou’remakingmistakes,sometimesit’sbecauseyou’renotapplyingyourprocesscorrectly,butsometimesyouareandyoustillaren’tdoingwell.Youhavetocombinethesetwothingsofbeingadaptive,open-minded,andbeingalearningmachinewithalsonotchangingyourstripesor

chasingthelatesttrend.It’sareallyfineline,areallydifficultlinetowalk.

There’salotofsuccessfulinvestorsofallstripesbutmyparticularstrengthandmyparticularadoptionoflong-termvalueisbecausetherearekindsofthingswhereIcanseeadifferentfuturethanotherpeoplesee.Icanhaveconfidenceinsomethingwherethemarketis

discountingcompleteuncertainty.There’sanevidence-basedpartofitandananalytical-basedpartofitbutthere’salsoatimehorizonpartofitwhereIwanttolookthroughandseehowthisisgoingtoshakeout.I’mgoingtolookathowlotsofotherthingshavehappenedinthepastandusemyabilitytolookfarandwidetodothatandIthink

thatpartcomesfromhavingthisdrivetounderstandthings,whetherthat’sfromreadinghistoryorunderstandingwhyscienceworks—Idon’tcare,whatevertoolIhavetousetofigureitout,Iwilluseit.Havingthissortofmultidisciplinaryviewpointabouttheworldhelpswiththat.

Whichinvestorshaveyouadmiredandlearnedfrom?Whatlessonshavetheytaughtyou?

IadmireandlearnfromanyonewhohasareallygoodrecordandItrytofigureouthowtheygotthere.I’llreadaninterviewwithanyoneandaskmyselfwhatdoIhaveincommonwiththispersonandwhatdoInot,andwhynotdo

itthatway?IusetheseasopportunitiestofigureouthowIcoulddosomethingbetterbutthereareobviouslysomepeopleIbondwithmorethanothers.It’sinteresting;they’renotnecessarilytheoneswhodoitjustlikeIdo.

Obviously,BillMillerismyhero.Hegavemethebuildingblockstobuildmycareer,andheandIwork

togethervery,verywell.AndwecreatedaprocesswhenIwasatLeggMasonfrom1993to2003thatIthinkwasexceptional.Ilearnedfromhimandhelearnedfromme,Ihope,alittlebit.Wehadaverywonderfultime.

BillistheonlyoneofthesepeopleIactuallyknow.AlltheseothersIdon’tknow.IreadwhattheydoandIlookandsay,“Partsofwhatthey

dohashelpedmedowhatIdobetter.”TheweirdestoneoftheseisBruceBerkowitz.Whenhetalks,it’slikeit’scomingoutofmymouthandyetweneverownthesamestocks,either.It’sjustwhenhetalksphilosophicallyIreallyfeelacamaraderiewithhim.

Ihavelearnedalotfromreadingtheonesthateverybodyreads,theSeth

KlarmansandtheBenGrahamsandtheWarrenBuffetts.AndItrytotakewhatthey’resayingandlearnfromthem,butwhat’sdifferentaboutmeisthatIdon’ttrytobetheseguys.Idon’ttakeeverythingtheysayasgospel.Becauseit’swhatsuitsthemandthat’swhythey’regood.Theyfoundwhatthey’regoodat.

Idon’tthinkyoucan

adoptsomeoneelse’sstyle.Idon’thaveaninvestingidol,someoneI’mtryingtobejustlike.Itrytolearnfromeachofthem,andIthinkhowamIdifferentfromthispersonandhowamIdifferentfromthisnextperson?

EvenifyoutalktoBillMiller,whoI’mstillveryclosewith,hewilltellyouallthethingsthatarewrongwithme,oneofwhichisthatI

havetoohighofanevidentiarythreshold,meaningIhavetodoalotmoreanalyticalgroundworkbeforeI’mcomfortablewithsomething.Ineedahigherdegreeofcertaintythanhedoes.ButifyoulookatmydegreeofcertaintythatIneed,it’sprobablymuch,muchlowerthanwhatBuffettneeds.OrwhatSethKlarmanneeds.

SoIreadthemallandIthinkthey’reallamazing.Someofmyfavoritepeopletoreadarealsotheoneswhoareoutoffavor.Itrytofindout,“Howdotheyreactintimesofadversity?”Alloftheseguyswhohaverecordsthatarereallygood,andbetterthanminerightnow,probably—theyallhavesomethingtoteachme.Itrytofigureoutwhichofthe

thingsthatthey’redoingareapplicabletomyskillset,mytemperament,myfirm,andmyteam.Andifitworks,Iwilltrytoadapttoincorporateit.

Ithinkthisisanimportantpoint,becauseaswetalkaboutinthebook,BuffettstartedoutaspureBenGraham,buthewouldbecomemorequalitative

andmorePhilFisher–likeovertheyears,thankslargelytoCharlieMunger’sinfluence.It’simportantforpeopletorealizethattheycanandshouldlearnfromtheestablishedmasters,buttheyshouldneverbeafraidtodothingstheirownway.

Right.Youcomefromadifferentsetofexperiences,youcomefromadifferent

generation,youhaveadifferenteducation,youhaveadifferentbrain,youhavedifferentparents.SowhatdrivesmecrazyispureBuffettworship.Sure,Buffett’sgreat,hehasagreatrecord,buthe’snotgoingtotellyoueverythingthat’sgoingoninhishead.Youcan’treplicateit,youcan’tcopycat.Thisbusinessiswaytoocompetitivetotrytobe

whatsomebodyelseisbeing.AsIsaidattheValueInvestingCongressoneyear,“IamnotWarrenBuffettandneitherareyou.”Sojustbecarefulnottotrytobesomeoneelse.Figureoutyourownplaceandjustbeyourself.

Inthelistofcorevaluesforyourfirm,LaneFiveCapitalManagement,you

list“Workwithbrilliantpeople.”WeknowBuffettalsovalueshisrelationships,whetherhe’sbuyinganentirecompanyandleavingthecurrentmanagementintact,orbuyingapieceofapubliccompanywithamanagementteamheadmires.Twoquestionsaboutthis,then—howdoyoudefine“brilliant”andhowdoyousuggestthe

averageinvestortrytoassessthemanagementofcompaniesheorshe’sinvestingin?

Therearethreekindsofdifferentpeopleyouworkwithinourbusiness.There’syourteam,thepeoplewhoworkforyouorworkwithyou.Thereareyourclients.Andthentherearethecompaniesyou’reinvestedin

andthepeoplethere.Wetrytoapplythatcorevaluetoallthree.

Idefine“brilliantpeople”inthefollowingway:Forthepeoplewhoworkformeorwithme,theotherpartnersinthefirm—theirbrilliancedoesn’thavetobethesameasmybrilliance.Thereisapureintellectualfirepowerissuethere.Themostimportantpieceiscuriosity

andhavingabroadrangeofinterests,andhavingafireinthebellytofigurestuffout,whetherit’scognitivepsychology,orthebestmechanismforwhereyouputyourhandwhenyoubringthefreethrowup,oreconomicsorpoliticalscienceorwhatever.Athrivingcuriosityisthesinglemostimportantpieceforme,becauseevenifthepersonhasafewpoints’

lowerIQ,ifthey’vegotthatthrivingcuriosity,they’llmakeupforit.Ilikevoraciousreaders.Ilikepeoplewhohavedonelotsofinterestingthings.

Backtotheunconventionalthing,Ireallydon’tlikepeoplewhohavehadacareerthatisjustwhattheytellyoutodo—IvyLeague,GoldmanSachsfortwoyears,businessschool,

trytogetajobatahedgefund.Thosepeopledon’tinterestme.Sothat’showIdefinebrilliance.AndthereasonthisisoneofourcorevaluesisthatIhaveastylethat’snotforeveryone,asaclient,either.Sowhathappensisthatthere’saself-selectionmechanismforthepeoplewhoaremylimitedpartners—mypartnersinmyfundversusmypartnersin

myfirm.TheytendtobepeoplewhoIenjoytalkingto,also.Ican’ttellyouhowamazingthatistohavehappen.

Andthenthere’sthemanagementpiece.Ibendtherulesalittlebitherebecausebrilliancehaslotsofdifferentwaysofmanifestingitself.Infact,I’vefoundthatjustbecausesomebody’sareallysmartguyorgirl,thatdoesn’t

meanthey’reagreatmanagerofacompany.SowhatI’massessingonthatsideisalmostalwaysjustwhethertheyareverygoodatcapitalallocation.That’snotjustwhetherornotyoubuybackstockorwhatkindofdebtyouuse.That’salsowhatR&Dyoufund,howyouchoosetogrow,doyouunderstandearningexcessreturnsinyourbusiness,and

doyouunderstandwhenit’sappropriatenottoinvest.SoIjudgethequalityofmanagementalmostexclusivelyonwhethertheygetthatcapitalallocationpieceofthepie.

Itrytojudgethatfirstwithoutmeetingthem,becauseasmoothpersoncanreallymessyouupalittlebit.IfI’minvestinginacompanythat’snotnecessarilya

turnaround,that’smorejustanongoingbusiness,whereIcanlookattherecordandmakeareasonableassessmentofit,Itrytojudgeitmathematically.Whathavetheydone?Havetheyboughtbackstockwhenitmadesense?Havetheyleveredupwhenitmadesense?Havetheiracquisitionsbeenvalue-added?Havetheyimprovedreturnsoncapital?Arethey

goodatthat?That’sasignificantmeasureastowhetherthat’sgoodmanagementornot.

Thenthere’stheoneswhereyouhavetoask,“Aretheygoingtogetit?”That’samuchmoredifficultassessmenttomake.Thenyou’rerelyingonhumanjudgment,whichistheleastreliableofthetoolsthatwehave.Ialsohavealotof

stupidrulesaboutcertaintypesofmanagersIjustdon’twantanythingtodowith.They’rethingslike,“Whatistheirbehaviorlike?Aretheyreallypromotional?Dotheyseemtobetoogearedupongrowth?Aretheytooslickaroundtheedges?Aretheytoosalesyonthewholething?”Youknow,basicquestionsaboutintegrity.Iprefersortofboringpeople

whoarelow-key,down-to-earth,andinterestedindoingtherightthingratherthanconvincingmethatthey’rethegreatestthingsinceslicedbread.

Foranaverageinvestor,theycandothemathematicalthingthatIdo,whichislookattheirhistoryofcapitalallocation.That’ssomethingthatanyonecando,becauseyoujustneedthe10-Kstodo

that.Buttheobjectivejudgmentofamanagementteamismuchtougher.Youcan’treallytellfromseeingaguyonCNBCifyoucantrusthimornot.

Youcanlearnalotfromtheconferencecalls,though.Youcanlearnalotfromhowtheyanswerthequestions,whethertheyanswerthemstraightforwardly,andhowtheyframetheiranswers,

whetherthey’reaggressiveorconciliatory.Butyouarealittlebitoutofluck,asanindividual,nothavingaccessnecessarilytothem.Andfrankly,evenasasmallfirm,Idon’talwayshaveaccesstoCEOsandCFOs.IusuallyhavetowinmywayintotheirheartsbyprovingthatI’vedonealltheworkandthatoftentakesalongperiodoftime.EventuallyIgetin.

Sometimesittakesalotofphonecalls,though,askingquestionsthattheIRpersoncan’tanswertodemonstratemyinterestandmyintegrityandtheworkthatwe’vedonebeforefinallygettingtheCEOortheCFOtopayattention.

Everyonceinawhile,youcomeacrossamanagementteamthatjustgetsit.Forexample,whenEd

BreentookoverTycoin2002thecompanyatthattimewasadisaster.Hewouldjustgetonthecall,andthisisaverycomplicatedcompany,andhewouldtalkaboutitintermsthatweresimplebutnotsimplistic.Henarroweditdowntothekeyelements.You’dgetoffhisconferencecallsandthink,“Youknow,it’sjustnotthathard.Whydoothercompanieshaveto

makeitsohard?”You’dwonder,“Howcomethisguygetsit?”andthenyou’dlistentoanothercall,wheremaybetheylistentoWallStreettoomuch,maybetheydon’tunderstandtheirconstituents,theythinktheyhavetochangetheirstory.You’djustcomeoffandthink,“Hedoesn’tgetit.Hedoesn’tgethowtodrivethisparticularbusinessandhowto

communicateittoWallStreetinasimplemanner.Orhe’sjusttryingtotelluswhatwewanttohear.”

Ithinkanybodycanlistentoconferencecallsanddetermine,“DoesthispersonsoundliketheyreallyunderstandtheirbusinessandifIworkedforhimwouldIdowhathesays?WouldIbeexcitedandonboard?”There’sjustayesorno.Does

themanagementgetitordoesthemanagementnotgetit?Believeitornot,therearemorecompanieswherethemanagementdoesn’tgetitthantherearewheretheydo.

Anotherofyourfirm’scorevaluesis“Learnandreadwidely.”ThisisalsosomethingthatBuffett’slegendaryfor,asishispartnerCharlieMunger.

Whydoyouthinkthisisimportant?

Itmattersbecausetheworldiscomplexandtheworldisadaptive.Idon’tknowwhythisis,Idon’thaveatheologicalorepistemologicalfoundationforthis,butithascometomyattentiontimeandtimeagainthattherearepatternsintheworldthatrepeatacross

seeminglyunrelatedsystems.Sotherearethingsaboutthemarketsthatappeartometobeverysimilartothewaythatbiologicalsystemswork.Orthereareanalogies,therearerecurringpatternsthataresimilar,andwesureknowalotmoreaboutbiologicalsystemsthanwedoaboutthemarkets,andsoifIcanstudybiologicalsystemsandtheycangivemeanylittleinsight

intohowthisworks,that’shelpful.Andit’sreallyindirect,soIdon’twanttomakeitsoundlike,“Well,IstudynervesystemsandIfigureoutthatthisworksthatway.”It’sreallyveryindirectandveryamorphous.

There’salsotheelementofhistoricalpatterns,notjustsystems,butevents,suchasthewaythatwarshappen,thewaythatculturesevolve,the

waythatdemographicshaveaffectedcountries,thewaythatnaturaleventshaveaffectedcountries—again,amorphous,indirect,buttheyprovidegreaterconnectionsinyourbrain,yourbrainbecomesmorerobust,andthepatternrecognitionmachinebecomesbetter.Youmakeconnectionsthatotherpeoplemightnotmake.That’sataverybroadlevel.

Atamorepracticallevel,acuriouspersonismorelikelytouncoverthepieceofinformationthatwillbetheevidenceyouneedtohavehigherconfidencethanthenextguythatisnotcuriousenoughtoberesourceful.Youknow,someonewho’sbasicallylike,“Igetthis.Iunderstandhowthisworks.Idon’tneedtothinkaboutitallthatmuch.”Whereas

someonelikeme,orthepeoplewhoworkforme,arealwaysasking,“HowelsecanIthinkofthat?WhatamImissing?Whatelseishappening?WhatelsecouldIdo?HowelsecouldIturnthisonitshead?WhatelsecouldIresearchtofigureoutifthisisrightornot?”

Now,youhavetobecarefulwiththat,becauseyoucouldworkononething12

hoursadayfortherestofyourlifeandstillnothave100percentinformation.Butit’sthedrivetobecurious,andthepersonwhonaturallywantstolearnandreadwidelyismorelikelytobeabetteranalyst.Then,secondly,theactofreadingwidelyandbroadlyprovidesyouwithamorerobustsetofpatternsandconnectionsandnetworksthat,atthemargin,I

thinkhelpyouunderstandhowtheworldworks.

Whatdoyoureadeveryday?

Well,everydayislessimportantthanovertime,buteverydayyoudohavetodoyourdefensivereading.Youhavetokeepupwithwhat’sgoingon,andreadthebusinessnews,whichis

annoying,butyouhaveto.Thatismoredefensivethanoffensive.

There’sacoupleofbigcategoriesofthings,solet’slookatmykindofreadingschedule.Numberone,IalwayskeeproomforreadingnovelsandIknowthatmightsoundlikeagirlythingtosay.I’lllettheboysallreadhistoryandbiographies—IknowthatbecauseIjust

interviewedfivehundredpeople,andeveryboy,whenyouaskthemwhattheyliketoread,theyallsay,“biographies.”Ikeeproomfornovels,though,becauseIthinknovelsareinsightsintohumanpsychologyandIenjoythemandtheyhelpyougetoffyour10-Ksand10-Qs.I’mverywaryofpeoplewhosayIdon’thavetimetoreadnovelsbecauseIhaveso

many10-Kstoread.Outsideofthat,thereare

threecategories.Firstisscience.IbelongtotheSantaFeInstitute,whichissomethingthatBill[Miller]introducedmeto.It’sforthestudyofcomplexadaptivesystemsandIreally,reallyloveit.Idon’tunderstand80percentofit,butIloveit.Andit’s,again,sortofindirectandamorphous—you

letitwashoveryouandoccasionallysomethingcomesoutwhereyougo,“Ohmygosh,Iunderstandnowhowthisworks.”SoIenjoyreadingaboutscience.It’llvary—I’llgothroughanevolutionperiod,I’llgothroughapsychologyperiod,Iwentthroughabigbrainperiodlastyear.Climatestuffisreallyfascinatingtome,too.

