The Six Elements of Intelligent Investing 41watch. Reporter after reporter was quick to criticize Buffett for
not having participated in the Internet boom. In December of
1999, Barron ’ s ran a cover story titled “ What ’ s Wrong Warren? ” The
fi rst sentence of the article was “ After more than 30 years of unri-
valed investment success, Warren Buffett may be losing his magic
touch. ” What sparked such an opinion? Shares in Berkshire were
set to decline for the fi rst time since 1990. Thankfully for Berkshire
investors, Buffett spends no time paying attention to what the
media thinks about his investments. 4 So for Buffett, his aversion to
the Internet companies was simply an exercise in discipline. With
billions of dollars at his disposal, he could have easily allocated tens
of millions of dollars to a basket of Internet stocks and not affected
Berkshire ’ s performance if they all lost money. But he didn ’ t do
that because doing so would have taken him outside of his circle
of competence. This is a very important lesson and one Buffett has
alluded to over and over. If you ’ re not willing to risk millions in an
endeavor you don ’ t fully understand, then you shouldn ’ t be willing
to risk thousands. An intelligent investor seeks to avoid all losses
and does not differentiate between a “ small ” and a “ big ” loss.
Just as Tiger Woods adheres to a concise and disciplined set of
steps for each and every golf swing, so does the value investor in
selecting stocks. In order, these six essential elements are:- Commit to a sound investment philosophy.
- Find a good search strategy.
- Effectively value a business.
- Have the discipline to say no.
- Be patient.
- Be willing to make a significant bet at the point of maximum
pessimism.
This framework — ingrained in the minds of Warren Buffett,
Charlie Munger, Mason Hawkins, Seth Klarman, and others — providesCH003.indd 41CH003.indd 41 9/2/09 11:07:04 AM9/2/09 11:07:04 AM