Warren Buffett Seminar 5/5/1978 at Stanford Graduate Business School-Prof. Jack McDonald via CSInvesting

The game of making money in the stock market is deceptively simple. It is one of the few businesses where one makes offensive decisions and is not forced into making defensive ones. You play the game only when and where you wish to. You need only swing at the fat pitches which are over the plate and belly-button height.

The stock market is manic-depressant which is ideal. Stocks become severely over and under priced based on non-economic factors. With large institutions handling greater percentages of the money in the market, the market has more of a tendency to over-react on the upside. Always when the stocks dropped the little stockholder would be driven to sell out of fear of losing everything. Now, in addition, when the market moves up the institutions jump in in large numbers because they fear what their clients will say if they miss a major move.(i.e., the fear of losing accounts is the driving force behind institutions).

Institutions are basically marketing organizations. They have learned how to evaluate their clients desires and manage the $ the way the client would like to see it managed. The biggest enemy of money managers is too much money under management.

There is absolutely no correlation between hours worked or intelligence and money management success, although there may be an inverse correlation (i.e., 80 hours/work + 200 IQ = 0). There is a tremendous correlation between approach and temperament, and investment success. The record is clear that money can be made if:

  1. One resists the temptation to be in every game all the time.
  2. One maintains an even temperament
  3. One has a reasonable knowledge of the subject and interest in it.
  4. One is disciplined
  5. One keeps a distance between himself and the market (i.e., Warren Buffett believes he benefits tremendously by being in Omaha than in Wall Street.).

Warren Buffett: Review of Funds

Graham – Newman Fund

  • Compensation = 20% of performance
  • Bought only stocks which were quantitatively undervalued.
  • He did not visit companies or even care about qualitative evaluations.
  • Graham was an intelligent, academic man.
  • The fund did best relatively in down market years. Held a bit of a lot of quantitatively undervalued companies.
  • Overall gain = 17.6% per year compounded after expenses but before Graham-Newman’s %.

WJS Partnership (Walter Schloss)

  • Run by one man who once worked for the Graham-Newman Fund
  • Not too bright, knows little about investing.
  • Works 2-3 hours per day.
  • Looks for statistically undervalued companies.
  • Has owned 700 securities in last 22 years
  • Presently owns 150 securities
  • Compensation 25% of performance.
  • Overall gain 17.2% per year compounded.
  • This example is given because it proves that anybody can make money if they are disciplined and consistent. Personally, Warren Buffett finds the ease repulsive.

Buffett Partnership, Ltd.

  • Compensation: gives client first 6% and takes 25% of performance after that.
  • Used quantitative criteria as first screen.
    • Both balance sheet and income statement orientation.
    • Likes “cookie-cutter” companies
    • Companies that jump out at you quantitatively
    • Does the business have the potential of being a good business?
    • Held approximately 25 securities in every year (many of those securities may be related in that they are built around the same idea)
    • 15 good ideas during the 13 years of the partnership
    • Warren Buffett put more emphasis on the qualitative and managerial aspects of the business.
    • He prefers to find businesses at cheap prices.
    • Warren Buffett buys good cigars at a substantial discount and gets many fine puffs. WJS picks up cigar butts for nothing and gets one puff each. Important–He gets them for nothing.
    • Annual Compounded Rate = 29.5% per year after expenses but before Warren Buffett’s percentage.

Berkshire Hathaway Portfolio

  • Now managed by Warren Buffett
  • $170 million in total
  • $130 million in 8 stocks
  • Other $40 million in 15 stocks.
  • Again, 1 idea can be represented by more than one stock.

Warren Buffett Seminar at Stanford Graduate Business School

See full PDF below.