Anothercategoryisstrategicorcompetitive—thesearemorebusinessbooks,buttheymightnotbe100percentaboutbusiness.Theymightbeaboutdifferentcompetitivewaysoflookingattheworld.Itmightberereading[Michael]Porter’sCompetitiveStrategy.Itmightbereadinganybooksabouthowindustriesdevelopandhowtothinkabout

competitivepositioning.That’salsoreadingMichaelEisner’sbook,orreadingDisneyWar,orreadingGoodtoGreat,orRogerLowenstein’sbooks—thosesortsofbooks,whereyoudon’talwayshavetoreadthewholething,buttheycangiveyouinsightintohowabusinessworksandthey’rereallyhelpful.Then,I’lldoalotofbehavioralfinancestuff

—thatmightnotbebooksasmuchaspapers,goingbackandreviewingsomeofthestuffthatAndrewLoisdoingorthosekindsofthings.

Whataresomeofyourfavoritebooksoninvestingorbusiness?

LetmetellyouthebooksthatIreread.TheonesthatIreadoverandoveragainarePeter

Bernstein’sCapitalIdeas,thefirstsixorsevenchaptersofRobertRubin’suncertaintybook(youcanstoponceyougettothepartaboutLatinAmerica—I’mtalkingaboutwherehelaysoutprobabilisticthinkinginthebeginning),theJesseLivermorebook,EducationofaSpeculator,Moneyball.I’vereadamillionotherbooks,butIdon’tgoback

andrereadSecurityAnalysis.IactuallywouldgobackandreadTheIntelligentInvestormorethanIwouldSecurityAnalysis.ThosearetheonesIreread.TheonesIremindmyself,maybenoteveryyear,butmaybeeveryotheryearorso,justtoremindyourselfwhyyoudowhatyoudo.

What’sbeenyourbiggest

mistakeasaninvestor?Whatdidyoulearnfromit?

IhavemadesomanymistakesIhaveahardtimepickingone.ButIcantellyouthattheyare,essentially,allthesamemistake.First,therearetwothingsyouneedtodifferentiateinourbusiness:There’sbeingwrong,andthere’smakingmistakes.Theyarenotthe

samething.Ireallyfocusonprocessversusoutcome.

Beingwrongiswhenyouappliedtheprocesscorrectly,andtheoutcomewasbad.Youlookbackandyousay,“OK,well,basedontheinformationIhadatthetime,wouldIhavemadethesamedecision?”Ifyoudeterminethatyouappliedyourprocesscorrectlyandthatyoudidthebestyoucouldandyoujust

madethewrongdecisionwiththerightprocess,fine.Acceptitandmoveon.

Theonesthatarebadoutcomesbecauseofbadprocess—orsometimesyoucanevenhavegoodoutcomeswithbadprocess,butwe’llfocusonthebadoutcomesandbadprocess—thosearetheonesyouhavetoreallyworryabout.

Here’sarecentexample

ofthat.I’vemadeothers,butI’llgiveyouarecentone.Ilostalotofmoneyin2008inalotofthings,buttheonethatdrivesmebananaswasinvestingintheRenaultstub—youknow,thecar.Ouranalysiswasactuallygood.It’snotliketherewasanythingaboutRenaultthatwedidn’tknoworunderstand,thatwedidn’tget.Thiswasatradewhere

youbuyRenaultandthenyoushortVolvoandNissanagainstitbecausetheyowned44percentofNissanand20percentofVolvoTruck,soyoucouldbasicallycreateRenault’scorebusinessforfree.Sothen2008happened,theeconomytankedandobviouslycarcompanieswoulddoparticularlybadlyatthatparticularmomentsoweendeduplosingalotof

moneybecausenotonlydiditgodown,butRenaultwentdownmorethanNissanandVolvo.Soastubthatwastradingforzerowentintomassivenegativetrading.Sofine,it’sanunderstandablemistake—howcouldyouhaveknowntheeconomywasgoingtofallapart?I’mnotbeatingmyselfupoverthatpart.

ThetwothingsIdidin

thatmistakethatabsolutelydrivemetodistractionare,No.1,Inormallysavemyselffrommassiveerrorslikebankruptcyandthingslikethatbyavoidingbusinesseslikecarbusinesses.Iwilldoturnarounds,Iwilldomessythings,butIdon’tusuallydothat.AsIlookbackonit,Ithinkprobablybecausethingsthatappearedcheaptomeatthatpointwerefewandfar

between,atthebeginningof’08,Ioverdiditonthisone.Iputwaytoomuchofmyportfolioinitbecauseitwassocheapanditwassoeasilyexplainable.Soitwasputtingtoomuchinit,inabusinessthatwasn’tagoodbusiness,sowhenyouarewrongyoudon’tgetsavedbythegoodnessofthebusiness.

Andhere’stheadditionallesson—probablytheone

that’sgoingtobetheeasiestnevertorepeatagain—Igotsomuchpositivefeedbackonthisone.Everyonesaiditwasbrilliant.IpresenteditattheValueInvestingCongressandthewholeworldwaslike,“OhmyGod,that’sthebestidea.”I’dtalkaboutitinclientmeetingsandthey’dbelike,“Ohit’ssogreat.It’ssowonderful.You’regoingtomakealotofmoneyonthis.”

Itwastooeasybyhalf.Lettingyourconfidence

beaffectedbyotherpeople’sreactiontoitshouldhavebeenagiantredflagbecausenormallywhenIinvestinsomething,especiallyatthebeginning,notafteritstartsworking,everyonethinksI’mwrong.Nooneevertellsmehowgreatitis.

There’salotoflittlelessonsinthere,butthebig

oneIthinkisthatexternalreinforcementoftheideadoesn’tmakeitbetter.AndthereforeIprobablydidn’trecognizetheimperfectionsofit.Igotoverconfident.Andwejustdidterribly.Itwasawful.Evenifithadn’tbeengoinginto2008—solet’stakethatpieceoutofit,whichisawhole’nothercanofworms—[therewas]theoverconfidenceinabad

businessandtoolargeaposition.Partofourprocessisavoidingthethingswhereifyou’rewrong,thebusinessdoesn’thelpyou,andactuallyhurtsyou.Thenatureofthebusinessitselfhurtsyou.Itwasjuststupid.

Youmentionedlookingaroundandnotfindinganyreadybargainsatthetimeyoudidthis.Doyoufeellike

youloweredyourstandards?

Yes,totally.Thelessonis“Whenthere’snothingelsetoinvestin,don’tinvestinanything.”

Whatlessons,ifany,didyoulearnfromthemarketmeltdowninthefallof2008?Haveyouchangedanythingaboutyour

investingstyleorapproachsincethen?

Yesandno.Wehadaterrible2008.Wegotcaughtlikeeveryoneelse.Westartedgoinglongwaytooearly.IstartedgettingmoreaggressiverightbeforeLehmanwentdown.There’sagoodlessonthereaboutpatience.Valuationsaren’tnecessarilyfleeting.You

don’talwayshavetobebuyingaggressivelyintodips.Youcanbealittlebitmorepatient.That’sprobablyalessonthatallvalueinvestorshavetolearnoverandoveragain.That’ssortofaself-reinforcingthing.

Butfroma“changing”perspective,I’malwaysalittleearly.WhensomethingreachesapricethatIthinkisagoodpriceIwillstart

buyingitandthemarketmightdecidetoofferitatanevenbetterpriceforarelativelylongperiodoftimebeforeitstartstobottomout.SoIjusthavetoacceptthatthat’spartofourprocess,andIcan’thelpit.That’sjustpartofinvesting.TherearetimesI’velookedatandsaid,“Well,Ishouldn’thavebeensoearly.Ishouldn’thavegotteninsofast.”Butatthe

sametime,that’salsopartofwhereoursuccesseshavecomefrom,soIcan’tjusteliminatethatwithouteliminatingsomeofourmajorsuccessesovertime.WhereIcandobetterisonwhatI’malreadyholdingwhenthingsstarttofallapart.Oneofthedangersthatlong-termvalueinvestorslikemehaveisthatwewilllookthroughdivots,and

differentiatingbetweendivotsandgiantblackholesisprobablysomethingthatIcouldbebetterat.

Weknewhowbadthebusinesseswouldget.Wedidn’treacttoitatall.Therearesomebusinesses,again,thatareterrificandyoudon’twanttoreactbutthereareotherbusinessesthatarenotasgoodandyouprobablyoughttoreact.We’vebeen

muchmoreconsciousofdescribingourbusinesseswhenwe’rebuyingthemupfrontastowhetherthesearethingsyou’regoingtoholdthroughthickandthinoraretheythingswhere,shouldyoustarttoseeevidenceofdeterioration,youneedtobealittlemoreaggressiveaboutselling.Oralsowhentheygetclosertofairvalue,bemoreaggressiveaboutselling.

Butwewentbackandwelookedateverythingwedidwrongandalotmoreofitwasexecutionthanprocess.Sowedidn’tchangeourprocessmuch.Weaddedsomesafetymeasures.Wetriedtoaddsomebetteranalysisofdownside,butwhenyouhavetradingdownside,ormark-to-marketdownside,it’sdifferentthanwhenyouhavebusiness

downside.Sowhenwelookedatit,wesaid,“Someofthethingsthatcausedustolosemoneyin2008willhappentousagain,andohwell.”Andthereweresomeotherthingsthatwethinkwe’llbeabletobemorecognizantof,likedeteriorationinthebusinessesthatarereallynotthekindsofbusinessesthatyouwanttoholdthroughanysortof

downturn.Iknow2008wasbadand

Idon’twanttosoundcavalieraboutit,butI’mactuallyprettyhappythatwedidn’tchangetoomuch.I’veseenalotofpeoplethatchangedeverythingtheydidandwerereactiveandthat’sreallybad.Soyes,welearnedsomethingsandyes,wechangedsomeapplicationsofourprocessandwetriedto

emphasizethethingsthatmighthavehelpedusdobetter,butphilosophicallythecoreisstillthesame.Wedidn’tsuddenlydecidewe’regoingtobefullyhedged.Wedidn’tsuddenlydecidewe’regoingtobemacrotraders.Wedidn’tsuddenlydecidetogoshort.Wesaid,“Wemadeaveryconsciousdecisiontodoitthiswayandthat’sbecausethat’swhatwethink

worksforthelongtermandIstillbelievethat.”

Ifyouhadonepieceofadvicetopassalongtobeginninginvestors,whatwoulditbe?

Don’twatchCNBC.That’ssortofflip,buttherealmessageis“Youhavetofindyourownstrategy.”Youcan’tcopyorreacttoother

people.It’saveryself-analyticalprocess.Focusonwhatyoudowellandwhatyourskillsetisanddon’tworryaboutwhateverybodyelseisdoing.

InterviewwithValueInvestorLaurenC.Templeton,Founderof

LaurenTempletonCapital

Management

Aswelearnedinthethirdchapterofthisbook,LaurenTempleton’sbeeninvestingsinceshewasjustalittlegirl.

Giventhatsheisthegreat-nieceofSirJohnTempleton,valueinvestingquiteliterallyrunsinherblood.Herfirm,LaurenTempletonCapitalManagement,isbasedoutofChattanooga,Tennessee.IconductedthisinterviewwithLaurenonSeptember22,2010,anditispublishedastranscribed.

Tellmealittlebitabout

LaurenTempletonCapitalManagement.Howisthefirmstructuredandwhatareyoutryingtoachieve?

We’reanassetmanagementfirm.Wewerefoundedin2001.Thefirmis100percentownedbyme,soit’safemale-ownedfirm.Webeganwithonehedgefundproductbutwe’vesincealsomovedintothelong-only

separatelymanagedaccountbusiness.Weareavalueinvestingboutiquefocusedexclusivelyonglobalbargainhunting.And,naturally,we’retryingtobuildwealthforourinvestorsandcompoundtheirmoneyatthehighestratepossibleinthemarketgivenanacceptablelevelofrisk.

Howdidyouendupasa

valueinvestor?Didyouexploreotherinvestmentstylesbefore“seeingthelight”?

Well,asyoumightimagine,becauseIgrewupintheTempletonfamilywearereallyafamilyofvalueinvestors.IstartedbuyingstockswhenIwassevenoreightyearsold.Mydadwouldallowmetobuyone

shareamonthofanystockIwanted.Hewouldbuyitforme.Andthenhewouldtakethestockcertificate,becauseatthetimetheymailedyouanactualcertificate,andhewouldmatandframethestockcertificateandhangitonthewallsofmyroom.SowhenIwasachild,myroomwasliterallywallpaperedwithstockcertificates.

Atfirst,likeanychild

would,Iboughtveryfamiliarcompanies—likeDisney,Wal-Mart,theGap.Ireallydidn’tpayanyattentiontovaluation.Butitwasveryimportanttohavethesestockcertificateshangingonthewallsofmyroombecauseallofasudden,Ireallydid,asachild,thinkofmyselfasanownerofoneofthesecompanies.Icanremembertellingfriendsonthe

playgroundthat,yes,IdidownpartofDisney.Andtheycouldn’tbelieveit.

ButitwasthatapproachtolookingatinvestingthroughtheeyesofabusinessownerIthinkthatnaturallyguidesinvestorsintovalueinvesting.Tome,valueinvestingisalifestyle.Ineveryotherareaofmylife,Iseektofindthebestbargaininrelationtosomething’s

value—whetherI’mbuyingacarorahouse,andwhywouldn’tIdothesameinthestockmarket?Ijustgrewupthatway.Myfamilywasverythrifty.Mydadwasverythrifty.Heownedalocalhardwarestoreandheandmymomsaved50percentofeverythingtheyevermade.UncleJohn[Templeton]sayshedidthesamething.Ofcourse,theyweresavingfor

theopportunitytogooutandbuysharesofbusinessesthatwerelistedonthestockexchange.Ifyou’rebuyingapartofabusiness,youwanttogetthebestbangforyourbuckandgowhereyoufindthebestvalue.

SoIwouldsayI’vealwaysbeenavalueinvestor.Now,ofcourse,I’vereadaboutandstudiedotherinvestmentstylesbutnoneof

themseemedtoresonatewithme.Ithinkthatvalueinvestingisinvestinginthestockmarket.Manyoftheotherstylesandstrategiesappeartometobemorespeculative.Idon’tapproachthestockmarketasacasino.Idon’tgambleinthestockmarket.Iinvestinbusinesses.

WarrenBuffett’sbeenquotedassaying

temperament—notintellect—isthemostimportantqualityaninvestorcanhave.Howdoyouthinkyourowntemperamenthasplayedintoyoursuccessasaninvestor?

Icompletelyagreewithhim,firstofall—itistemperamentandnotintellect.Ithinksomepeoplearebornwithanaturalabilitytobebetterinvestors

thanotherpeople.However,Ithinkallinvestorscanimprove[theirtemperaments].Ithinkwhatmakesagoodinvestoristheabilitytocontrolyouremotionsandsomepeoplearejustbetteratthatthanotherpeople,andthereareahostofreasonswhy.Therearesomanycoolresearchprojectsoutrightnowinthefieldofneurosciencelooking

attheroleofhormonesliketestosteroneandestrogenandneurotransmitterslikeoxytocinthatreallyaffectourdecision-makingprocessandmightcontributetoaninvestor’sabilitytocontrolhisorheremotions.SomepeoplearejustnaturallybetteratthatbutIalsothinkthateverybodycanlearntobebetteratcontrollingtheiremotionsandatleastbe

cognizantofhumanbehavior.Ithinkthatinvestorswho

cancontroltheiremotionsaregoingtohavebetterreturns.WarrenBuffett’sgreatatdoingthat.Andinmanyways,hedoesinvestlikeawoman.Hedoeshisresearch,he’scool,calm,andcollected.Alotofmengetonatestosteronehighandtakeriskierandriskierbets.IthinkWarrenBuffettisastudentof

humannatureandhecancontrolhisemotionsmuchbetterthantheaverageperson.

Bystudyingandreadingabouthumanbehavior,youcanimplementsometoolstohelpyourinvestingstrategy.Forinstance,UncleJohnalwayskeptawishlistofsecuritiesinhisdeskdrawer,andoftentimes,hewouldhavegood-til-cancelledlimit

ordersoutonthesesecuritiesatwellbelowmarketprices.Let’ssay30percentbelowthemarket.Sowhenthemarketwouldfallinvalueortherewouldbeamajorcorrectioninthestockpriceandheknewthathumannaturewouldmakeitscarytostepinandbuy,becausethetradeswerealreadyoutthere,it’skindofforcingyourselftodowhatyoushoulddoand

buyagoodcompanywhenthestockgoesonsale.

IthinkmytemperamenthashelpedmebecauseI’maverygoodstudentofhumannature.I’mverycognizantofmybiasesandIspendalotoftimethinkingabouthowtocompensateforthem,whetherthat’shavinglimitordersinoncertainsecuritieswellbelowthemarketordifferentrulesorprocedures

wehavehereatthefirmtoassistmewhenIknowI’mgoingtobeinastressfulsituation.IalsothinkthatItakemoreriskthanmostwomendo.SoIthinkthathashelpedmeinmyinvestmentcareer.

