Warren Buffett’s 1999 Lecture: How To Stay Out Of Debt And Live A Meaningful Life (Transcript)

And if you match that with intelligence which you have and energy which you have, you will get an extraordinary result, and you’d be very foolish to sell me ten percent of yourself for fifty thousand. On the other hand, if you don’t match it with that, your potential will, in a significant part, go unused.

The Admiration Exercise

WARREN BUFFETT: And I’ll give you a little simple test to apply in terms of thinking about the kind of habits you want to develop because you can have any habits you want to be. You can be lazy. You can be prompt. You can be late. You can be honest. You can cut corners. I mean, you have all these choices, and those are choices for you to make. Nobody else is going to make them for you.

And I would suggest that you play this little game with me too. Think about the person you would most like to be in life. Maybe it’s one of your contemporaries, maybe it’s somebody a little older, but pick out the person you admire the most, the person that you’d change places with if you could, and then write down why you admire them. Just put it on a piece of paper.

And then figure out the person that you would least like to change places with, who really turns you off, who do you find repulsive, and list the reasons why that person turned you off so much, and put those down on the other side of the paper.

And then look at that list, and you’ll find that everything on the left hand side, what you admire in other people, the qualities they bring to life, cheerfulness, generosity, all kinds of things, you’ll find those are things you can do yourself. It’s very simple. You’ve got to apply yourself, but the habits you form in doing that early on will carry you through life.

And on the other hand, you’ll find that the things that make people repulsive, selfishness, obnoxiousness, egotism, are things that no one has to have. If you find those in yourself, you can get rid of them as long as you get rid of them early.

So all I suggest is that you write down a list of what you admire, what you find contemptible, and decide that the ones on the admired side are ones you’re going to acquire for yourself. And if you do that when you’re young, it’ll carry you through the rest of your life. This doesn’t work if you do it when you’re fifty or sixty. By then, the habits are too well formed. But if you do it early, behavior becomes a habit.

So if you do that two or three years from now, if you go through the same exercise, you’ll find out that the person you admire the most is yourself. That can be a little dangerous under some circumstances, but it’s not a bad thing. I mean, you want to be somebody you like, and you don’t want to be somebody that you dislike. And form those habits early, you basically can’t miss.

Advice on Credit Cards and Financial Discipline

WARREN BUFFETT: Now I’ll give you one other small piece of advice that’s just a corollary on this, and then we’ll get to your questions. And that is, as a general matter, as one piece of specific financial advice, I would say, avoid credit cards. Just forget about them. We’re in various businesses that issue credit cards. The American public loves credit cards. But if you start revolving debt on credit cards, you’re going to be paying eighteen or twenty percent. And you can’t make progress in your financial life going around borrowing money at eighteen or twenty percent.

You can make a lot of money by lending it out at eighteen or twenty percent over time. If you can find anybody that’s good that will borrow from you, but you don’t want to be on the side of the equation that’s always behind in life.

I was lucky. I’d saved about ten thousand dollars by the time I got out of school. That ten thousand dollars was really worth millions I might have earned later on because after you get a family and everything, the expenses roll in. But those were my tools to work with, but it was only because I was ahead of the game. If you’re behind the game by ten thousand dollars at some point and paying eighteen or twenty percent interest on it, you will never get out of it.

I’ve got a partner that says, “All I want to know is where I’m going to die, so I’ll never go there.” And that’s true in financial matters as well. You want to figure out where you don’t want to be ahead of time and avoid that.

I get about a dozen letters a day from people who are having terrible problems, and there are two reasons why they have terrible problems. One is a number of them have had health problems of some sort. I mean, they have really been hit, or somebody in their family has been hit, by some kind of catastrophic illness, and that is a terrible thing to happen to any family. And they run up bills they can’t pay, and really only society can solve that one in terms of protecting people against that. That’s just plain bad luck.

But the other one is from people who run up credit card debt, and they’re facing bankruptcy or they’ve been through bankruptcy once before. And they owe a whole bunch of money, and they can’t even pay the interest, let alone pay any principal. And half of my letters come from people like that, and that problem is avoidable. Catastrophic illness is not, but credit card debt is something you bring on yourself.

And it’s way easier to stay out of trouble than to get out of trouble financially. And I will guarantee you, if you run a big credit card debt, you will be in trouble probably the rest of your life in terms of your financial situation. On the other hand, if you get ahead of the game, even on a very modest scale, so that money is coming in from investing and equities owe you ownership, you’ll be way ahead of the game compared to always paying your creditors every month.

