I have read all the letters that Warren Buffett wrote to Berkshire Hathaway shareholders since 1977. In the 1987 letter, he describes the mindset they follow when buying a publicly listed stock.
The way of thinking below is followed by both Warren Buffett and Charlie Munger.
- We approach the transaction as if we were buying a private company.
- We look at the economic prospects of the business, the people in charge of running it, and the price we will pay.
- We don’t have a selling price in mind.
- We are willing to hold a stock indefinitely as long as we believe the business will increase in intrinsic value at a satisfactory rate.
- When investing, we see ourselves as business analysts – not as market analysts, not as macroeconomic analysts, and not as investment analysts (Security Analysts).
- Our approach makes the market useful, as it periodically presents us with mouth-watering opportunities. But it is by no means essential: a prolonged suspension of trading in the securities we hold would not bother us.
- Eventually, our economic results will be determined by the results of the businesses we own, whether our ownership is partial or total.
- We measure whether a business is successful by operating results and not by its daily or even yearly market price.
- The speed with which a company’s success is recognized (by the market) is not that important as long as the company’s intrinsic value increases at a satisfactory rate.
- We need to emphasize that we don’t sell shares just because they’ve gone up in value or because we’ve held them for a long time.
Those were some of the points in the 1987 letter. It’s nice to note that Buffett really looks at the business, not the stock.
This was a short post, but I wanted to bring a bit of his view on the subject. I also collected 10 pieces of investment advice from Warren Buffett.
Happy investing!