Yourinvestmentfirm,andthebookyouandyourhusbandwrote,arebasedontheinvestmentstyleof

yourgreat-uncleSirJohnTempleton,whowasarenownedvalueinvestorhimself.InwhatwaysishisstyleofinvestingdistinctfromBuffett’s?

BothUncleJohnandWarrenBuffettstudiedunderBenjaminGraham.Sothey’rebothgoingtohavethatasacommondenominatorintheirinvestmentstrategies.Butthe

majordifferencebetweenSirJohnandWarrenBuffettisthefactthatSirJohnpioneeredglobalinvesting.Sohe’sknownasaglobalinvestor,andalthoughWarrenBuffetthasrecentlymadesomepurchasesoutsideoftheUnitedStates,he’slargelyknownasaU.S.investor.IthinkthatUncleJohnhadacompetitiveadvantageoverWarren

Buffettinthathehadalargeruniverseofstockstostudytofindbargainopportunities.

Letmegiveyouanexampleofwhyalargeruniverseofstocksisimportant.UncleJohnwasinvestinginJapanintheearly1960satP/Eratiosof4x.SohewasveryearlyintoJapan.U.S.investorsstartedbuyingintoJapaninthe1980s.Ofcoursebythatpointstocks

wereovervaluedinJapan,therewasahugebubbleinJapan,headedtowardabigstockmarketcrash.UncleJohnwasalreadyoutofJapanbythattime.He’dmoved60percentofhisassetsintotheUnitedStates,around1981,1982.Atthesametime,BusinessWeekwasproclaimingthe“DeathofEquities”intheUnitedStates.

Sobecausehehada

largerinventoryofstocksandtheabilitytoinvestinanycountry,hecouldmovefromJapanwhenJapanwasgettingoverheatedtotheUnitedStateswhenstockvaluationswereverydepressed.AndhewascapableofavoidingJapan’sbubble.Ithinkitjustmakesmoresensetoincreaseyourinventoryoruniverseofstocksbylookingoverseas.

IthinkthatWarren

Buffett’sgeniusisinhisinvestmentvehicle.ThewayhestructuredBerkshireHathawayissosmart.UncleJohnmanagedamutualfund,andmanagingamutualfundisverydifficultbecausethetendencyofaninvestoristowithdrawcapitalattheworsttime.Sothemutualfundmanagerhastoprepareforcapitaloutflowswhenstocksarecheapandinflowswhen

stocksareexpensive.

WeknowBuffettconsidersmanagementveryimportantandvalueshisrelationshipswithpeople,whetherhe’sbuyinganentirecompanyandleavingthecurrentmanagementintact,orbuyingapieceofapubliccompanywithamanagementteamheadmires.Twoquestions,

then:Doyousharethistraitwithhim?And,ifso,howdoyousuggesttheaverageinvestortrytoassessthemanagementofcompaniesheorshe’sinvestingin?

WedosharethattraitwithWarrenBuffett.However,weassessacompany’smanagementabilitybasedonthenumbers.So,studyingtheirfinancialstatements,

we’relookingforcompaniesthataregrowingfasterthantheirindustry,havehigheroperatingmarginsthantheirindustry,andhigherreturnsoncapital.Ofcourse,whenwestudythecompany,we’restudyingtheircompensationstructure,we’relookingataccountingtechniquestoseeifthey’rebeingtooaggressivewiththeiraccounting.Alargepartof

thatissimplythatwe’reasmallerfirmandwecan’taffordtogovisiteverysingleoneofthemanagementteams,butwedospeaktothemallbeforeweinvest.Wegetthebestinformation,though,fromtheircompetitors.Butyes,Ithinkmanagementisextremelyimportant,butwejudgethatthroughastudyoftheirfinancialstatements.

Youknow,evenWarrenBuffettsaid,“Youshouldinvestinabusinessevenafoolcanrunbecausesomedayafoolwill.”Also,eventhoughWarrenBuffettplacesahugedegreeofimportanceonmanagement,healsolooksatcompetitiveadvantage,economicmoat,forinstance.Ithinktheaverageinvestorshouldlookforcompaniesthataregrowingfasterthan

theirindustry,havehigheroperatingmarginsthantheirindustry,andhigherreturnsoncapitalthantheirindustry.Andiftheyfindacompanythathasthosethreequalities,they’velocatedagoodmanagementteam.

Buffettislegendaryfortheamountofreadinghedoesandinformationheconsumes.Whatdoyou

readonaregularbasis?Whatareyourfavoritebooksoninvesting?

Onadailybasis,IreadtheWallStreetJournal.WealwayshavetheEconomistlyingaround,alloverourhouse,differenteditionsofit,becauseittakesalongtimetoreaditsoImaystillbeworkingonaneditionfrombackinJulymonthslater.On

theweekends,wegetBarron’s.

WhenIwasayoungperson,oneofthefirstbooksIreadoninvestingwas[James]O’Shaughnessy’sWhatWorksonWallStreetandIreallylikethatbook.AndIreadPeterLynch’sbooksandIenjoyedthose.Forsomeonewho’smoreseriousaboutinvesting,IthinkTheIntelligentInvestor

andSecurityAnalysisbyBenjaminGrahamaremust-reads.CommonStocksandUncommonProfitsbyPhilipFisherisareallygoodbook.Likeeveryone,we’realsoreadingatonofdataonline.WehaveanonlinereportthatcomesoutonaquarterlybasiscalledtheMaximumPessimismReportthatweprofileourcontrarianinvestmentstrategiesinand

that’sbeenreallywellreceived.ButIlovetoreadothervaluemanagers’newsletters.IliketoreadthequarterlyreportsfrommutualfundsthatIown.Really,anytimethatIcangetmyhandsonanothermanager’slettersorinformationthatIrespectandagreewiththeirstrategy,that’sveryhelpfultome.

Buffett’sknownforstayingwellwithinhiscircleofcompetence,leavingareasliketechnologycompanieslargelyalone.Doyousharethisinvestingtraitwithhim?

Yes,verymuchso,especiallyasavalueinvestor.Asavalueinvestor,ifIcan’tvalueit,Ican’tinvestinit.Sothatkeptusoutofalotof

financialstocksthatwereshowingupinourscreensduringthefinancialcrisis.Wecouldn’tgetourarmsaroundthebalancesheetssowecouldn’tinvestinthem.Howdoyouvaluesomethingifyoureallydon’thaveatransparentviewofthebalancesheet?Ofcoursethatkeepsusoutofbiotechandindustrieslikethatwherethere’sjustnogoodwayfor

ustovaluethecompany.Soifwecan’tvalueit,wecan’tinvestinit.

You’refamiliarwithsomeoftheresearchaboutthedifferencesbetweenmenandwomeninvestors.Toyou,what’sthemostinterestingaspectofthisresearch?

AbouttwoyearsagoIhadthe

greatprivilegeofparticipatinginadiscussionoutinCalifornia,withaboutfifteenhedgefundmanagers.Thepurposeofthediscussionwastodiscussfreedomandfreeenterprise,butthediscussionwasledbyneuroeconomistPaulZakfromClaremontUniversity.He’sproducedsomeamazingresearch,whichhassomefinancialimplications.Itjust

mademesoexcitedaboutthefieldofbehavioralfinanceandneuroscienceandthedifferencesbetweenmenandwomenandthat’sreallywhatI’vebeenstudyingforthepasttwoyears.Sothebooksonmybedsidetablerightnowareallrelatedtothatfield.Itisreallyfascinatingstuff.IguessIamdrawntoitbecausetherearefewwomeninmyprofessionanditis

interestingtoconsiderhowgenderinfluencesmybehavior.Also,behavioralfinanceandvalueinvestingareverycompatiblesubjects.

Whatadvicewouldyoupassalongtobeginninginvestors?

Startearly,startnow.

So,startinvestingateight

yearsold?

Yes,actually!Compoundingismagic.You’lllaughatthis,butit’strue.Mydadtoldmebedtimestoriesaboutthemagicofcompounding.Itismagical,butthemagicingredientistime,sostartearly.Butalso,startearlybecauseyou’regoingtomakemistakesandthat’sOK,too.Butgoaheadandmakethose

mistakes.Andthenmybiggest

pieceofadviceisinvest,don’tspeculate.Approachapurchaseofastockasbuyingaportionofabusiness.Andifyoulookatitthroughtheeyesofabusinessowneryou’regoingtomakewiserinvestments.Iwish,forthatreason,thateverytimepeopleboughtstocktheywerestillissuedastockcertificate.

Becausesomethingaboutthat,asachild,holdingthatstockcertificateinmyhandandhavingsomethingtoputonmywallthatrepresentedthesharethatIowned,itreallygavemeasenseofownershipinthatbusiness.Andnowwitheverythingelectronicandnoonehasstockcertificatesanymore,itfeelslikesomethinginvestorsaremoreapttogoinand

tradebecausetheyhavelessownershipofit.Ireallylikestockcertificates.

WhenIgraduatedfromcollege,Iborrowedaverysmallamountofmoneyfrommyfathertobuyastockthatoneofmyfriendshadrecommendedtome.AndIborrowedthemoney,Iboughtthestock,anditreallycrashedinvalue.Ilostatonofmoney.Icalledmydadup

andsaid,“Oh,I’msosorry,I’velostthemoney.”Andhesaid,“Great!That’sexactlywhatIwashopingwouldhappen!Nowyouknowtherearenohottipsinthestockmarket;thisisnotagameofgambling.Youhavetodoyourhomeworkandmakewiseinvestments.ThisisthebestlessonIcouldhaveevertaughtyou.Iwashopingthatstockwouldgodownin

value.”ItreallytaughtmealotbecauseIwasreallyupsetaboutit.It’snotacasino.Ifyoutreatitlikeacasinothenthosearegoingtobeyourresults.

InterviewwithValueInvestorsCandaceKing

WeirandAmeliaWeirofParadigm

CapitalManagement

Mother-and-daughtervalueteamCandaceKingWeirandAmeliaWeirsearchforvalueopportunitiesthroughtheirfirmParadigmCapitalManagement,whichserveshigh-net-worthand

institutionalinvestors.Foundedasasmall-capoutfit,ithassinceexpandedtoofferseveraldifferentinvestmentvehiclesforundervaluedcompaniesofallsizes.IconductedthisinterviewwithCandaceandAmeliaonOctober7,2010,andithasbeenpublishedastranscribed.

Tellmealittlebitabout

ParadigmCapitalManagement.What’sthehistoryofthefirm?

CANDACEKINGWEIR:Itwasformedin1972,soclearlythatwasalongtimeagoandIthinkIformeditwhenIwastooyoungtoknowanybetter.IformeditalwayswiththeideathatIenjoysmall-capvalueinvesting.Thathasjustalwaysappealedtomewhere

youcouldunderstandacompanyandactuallyhaveanevaluationmethodologythatgaveyouacomfortlevel.Didn’tmeanyoualwayswereright,butyouhadcomfortthattheprocesswassolidandobviouslyoverthirty-sevenyearsyoulearnalot,butIstillbelievetheprocessisverysolidanditisverytangible.Ileftasmallerfirmthathaddonealotofvery

esotericinvesting,likeinbiotechandthingsthatwouldbethenextgreatfixforsomething,butwouldalwaysbesellingat30timesrevenuesandazilliontimesearningsornoearnings.Iwasnevergoodatthat.IguessIammoreofafundamentalist.

Amelia,didyouwanttoaddanythingtothat?

AMELIAWEIR:Igrewup,obviously,withamotherwhohadthisinherbloodforalongtime,inthateverytimeyouwenttodoerrandsorback-to-schoolshoppingoranythinglikethat,youwereinevitablydoingastorewalkatthesametimeandcheckingoutinventoriesortrafficorhowlongthelinesweretocheckout.So,inthatsense,obviouslyitwassomething

thatIwasalwayskindofindoctrinatedwith.ButIactuallywenttocollegeandwasanEnglishmajorundergradanddidn’treallytotallyeverimaginethatIwouldquitebeinthisseatatthispoint.

ButIactuallystartedoffworkingasaneditoratPaineWebberrightaftercollegeinequityresearchandatsomepointitgotalittletiresometo

keepcorrectinganalysts’typos.Atsomepoint,youwouldratherbeontheactualanalyticsidethanjustkindofreadingsomeoneelse’sthoughts.IwenttoworkatBearStearnsinequityresearchcoveringthetextileandapparelindustries,socompanieslikeTommyHilfigerandPolo.Ireallylikeditanddecidedtogobacktobusinessschooland

reallyknewatthatpointthatIwantedtobeonthebuyside.Ithinkyousortofhavethatiterativeprocessofrealizingthatatsomepointyoudon’twanttobereadingotherpeople’sopinionsandatsomepoint,evenifyoucanwritetheresearchreports,youwouldstillratherbeontheactualdecision-makingside,andsothatledmetowhereIamtoday.

Howdidyouendupasvalueinvestors?Dideitherofyoutryotherstrategiesorothermethodsbeforekindofsettlingintoyour“valueskin,”sotospeak?

CANDACEKINGWEIR:IguessIspeakformyselfsinceIhaveobviouslydonealotmoreyearsthanAmelia.No,Ihavealwayshadavaluetilt.ThatisoneofthereasonsIformed

myfirm.Ireallydidn’tunderstandmoreesotericinvesting.IalwayskindofbelievedthatEBITDAmultiplesoffreecashflowmeantsomething,andaslongasyouthoughtyouhadamanagementteamthatmadesenseandhadaproductgrowthstorythatyoucouldunderstand,normallythosewerethekindoffundamentalsthatallowed

youtobeprettysuccessfulovertime.

AMELIAWEIR:OnethingIamjustthinkingabout,anditiseasiertoseeinhindsight,butwhenIwascoveringthetextileandapparelindustries,itwasinthelate’90sthrough2001,soneedlesstosay,noonecared.EveryonewasreallyfiredupaboutInternetthisandInternetthatand

everythingwassellingatcrazyvaluations.Thefactthatyouhadthesereallyinterestingcompanieswithrealbusinessesandrealbalancesheetsandsolidcashflowsdidn’tmatter.Ijustrememberthesalesguyswouldbecomingaroundthefloortoseewhichanalystshadanythinginterestingtosay.Theywouldwalkrightbyusbecausetheycouldn’t

careless.Theywantedthemoreinterestingtechnames.

Ithinkeventhenitgavemeasortofperverseorcontrarianappreciationforrealcompanies,obviouslyseeinghowthatallplayedout,butatsomepointIalsothinkitishardanytime.Itislikegoingshopping,evenfromaconsumerstandpoint.Youneverwanttofeellikeyouareoverpayingfor

something.Youliketogetsomethingonsale,andIthinkthatthereiskindofasimilarmindsettothatideaofrecognizingvalueandfeelinglikeyougotitattherightpriceandthatyouactuallythinkitisworthmore.

WarrenBuffetthasbeenquotedassayingthattemperament,notintellect,isthemostimportant

qualityaninvestorcanhave.Sohowdoyouthinkyourowntemperamentshaveplayedintoyoursuccessasinvestors?

CANDACEKINGWEIR:Hmmm,thatisaprettycomplexquestion.IguessIwouldsayIthinktobegoodatthis,youhavetohaveaprettyeventemperament.Ithinkyouhavetobeabletotakea

longerviewattimes.Iwilljustgobacktosomethingmorefreshinmymind,thedebacleattheendof’08andearly’09.Idon’tthinkanyofusquiteknewwherethingsweregoingtoshakeoutatthatpoint,butyoucouldn’ttakeyourselfoutofthegame.Youhadtokeepshowingup,sotospeak,andplayingthegame.

ButIthinkthatiswhere

ourmantra,andIthinkAmeliacanspeaktothis,comesinhandy.Isaytoouranalysts,“Headdown,steadywinstherace.”Whoknowswhatthisisallgoingtoshakeoutto,whatthefinaloutcomeisgoingtobe?Butifyousticktowhatyouknowyoudowell,whichisspeakingwiththecompaniesandbeingabletogettomanagementandsay,“Yourstockisoff70

percent.Isthereanychangeinyourbusiness?”Oftentheysayno.Thenyousay,“Boy,thisisreallywhacko.”Butyouwouldn’tgooutandspendeverylastdimeyouhadbecauseyouknewyouhadtobeprudent.Ithinkittakesacertainamountofasteadyhandtobesuccessfulasaninvestor.

Wenevertryandmarket-time.Iamnotgoodatit.It

wouldn’tentermymindtobeamarkettimer.Sure,Ithinkaboutthemacroissues,butIdon’ttrytotimemyinvestments.Itisreallyoneinvestmentatatime.Thatmakessensetome.Iguessyouhavetohaveacertainsetcourageofyourownconvictions,becauseoftenyoucanbewrongforweeksormonths.It’snotthatyoureallywerewrong,butyou

appeartobewrong.WallStreetisdownon,goingbacktoAmelia’sstory,WallStreetdoesn’twanttotalkaboutclothingmanufacturers.Thatisreallydull.Ayearlater,theymaysay,“Boy,thatisbrilliant.Wewantallwecanget.”Soyoudohavetohavethecourageofyourconvictions,Ithinktobegood.Youreallyhavetobegrounded.