So my advice to you is, if you can’t pay for it, don’t buy it, and get yourself in a position where you can pay for anything. And then we’ll be glad to see you at Borsheim’s or Nebraska Furniture Mart.

Q&A Session

WARREN BUFFETT: Now let’s have some questions. Do we have a mic out there that people can either go to or that travels around? And I can’t necessarily see too well from here.

UNIDENTIFIED SPEAKER: We’re going to have one mic on each side, so just raise your hand and wait for us to come to you.

WARREN BUFFETT: Okay. We have somebody up front who would like a mic. Anything that’s on your mind. Don’t be bashful.

Following Your Passion vs. Chasing a Salary

AUDIENCE QUESTION: How would you advise people who aren’t necessarily going into a career field in which you would make a large base salary, such as medicine or something like that, maybe performing arts or music? How would you advise us to keep up financially with the rest of the world?

WARREN BUFFETT: Well, it is true that a market system does not pay as well in some activities as might seem appropriate for the importance of those activities to society. Just take teaching, for example. I mean, teaching does not pay well. And what could be more important? I mean, you’ve got to be as interested in who the teachers of your children are as who your accountant is, or who’s winning the heavyweight title of the world, or that sort of thing. But it doesn’t pay well.

And it’s a fundamental choice whether you’re going to go into something you love or something to try and make a lot of money. I think that, generally, it pays to go with what you love. And I think that it’s very hard to find people when they get to be my age who say they’ve loved what they’ve done all their life and feel it was very worthwhile, but they’re terribly sad they made that choice because they didn’t make a lot of money. I don’t think anybody’s ever said that to me, that they wish they’d gone into something else where they were uncomfortable doing it or didn’t enjoy it, didn’t feel very productive, but made a lot of money.

The Value of Doing What You Love

So I don’t think you’ll find that. So I would go to work in whatever turns you on. It may turn out that it’ll be more profitable than you can think, but almost everybody here will make enough money unless they get some terrible habits along the way to do reasonably well. And doing reasonably well in this country really is pretty darn good. I mean, it is not necessary to have huge amounts of money in order to enjoy yourself.

I enjoyed myself when I was at my ten thousand dollars, and I live in the same house that I lived in when I had about that. I bought it forty one years ago. I like the house then. I like the house now. I mean, if you think about it, if you have a reasonable job, you’ll be eating at McDonald’s, and I’ll be eating at McDonald’s.

So we’re to push on on food. I mean, you know, often, in fact, I hope it’s Dairy Queen, actually, and if you come to Dairy Queen, you’ll see me. And you can order anything on the menu I can order, we’ll both can afford it. You know, you’ll wear the same clothes I wear. I’ll pay more for my suits, but as soon as I put them on, they look cheap on me.

So we’ll look about the same. And we’ll both live in the same kind of houses. I live in that house from forty one years ago, and it’s warm in winter, and it’s cool in summer, and it’s comfortable. And you’ll live in a house that’s similar. And what difference does it make if you have fifty more rooms or, you know, guesthouses or all that?

It’ll probably just bring you problems. I mean, you have to worry about the greenskeeper or something when you get through. So I have been in the houses of people where the houses are worth, oh, probably two hundred times what my house is worth, and I would not be any happier in those houses at all. In fact, I’d be less happy. I just have one more thing to worry about, you know, the dozens of people around the place and people quitting and people stealing from you and all kinds of things.

To hell with it. Yeah. We’ll drive the same kind of car. In fact, you’ll probably drive a better car. I drive a car that’s about eight years old. I don’t know what it’s worth now, but it gets me around fine. I mean, I’m perfectly happy. We’ll watch the same television. You know? We’ll work on the same computer pretty much.

The only difference will be how we travel long distances. You know? I will fly in a plane that’s more comfortable than flying Southwest Airlines or something, which I’ve got nothing against. But that’s the one real big difference. And other than that, I do what I like every day.

I hope you’ll do what you like every day to do. And work with nice people. I hope you work with nice people. And there’s twenty four hours in the day, and those are where the hours go. So great wealth is the tiniest bit different in a real sense than having just a decent income.

And to trade a decent income and something you love doing and something where you feel worthwhile doing it for huge wealth where you trade off a lot of your principles, would be a terrible mistake.

The Role of Luck and Heroes

AUDIENCE QUESTION: Would you acknowledge your success more on yourself or from the help and teachings of others?

