1997: How does Buffett avoid making the same mistakes twice?
AUDIENCE MEMBER: Yes. My name is (inaudible). I’m from New Mexico. And I’m a shareholder. I have two questions.
First, in your ’91 letter, you wrote about investors eventually repeat their mistakes. So what do you do to keep you from making the same mistake twice?
And the second question is, in your ’92 letter, you wrote that you tend to deal with a problem of future earning in two ways. The first way is the business you understand. And the second is the margin of safety. And you say they are equally important. But if you — (loud noise) — but if you cannot find the happy combination of faster growth at a low key, which one do you think is more important, faster growth or low key? That’s my two questions.
WARREN BUFFETT: I think we were told by — (loud noise) — we were told by some higher authority which one was more important there for a second. (Laughter)
Well, they’re bound together. Obviously, if you understood a business perfectly — the future of a business — you would need very little in the way of a margin of safety.
So the more volatile the business is — or possibility is — but assuming you still want invest in it, the larger the margin of safety.
I think in that first edition of [Benjamin] Graham — I doubt if I’m right — was it (inaudible) and said, you know, maybe it was worth somewhere between 30 or 110, or some number. He said, “Well, that sounds — how much good does that do you to know that it’s worth between 30 and 110?” Well, it does you some good if it’s selling below 30 or above 110.”
That’s — you need a large margin of safety.
Well, if you’re driving a truck across a bridge that holds — it says it holds 10,000 pounds — and you’ve got a 9,800 pound vehicle, you know, if the bridge is about six inches above the crevice that it covers, you may feel OK.
But if it’s, you know, over the Grand Canyon, you may feel you want a little larger margin of safety, in terms of only driving a 4,000 pound truck, or something, across. So it depends on the nature of the underlying risk.
We don’t get the margin of safety now that we got in a 1973-4 period, for example.
The biggest thing to do is understand the business. If you understand the business, and get into the kind of the businesses where surprises — by their nature — surprises are few. And we think we’re largely in that type of business.