Ithinkwehadaprettyfabulousyearin’09,justbecausewestucktoourknittingwhenotherpeoplewerejustfrozenintheground.We’djustcomeinandwe’dtalktoourcompaniesandifwethoughtthatthingswerereallyoutrageouslyoutofwhack,thenwewouldbuyalittlemore,butfundamentallyweareverydisciplined.Ithink

disciplineisreallycritical,too.Youdohavetoshowupeveryday,nomatterthedaysyouhateit.Yousay,“Ican’tbearit.”Youcan’tbeartoloseanymoremoney.Itakeitverypersonallyalways,butifyoudon’tshowup,youdon’tgettoplaythegameandeventuallyyouarejustoutofthegame.AMELIAWEIR:2009wasreallyamazingifyoulookatthe

month-by-monthperformance,inthesensethatweultimatelyhadavery,verygoodyearperformance-wise.IguessIamjustreiteratingtheideathatyouhavetohavealong-termviewandyouhavetohavethattemperamentthatismoreevenkeeledandthatyoulistentoyourselfandyoustickwiththeoriginalideathatyouhad,versusbeing

swayedbythemarketorthenewsoreveryoneappearingtorunfortheexits.

Itwasinthefirstquarterof2009whereIwouldsay,andIwouldsaythismoreaboutmymotherthanmyself,Ithinkthecumulativeexperiencehelps.Butitistemperamentaswell,ofbuyingmoreofnamesthatyouknewandhadacomfortlevelwithversussomany

peopleatthatpointwhowerereallyparalyzedandstayedonthesidelines.Sothatbythetimethemarketturned,theywerethenkindofscramblingtocatchupinthesecondhalfoftheyear,whichatsomepointyoucanonlymakeupsomuchofthatwiththekindofswingthatthemarketshad.Ican’tthinkofabetterexampleofthetemperamentquestionina

longtimethanthatperiod,whereyoureallyhadtogetinthereandhaveyourowninternalclockthattoldyouitwasOK,insteadofwaitingforeveryoneelsetodoit,becausethatisreallywhereyoumakethebestmoney.

Managementandthe“peopleaspect”ofinvestingareveryimportanttoBuffett.WhenBerkshire

buysawholecompany,heleavesmanagementintact,orifheisbuyingsharesofapubliccompany,hewantstohavemanagementhetrustsandbelievesin.Isthatimportanttoyouall,too?

CANDACEKINGWEIR:Absolutely,yeah.

Why?Andthen

additionally,aretherewaysforindividualinvestorstotrytoassessmanagement?Howwouldyousuggesttheygoaboutthat?

CANDACEKINGWEIR:Yes,Ithinkitiscriticalbecauseattheendoftheday,ifIamanyexample,weown,maybeatanytime,maybe70namesinourportfolio.Soyoucan’tpossiblybeanexperton

everyproductandeverycompany.Thatwouldbeafool’sgame,soyoudohavetodoalittlebitofdelegation.Youhavetothinkthatyouhaveamanagementteamthatcanunderstandwheretheyshouldbeinthemarketplaceandwhatproductsaregoingtodrivetheirbusiness.IamnotgoingtotrytogetdowntothatnextgranularleveloftellmewhyXYZisthenext

whatever,soIthinkthisisapracticalapproachtoit.Youcan’tknowitall.

Ithink,maybeagain,itisbecauseofexperience,butclearlyyoujustquicklypickuponbrightpeople,articulatepeople,peoplethatcantellyouareallycohesivestoryandavision.EventothisdaywhenItalktoanewcompanyandIhavenovestedinterestasIstartthedialogue,

sometimesafterIfinishaconversation,Iwilljustkindofputthefiledownandsenditbacktotheanalystsandsay,“Idon’tthinkso.Maybeyouareright,butIdon’tthinkitisgoingtoworkifIdon’tthinkthecompanycanarticulatewhattheydo.”

SoIthinkyouhavereallygottounderstandnotonlycantheyarticulatetheirbusinessfromtheinvestment

communityside,butmostimportantly,dotheyknowtheirbusiness?HowdoIknow?Ilookatthetrackrecord.IguessIfeellikeIamatriallawyer.Iaskthesequestionsdayinanddayout.Ihavealreadyspokentosixcompaniestoday.It’swhat,3:30?It’satypicaldayforme,andIamjustconstantlygaugingandlisteningfortheanswers,soyoudothislong

enoughandyoudohaveasenseofwhattherightanswershouldbe.

Wearesittingwithadetailedsetofquestionsfromtheanalystsandsaying,“Well,youneedtogobackandtalkabouthavetheyrenewedtheirlineofcredit,havetheydonethis,whataretheythinkingaboutthat?”Soyouareconstantlygrillingthemandyourealizeitisa

goodmanagementteamiftheyhavethoseanswers.Whensomebodyasksmeaboutmybusiness,IliketothinkIcanarticulatemostoftheanswersbacktothem.Andifallofasuddenyoufindsomebodywhoiskindofhemmingandhawingorbeingslightlyevasive,itisjustmysetofrules,butwejustkindofdropthename,becauseyoureallydon’thave

time.Thisisahardenough

gamewhenyouthinkyouaregettinggoodinformationfromthemanagement,notinsideinformation,justaclearunderstandingoftheirbusiness.Ifpeoplesomehowarenotwillingtosharethatwithyou,wejustkindofmoveon.Thereareenoughsmartmanagementsoutthere,enoughgoodbusinesses.I

wouldnotinvestinacompanythatsays,“Yeah,youcanreaditwhenwereleaseour10-Q.”Iwouldsay,“OK,thankyou.”Andthatwouldbeit.

Butasto[individual]investorshavingthataccess,Ithinkthatishard.Itisnotlikeyouhaveinsideinformation,butitisjusthavingtheaccessbecauseyourunenoughmoney.IamnotWarren

Buffett,butpeopleknowweareseriousinvestors,letmeputitthatway,andtheyknowwehavedoneitforalotofyears,sopeoplerespectthat,forlackofabetterterm.

AMELIAWEIR:OnethingIwouldsaythoughisthatgoingback,thereweretimeswherewemaybeonthephonewithacompany,andIcanthinkofafewinmore

recentmonths,buttherewasonewherewhateverguidancetheyhadputout,theysortofhadatrajectoryfortheyearthattheyneededtoreallystickprettycloselytoittomaketheirnumbersfortheyear.Atsomepointtowardtheendofthecall,andagain,wehavealistofquestions,andmostofthemareprettystraightforward,butweaskedsomethinglike,“So,you

thinkyouareontracktohitthat”—Iammakingupthenumbersrightnow—“butyouthinkyouareontracktohitthat$20millionrevenuenumberforthesecondquarter?”AndtheCFO,hepausedforaboutonesecondlongerthannormalandwaslike,“Well,”andbasicallyhisanswerwaslike,“Yeah.”Hedidn’tsayanything,hedidn’tgiveyoutonsofinformation,

butonacertainlevelweboth,afterwehungup,wewerelike,“Thatdidnotsoundgood.”Andthepointbeing,theyblewthequarternottoolongafterthat.Thentherealtrickisactingonitintime,notjustpattingyourselfonthebackforhavinggaugedtheanswerright.

Toyourpointaboutindividualinvestors,ifitisacompanythatIeitherdon’t

knowwellordon’tfeellikeIreallyhavemyarmsaround—andthisissomethingthatIthinkdoesmatterfortherandompersononthestreetwhowantstoinvest—youcanlistentothereplayoftheconferencecalloryoucanreadthetranscript.Ialwaysfinditmuchmoreusefultolistentotheconferencecall.Becauseatranscriptisatranscript,ifyouarejust

lookingforsomenumbersorclarification,butyoukindofwanttohearwhatthetoneisinmanagement’svoice.YouwanttohearthemduringtheQ&Aperiod.Sometimessomeoftheanalystsaremoreaggressiveornot,butyouwanttohearwhatthatdialogueislikeandaretheydefensiveoraretheyalittlevagueoraretheyreallyhelpful?Ithinkthatnoneof

thatisanexactscience,butIthinkagain,itlendsadditionalinformationifyouarewillingtogothroughthatefforttolistentoit.

Ithinkthatisveryuseful.Andyou’reright,it’sjusttough,itjustis.Ifyouarearetailinvestorandyoudon’thaveaccesstopeople,youareleftalittlebittoyourowndevices,justthe

conferencecallsorjustpublicinformation,butthat’sachallenge.

CANDACEKINGWEIR:Itisjustverytimeconsuming.Bythetimeyoutalktosixcompanies,youhavespentsixorsevenhoursofthedayonthephone,soitisnotsomethingthatyoudolightly.Youhavetohaveenough,Iguess,ofaweightedinterest

tospendthattime.

Buffettislegendaryfortheamountofreadingthathedoesandtheinformationheconsumes,sowhatdoyoureadonaregularbasis,andthenwhataresomeofyourfavoritebooksoninvesting?

CANDACEKINGWEIR:Ireadprettyvoraciously.IthinkAmeliacanattesttothat.

ThereisprobablynotaweekendinmylifeIamnotupearlyreadingforprobablyacoupleofhoursbeforethedaygetsgoing.Butnormallyitisjustprobablyatonofsell-sidenotes,notesfrommyanalysts,andmydailyreadingisstrictlyalltheinvestmentthings,whetheritistheWallStreetJournal,Investor’sBusinessDaily,Bloomberg,therearezillions.

ButIthinkthetrickisyougetsomuchinformationoverloadtodaythatyouhavegottobeabletosaythisisn’tworthmytimeprettyquickly.Youcandrownintheinformation,soItryandlimitit,keepitrelativelysimple.

SometimeswhenIsortoutmyreadingattheendofthedaybeforeIdoitthenextmorning,Iwilljustsortitinpiles.Onewillbelikecritical

information,earnings,companyreleasesandwheresomeoneasksaboutacompanythatIownrightnowthatIneedtothinkabout.Thentheotherpilewillbeforwhenmybrainisalittlemorerelaxed.Icanlookatthisontheweekend,likenewinvestmentideasormoremacrothoughts.AndtherearereallytwodifferentkindsoftheinformationIneedto

absorb,soIalmosthavetodoitinadifferentmindset,ifthatmakessense.

Andthatismytypicalreading.Criticalinformationrightaway,whichIprobablyspendacouplehoursadayonandthenalittlemorebigpicture,whichIprobablyspendafewhoursaweekendon.Andhonestly,Idon’tthinkIhavepickedupabookoninvestingintenyears.

Thatisthetruth.Ifind,personally,Iamalwaysinconstantoverload.Itisalmosttoomuchinformation.Weprobablygetresearchfromthirtyfirmseveryday.Wejustfilteritouteveryday.Itisalotofstufftothinkabout.

ThenIthinkourstyleisourstyle,whichisreallyaboutknowingmanagement,runningourownearningsmodels,makingourownkind

ofhypothesisofwhywearedoingthisinvestment.Soitisnotlike,letmegoreadthisbookandfigureouthowtodoitbetter,andIamnotsayingwecouldn’tdoitbetter.ItisnotlikeIthinkwearesoterrific,buttherearejustsomanyhoursinaday.NowandthenIwillbuyabookandIwillsay,“Hmmm,whenIamonvacation,Iamgoingtotakethiswithme.”

ButIhavegottosayhonestly,I’drarelyeverpickitup.

AMELIAWEIR:Yeah,Iunfortunatelywouldhavetosecondthat.Onceinawhilesomeonewillgivemeabook,andthey’relike,Ithoughtthiswasagreatbook,butitsortofgoesbacktothefactthatyouareworkingsohardwhileyouareworkingthatby

thetimeIamgoingaway,thenIreallywanttoreadtheNewYorkerorsomething.Idon’twanttoreadamaybegoodormaybebadbookoninvesting.

ButoneofthethingsthatIthinkisveryusefulis—again,thereissortoftheusuallitany,youarereadingtheWallStreetJournal,youarereadingtheNewYorkTimes,youarereadingthe

FinancialTimes—thenIthinkonethingthatIdovaluealotissortofaslightlymoreinternationalperspective.SowhetheryouarereadingtheEconomistortheFinancialTimes,inadditiontotheJournalandBloomberg,becauseIthinkagain,youjustseeaslightlymore,insomeways,objectivetakeonthings.Inaway,itisthesamepiecesofthepuzzle,but

theyaremaybepresentedinaslightlydifferentalignment,whichmakesyousometimesthinkaboutthingsdifferently.

CANDACEKINGWEIR:Ithinkthatisabsolutelytrue.

AMELIAWEIR:Asanexample,theNewYorkTimes,sometimeinearlySeptember,hadanarticleabout3-Dprintingandhowitisbeingusednow

forthingslikeprosthetics,thathistoricallyhavebeenprohibitivelyexpensiveandhardtomanufactureandtimeconsuming.Andsomeofthenewerprintingprocessesaremuchfaster,muchcheaper,andmakethesethingsmuchmoreaccessible.

AndbecauseIamobviouslyalwaysbehindonmyreading,Iwasjustthrowingawaysomeold

Economistsrecently,andIwasflippingthroughone.ItwasaFebruaryissuefromthisyear,andtheyhadathreetimesaslongarticleontheexactsametopic,andthatwasinFebruary,versustheNewYorkTimeswritingthisarticleinSeptember.Thatisthestuffthatisinteresting,wheresomeinformationisoutthereandsomepeopledecidetofocusonitat

differenttimes.Ithinkbyhavingthatspectrumofreading,thatishowsomethingsparksyourbrain.Obviously,Ididn’treadthatarticleinFebruary,butIthinkthatstuffisinterestingbecauseyouneverknowwhatkindofalchemymakessomethingfromaninvestingperspectivesparkinyourownmind,like,“Whataboutthis?”Or,“Ifthisis

happeninghereandthatishappeningthere,thenwhatistheimplicationforpalladiumminingstocks?”SoIthinkinthatway,itisreallyimportanttojusthavethatbreadth.

CANDACEKINGWEIR:AndalsoIwouldsayjustthatyouneedtogetaway,becauseweareprettyintensewhenyouareworking.Theyareprettyintensedays—whetherthey

areten-ortwelve-hourdays—theyarelongdaysandtheyareveryintense.Sometimesyoujustabsolutely,whetheritisbeinginTimbuktuorbeinginLondonorbeinginParis,youdefinitelyjustneedtototallychangeyourenvironment.Andthenthatdoesgiveyouatotallyfreshlookatthings.

Ithinkthatiscritical,too.Iknowatonofreallybright

peoplewhoworkextraordinarilyhard.Itdoesn’tmeanitisalwayssuccessful.Thatistheironyoflife,sosometimesyoujusthavetostepbackandsay,“Whoa,whatamIdoingherethatisn’tworking?”BecauseIdon’tthinkanyonehastheHolyGrailhere.Itisjustkindof“Doyouthinkyoudoitbetterthansomepeople?”Yes,and“Haveyoudoneit

foralongtime?”Yes.“Areyoureasonablycompetent?”Yes,butnobodyhastheHolyGrail.Ithinkwhenyoucanstepback,whetheritbeinDelhiorLondon,andsay,“Whoa,lookwhattheyaredoinghere,”youcanseealltheinfrastructure.Itisjustmind-boggling.Everywhereyoulookedthereweredamsandroadsandyourealizedthatmeantsomethingina

big-picturewaythatyouweren’tseeinginAlbany,NewYork,orNewYorkCity.

Thatisgreatadvice.OK,nowweknowthatBuffettisknownforstayingwithinhiscircleofconfidence,leavingareasliketechnologylargelyalone.Doyouallsharethisinvestingtraitwithhim?

CANDACEKINGWEIR:AbsolutelyIdo.AsIgetolder,IthinkIshouldjustinvestinwhatIknow.Everytimewedoaone-off,it’sliketryingtounderstandsomebusinesslikeweownthecompany.Iwon’tboreyouwithanamerightnow,butwesay,“Boy,thosearethenamesyouenduplosingmoneyonbecauseyoudon’treallyhavetherightpeer

groupkindofperspective.”It’snotlikeyouknowthreeotherpeopleinthebusinesswhounderstandhowthebusinessmodelshouldwork,letalonebeabletocheckoutthemanagementteam,becauseotherpeopleknowthem.

Invariably,Iwouldsaytwooutofthreetimestheyturnouttobedisappointinginvestments.Itmaybetakes

usayeartofigurethatout.Whereasifyouareinvestinginyourthirdcontractmanufacturingcompanyandthereareonlyseveninthewholeindustrythatarepublicandyouknowfourorfiveoftheseven,thenyouhaveaprettygoodperspective.Iamnotsayingyouarealwaysright,butyouknowwhatyoushouldavoid,letmeputitthatway.Ithinkthatisvery

helpfulinlife,it’sthelossesyouneedtoavoid.

AMELIAWEIR:ButIwouldsay,well,he[Buffett]avoidstechnology.Thatisanareathatweareoverweightin,soIthinkagain,everyonehastheirownverysubjectivesortof...

CANDACEKINGWEIR:Senseofstrength.

AMELIAWEIR:Yeah,exactly,andwhatkindofgrabssomeoneintellectuallyorfrommykindofcuriosityperspectiveandsointhatsense,Ithinkeveryonecanhavetheirowncorecompetence.ButItotallyagreethatanytimeyoukindofhavedabbledinanamewhereyoureally,again,don’thavethatpeergrouporcompetitivelandscapeorjust

yourownrealunderstandingofit,youarebasicallyweightingthingstothedownsideoverthelongerterm,justbecausetherearemorewildcardfactorsthanyoucanaccountforversusaretailerwhenyouowntenotherretailers.