WARREN BUFFETT: Well, I was very lucky in life. If you tell me who your heroes are, I will make a pretty good prediction about what you’re going to do. And I had the right heroes. I was very lucky in life, and my heroes never let me down and started with my dad. And then I had others in business. And so I have had great teachers, some formal teachers, some that were just informal teachers, teachers by instinct or example. And if I hadn’t had those, my life, I’m sure, would have been very different.

If I’ve been born any place else — I was born in 1930, and at the time, one out of fifty births in the world were in the United States. So I came in against fifty to one odds against being born in the United States. I would’ve been a disaster, you know, if I’d been born in Afghanistan or Peru or someplace. I mean, I was extraordinary. I won the lottery the day I was born, you know, by being born in this country. So have you.

I mean, the odds were probably forty to one against you being born in this country, and you were five times more likely to have been born in China or four or five times more likely to have been born in India or some other place where it would not have been as easy to exploit the full potential of your talent. So we’ve all won the lottery in that respect, and that’s just plain luck.

I mean, and I was lucky to be born at this time. Capital allocation is something that pays off extremely well in this society now, but it doesn’t pay off in other societies, and it didn’t pay off many years ago. My friend Bill Gates says that if I had been born a few thousand years ago, I’d have been some animal’s lunch. You know? I can’t run very fast, and I can’t climb trees, and those are talents. Nobody asked me to climb trees now, but there was a time when it might have been important. And, incidentally, Bill would have been some animal’s breakfast. I mean, can’t run so fast either.

But in any event, you know, we are lucky. I mean, just imagine being born a couple hundred years ago with exactly the same talents and how far they would have taken you then. You know, the average person today lives so much better than the richest person lived a hundred or a hundred and fifty years ago. So I’m lucky in that respect. I’m lucky to be born of terrific parents.

I was lucky to be raised in Omaha in a great public school system. I got a start here in the first eight grades. That gave me a foundation that later when I went off the track a few times, carried me through because I had a terrific grade school education right here in Omaha at Rose Hill. And one of the reasons I had it, incidentally, is kind of unfortunate, but I had that great education in part because women were being enormously discriminated against. And so a woman at that time could be a teacher. She could be a secretary. She could be a nurse. You know? And that was about it.

So you had half the talent pool in the United States limited to just a few jobs. So you had an abundance of talent in those activities like nursing or teaching because that talent with males was spread across every form of work activity there was. But with women, it was concentrated in a few areas, and that benefited me. It’s kind of sad because it didn’t benefit those teachers, but I was very lucky. And I’ve really been that way all my life.

And what I do is important as, you know, what a good teacher does or a good nurse does or something of the sort — I think that’s quite questionable. It pays off enormously well in a market economy like the United States, but that’s an accident. Didn’t have anything to do with any innate ability of mine.

Technology and the Future of the World Economy

AUDIENCE QUESTION: My name is Marina Tsed, and I attend Omaha Central High School. Now, mister Buffett, technology has been a great factor in stimulating the world economy. What are your predictions for the future of the technology industry, and what is its future role in world economy and the United States economy?

WARREN BUFFETT: Well, there’s no question it’s turning the world upside down. It’s done it somewhat already, but it’s just beginning, and it’s moving very fast. I met Gates on July fifteenth 1991. I was out there for a fourth of July celebration with a friend who subsequently died in Greenfield with the Washington Post, and she took us down to visit the Gates family. And he tried to educate me about high-tech, and he’d had better luck with chimpanzees. I mean, I was really a disaster, but he’s a good teacher.

But one thing he told me was that at the time, he said, “You’ve got this model in your head of the world, and your model has time and distance as very limiting factors.” And he said, “They aren’t limiting factors anymore.” He said, “You know, the cost of talking to somebody around the world or getting your message in front of somebody or publishing,” he said, “it’s going to be zero, or so close to zero, it doesn’t make any difference.” And, you know, that was revolutionary, but it’s happening already in a very, very big way. And it’s just, what, eight years later, and it’s exploding.

So high-tech information technology, whatever you want to call it, is changing the world, and it’s going to change it in a very, very big way. That’s one of the things I think about in businesses we buy. We announced the purchase yesterday of a furniture retailer in the Boston area. And, you know, I think to myself, what effect does this new world have in terms of the Internet on furniture retailing? I mean, you have to think about questions like that. The changes will be huge.

