2005: What advice would Buffett give a young investor?

AUDIENCE MEMBER: I’m Dudley Shorter (PH) from Council Bluffs, Iowa.

When you were younger, what first sparked your interest in investing, and what advice would you give a younger person if they wanted to invest in the stock market? Thank you.

WARREN BUFFETT: Well, I’m not exactly — I got interested probably when I was, maybe, seven or thereabouts. I wasted my time before that. (Laughter)

It’s a little like W.C. Fields. When he inherited some money, somebody asked him what he did with it and he said he spent half of it on whiskey and the rest he wasted. (Laughter)

So there I was, dawdling around. But I got — my dad [Howard H. Buffett] was in the business, so I would go down to his office, and I would see these interesting books, and I would read them and I would go down — he was on the fourth floor of what’s now known as the Omaha Building at 17th and Farnam, and on the second floor was Harris Supplement Company, and they had a board, and I would go down there.

The market was open on Saturdays in those days, so I could — for two hours — so I could go down on Saturday, and I saw all these interesting things going across the tape.

And I just read a lot. I probably took every book in the Omaha Public Library, every book they had on investing — or the stock market — basically.

I was very interested in the New York Stock Exchange. I thought maybe I’d want to become a specialist when I grew up and maybe I still will.

But the — I took all the books out. I read them. And finally, when I was 11, I bought three shares of stock and I didn’t know — I was fascinated by the subject.

My dad got elected to Congress, so now the library became even bigger, and I took all the books I could out of there on markets. And I used a chart and do all that sort of thing.

And then, finally, I read [Benjamin] Graham’s book when I was at the University of Nebraska, “The Intelligent Investor,” when I was 19, and that just changed my whole framework.

But the advice I would give is to read everything in sight.

And to start very young. It’s a huge advantage in almost any field to start young.

If that’s where your interest lies, and you start young, and you read a lot, you’re going to you’re going to do well.

I mean there are no secrets in this business that only the priesthood knows. I mean, you know, we do not go into temples and look at tablets that are only available to those who have passed earlier tests or anything.

It’s all out there in black and white. It’s a simple business.

It’s not — it requires qualities of temperament way more than it requires qualities of intellect. I mean, if you’ve got more than 125 IQ, you can throw away the rest of the points or give them to your other members of the family or do something because you don’t need it in investing.

But you do need a certain temperament that enables you to think for yourself. And then you have to develop a framework — and I developed it from reading Ben Graham, I didn’t come up with it myself — very simple framework.

And then you have to look for opportunities that fit within that framework as you go through life, and you can’t do something every day. You know, you can learn every day, but you can’t act every day.

And I talked about reading the annual reports of Anheuser-Busch for 25 years, but I’ve read the reports of Coca-Cola and Gillette and all kinds of companies long before we invested in them.

And if you enjoy the game, you know, you’ll find that like playing bridge or playing baseball or whatever, if you don’t enjoy it you probably won’t do well on it.

But I would advise you to start early. Read everything in sight. Look for the successful framework that’s been successful for people, and there’s nothing like Graham’s, in my view, and you’ll have a lot of fun and you’ll probably make a lot of money.

Charlie?

CHARLIE MUNGER: Well, I’m at a little disadvantage here. Warren has made himself into kind of a dean of investors, starting as a boy, and he has a greater respect for the process than I do.

I have a good bit of [economist John Maynard] Keynes’ attitude that money management is sort of a low calling, compared to being a surgeon or a lot of other things.

CHARLIE MUNGER: I think the corporate types — the corporate managers — ought to study investing better because they’d be better managers.

And I think that everyone who thinks through the investment process learns more about how the world really works. And I think that’s very worth having.

But I do not like as big a percentage of GDP as we now have going to money management and its attendant frictions.

And I don’t like the percentage of the nation’s brainpower that is now in all of these different forms of highly-compensated money management.

I don’t think it’s a good thing for the country, and I hate the fact that we’ve contributed to it by our own predilections.

WARREN BUFFETT: Charlie is only sitting up here next to me as part of his outreach program, actually. (Laughter)

Please don’t take any pictures that you could blackmail him with, being associated with me.

Charlie made a very good point there about how managers would do better if they understood investments.

I find it absolutely fascinating, and I’ve seen this throughout my life, I’ve seen it close up.

I will have friends who are CEOs of companies and they’ll have somebody else handle their money.

If you say to them, you know, should you buy Coca-Cola or Gillette or something like that, they’ll say that’s much too tough. I don’t understand that sort of thing. What do I know about investing?

And then some investment banker walks in the next day with the idea they buy a $3 billion company, which is just buying a lot of shares of stock in one company, and they’ll run through some little two-hour presentation and turn it over to a strategic planning group and think that they are then the ones that should make that decision as to whether to buy multibillion-dollar businesses when they really don’t feel they’re qualified to make $10,000 decisions with their own money.

And it’s extraordinary what you see in corporate America and the acquisition activity.

It’s a little like they say about making sausage and making laws, it’s better unobserved.

Charlie, you have any further thoughts on that? You’ve seen a lot of it with me. (Laughs)

CHARLIE MUNGER: Well, I do think that the present era has no comparable precedent in the past history of capitalism.

I think we have a higher percentage of the attention of our intelligent classes into buying little pieces of paper and getting — trying to get rich doing it, and in promotional activities with big profit sharing fees.

I can recall no past era which had a similar concentration of this type of activity. Can you, Warren?

WARREN BUFFETT: No, but I think you would say, probably, too, that we’ve seen sort of baby versions of this, something subsequently happened, that —

CHARLIE MUNGER: Oh, yes. If you want to talk about what are the future implications, a lot that I see now kind of reminds me of Sodom and Gomorrah, and —

WARREN BUFFETT: We weren’t there, incidentally. I mean — (Laughter)

CHARLIE MUNGER: No, but there’s a published account. (Laughter)

And I think when you get as much sort of regrettable activity going on and sort of feeding on itself in frenzies of envy and imitation, that — it has happened in the past that there came bad consequences.