CANDACEKINGWEIR:Ithinkthatisright.SoweagreewithMr.Buffett.

Whatadvicewouldyoupassalongtobeginninginvestors?

CANDACEKINGWEIR:Asabeginninginvestor,Iwouldsaystartwhereyouhavesomekindofcomfortzone,sometouchstonethatmakesyouthinkthismakessensetoyou.Maybeitisbuyingsharesinthelocalbank,ifyouhavealwaysdoneyour

bankingthere,orbuyingtensharesofNikebecauseyoulikeNike’srunningshoesandyouthinkitisagoodcompany.Gosomewherewhereyouhavesomerealtangiblethoughtaboutthecompanyandnot,“So-and-sosaidtobuythisstockbecauseitisgoingtogoupnextmonth.”

Irememberasakid,myfirststockinvestmentwas

buyingsharesinMohawkAirlines,whichwasthelocalregionalairlineherebackintheday.Itwasjustverytangibletomebecauseweflewitallthetime.IwouldhaveahardtimetellingyouifImadeanymoneyonitornot.IthinkIdidmakealittlemoney,butIthinkthatwastheidea.WhatwasI,sixteenyearsoldandprobablyspent$200,butitwasverytangible

tome,andIthinkthatisimportanttogowithsomethingthatatleastifitgoeswrong,youhavearationaleforwhyyoudiditasopposedtosomebodytoldmetodoit.

Amelia,didyouwanttoaddanything?

AMELIAWEIR:Ithinkit’sfunnythatyouwerejust

talkingaboutMohawk.Iamthinkingaboutsomeofmyearlyinvesting,andagain,itwassortofrightoutofcollege.IwasclearlymoreofaLudditeandsonotsotunedintothesortofInternetdot.comboom,butIbought,itisamazing,itissortoflikethetwostocksyoushouldhaveneverbought,oneofwhichwasXerox.IboughtXerox,andthisisobviously

aspeoplearestartingtouseemailmoreandstartingtoemailfilestoeachother.Thentheotherone,whichyouknow,itwaswaybeforetheiPod,butitwasamusicretailer,whichagain,overtimeCDsaleshavefallenoffacliffandnomusicretailerhaseverfoundawaytoreallystillkeepsellinghardcopiesofanythinginanupwardtrajectory.

Withthatbeingsaid,Iwouldsayfrommyfirstinvestingexperience,theywerethingsthatIthoughtIsortofunderstood,theymadesensetome.Ithinkprobablyveryfewnewinvestorsaregoingtobesuccessful,soatleastyoucanlookatitandunderstandwhyversusyouboughtsomethingthathaddot-comontheendandyouboughtitfor$50ashareand

thenitwenttozero.Istillwouldjuststandbytheideathatitissomethingthat(a)youuseoryouarefamiliarwith,or(b)goingbacktoyoutalkingaboutNike,itissortofsomewherethatyougo,soyoumightbuyFinishLineoverFootLockerasafootwearretailerbecauseyouseebothinthemallandyoualwaysseemorepeopleintheFinishLinestore.Anditmay

notactuallyberight,butatleastyouhavethekindofatouchstonethatyoucankeepreferringbackto,versusitallbeinginavacuum.

Yeah,youarestartingtothinkaboutitandapplycauseandeffect,inasense.Therearemorepeopleinthestore,somaybeyoucouldbewrong,butatleastyouarethinkingaboutit.

AMELIAWEIR:Theniftheymissonthequarterandtheysay,“Weweremorepromotionalthanweplannedon,”thenthatpersonthinksthenexttimearound,“Whatisonsale?”andnotjusthowmanypeopleareinthestore.Ithinkitissortofthatiterativeprocess.

InterviewwithValueInvestorBillMannoftheMotleyFoolIndependence

FundandtheMotleyFoolGreatAmerica

Fund

BillMannistheportfoliomanagerfortheMotleyFoolIndependenceFundandtheMotleyFoolGreatAmerica

Fund.Hespecializesinidentifyingcompanieswithunderappreciatedcompetitiveadvantagesandassets.PriortoworkingforMotleyFoolAssetManagement,heservedascoadvisorforTheMotleyFool’sHiddenGemsandPayDirtsmall-capinvestmentnewsletterservicesandwasthefoundingadvisorforTheMotleyFool’sGlobalGainsinternationalstocknewsletter

service.LongtimeFoolChrisHillconductedthisinterviewwithBillonSeptember22,2010.Ithasbeenpublishedastranscribed.

Buffetthasbeenquotedassaying,“Temperament,notintellect,isthemostimportantqualityaninvestorcanhave.”Howdoyouthinkyourowntemperamenthasplayed

intoyoursuccessasaninvestor?

Firstofall,IhavebeendoingthisforawhilebutIdon’tknowthatI’dgosofarastocallmyselfasuccessfulinvestoryet.Ithinkanybodywhodoesisfullofit;probablyalittleprematureifyouaren’tBuffett’sageandathislevelofsustainedsuccessyet.

Thatsaid,Ithinkhavingatemperamentthatallowsyoutoworryaboutthethingsthatarecentraltoabusinessasopposedtowhatthestockmarketisdoingisaprettycrucialthingforme.Youseepeoplesayingallthetime,“ThemarkethasdroppedXpercent,”or“Somecompanyhasgoneup15percent,”likesomebodyknowssomething.Inmostsituations,nobody

knowsanything.Itispeoplebeingbattedtoandfrobythewavesofthemarket.

Businessesdon’tjustgainvalueorlosevalueasquicklyasthemarketsaysthattheydo.Ithinkthatisaprettyimportantthingbecauseitallowspeoplewhodohavethatmentalitytofindopportunity.

Doyouthinkofyourselfas

avalueinvestor?

Ido.Ithinkofmyselfasascaredy-catinvestor.Ithinkwhenyoutalkaboutvalueinvesting,therearereallytwowaystolookatit.There’sthesortofwhatyou’dcallstatisticalvalueorthepeoplewhosay,“Well,IamnotbuyinganythingunlessitislessthanaP/Eof7,”or,“Iamnotbuyinganything

abovebookvalue.”Idon’tthinkthatway.Ithinkintermsofjusttryingtobuysomethingforlessthanitisworthandtryingtosellitforwhatitisworth,orevenbetter,formorethanitisworth.

Tome,thatisthedefinitionofvalue.Asagoodexample,andIwaslamentingthistheotherdaybecausethecompanywastakenprivate,

in2005,IrecommendedacompanyforMotleyFoolHiddenGems(TheMotleyFool’ssmall-capstocknewsletterservice)calledFairmontHotels.Ithadnoearnings.Itwasinthemiddleofarestructure.Itwasaprettybadtimeforthehotelbusinessandthestockhaddonehorribly.Soifyoubelievedthestockmarket,thiscompanywasonitsway

out,butthereweretwothingstomethatasavalueinvestorIfocusedon.

Onewasthefactthatthiswasacompanytradingatabout$2billionwhereyoucouldn’tpossiblyreplaceallofitshotelsforanywhereclosetothatlittle.Thepropertiesthemselveswerejustworthsomuchmorethan$2billion,soyouhadsomeopportunityrightthere.You

hadwhatIwouldcallafloor.Theotherthingwasthatit

hadcashandsoitwasnotacompanythatwasgoingoutofbusiness,itwasjuststruggling.Ithinkbeingavalueinvestorgivesyoutheconfidencetobuysomethinglikethat,notreallytoworryaboutwhatishappeningoverthenextcoupleofquarters.Iguessthatgetsbacktosortofthetemperamentalissue,but

italsosortofdefineswhoyouare.Youarenotlookingformomentum.Youarenotlookingforcompaniesthatarenecessarilyshowingspectacularearningsgrowth.Infact,theirearningscouldquitefranklybekindoflousy,butatthesamepointintimethattheyaregreatinvestments.

Howdidyougettothat

pointinyourinvestingphilosophy?Werethereotherinvestmentstylesthatyouexperimentedwithbeforeyou“sawthelight”?

Ididalittlebitofeverything.Ihavealwaysbeenfascinatedbymathandsothegraphingandthechartingandputtingthingsthroughsortofmechanicalscreenstolookforinvestments—that,tome,

wasalwayskindofelegant,becauseitjustseemedsologicalandreasonable,buttherewasalwayssomethinginthebackofmymind.

Whenyoulookedatacompany,yousaid,“Well,itearnedadollarthisyearandIamgoingtomuddleitoutat10percentgrowthgoingonforXperiodoftime.”WheneverIwasdoingsomething,therewas

somethinginthebackofmymindthatalwayssaid,butwhatifitdoesn’t?Ithinkthatthatisoneofthecoreattributesofvalueinvestors.

Ifyouthinkaboutthestockmarket,thestockmarketisanexerciseinoptimism.Itisalmostanirrationaloptimismbecauseyouaresayingwheneveryoubuysomething,thatyouaresmarterthantherestofthe

market.Youknowmore.Youhavebetterinsightthan100millionpeoplewhoarewillingtobuyorsellstocks.Ithinkthatisaprettyboldstatementforalotofpeople.Itisaboldstatementforeverybody.

Sotocomeintowhatisanoptimisticpursuitandbepessimisticaboutwhateveryouarelookingat,Ithinkitisaprettyinterestingmindset,

butIdon’tknowthatIhaveseentoomanypeopleinthestockmarketgetintroublebybeingtoopessimistic.Generallyspeaking,youseetheothersideofthecoin.Peoplesay,“Well,thiscompanyisgrowingat40percent,itisgoingtokeepgrowingat40percent,orifIwanttobeconservativeaboutit,itisgoingtojustgrowat36percent.”Wellyouknow,

whatifitdoesn’t?Whathappensthen?Whatisyourprotection?

Ithinkthatthatisreallytheessenceofavalueinvestor—someonewhoentersintosituationswherehesees,evenifhehappenstobewrongbecauseit’snotlikevalueinvestorshavesomegreaterinsightonthefuture,buttheyseesomesortofdefensivestance,beitjustin

theutterlylowlevelofthestockprice,orthereissomethingaboutthecompanythattheythinkpeoplearemissing.Butyoustillgothroughtheprocessofbeingapessimisticoptimist,Iguesswouldbetheleastawfulwaytoputit.

Buffettreadsawholelotandconsumesatonofinformation.Whataresome

thingsthatyoureadonaregularbasis,andalongthosesamelines,doyouhaveacoupleofbooksoninvestingthathavebeenparticularlyhelpfultoyou?

IdosomethingthatBuffettalsodoes,whichisthatItrytoreadcompanyannualreportseverysingleday.Itcanbeboring.Itcanbeincrediblytediousgoing

throughannualreportsofcompaniesthatmakefastenersfordoorsfortrailerhomesandthingsofthatnature.SomuchofinvestingIthinkforalotofpeopleisreceivedwisdomasopposedtogoingtothesourcedocuments.That,tome,isimportant.ThereisanadvantageofgoingthereoverlisteningtoaWallStreetanalystorsomethingsimilar.

Thatmakesupahugeamountofmyday.

Ialsolikereadingtradejournals.WewillgetQuick-ServeRestaurantMonthlyandOilRefineryWeeklyandtheViaticalJournal,forinstance.

Whatwasthatlastone?

Viaticals.

Whatisa“viatical”?

A“viatical”iswhenyou’vegotalifeinsurancepolicyandyouarenotyetdead,butyouthinkyouwouldliketotradeinthevalueofthatinsurancepolicy.Therearecompaniescalledviaticalsthatbasicallywilldothat.Theywillpassyououtofyourinsurance.

ButIdon’thavetodiefor

themtodothat,doI?

Thegoodnewsisyoudon’thavetodie.Thebadnewsisyoudon’tgetasmuchmoney.Someonedoesn’tgetasmuchmoneyastheywouldhaveifyouwereactuallydead.

Hmmm.Gotit.

Asyoucanimagine,thatis

awfullychipperreading,becauseithasgottwoofthegreatestsubjectsintheworld—ithasgotdeathandithasgotinsurance.Thatisacheerfulread.

Whataboutinvestingbooks?

BothofJoelGreenblatt’sbookshavebeenincrediblyvaluable.Oneisthevery

modestlytitledYouCanBeaStockMarketGenius,andtheother,almostequallymodestlytitledTheLittleBookThatBeatstheMarket.Botharejustspectacularintermsofthinkingandintermsofreallyinstructingenterprisinginvestorstosomeoftheoddballplaceswhereyoucangoandfindvalue.

Thenobviouslytheonethatyouwillhearfrom

everyone,andtheonethatyouwouldhearfromBuffetthimselfwouldbeSecurityAnalysisbyBenjaminGraham,whichIwouldcallthemostactivelyavoidedinvestingbookinhistory,justbecauseitissuchhardreading.Itishardreadinganditspellsalmostapuritanicalapproachtothemarketthatforfolkswhoareoptimists,doesn’tseemlikeawhole

heckofalotoffun.Itisliketakingthejoyoutofthings,butitistrulyawonderfulinstructionmanualforpeoplewhowanttobevalueinvestors.

AsidefromBuffett,arethereotherinvestorsthatyouhaveadmiredforyearsandlearnedfromandifso,whataresomeofthekeythingsthatyouhave

learnedfromthem?

ImentionedJoelGreenblattearlier.IthinkwhatisgreataboutJoelisthatheissomeonewho,unlikeBuffett,whoisoftenbuyingwholecompaniesatthispoint,isgenerallyspeaking,involvedinthemarket.Hehasreallygivenaninstructionmanualforhowtothinkaboutcertainoddballsecuritiesthataren’t

whereeveryoneislooking.Likepreferredsecuritiesanddebtandconvertiblesandreally,reallyfunthingslikethat,andby“fun”Imeannotfun.Soyeah,hehasbeenaveryimportantinfluence.

IthinkDavidNierenbergisprobablysomeonewhonoteveryonewillmention.HerunsaveryconcentratedvaluefundbasedjustoutsideofPortland,Oregon,in

Washingtonstate.Ihadtheopportunitytositdownwiththemnotthatlongago,andthethingthattheysaythatIthinkisaveryimportantthingforinvestorsistheydoeverythingtheycantogettoknowacompany.Theyknowthesuppliers.TheyknowwhentheCEO’smother’sbirthdayis.Noamountofinformationtothemistoosmallortooesotericandthey

runaveryconcentratedportfolioandtheyhavedoneextraordinarilywellovertime,reallybasedontheirwillingnesstogoandtrytogetaninformationaledgeinanentirelylegalway.

Itisnotliketheyaretradingoninsiderinformationorstealingpitchsignals.Theyjustdecidedthatiftheyaregoingtoinvesttheirmoneyintocompanies,theyare

goingtoknowthecompaniescold.Thedaytheyinvestisreallywhentheworkbegins.Theythinkthatisareally,reallyimportantthingforinvestors,becausesomanypeople,theybuysomethingandsay,“Well,timetolookforthenextthing,”andtheykindofforgetthattheyjustputthousandsofdollarsintothelastthing,andthatlastthingdoesn’tstopevolving

simplybecausetheyhavestoppedanalyzing.Thatwasareally,reallyvaluablethingforme,particularlyaswelaunchedtheIndependenceFund,tojustseesomeonewhoreallywalksthatwalk.

Buffettisknownforstayingwithinhiscircleofcompetence.Isthataninvestingtraitthatyousharewithhim?

Itis,thoughIwouldsaythatwetryto.IdohaveateamthatworkswithmeandsowehaveputeachpersonwithintheirowncirclesofcompetenceandthenIdependsomewhatuponthemtoberight,ifyouwill.Ourportfolioisnotasconcentratedastheaverage,eventhecollectionofcompaniesatBerkshireHathaway,anditdoesgo

acrossindustriesandgoacrossgeographicboundariesinawaythathisdoesnot,butIwouldsaythatthecircleofcompetencecanbedrawnanumberofdifferentways.IknowforafactthatIhaveabsolutelynoabilitytodetermineeitherwhattechnologyisgoingtobethenextbigthingorwhatdrugshavethebestchanceofsucceeding.

Sothesingle-drugbiotechcompaniesandthentechcompaniesingeneralareonesthatIjustknowtostayawayfrom,andnotbecausetherearen’topportunitiesthere,butIhavenoinformationaladvantage.IhavenoknowledgeadvantageandbasicallyIwouldberollingthedicewithreceivedknowledge,andwhoknowswhatagendamightbebehind

thatinformationorthepropagatoroftheinformation.SoIknowwellenoughtostayawayfromlotsofthings.IthinkmywifewouldprobablysaythatIhavenoabilitytoforecastanytrendsinanywalkoflife,sothatisprobablybestthatIstayawayfromtryingtodoso.

Whatadvicedoyouhave

forbeginninginvestors?