I played bridge yesterday with people all over the country, but I played it with people all over the world. I just sit down at my computer, and I’ve got some popcorn there. And I’m in khakis and a sweater, and I can have a bridge game in thirty seconds with people all over the world, at no cost to it, basically. You know, that’s a lot different than trying to arrange a game with four people in Omaha on a day when one guy wants to play golf, another wants to watch baseball. I mean, it just changes things in a huge way.

We are very fortunate in the degree to which the United States leads the world in this area. I mean, we have a lead. It’s hard to think of who’s in second place. And fifteen or so years ago, this country had an inferiority complex. It’d be hard for you to remember because you weren’t old enough to be around then. But in the early eighties, we were wondering whether the Germans and the Japanese were going to own everything and that they were going to make all the steel and they were going to make all the cars and everything else and the television sets, and we were going to flip hamburgers. That was the standard line.

And just imagine in a short period like fifteen years how that’s changed around. In an important way, that’s changed because of this information revolution, where — like I said, I don’t know who you would name as being in second place in the world, but here’s the most important industry in the world, and the United States has this incredible position, and we’re moving all the time with that position. So I think that argues for a terrific future for the world over time, and I think it argues even more for a terrific future for this country.

Securing Your Financial Future

AUDIENCE QUESTION: What are the best ways for youth to get started now in securing their financial future?

WARREN BUFFETT: Well, it’s not very complicated. It goes back to getting full use out of your own talents first. I mean, the difference between whether you’re going to be earning x or two x or three x a year twenty years from now is going to be a function of not how much talent you have, but how well you use the talents you already have.

And so that is the — your best financial future is your own ability and your capacity to use those abilities to their potential. And they can’t be taken away from you. They can’t even tax it. I mean, you know, most things — if you own a piece of real estate, if they double the taxes, they double the taxes, and that changes your ownership in the property because now, in effect, the taxing authorities own more of it because they’ve got a greater command on the revenue stream. The same thing about almost any assets you have.

But they don’t tax what’s in your head, and they don’t tax your ability to start performing when you get to work in the morning and finish in the evening to your potential. One of the things that amazes me is how people who really do perform well just sort of jump out at you once you’re running a business. When I got out of school, I thought, you know, everybody would behave that way, but they don’t. Most people sort of go through life in a sleepwalk, and if you don’t, you will stand out.

The Importance of Getting Ahead of the Game

So the biggest thing for your financial future is yourself. Now beyond that, it is always being ahead of the game rather than getting behind the game. It’s saving a little no matter how you do it.

I mean, I delivered papers. I worked at pennies. I sold golf balls. I had a pinball machine around. I did a lot of things that enabled me to accumulate about ten thousand dollars by the time I got out of school. Ten thousand doesn’t go as far now as it did then, but having anything so that you’re ahead of the game and not getting behind the game is enormously important.

I mean, just you know, if you’re going to run a hundred yard dash against a bunch of people in life, if you can figure it out so that when the gun goes off, you’re ten or fifteen yards ahead instead of ten or fifteen yards behind, it’s going to make an enormous difference in how that race comes out.

So having some net resources doesn’t make much difference whether they’re in stocks or bonds in my view, and not having debt when that gun goes off when you get out of school, is a huge plus over being behind the game. And, you know, it may come from delivering a paper out in the morning. It may come from part time work someplace, but put aside a few dollars for yourself, so that when the time comes and you enter the workforce, you’re ahead of the game and not behind.

And then once you get there, don’t get behind by buying a whole lot of things that you figure you’re going to pay for someday while you’re paying twenty percent interest in between.

Students, if you could please say your name and school when you ask a question.

On the Cost of Education and Student Debt

AUDIENCE QUESTION:

PATRICK DOUGHERTY: My name is Patrick Dougherty, and I’m from Pavilion La Vista High School. I was wondering, with the increasing costs of education today, what can students do to deal with their debts once they’re out of college?

WARREN BUFFETT: Well, that’s a tough one. I mean, I’d pay it off as fast as I could, and I would incur as little debt as possible before that time came.

And I would say this, in my experience in business, there is very little difference, if any, between a very high priced business education and what’s available for a lot less money. I went to the University of Nebraska at Lincoln my last year in college. I went to Wharton for a couple years before that. I learned just as much at University of Nebraska as I did at Wharton, and there’s nothing against Wharton. I mean, it’s just that we had a very good school here. I had some terrific professors at Lincoln.

