Warren Buffett employs investment principles that he describes as “simple, old, and few.”Many of Buffett’s methods evolve from his personality and character.Others he has learned from teachers and experience. Like all good students, he uses his training as a foundation.In time, he stacked the bricks far higher than his best teachers.
HAVE A PHILOSOPHY
“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
“Over the years, a number of very smart people have learned the hard way that a long stream of impressive numbers multiplied by a single zero always equals zero.”
Buffett returns again and again to Ben Graham:
“I consider there to be three basic ideas, ideas that if they are really ground into your intellectual framework, I don’t see how you could help but do reasonably well in stocks. None of them are complicated. None of them take mathematical talent or anything of the sort. [Graham] said you should look at stocks as small pieces of the business. Look at [market] fluctuations as your friend rather than your enemy—profit from folly rather than participate in it. And in [the last chapter of The Intelligent Investor], he said the three most important words of investing: ‘margin of safety.’ I think those ideas, 100 years from now, will still be regarded as the three cornerstones of sound investing.”
Buffett summarizes Graham this way:
“When proper temperament joins with proper intellectual framework, then you get rational behavior.”
RECOGNIZE THE ENEMY: INFLATION
“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income taxes during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent.”
“If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker—but not your partner.”
Buffett explains why he holds stocks even in times of high inflation:
“Partly, it’s habit. Partly, it’s just that stocks mean business, and owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation—at least they are if you buy in at appropriate prices.” 9
Buffett has a few ideas on how to control inflation:
“I could eliminate inflation or reduce it very easily if you had a constitutional amendment that said that no
congressman or senator was eligible for reelection in a year in which the CPI increased more than over 3 percent.