TheysaythatsomanyguitarplayersreallyburnoutbecausetheytrytoemulateJimiHendrixandsomanydrummersburnoutbecausetheytrytoemulateNeilPeart,andIthinkthatthereissomethingtobesaidaboutnottryingtobesomeoneelse.Tobeingtruetoyourselfandnottryingtoemulateeven

someonewhoisasspectacularasWarrenBuffett.Hecandividecomplexfractionsinhishead.Heisreallyatalentwithoutcompare.Heiskindofanislanduntohimself.

IthinkalotofpeoplejustreallytrytobethenextBuffettinsteadoftryingtobethefirstwhoevertheyare.Investingishardenoughwithoutsaying,“Well,my

instinctsaysX,butWarrenBuffettsaysY,soIamgoingtodoY.”Ithinkthatisaveryimportantthingforpeoplewhoarejuststartingout.

Mysecondpieceofadvicewouldbetotakeyourtime.Thereisnorush.Somanytimeswithbeginninginvestorstheygetawfullyexcitedaboutitandbeforetheyhavestudieditforsixmonths,theyown20different

thingswith95percentoftheirmoney,andthatisscary.Itisscarybecausetheymightnotthinkitisscary.Sotakeyourtime,beyourself.Thatsoundslikeanafter-schoolspecial,butitapplies.

FurtherReading:Booksfor

InvestorsofAllLevelsWhoWanttoLearnMore

(CourtesyofMotleyFoolInsideValue)

Fourbookseveryaspiringvalueinvestorshouldread:

TheEssaysofWarrenBuffett:LessonsforCorporate

America,byWarrenE.BuffettandLawrenceA.Cunningham

TheIntelligentInvestor:ABookofPracticalCounsel,byBenjaminGraham

CommonStocksandUncommonProfits,byPhilipA.Fisher

TheLittleBookThatBuildsWealth,byPatDorsey

BeginningInvestors

AgainsttheGods:TheRemarkableStoryofRisk,byPeterL.Bernstein

ARandomWalkDownWallStreet,byBurtonG.Malkiel

BeatingtheStreet,byPeterLynch

Buffettology,byMaryBuffettandDavidClark

GoodtoGreat:WhySome

CompaniesMaketheLeap...andOthersDon’t,byJimCollins

HowtoBeaValueInvestor,byLisaHolton

HowtoReadaFinancialReport,byJohnA.Tracy

InvestmentMadness:HowPsychologyAffectsYourInvesting...andWhattoDoAboutIt,byJohnR.Nofsinger

OneUponWallStreet:How

toUseWhatYouAlreadyKnowtoMakeMoneyintheMarket,byPeterLynchandJohnRothchild

SelectWinningStocksUsingFinancialStatements,byRichardLoth

TheEssentialBuffett:TimelessPrinciplesfortheNewEconomy,byRobertG.Hagstrom,Jr.

TheFutureforInvestors:

WhytheTriedandtheTrueTriumphOvertheBoldandtheNew,byJeremyJ.Siegel

TheLittleBookofValueInvesting,byChristopherH.Browne

TheLittleBookThatBeatstheMarket,byJoelGreenblatt

TheMotleyFoolInvestmentGuide:HowtheFoolBeatsWallStreet’sWise

MenandHowYouCanToo,byDavidGardnerandTomGardner

TheNeatestLittleGuidetoStockMarketInvesting,byJasonKelly

IntermediateInvestors

BeyondGreedandFear:UnderstandingBehavioralFinanceand

thePsychologyofInvesting,byHershShefrin

Buffett:TheMakingofanAmericanCapitalist,byRogerLowenstein

Bull’sEyeInvesting:TargetingRealReturnsinaSmokeandMirrorsMarket,byJohnMauldin

ContrarianInvestmentStrategies:TheNextGeneration,byDavid

DremanHowtoPickStocksLike

WarrenBuffett:ProfitingfromtheValueHuntingStrategiesoftheWorld’sMostFamousValueInvestor,byTimothyVick

Investing:TheLastLiberalArt,byRobertG.Hagstrom

InvestmentFables:ExposingtheMythsof“Can’t

Miss”InvestmentStrategies,byAswathDamodaran

It’sEarningsThatCount:FindingStockswithEarningsPowerforLong-TermProfits,byHewittHeiserman,Jr.

JohnNeffonInvesting,byJohnNeffandS.L.Mintz

JustOneThing:TwelveoftheWorld’sBestInvestorsRevealtheOneStrategy

YouCan’tOverlook,byJohnMauldin

LessonsfromtheLegendsofWallStreet,byNikkiRoss

MoneyMastersofOurTime,byJohnTrain

MoreThanYouKnow:FindingFinancialWisdominUnconventionalPlaces,byMichaelJ.Mauboussin

Mosaic:Perspectiveson

Investing,byMohnishPabrai

PoorCharlie’sAlmanack:TheWitandWisdomofCharlesT.Munger,byCharlesT.Munger

TheDhandhoInvestor:TheLow-RiskValueMethodtoHighReturns,byMohnishPabrai

TheEssentialBuffett:TimelessPrinciplesfortheNewEconomy,by

RobertG.HagstromThe5KeystoValue

Investing,byJ.DennisJean-Jacques

TheFiveRulesforSuccessfulStockInvesting:Morningstar’sGuidetoBuildingWealthandWinningintheMarket,byPatDorsey

TheFocusInvestor,byRichardM.Rockwood

TheWarrenBuffettPortfolio:

MasteringthePoweroftheFocusInvestmentStrategy,byRobertG.Hagstrom

ValueInvesting:ABalancedApproach,byMartinJ.Whitman

ValueInvesting:FromGrahamtoBuffettandBeyond,byBruceC.N.Greenwald,JuddKahn,PaulD.Sonkin,andMichaelvanBiema

ValueInvestingToday,byCharlesH.Brandes

WhenGeniusFailed:TheRiseandFallofLong-TermCapitalManagement,byRogerLowenstein

YouCanBeaStockMarketGenius:UncovertheSecretHidingPlacesofStockMarketProfits,byJoelGreenblatt

AdvancedInvestors

CreativeCashFlowReporting:UncoveringSustainableFinancialPerformance,byCharlesW.MulfordandEugeneE.Comiskey

ExpectationsInvesting:ReadingStockPricesforBetterReturns,byAlfredRappaportandMichaelJ.Mauboussin

FinancialFinePrint:UncoveringaCompany’sTrueValue,byMichelleLeder

FinancialShenanigans:HowtoDetectAccountingGimmicksandFraudinFinancialReports,byHowardM.Schilit

FinancialWarnings,byCharlesW.MulfordandEugeneE.Comiskey

FooledbyRandomness:The

HiddenRoleofChanceinLifeandintheMarkets,byNassimNicholasTaleb

InvestmentPhilosophies:SuccessfulInvestmentPhilosophiesandtheGreatestInvestorsWhoMadeThemWork,byAswathDamodaran

InvestmentValuation:ToolsandTechniquesforDeterminingtheValueof

AnyAsset,byAswathDamodaran

OptionsasaStrategicInvestment,byLawrenceG.McMillan

QualityofEarnings:TheInvestor’sGuidetoHowMuchMoneyaCompanyIsReallyMaking,byThorntonL.O’Glove

SecurityAnalysis:TheClassic1940SecondEdition,byBenjamin

GrahamandDavidDoddTheAggressiveConservative

Investor,byMartinJ.WhitmanandMartinShubik

TheInterpretationofFinancialStatements,byBenjaminGrahamandSpencerB.Meredith

The(Mis)behaviorofMarkets:AFractalViewofRisk,Ruin,andReward,byBenoit

MandelbrotandRichardHudson

TheQuestforValue,byG.BennettStewart,III

TheTheoryofInvestmentValue,byJohnBurrWilliams

Valuation:MeasuringandManagingtheValueofCompanies,byTimKoller,MarcGoedhart,andDavidWessels

Acknowledgments

Funnyhowthingsturnout,isn’tit?Theideaforthisbookandtheinitialpitchforithappenedwaybackinthesummerof2007.Atthetime,

weFoolsweresimplymarvelingoverthestudiesthathadcomeoutoftheworldofbehavioraleconomics,showingthatwomenandmentendedtoinvestinverydifferentways.Andwenoticedsomethinginteresting—namely,thatitappearedwomeninvestedwithavery“Buffett-like”temperament.We’dlongadmiredMr.Buffettandhis

calm,patient,unflappabletemperament.Wesawthisexemplarytemperamentasadefiningcharacteristicandanexplanationforhisabilitytobuildgreatwealthandbeatthemarketoverdecades,puttingcharlatanaftercharlatanonWallStreettoshame.WeknewtheimportancethatBuffetthimselfplacedoninvestorshavingtheproper

temperament,andwebelievedthatbyfocusingoureffortsforthisbookonuncoveringandhighlightingthekeystohavingtheoptimaltemperament,wecouldhelpimprovethelong-termreturnsofallinvestors,menandwomenalike.

Whatwecouldn’thaveforeseeninourabsoluteworstnightmareswaswhatwastocomeforthefinancialworlda

littleoverayearlater.Asitturnedout,weallneededalessonintemperament,perhapsmorethaneverbefore.

Ofcourse,giventhechoicebetweenwatchingnumerousexamplesoftemperament-gone-wrongunfoldbeforeoureyesandnothavingtoseeourportfoliosandnesteggsabsolutelydemolished,I’m

prettysurewe’dhavechosentoskiptheexamples.Buthereweare,withaneyetothefuture,and,hopefully,youfeelreadytofaceitwithasteady,calmtemperament.Infact,you,dearreader,arethefirstthank-youofmanyImustmakehere.Thankyouforcomingonthisjourneywithme,andforreadingthisfar(youdidn’tjustskipahead,didyou?!).IhopeI’ve

madeitworthyourwhile,andthatyou’velearnedandlaughedalongtheway.

ThankyoutoWarrenBuffett,formodelingtheidealtemperamentoverdecadesanddecades.Thanks,too,forsoopenlysharingyourwisdomwithinvestorseverywhereovertheyears,andfor(hopefully!)havingasenseofhumoraboutthisbook’stitle.

ThankyoutoDavidGardner,TomGardner,andErikRydholmforfoundingTheMotleyFoolohsomanyyearsago.It’sgoodtobeaFool.Thankyouformakingitpossibleandforgivingmesomanyincredibleopportunitiesovertheyears.AndTom,aspecialthank-youtoyouforwritingtheforeword,fortrumpetingthisprojectthewholeway

through,andforyourfriendship.

ThankyoutoSuzanneGluck,ouragentatWilliamMorrisEndeavor,fornegotiatingourbookdealandforsupportingTheMotleyFooleverystepoftheway.

ThankyoutomyeditoratHarperBusiness,HollisHeimbouch,forherconstantencouragement,sharpedits,thoughtfulsuggestions,and

enormousdosesofpatienceandflexibility.Thankyou,Hollis,aswell,foryourkindnessandsenseofhumor.Icouldn’thaveaskedforabettereditorandwillremainforevergrateful.

ThankyoualsototheotherexcellentfolksatHarperCollinsforbeingasenthusiasticaboutthisbookasweare,includingKathySchneider,DougJones,

AngieLee,TinaAndreadis,SamanthaChoy,MarkFerguson,MatthewInman,andColleenLawrie.It’swonderfultoworkwithateamofpeopleasexcitedaboutsomethingasyouare!

ThankyoutoRobynGearey,whofoundthetimetomakesurethisbookactuallycametogetherwhilealsoworkingtripletimetooverseethelaunchofseveral

newFoolnewsletterservices.Robyn,thankyoufortalkingmethroughmomentsofexistentialangst,self-confidenceswoons,andgeneralfreak-outs.Yourcalmdemeanorandencouragingmannerwereagodsend.Thankyouforalwaysbeingthere.

ThankyoutomoneymanagersLisaRapuano,LaurenTempleton,Candace

KingWeir,AmeliaWeir,andBillMannfortakingthetimeoutoftheirpackedschedulestodointerviewsforthisbook.Thankyouforsharingyourexperienceswithallofus.

ThankyoutoFoolsMacGreer,ChrisHill,andSteveBroidoforalltheirhelpnailingdowninterviewsandquotesfromfolkslikeRogerLowenstein,AndrewKilpatrick,PremJain,and

NellMinow.Wordtothewise:ifyouneedtotalktoanybody(seriously,justaboutanybody),thesearethethreeguyswhocanpullitoff.

ThankyoutoFoolsJohnReevesandAlexPapeforfact-checkingthisbookwithinaninchofitslifeandfortheirexcellentoverallcommentsonthemanuscript.Thankyoubothforsavingmefrommymistakes!Thank

youalsotoFoolsHopeNelson,PaulElliott,ToddEtter,BuckHartzell,andAndyCrossforreadingthemanuscriptandsharingyourideasonhowtomakeitasgoodasitcouldpossiblybe.Allofyoursuggestionswereenormouslyhelpful.ThankyouallfortakingthetimetoworkonthiswhenIknowyouhadaboutamillionotherthingsgoingonatthesame

time.ThankyoutotheFool’s

ownmarketingguru,theaforementionedPaulElliott,andtotheFool’spublicrelationsguru,AlisonSouthwick,fornevershootingdownacrazyideaandfortheirwillingnesstogoallouttomakethisbookahit.ThankyoutoFoolDanStapletonforworkinghisdesignmagiconthecover.

ThankstoFoolsGinniBrattiandRandyCoonforsupportingthisproject.ThankyoutoFoolwritersAlyceLomaxandDayanaYochimforbeingsuchinspirations.ThankstoJoeMagyerandtheentireMotleyFoolInsideValueteamforsograciouslysharingtheirreadinglist.AndthankyoutoFoolJonathanMuddforpullingonesentenceburiedwithinabook

proposaltotheforefront,therebygivingusourmostexcellentbooktitle.

Last,butcertainlynotinanywayleast,thankstoAustinforyourloveandsupportasIsathunchedovermylaptop,peckingawayonthisforseeminglydaysandnightsonend.ThanksformakingmelaughandsmilewhenIneededit(alot).Thanksforbeingsweetand

understandingandpatient.Thanksformakingmeendlesscupsofteaandpotsofcoffee.ThanksfordistractingmewithepisodesofTheOfficejustwhenIthoughtI’dreachedmybreakingpointandneededsomelevityfromthattitanofthepaperbusinesshimself,MichaelScott.Mostly,thanksforputtingupwithme.Iappreciateit,andammore

gratefulforyouthanIcanexpress.Thankyou.

Notes

1:WhyTemperamentMattersNowMoreThanEver

1.ToddWenning,“The

WallStreetPanicof2008,”TheMotleyFool,http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx.

2.AndrewRossSorkin,TooBigtoFail(NewYork:Penguin,2010),10.

3.WarrenE.Buffett,BerkshireHathaway2007ShareholderLetter,February2008,

http://www.berkshirehathaway.com/letters/2007ltr.pdf,3.

4.TheAmericanHeritageDictionary,4thed.,s.v.“temperament.”

5.WarrenBoronson,J.K.Lasser’sPickStocksLikeWarrenBuffett(NewYork:Wiley,2001),246.

6.BusinessWeek,July5,1999,quotedinRobertG.Hagstrom,The

WarrenBuffettWay,2nded.(Hoboken,NJ:Wiley,2005),178.

7.SheelahKolhatkar,“WhatifWomenRanWallStreet?,”NewYork,March21,2010,http://nymag.com/news/businessfinance/64950/.

8.Sorkin,TooBigtoFail,29.

9.MichaelLewis,“WallStreetontheTundra,”VanityFair,April2009.

10.RuthSunderland,“Afterthecrash,Iceland’swomenleadtherescue,”Observer,February22,2009,http://www.guardian.co.uk/world/2009/feb/22/iceland-women.

11.DavidJolly,“IcelandEmergedfromRecessionin3rdQuarter,”NewYorkTimes,December7,2010,

http://www.nytimes.com/2010/12/08/business/global/08icecon.html.

2:TheScienceBehindtheGirl

1.HannaRosin,“TheEndofMen,”Atlantic,July/August2010,http://www.theatlantic.com/magazine/archive/2010/07/the-end-of-men/8135/.

2.Ibid.3.DanieldeVise,“Report:Morewomenthanmen

inU.S.earneddoctorateslastyearforfirsttime,”WashingtonPost,September14,2010,http://www.washingtonpost.com/wp-dyn/content/article/2010/09/14/AR2010091400004.html.

4.Rosin,“TheEndofMen.”

5.BradM.BarberandTerranceOdean,“BoysWillBeBoys:Gender,Overconfidence,and

CommonStockInvestment,”QuarterlyJournalofEconomics116,no.1(February2001),261–92.

6.JohnAmeriks,Ph.D.,JillMarshall,andLiqianRen,Ph.D.,“Equityabandonmentin2008–2009:Loweramongbalancedfundinvestors,”Vanguard,https://institutional.vanguard.com/iam/pdf/RPD25.pdf,

December2009.7.JoanMacLeodHeminway,“FemaleInvestorsandSecuritiesFraud:IstheReasonableInvestoraWoman?,”UniversityofTennesseeatKnoxvilleCollegeofLaw,LegalStudiesResearchPaperSeries,researchpaper77,October2009.

8.StefanRuenziand

AlexandraNiessen,“SexMatters:GenderDifferencesintheMutualFundIndustry,”http://ssrn.com/abstract=1343490,February15,2009.