And so I would not assume that if I was paying a few thousand dollars for an education here in the state, for example, versus paying huge amounts elsewhere, that it was going to make a lot of difference. Most of the education you need — you need to be prodded in the right direction, but an awful lot of it is self taught.

I mean, Andrew Carnegie did a wonderful thing in this country in terms of libraries, and I used to spend a lot of time at libraries. I even got locked in at what was then the University of Omaha one night, and couldn’t get out for hours — I got so entranced with what I was reading.

But there’s all kinds of information available. Now with the Internet, it’s so much easier than it was then. So it’s out there to be taken, and it isn’t necessary to pay thirty or thirty five thousand dollars a year to go to some big name school to get the education at all.

I mean, if you’re going to learn accounting — which is probably the most important course you’d take in business — if you’re going to learn to count, you can learn accounting absolutely as well, in my view, going to UNL as going to Harvard. I mean, I would bet on that.

And so I wouldn’t run up huge bills in terms of getting a business education. Now, if you’re going to get a medical education, there are certain professions where there may not be any way around spending a fair amount of money and getting in debt to some degree. You gotta make that decision yourself, but I’d certainly try to minimize it.

And I would have it figured out how I would handle that debt in, say, a five year period after I got out of school, or I would think twice about incurring it.

On Forming a Nonprofit Organization

AUDIENCE QUESTION:

KYLE CLARK: My name is Kyle Clark. I’m here representing the Omaha Youth Advisory Council. What advice would you have for a forming nonprofit organization?

WARREN BUFFETT: For forming a nonprofit organization? Oh, I’ve always tried to avoid forming nonprofit organizations. That would depend entirely on what I want it to accomplish. I mean, it’d be one thing if it were a hospital. It could be another thing. There are so many types of it. So you’ve gotta get people that are experienced and involved in an entity like that. But it depends so much on the objective you’re working at.

On Civic Involvement

AUDIENCE QUESTION:

KARA HARBERT: Hi. My name is Kara Harbert, and I attend Millard West High School. I understand that you’re very civically involved, and I was wondering how important of a quality you think that is for an individual in life and why.

WARREN BUFFETT: Well, I wouldn’t say that I am — I mean, I do certain civic things. I think your model as a citizen, for example, in Omaha would be Walter Scott. I mean, he is far more civically involved than I am. And, incidentally, his predecessor, Peter Keywit, was too, but Walter’s carried it to new heights. So I don’t want to take on any mantle for that myself.

I do some things. One of the problems I have is I love what I do so much that it sort of takes over. I mean, I’m like a guy that likes to play a lot of golf or something, except I like the business I’m in. But I’ve got a family that participates very actively. Some of my children work on almost anything that comes along in the civic area.

And, you know, people do what they want to do to quite a degree. And I think I’ve never talked to anybody that enjoyed working in civic activities that didn’t feel that was very worthwhile after they’ve done it. I mean, they built something, and participating in building something is always a lot of fun.

And actually, you can have a good time. We have this golf tournament, for example, in September, and we raised some money for civic, but everybody has a good time. So nobody’s paying any price by doing it. I’m having a good time. The people who come are having a good time, and we get to show them off to people.

But you should be enjoying things as you go along, and you will if you work in civic activities that interest you. And you can do the same thing in politics. I mean, if you find political ideas or politicians who you particularly identify with, you can get a lot of self satisfaction out of working, and you’re doing something worthwhile. So just follow your instincts on that. That’d be my recommendation.

On the Biggest Economic Problem Facing Youth

AUDIENCE QUESTION:

JEREMY GRAHAM: Hi. My name is Jeremy Graham from Millard South High School. We’re probably the elite youth of today. And I have a question. What do you see as the biggest economic problem facing the youth of today going into the future?

WARREN BUFFETT: I don’t think that you’re going to have enormous economic problems. I think you will live in a society where the average person lives better by a significant margin than the average one of a generation earlier or two generations earlier. That’s been the history of this country. It’s a marvelous country that way.

I mean, when you think of it, we have four and a half percent of the world’s population, and what’s been accomplished here is incredible. Fifty three percent of the value of corporations that are publicly traded in the world exists in the United States with four and a half percent of the population. This country always has done well.

They say in stocks that you should buy stock in a business that’s so good that even an idiot can run it because sooner or later, one will. And that’s not terrible advice. Well, that seems to have been sort of the history of this country from time to time.

I mean, we’ve had all these problems that have come along. If you look back on the last hundred years and list all the problems this country has run into, you can make a very long list. And a lot of people who focused on those problems at the time have missed the bigger picture, and the bigger picture is that every generation lives better than the one before it.