9.Ibid.10.“50LeadingWomenin

HedgeFunds:AreportinassociationwithPriceWaterhouseCoopers,”HedgeFundJournal,February2010,

http://www.thehedgefundjournal.com/magazine/201002/research/thfj-50-women-in-hedge-funds.pdf.

11.“WomeninFundManagement:ARoadMapforAchievingCriticalMass—andWhyItMatters,”NationalCouncilforResearchonWomen,August2009,http://www.ncrw.org/sites/ncrw.org/files/WIFM%20Report.pdf.

12.“WhenItComestoInvesting,Gendera

StrongInfluenceonBehavior,”MerrillLynchInvestmentManagers,April18,2005.

13.ClaremontGraduateUniversityMediaServices,http://www.cgu.edu/pages/4627.asp.

14.JasonPalmer,“Traders’raginghormonescausestockmarketswings,”NewScientist,April14,

2008,http://www.newscientist.com/article/dn13664-traders-raging-hormones-cause-stock-market-swings.html.

15.JohnM.Coates,MarkGurnell,andZoltanSarnyai,“Frommoleculetomarket:Steroidhormonesandfinancialrisk-taking,”PhilosophicalTransactionsofthe

RoyalSociety:BiologicalSciences,January27,2010.

16.Ibid.17.Ibid.18.Ibid.

3:AQuickIntrototheOracle

1.WarrenBuffett,interviewwithLizClaman,“The

BillionaireNextDoor,”CNBC,December2006.

2.AliceSchroeder,TheSnowball:WarrenBuffettandtheBusinessofLife(NewYork:Bantam,2009),88.

3.JohnTrain,TheMoneyMasters(NewYork:HarperCollins,1994),16.

4.LaurenTempleton,interviewwithauthor,

September22,2010,publishedastranscribed.

5.Schroeder,TheSnowball,148–49.

6.AlexCrippen,“CNBCTranscript:WarrenBuffett’s$200BBerkshireBlunderandtheValuableLessonHeLearned,”October18,2010,http://www.cnbc.com/id/39724884.

4:TradeLess,MakeMore

1.WarrenE.Buffett,BerkshireHathaway1988ShareholderLetter,February28,1989,http://www.berkshirehathaway.com/letters/1988.html.

2.DavidA.ViseandSteveColl,“SalomonDealGeneratesMoreBuffett-Watching,”WashingtonPost,September30,1987.

3.JenniferMyers,“28Business,Investment,Academic&LaborLeadersJoinAspenInstituteinBoldCalltoOvercomeShort-Termism,”AspenInstitutepressrelease,September9,2009,http://www.aspeninstitute.org/news/2009/09/09/28-business-investment-academic-labor-leaders-join-aspen-institute-

bold-call-overcom.4.WarrenE.Buffett,“AnOwner’sManual,”1996,http://www.berkshirehathaway.com/ownman.pdf,1.

5.MarkHulbert,“BeaTigerNotaHen,”Forbes,May25,1992,quotedinHagstrom,TheWarrenBuffettWay,180.

6.WarrenBuffett,1992BerkshireHathaway

annualmeeting,quotedinJanetLowe,WarrenBuffettSpeaks:WitandWisdomfromtheWorld’sGreatestInvestor(Hoboken,NJ:Wiley,2007),163–64.

7.———,BerkshireHathaway1996ShareholderLetter,quotedinWarrenE.BuffettandLawrenceCunningham,The

EssaysofWarrenBuffett,2nded.(NewYork:CunninghamGroup,2008),108.

8.PremJain,emailinterviewwithMacGreerofTheMotleyFool,September27,2010.

9.MattLogan,“BuyingtheBuffettWay,”TheMotleyFool,March26,2003,

http://www.fool.com/news/2003/03/26/buying-the-buffett-way.aspx.

10.MurrayChass,“BuffettIsInvestedinRodriguez,”NewYorkTimes,August10,2007,http://www.nytimes.com/2007/08/10/sports/baseball/10chass.html.

11.LisaRapuano,interviewwithauthor,September10,2010,publishedastranscribed.

12.TomandDavidGardner,MillionDollar

Portfolio(NewYork:HarperCollins,2009),xiii.

13.MorganHousel,“LearnfromBuffett’sPatience,”TheMotleyFool,November20,2008,http://www.fool.com/investing/value/2008/11/20/learn-from-buffetts-patience.aspx.

14.WarrenE.Buffett,BerkshireHathaway

1986ShareholderLetter,quotedinBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,95.

5:ReininOverconfidence

1.WarrenE.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967,http://www.pragcap.com/wp-

content/uploads/2010/02/BP20.pdf.2.WarrenBuffettandCarolLoomis,“Mr.BuffettontheStockMarket,”Fortune,November22,1999,http://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm.

3.Schroeder,TheSnowball,277.

4.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967.

5.LaurenTempleton,interviewwithauthor,September22,2010,publishedastranscribed.

6.WarrenE.Buffett,BerkshireHathaway1982ShareholderLetter,http://www.berkshirehathaway.com/letters/1982.html.

6:ShunRisk

1.WarrenE.Buffett,BerkshireHathaway

1992ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,103.

2.Lowe,WarrenBuffettSpeaks,p.116.

3.WarrenE.Buffett,BerkshireHathaway1985ShareholderLetter,inBuffettandCunningham,TheEssaysofWarren

Buffett,2nded.,77.4.———,BerkshireHathaway2008ShareholderLetter,February27,2009,http://www.berkshirehathaway.com/letters/2008ltr.pdf,16.

7:FocusonthePositivesofPessimism

1.WarrenE.Buffett,“BuyAmerican.IAm,”op-ed,

NewYorkTimes,October16,2008,http://www.nytimes.com/2008/10/17/opinion/17buffett.html.

2.Ibid.3.Ibid.4.———,BerkshireHathaway2008ShareholderLetter,5.

5.———,BerkshireHathaway2009ShareholderLetter,February26,2010,http://www.berkshirehathaway.com/letters/2009ltr.pdf,

15.6.BenjaminGraham,TheIntelligentInvestor,reviseded.(NewYork:HarperCollins,2006),204–5.

7.WarrenE.Buffett,“YouPayaVeryHighPriceintheStockMarketforaCheeryConsensus,”Forbes,August6,1979,republishedatForbes.comon

November8,2008,http://www.forbes.com/2008/11/08/buffett-forbes-article-markets-cx_pm-1107stocks.html.

8.BillMann,interviewwithChrisHillofTheMotleyFool,September22,2010,publishedastranscribed.

8:ResearchExtensively

1.Schroeder,The

Snowball,173.2.Ibid.3.Ibid.,149.4.RogerLowenstein,Buffett:TheMakingofanAmericanCapitalist(NewYork:RandomHouse,2008),32,287.

5.Schroeder,TheSnowball,445.

6.Lowenstein,Buffett,150.7.QuotedbyPeterLynch,Forewordtothefirst

editionofTheWarrenBuffettWay,inHagstrom,TheWarrenBuffettWay,2nded.,x.

8.AndrewKilpatrick,emailinterviewwithMacGreerofTheMotleyFool,September22,2010.

9.LisaRapuano,interviewwithauthor,September10,2010,publishedastranscribed.

10.JasonZweig,“HowtoIgnoretheYes-ManinYourHead,”WallStreetJournal,November19,2009,http://online.wsj.com/article/SB10001424052748703811604574533680037778184.html.

11.Buffett,BerkshireHathaway2008ShareholderLetter,16.

12.Ibid.

9:IgnorePeerPressure

1.WarrenE.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967,http://www.pragcap.com/wp-content/uploads/2010/02/BP20.pdf.

2.WarrenE.BuffettandBillGates,interviewbyBeckyQuick,“WarrenBuffettandBillGates:KeepingAmericaGreat,”CNBC,November22,2009.

3.Buffett,BuffettPartnership,Ltd.,LettertoPartners,January25,1967.

4.WarrenE.Buffett,“LookatAllThoseBeautiful,ScantilyCladGirlsOutThere!,”Forbes,November1,1974,republishedatForbes.comonApril20,2008,http://www.forbes.com/2008/04/30/warren-

buffett-profile-invest-oped-cx_hs_0430buffett.html.

5.MacGreer,“TheMostUnderratedPartofWarrenBuffett’sSuccess,”TheMotleyFool,July19,2010,http://www.fool.com/investing/general/2010/07/19/the-most-underrated-part-of-warren-buffetts-succes.aspx.

6.RogerLowenstein,email

interviewwithMacGreerofTheMotleyFool,September16,2010.

7.CandaceKingWeir,interviewwithauthor,October7,2010,publishedastranscribed.

8.JasonZweig,“SoThat’sWhyInvestorsCan’tThinkforThemselves,”WallStreetJournalOnline,June19,2010,

http://online.wsj.com/article/SB10001424052748703438604575314932570154178.html.9.Buffett,BerkshireHathaway2008ShareholderLetter,16.

10.Schroeder,TheSnowball,133–34.

11.AndySerwer,“TheOracleofEverything,”Fortune,November11,2002,http://money.cnn.com/magazines/fortune/fortune_archive/2002/11/11/331843/index.htm.

12.LisaRapuano,interviewwithauthor,September

10,2010,publishedastranscribed.

13.Schroeder,TheSnowball,698.

14.Buffett,“BuyAmerican.”

15.Lowenstein,Buffett,133.

16.Ibid.,111.17.Schroeder,The

Snowball,31–32.

10:LearnfromMistakes

1.JasonZweig,“WhatWarrenBuffettWantsYoutoKnow,”Money,May3,2004,http://money.cnn.com/2004/05/03/pf/buffett_qanda/.

2.WarrenE.Buffett,BerkshireHathaway1996ShareholderLetter,inBuffettandCunningham,TheEssaysofWarren

Buffett,2nded.,134.3.———,BerkshireHathaway1994ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,132.

4.———,BerkshireHathaway1996ShareholderLetter,inBuffettandCunningham,The

EssaysofWarrenBuffett,2nded.,134.

5.Lowenstein,Buffett,354.6.WarrenE.Buffett,BerkshireHathaway2007ShareholderLetter,February2008,http://www.berkshirehathaway.com/letters/2007ltr.pdf,8.

7.———,BerkshireHathaway2009ShareholderLetter,February26,2010,

http://www.berkshirehathaway.com/letters/2009ltr.pdf,12.

8.Schroeder,TheSnowball,593.

9.Ibid.,252.10.LisaRapuano,interview

withauthor,September10,2010,publishedastranscribed.

11.WarrenE.Buffett,BerkshireHathaway2008ShareholderLetter,February27,2009,

http://www.berkshirehathaway.com/letters/2008ltr.pdf,16.

12.Ibid.13.WarrenE.Buffett,

BerkshireHathaway1989ShareholderLetter,March2,1990,http://www.berkshirehathaway.com/letters/1989.html.

11:EmbraceFeminineInfluences

1.Schroeder,The

Snowball,281.2.SamWhiting,“TheBridgeClub:WhatDoSharonOsberg,WarrenBuffettandBillGatesShare?Aloveofbridge,”SFGate.com,January22,2006,http://articles.sfgate.com/2006-01-22/living/17278374_1_bill-gates-mr-buffett-bridge.

3.“LikeaMarriage,Only

MoreEnduring,”MagazinefromTheWallStreetJournal,December2,2010,http://magazine.wsj.com/people-ideas/partnership/like-a-marriage-only-more-enduring/.

4.KatharineGraham,PersonalHistory(NewYork:Vintage,1998),525.

5.WashingtonPost

Company,“WarrenBuffetttoRetirefromtheBoardofTheWashingtonPostCompany,”January20,2011,http://finance.yahoo.com/news/Warren-Buffett-to-Retire-from-bw-3922745384.html.

6.LizClaman,“Buffett:Wouldn’tbuymorenewspapersatanyprice,”May2,2009,

http://liz.blogs.foxbusiness.com/2009/05/02/buffett-wouldnt-buy-more-newspapers-at-any-price/.

7.WashingtonPostCompany,“WarrenBuffetttoRetire.”

8.WarrenE.Buffett,BerkshireHathaway1983ShareholderLetter,March14,1984,http://www.berkshirehathaway.com/letters/1983.html.

9.———,Berkshire

Hathaway1984ShareholderLetter,February25,1985,http://www.berkshirehathaway.com/letters/1984.html.

10.———,BerkshireHathaway2007ShareholderLetter,13.

11.Ibid.

12:MaintainConsistent,PersistentResults

1.Train,TheMoney

Masters,1.2.WarrenE.Buffett,“TheSuperinvestorsofGraham-and-Doddsville,”inGraham,TheIntelligentInvestor,rev.ed.,appendix1,537.

3.Ibid.,546.4.WarrenE.Buffett,BerkshireHathaway1988ShareholderLetter,inBuffettand

Cunningham,TheEssaysofWarrenBuffett,2nded.,88–89.

5.———,BerkshireHathaway2009ShareholderLetter,February26,2010,http://www.berkshirehathaway.com/letters/2009ltr.pdf,4.

13:ValuePeopleandRelationships

1.Schroeder,TheSnowball,273.

2.WarrenE.Buffett,BerkshireHathaway1989ShareholderLetter,March2,1990,http://www.berkshirehathaway.com/letters/1989.html.

3.NellMinow,interviewwithChrisHillofTheMotleyFool,September22,2010.

4.WarrenE.Buffett,“AnOwner’sManual,”1996,

http://www.berkshirehathaway.com/ownman.pdf,5.

5.PremJain,emailinterviewwithMacGreerofTheMotleyFool,September27,2010.

6.LisaRapuano,interviewwithauthor,September10,2010,publishedastranscribed.

7.AmeliaWeir,interviewwithauthor,October7,

2010,publishedastranscribed.

8.MichaelD.Eisner,withAaronCohen,WorkingTogether:WhyGreatPartnershipsSucceed(NewYork:HarperBusiness,2010),35–36.

9.Lowenstein,Buffett,75.10.EisnerandCohen,

WorkingTogether,36.11.Schroeder,The

Snowball,532.

12.CarolLoomis,“WarrenBuffettgivesitaway,”Fortune,July10,2006,http://money.cnn.com/magazines/fortune/fortune_archive/2006/07/10/8380864/index.htm.

13.CarolLoomis,“The$600billionchallenge,”Fortune,June16,2010,http://features.blogs.fortune.cnn.com/2010/06/16/gates-buffett-600-billion-dollar-philanthropy-challenge/.

14.Hagstrom,TheWarrenBuffettWay,167.

15.Lowenstein,Buffett,45.16.WarrenE.Buffett,

BerkshireHathaway1986ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,50.

14:QuestiontheMasters

1.WarrenE.Buffett,BerkshireHathaway

1992ShareholderLetter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,103.

2.Schroeder,TheSnowball,221

3.PhilipA.Fisher,CommonStocksandUncommonProfits(NewYork:Wiley,1996),16–19.

4.WarrenE.Buffett,

BerkshireHathaway1989ShareholderLetter,March2,1990,http://www.berkshirehathaway.com/letters/1989.html.

5.———,BerkshireHathaway1993Shareholderletter,inBuffettandCunningham,TheEssaysofWarrenBuffett,2nded.,90–91.

6.Schroeder,TheSnowball,133–34.

15:ActFairlyandEthically

1.AlyceLomax,“PoptheChampagne!RegFDTurns10,”TheMotleyFool,August11,2010,http://www.fool.com/investing/general/2010/08/11/pop-the-champagne-regfd-turns-10.aspx.

2.WarrenE.Buffett,BerkshireHathaway2000ShareholderLetter,inBuffettand

Cunningham,TheEssaysofWarrenBuffett,2nded.,38.

3.WarrenE.Buffett,“AnOwner’sManual,”1996,http://www.berkshirehathaway.com/ownman.pdf,4.

4.Ibid.5.Schroeder,TheSnowball,229.

6.SusanGharib,“WarrenandCharlie:Ethics101,”xChange:The

NBRBlog,May3,2010,http://www.pbs.org/nbr/blog/2010/05/warren_and_charlie_ethics_101.html

16:FoolishInvestingPrinciples101

1.AndrewKilpatrick,emailinterviewwithMacGreerofTheMotleyFool,September22,2010.

2.LisaRapuano,interview

withauthor,September10,2010,publishedastranscribed.

3.CandaceKingWeir,interviewwithauthor,October7,2010,publishedastranscribed.

4.BillMann,interviewwithChrisHillofTheMotleyFool,September22,2010,publishedastranscribed.

5.WilliamJ.Bernstein,

TheFourPillarsofInvesting:LessonsforBuildingaWinningPortfolio(NewYork:McGraw-Hill,2002/2010),268.

6.WarrenE.Buffett,BerkshireHathaway2009ShareholderLetter,February26,2010,http://www.berkshirehathaway.com/letters/2009ltr.pdf,14.

7.Thesectiononsellingis

pulled,inlargepart,fromStep10,“Don’tSellTooSoon,”in“TheMotleyFool’s13StepstoInvestingFoolishly,”writtenbyJoeMagyerandRichGreifner,andfoundhere:http://www.fool.com/how-to-invest/thirteen-steps/index.aspx.

Index

Thepaginationofthiselectroniceditiondoesnotmatchtheeditionfromwhichitwascreated.Tolocateaspecificpassage,pleaseusethesearchfeatureofyoure-bookreader.