That’s because of savings — because savings enable people to create new tools, to do better things as they go along. And it’s also due to an environment that lets people realize their potential to a greater degree than most other environments in the world. It’s far from perfect. I mean, it’s sad how far it is from perfect, but it is better than anything else around.

In this country, you don’t have some commissar running a big business. You’ve got a guy like Jack Welch. And a fellow like Jack Welch makes a difference of night and day in terms of the productivity of that business over a period of decades. And productivity is what causes the standard of living to rise.

So a system that throws up the Jack Welches of the world to run businesses is going to have an enormous advantage over a society that does it by heredity or that does it by government edict. And we’re closer to that society than any other country, and it’s led to great things. And it will continue to lead to great things.

So I think you’ve got the best future. You don’t face a war, and you’ve got a better future in terms of achieving material rewards than any generation in history. So I wish I could trade you places. I might get taken up on that by a few of you, though.

On Y2K and Its Impact on the Economy

AUDIENCE QUESTION:

RYAN WILKINS: Hi. I’m Ryan Wilkins from Millard West High School, and I was wondering if you, or if you could speak for Mr. Gates, were afraid of the impact of Y2K on the economy or specifically the stock market.

WARREN BUFFETT: Well, I’m glad you gave me a chance to bring in other people because I’m the last guy in the world to understand about Y2K. I don’t know why this microphone’s working. I don’t know why lights go on — I flip on the switch of my television set and pray. I mean, it’s all beyond me.

But I would say this, the smartest people I know in that area, in large part, think it’s going to be a nonevent in this country. I can’t speak for the rest of the world, but I think you’ll wake up on January first and find the world hasn’t changed from December thirty first.

Now I would say this — you might get a whole bunch of friends to write you checks for a billion dollars on December thirty first and then deposit them. Who knows what’ll happen? You can’t lose anything. I mean, all they do is bounce. And if the system gets fouled up, you might find a lot of money in your account, but I wouldn’t count on it.

We own a company called Executive Jet. We have about fourteen or fifteen hundred customers who own pieces of airplanes with us, and we’ve got a hundred and sixty airplanes of our own flying around. It’d be very interesting to me to see — the advance people let us know ahead of time when they want to use it — it’ll be very interesting to see how many sign up for January first at twelve oh one. But it wouldn’t bother me to fly them in the least on January first or do anything else on January first. Ideally, I hope they were getting prepared to watch the Huskers play in the big game.

On How to Decide What to Invest Time and Money In

AUDIENCE QUESTION:

JAMIE SOLACE: I’m Jamie Solace from Twin Valley, and I was wondering how do you decide what you’d invest your time and money in?

WARREN BUFFETT: Well, I like to find businesses that have good economics. Now what are good economics? Well, good economics are a business that has some kind of a moat around it that makes its product or its service or its location or something a little more desirable to the customer than any other sort of comparable product.

The Discipline of Investing

You know, the number one candy bar in the last thirty or forty years has been Snickers. People don’t fool around with different candy bars. They fool around with different length dresses. They fool around, you know, with all kinds of things, but they don’t fool around with candy bars because they figure, you know, they’re going to go in and lay out fifty cents or whatever it is and put it in their mouth. And they’re not going to — for fifty cents and putting it in your mouth, I mean, you’re not going to say I’ll lay out forty five cents and put something else in my mouth.

So you find that very stable, and we like businesses that we think we can figure out where they’re going to be in ten or fifteen years. I don’t know where the information technology businesses are going to be in ten or fifteen years. I know where Snickers bars are going to be in ten or fifteen years. They’re going to be selling just about this, you know, the way they do now. I know where Wrigley’s gum is going to be in ten or fifteen years.

There’s not going to be a lot of innovation in chewing gum. And the Internet’s not going to cause people to quit chewing gum either. I mean, at least — Gates may think so, but I don’t think so. But it’s predictability regarding the sustainability of a competitive advantage, something special about a product. So we look for those kind of products, and then we look for people that are running the business that are honest and able.

And it’s easier to find people that are honest and able than it is to find businesses that are going to stay wonderful for a long period of time. There are a lot of businesses that looked like they were going to stay wonderful that really evaporated over time. But that’s what we’re looking for. And the nice thing about it is we don’t have to find very many. If we find one a year, that’s terrific, you know, because you don’t need a hundred or a thousand great investment ideas to do well.

You need a couple. And the discipline is the most important thing. We don’t need brainpower. We need discipline. And you don’t need a hundred and fifty IQ to do what I do.

Thank god. You don’t need a hundred and forty. You don’t need a hundred and thirty five. You may need a hundred and fifteen or something like that. But you do need discipline.

The No Called Strike Game

You have to wait until you see the fat pitch to swing at because investing is a no called strike game. You know? If I were a baseball player and I only like pitches two inches above my navel, some guy could learn that and he could pitch me three or four inches below that, and I get called out on strikes because I never find a pitch I like. You can get called out on strikes in baseball. You have to swing at pitches that you don’t even necessarily like, particularly after the count gets to two strikes.

In business, you don’t have to swing at anything. You can sit there, and the paper says General Motors at sixty eight or it says General Electric at a hundred and fifteen or it says General Dynamics at sixty three. And if you don’t like those prices, you don’t have to swing. You can wait there day after day after day after day, and there are no called strikes. Now when you swing, when you decide to buy something, then, if you swing and miss, it’s a strike.

But it’s a marvelous game to be in because there are no called strikes, and you can simply wait for that one time in a month or six months or a year or two or three years when you really know what you’re doing, where you like the price, where you like the people running the business, and then you swing. And you only need a few swings in your lifetime. So that’s the way we try to pick businesses. We try to stay with things we understand. I mean, there can be all kinds of wonderful investment opportunities out there that I don’t understand.

I don’t know what cocoa beans are going to do next year. Maybe you know, but I don’t know. I don’t know what crude oil is going to sell for. But I don’t have to know. I just have to know what I know.

I have to know where the limits of my understanding are, what I call my circle of competence. And if I’m only able to evaluate five percent of the businesses in the world, no problem. I just stay within that five percent and try and find something. Most people get in trouble in investments because they get itchy. They can’t discipline themselves, and they hear about other people making money.

Nothing upsets people so much as hearing about their friends making money. That’s very destructive to discipline because they think, I’m smarter than that guy next door, and he just bought that new car with the money made trading stocks on the Internet, so why can’t I? Well, the answer is you can’t over time. You will lose money if you trade stocks actively. And it’s hard to exercise the discipline.

But anytime you buy something, you should be able to take out a one page sheet of paper and say, “I’m buying General Motors at sixty five. I’m buying General Electric at a hundred and fifty because —” and you should write down the reasons. If you can’t fill out the sheet, if it’s because somebody told me about it at a cocktail party last night, that’s not good enough. It’s because my broker told me about it, that’s not good enough. You’ve got to have a reason for thinking that it makes an intelligent investment.

You do the same thing if you’re buying a farm or an apartment house. If you’re buying a farm, you’d say, “I’m buying this farm at a thousand dollars an acre because I think I can earn sixty dollars an acre on it. If corn sells at such and such and soybean sells at such and such and yield is such and such,” and you’d figure it out. That’s the same reason you buy businesses. And when you buy stocks, you’re buying a little piece of a business.

And that’s probably the most important thing to remember in investing — that when you are buying a stock, you’re buying a little piece of the business. And if you are buying it at an attractive price for the business, for the whole business, you’re going to make money. And if you aren’t, over time, you won’t make money.

Q&A: Moral Standards and Society

AUDIENCE QUESTION: Hi. My name is Cliff McElroy from El Coral Mount Michael. Reverend Jackson, Jesse Jackson, talked to us earlier. He seemed to believe that the moral standards of today’s society will eventually affect us in business. How do you feel this will affect us as youth growing up in the United States?

WARREN BUFFETT: He said the moral standards will affect us how?

AUDIENCE QUESTION: Like, the moral decay in society today will affect us in business by how we feel and how we interact with other people.

WARREN BUFFETT: Well, I think it’s very difficult to quantify moral standards over time. You could pick out huge weaknesses at any given time in terms of how people or the country is behaving, and huge strengths. So I think it’s enormously difficult to quantify. I think, by and large, we have made progress in what I would call institutionalized moral standards in this country. In terms of slavery, in terms of — women couldn’t vote, you know, a century ago. Half the country were second class citizens in that respect, and they had much lesser rights in terms of inheritance and all kinds of things. The income tax didn’t exist a hundred years ago. So the idea of taxing people according to how much they benefited from society and their income didn’t exist. So I think in terms of institutionalized moral standards, the country has made really quite significant progress in the last hundred years.