ABC,132accounting,79“Air-aholism,”101,103AmericanExpress,49,61,107,

144–45apparelandtextilebusinesses,42–

43,209–10assets,allocationof,161–63AudurCapital,13balancesheets,79banks,seefinancialindustryBarber,BradM.,18–21,23,28Barron’s,204

BearStearns,2,209behavioraleconomics,18,28–29,

120,191–92,206Berkowitz,Bruce,183BerkshireHathaway:compoundedannualgaininbookvalueof,43,117–18

asoutperformingS&P500inmarketdownturns,121

sharepriceof,95–96stocksplitof,95–96transformedintoholdingcompany,43,110

WB’spurchaseof,42–43,100Bernstein,Peter,192Bernstein,WilliamJ.,163

biases,201Bill&MelindaGatesFoundation,

132biologicalsystems,asanalogiesfor

markets,80,189biotechcompanies,232BlueChipStamps,143Blumkin,Rose,113–14,115,125bonds,145,162Borsheim’sFineJewelry,60,114,

132“BoysWillBeBoys:Gender,

Overconfidence,andCommonStockInvestment”(BarberandOdean),18–21,23

brain,pleasurecentersin,89–90

Breen,Ed,188bubbles,50,119dot.com,56,71,86,88,89,90–91

housing,2,8–9,88,89Japanese,202

BuffaloNews,59Buffett,Susan,109–10Buffett,Warren:backgroundof,37–38,40charitabledonationsof,132“Graham-and-Doddsville”speechof,119–20,133

investmentcareerof,40–43paperrouteof,37–38,48,59,112

readinghabitsof,77–78temperamentof,6–7,14,15,88and2008–9financialcrisis,4–5,10,52–53,69–70,92–93

U.S.companiesasprimaryinvestmentsof,67–68

seealsospecificinvestmentstrategies

BuffetAssociates,Ltd.,41–42,87,117

BuffettBeyondValue(Jain),50,126

Buffett:TheMakingofanAmericanCapitalist(Lowenstein),88

BurlingtonNorthernSantaFe,59–

60,95–96,166businessmodels,79BusinessWeek,202BusinessWire,114“BuyAmerican.IAm.”(Buffett),

69,70,92buy-and-holdinvesting,seelong-

terminvestingBYD,68Callan,Erin,11–12capitalallocation,93–94,129,

186–87CapitalCities,112,132CapitalIdeas(Bernstein),192cash,maintainingamplereserveof,

67“challenge”hypothesis,30,31change:incompanies,166–67inmarketconditions,108

children,asinvestors,39–40,206–7

“cigarbutt”investing,72–73,131,136–37

circleofcompetence,13,55–62,68,81,83,106–7,108,147–48,152,159,160,164,173,174,175,197,205,211,221–24,232

WBon,86–87CitiesService,38

Coca-Cola,43,48–49,56–57,60,107

collaboration,12ColumbiaBusinessSchool,40,

119–20comfortlevel,139,208–9,213,

222–23inrisktaking,162–63,168seealsocircleofcompetence

CommonStocksandUncommonProfits(Fisher),137,204

companies,changesin,166–67competitiveadvantage,see

sustainablecompetitiveadvantage

CompetitiveStrategy(Porter),191

compoundinterest,154–56,206conferencecalls,andevaluating

management,130,187–89,216–17

confirmationbias,82–83,148,174conformity,appealof,89–90ConocoPhillips,82,107consistency,ofinvestment

performance,24,35,44,117–22,175

consumerbrands,60consumerconfidence,3contrarianinvestmentstrategies,

89,97,148,174,205,228CorporateLibrary,124–25cortisol,29–30,31–33

Costco,60,128–29courageofone’sconvictions,see

self-confidencecreditmarkets,3,9–10curiosity,importanceof,79–81,

185–86DairyQueen,43,60debt:creditcard,66,156–58excess,2,7,10,66–67,68,148,157,159,173

managementof,129decisionmaking:emotionsand,200–201outcomesvs.,102,192–93

discipline,maintaining,89,160,211–12

Disney,132,199diversification,138–39,164–65dividends,WB’sdislikeof,93–94Dodd,David,40,86,135,179dominance,maleassertionof,27dot.combubble,56,71,86,88,89,

90–91,210,223DowJonesIndustrialAverage,3,

90economicmoats,56–57,60,75,

106,204Economist,204,219,220efficientmarkettheory,118–21,

133Eisner,Michael,191emotionalcapital,13emotions,controlof,200–201EndofWallStreet,The

(Lowenstein),88Enron,92estrogen,200ethics,141–46,150,176seealsohonestyandopenness

Eubanks,Bob,178–79FairmontHotels,226–27fairness,seeethics;honestyand

openness“FemaleInvestorsandSecurities

Fraud”(Heminway),22“feminine”qualities,12financialcrisisof2008–9,2–6,17,

21–22,33–34,59,195–97,205,211,212–13

Icelandin,12–14WBand,4–5,10,52–53,69–70,92–93

women-managedhedgefundsin,25

financialindustry,9,61asmale-dominated,11–12toxicassetsof,9–10womenin,17–18

Fisher,Philip,85,137–38,184,204

float,43,61,94,100Forbes,88Fortune,71,110FourPillarsofInvesting,The

(Bernstein),163FranklinStreetPartners,178–79FruitoftheLoom,60futurescontracts,29–30Gap,199Gates,Bill,55,132Gates,Melinda,132GEICO,43,48,59,61,77,90,

107,139genderdifferences,seeinvesting,

genderdifferencesin

GeneralElectric,5,53,92GoldmanSachs,5,53,61,92Google,81Graham,Benjamin,40–42,47,63–

64,70,76,85,86,90,110,119,135–36,158–59,164,179,183,184,202,204,230

“cigarbutt”investmentstrategyof,72–73,131,136–37

Graham,Katharine,111–12,115Graham-NewmanCorporation,41Greenblatt,Joel,230,231Guinness,67gurus,questioning,135–40,175–

76,183–85

hedgefunds,177,198genderdifferencesinmanagersof,24–25,35,44–45,175

Heminway,JoanMacLeod,22Herbert,Joe,29Hermes,120Hill,Chris,225history,recognizingpatternsin,80,

189–90Hochschild-Kohn,103–4,106–7,

131honestyandopenness,13ofmanagement,128,130,138,146,150,175,176,187,215

WBon,142seealsoethics

housingbubble,2,8–9,89,107humanbehavior,investingand,

201Iceland,infinancialcrisisof2008–

9,12–14independentthinking,WBon,91indexfunds,164–65information:onlineavailabilityof,120overloadof,218

InnerScorecard,96–97,174,182institutionalinvestors,153insurancecompanies,floatused

by,43,61,94,100Intel,57–58

IntelligentInvestor,The(B.Graham),40,63–64,192,204

InternationalJournalofBankMarketing,26

Internet,76,90,210investing:“cigarbutt”approachto,72–73,131,136–37

contrarian,89,97,148,174,205,228

diversificationin,138–39,164–65

aslong-termcommitment,158–59

marketdownturnsasopportunitiesfor,88

inoverseascompanies,67–68,148,173

asowningpartofanactualbusiness,47–48,54,63,147,151–52,176,199,206–7

qualitativevs.quantitativefactorsin,73,85,108,136–38,184

socialimpactof,13startingoutin,169,206–7,222–24,233

valueapproachto,38,39,40,58–59,91,135,136

investing,genderdifferencesin,15,17–35,123,168,169–70,173–75,205–6

ofhedgefundmanagers,24–25,35,44–45,175

andlearningfrommistakes,27–28,35,44,174

long-termvs.short-termthinkingin,12

ofmutualfundmanagers,23–25optimismand,22–23,34,44,148,174

overconfidenceand,19–21,22–23,34,44,147–48,170,173

patienceand,21–22,147,173peerpressureand,26–27,30,35,44,109,148–49,174

andresearchthoroughness,26–27,34,44,148,174

risktakingand,20–21,24,30,32,33,34,35,44,109,148,170,173,201

testosteroneand,12,29–34,35,44,170,175,201

tradingfrequencyand,19–21,24,31,34,44,147,170,173

IRAaccounts,21–22Iscar,68Jacques,Susan,114Jain,Prem,50,126–27Japan,bubblein,202Johnson&Johnson,126–27,166Kilpatrick,Andrew,78,159

Klarman,Seth,183,184KraftFoods,60–61LaneFiveCapitalManagement,

177–78,185LaurenTempletonCapital

Management,198–99LeggMasonCapitalManagement,

177,179,180,183LehmanBrothers,11bankruptcyof,2–3,5,195

leverage,2,9Levitt,Arthur,141–42LittleBookThatBeatstheMarket,

The(Greenblatt),230Livermore,Jesse,192

Lo,Andrew,192long-terminvesting,9,10–11,165,

181,211asfemaletrait,12,147,173asowningpartofanactualbusiness,47–48,54,63,147,151–52,153,176,199,206–7

speculationvs.,47,152–53,200,206

WBon,71seealsovalueinvesting

Loomis,Carol,110–11,115Lowenstein,Roger,88–89,191Lynch,Peter,152,164,204macroeconomicenvironment,see

marketconditions,changeinMagellanFund,152,164managers,management:changesin,167conferencecallsasguideto,130,187–89,216–17

evaluating,126–30,134,150,159,186–89,203–4,213–17

honestyandopennessin,128,130,138,146,150,175,176,187,215

importanceof,125–26,137returnonequityasmeasureof,127

Mann,Bill,71–72,160–61,225–33

onvalueinvesting,226–29marginbuys,66marginofsafety,63–64,68,72,

93,135,148,176marketconditions,changein,108,

174market-timing,212MaximumPessimismReport,205mentors,questioning,135–40,

175–76,183–85MerrillLynchInvestment

Managers,27–28Microsoft,81,132Miller,Bill,179,183,184,191Minow,Nell,124–25mistakes:

impatienceand,102,103–5,106–7

learningfrom,27–28,35,44,51,82,99–108,174,192–94

ofomissionvs.commission,99–100

peerreinforcementand,105,194asreasonforsellingstock,167–68

asresultofchangingmarketconditions,108,174

asresultoffaultyanalysis,101,108,174

moats,seeeconomicmoatsMohawkAirlines,223Moody’sManuals,76

Moody’sreports,76MotleyFool,141–42IndependenceFundof,71–72,225,232

investmentprinciplesof,15,150–70

MotleyFoolHiddenGems,225,226

Mr.Market,70–71,73,136,148,158–59,167,174

Munger,Charlie,43,49,110,131,133,139,189

inHochschild-Kohnpurchase,103–4

qualitativeinvestingstrategyof,73,85,108,137,138,184

Wescopurchaseand,143–44Murphy,Tom,132mutualfunds,87,153,203genderdifferencesinmanagersof,23–25

Nasdaq,90NationalCouncilforResearchon

Women,26NebraskaFurnitureMart,60,113–

14,125NetJets,102–3neuroeconomics,12,29,205–6NewYorkTimes,51–52,219WB’sop-edcolumnin,69,70,92

Nierenberg,David,231–32Niessen,Alexandra,23–24“NiftyFifty,”87,89Nike,60Nissan,193novels,190–91October1987stockmarketcrash,

92Odean,Terrance,18–21,23,28OfPermanentValue(Kilpatrick),

78,159OmahaSun,59openness,seehonestyand

opennessoptimism:

benefitsof,69–70excess,22–23,34,44,71,73,148,174

Osberg,Sharon,110,111O’Shaughnessy,James,204overconfidence,19–21,22–23,34,

44,61,147–48,170,173,194overseasinvestments,67–68,148,

173,202–3oxytocin,200PaineWebber,209ParadigmCapitalManagement,

208–9patience,12,38,50–54,62,102,

103,105,106–7,160–61,

180–81,195,211,233genderdifferencesin,21–22,147,173

WBon,51–52peerpressure,26–27,30,35,44,

85–97,109,148–49,174,181,197

performancepersistence,24,35,44PersonalHistory(K.Graham),112pessimism:asinvestmentstrategy,22–23,34,44,69–73,148,174,228–29

WBon,70,73PetroChina,67Petursdóttir,Kristin,13

Porter,Michael,191price,valuevs.,118–19,120–21,

180Procter&Gamble,60,166profiteering,7QuarterlyJournalofEconomics,

19railroads,59–60Rapuano,Lisa,177–97onevaluatingmanagement,129–30,186–89

onfinancialcrisisof2008–9,195–97

onmakingmistakes,104–5

onpatience,52,180–81,195onreadingandcuriosity,79–81,185–86,189–90

readinghabitsof,190–92onrelationships,185–86onself-confidence,91–92,160,197

reading,importanceof,77–81,148,185–86,189–92,204–5,217–20,229–31

RegulationFairDisclosure(2000),142

relationshipbuilding,12,123–34,150,185–88,203

vs.returnoncapital,124,134,150,175

WBon,124Renault,193reputation,96research,thoroughnessof,53,61,

65,68,75–83,119–20,137–38,184,203–4,207,227–28,231–32

genderdifferencesand,26–27,34,44,148,174

researchanddevelopment(R&D),129,186

retirementsavings,168returnoncapital,203relationshipsvs.,124,134,150

returnonequity,127risktaking,63–68

comfortlevelin,162–63,168cortisoland,32–33excess,7,10,11,33,82genderdifferencesin,20–21,24,30–31,34,35,44,109,148,170,173,201

marginofsafetyand,63–64,68,72,93,135,148,176

returnand,21testosteroneand,30–31,33,44,175,201

Ruane,Bill,133Rubin,Robert,192Ruenzi,Stefan,23–24SalomonBrothers,145–46

SantaFeInstitute,191saving,importanceof,156–58Schloss,Walter,133scuttlebutt,137–38SecuritiesandExchange

Commission,76,141–42,143SecurityAnalysis(B.Grahamand

Dodd),40,192,204,230–31See’sCandies,43,60,107selectivedisclosure,141–42self-confidence,88,89,91–92,96–

97,160,197,212sellingstock,153–54,165–68,196shareholders:equaltreatmentof,141–42aspartners,143

short-terminvesting,7,10,47,63,200,206

asmaletrait,12marketvolatilityand,50

Sinegal,Jim,128–29small-capvalueinvesting,208socialimpact,investingand,13speculation,seeshort-term

investingsphereofunderstanding,seecircle

ofcompetenceStandard&Poor:500indexof,3,14,43,96,121,164

reportsof,76steroids,seecortisol;testosterone

stockmarket:downturnsin,33,87–88,121October1987crashof,92volatilityof,3,32–33,50,64,136

vs.otherinvestmentvehicles,155

seealsobubbles;financialcrisisof2008–9

stockoptions,127stocksplits,WB’sdislikeof,93,

94–95subprimemortgagebubble,see

housingbubbleSumner,WilliamGraham,2“SuperinvestorsofGraham-and-

Doddsville,The”(Buffett),119–20,133

sustainablecompetitiveadvantage,56,57,60,75,106,137,159,204

changein,167Tamraz,CathyBaron,114technologycompanies:difficultyofpredictingprofitabilityof,55–56,57,81,232–33

seealsodot.combubbletemperament,1–15,180–81,200–

201,211–13,225–26definitionof,6

genderdifferencesin,seeinvesting,genderdifferencesin

ofWB,6–7,14,15,88Templeton,John,39,58,198,201–

2Templeton,Lauren,38–39,58–59,

198–207onevaluatingmanagement,203–4

onglobalinvesting,202–3readinghabitsof,204–5ontemperament,200–201

testosterone,12,29–34,35,44,103,109,170,175,200,201

Tiffany’s,79

Tómasdóttir,Halla,13tradejournals,229trades,frequencyof,19–21,24,31,

34,44,47–54,147,153,170,173

travel,importanceof,220–21Treasurybondmarket,145Tyco,188USAirways,51,101–4,106–7U.S.Bancorp,61valuation,58–59,65–66,167,179–

80value:intrinsic,135–36

pricevs.,118–19,120–21,180valueinvesting,38,39,40,58–59,

91,135,136,177,178–79,198–99,205,208,210–11,226–29

seealsolong-terminvestingValueInvestingCongress,105,

185,194Vanguard,21–22Volvo,193WallStreet,seefinancialindustryWallStreetJournal,77,78,204Wal-Mart,60,79,100,199WashingtonPost,37,48,59,112WashingtonPostCompany,43,

53–54,59,65,93,111–13Weir,Amelia,129,208–24oncirclesofcompetence,222onevaluatingmanagement,130,216–17

readinghabitsof,219Weir,CandaceKing,208–24oncirclesofcompetence,221–22

ondisciplineandself-confidence,89,160,211–12

onevaluatingmanagement,214–15,217

onimportanceoftravel,220–21readinghabitsof,217–19

Weldon,William,127

WellsFargo,61Wesco,143–44WhatWorksonWallStreet

(O’Shaughnessy),204“winnereffect”hypothesis,30–31women:educationof,17financialindependenceof,13,168–69

infinancialindustry,17–18growingeconomicroleof,17asinvestors,seeinvesting,genderdifferencesin

retirementand,168Xerox,223

YouCanBeaStockMarketGenius

(Greenblatt),230Zak,Paul,29,206

AbouttheAuthors

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