I think there’s an enormous distance to go. I think we’re going in the right direction, maybe by fits and starts, but I think we’re going in the right direction. And I think that it will be a significant plus to everybody in this room if they live in a more moral society forty years from now than a less moral one. But I think the odds are that they will. I think the country moves in that direction. Very difficult to do it. All kinds of interests work against it. But in the end, I think the American people want it.

And you saw it in civil rights. I mean, it took television to dramatize what was going on, and people that weren’t near it preferred not to think about it. But it got through to the conscience of the American people. And a lot of progress has been made there, and there’s a lot left to be made. But it’s better than it was. And the pace may seem very slow to those people involved, and I can understand that. The pace, for woman’s suffrage, went for decades and decades and decades.

I was reading the trial of Clarence Darrow, which took place in California in about 1910 or 1911. There were no women on the jury. The woman wasn’t allowed to be on a jury. They weren’t citizens in that sense. So the moral behavior of the country has, in my view, improved. And it’ll continue to improve, and I hope you all in this room do your part to help it improve.

Q&A: Should Young People Invest Now?

AUDIENCE QUESTION: Hi. I’m Nick Jors from Central High, and I was wondering, since the stock market’s so high right now, if it’d be smart for us to get involved now or to wait till it goes down a little or what.

WARREN BUFFETT: I can’t tell you whether or not to buy stocks now generally. I think it’s important that you save money, and whether you put it in the stock market or not, I don’t think it’s terribly important. I think if you’re interested in stocks, you should buy it, and if you’ve got a little capital, you should buy a few. I don’t think there’s any way of learning about them better than experiencing it. Doing it on paper isn’t the same.

I can guarantee you, if you lose money on paper or lose real money, it’s a different experience. I think you’ll learn more about yourself if you do it that way. I bought my first stock when I was eleven. I was actually at Rosehill at the time, and I bought three shares of City Service Preferred at thirty eight, and it went down to twenty seven, which is something I still remember even though I was eleven at the time. And then it went up to forty, and I sold it. I made five bucks on my three shares after commissions, and then it went to two hundred and something. I probably remember that a little better than if I’d been doing it on paper.

And I fooled around doing a lot of things between about age eleven and nineteen in the stock market. I did charts. I did all kinds of technical analysis. I read every book I could get on the subject. And I didn’t do that well. I didn’t do terrible, but I was really just floundering around. But by the age of nineteen, when I read Ben Graham’s book, I was at the University of Nebraska in Lincoln. I went and bought this book called The Intelligent Investor. It had just come out, and it had an enormous impact on me.

Now if I hadn’t done what I did in the previous eight years, if I hadn’t been all over the lot, I’m not so sure that that book would have had the same impact on me. By that time, I was prepared to read Ben Graham’s book, which changed my life financially in an incredible way. I mean, I wouldn’t be up here today if I hadn’t read that book. But part of life is getting prepared so that when something does happen that’s significant, you can grasp the significance of it and know what to do with it. And I would say that first eight years of fooling around, even though it produced nothing financially to speak of, produced a lot in terms of getting my mind prepared for when I really did read something that made sense.

So I was ready to accept it, and I actually went back and went to Columbia to study under Graham. And all kinds of things flowed out of it because of reading that book. So I would encourage you, if you’re interested in the field, to do a few things. I’d still try and make it as intelligent as possible. I would try to stick with businesses I thought I understood. I’d still get out that sheet of paper, and I’d write, “I’m doing this because —” and just test my reasoning. And then I’d go back and read it a year later and see whether what you thought would be true turned out to be true. So I would always check myself. I believe in grading myself on everything. Doctors have postmortems, and they do it because they learn from postmortems.

Learning from Mistakes and Social Policy

And business people don’t like to do postmortems. When I’m on the board of a company, and they can be building plants or buying companies, they never want two years later to run a check on how that decision turned out because it can be unpleasant. But you learn from postmortems, and you don’t want to learn — it’s way better to learn from other people’s mistakes than your own, but you got to learn from a few of your own too. And the time to do it is when you’re young. We can do maybe one more, and then we wrap this up at one, do we?

Or maybe two more.

PETE WALSH: My name is Pete Walsh. I’m from Creighton Prep. And my question is, to what extent do you feel that the government, with the current policies of welfare and Social Security, is it financially competent and fiscally prepared for the future?

WARREN BUFFETT: Well, I think that the country as a whole is quite well prepared for the future. That doesn’t mean I would adopt every policy they have. But I think, a, we have an enormously rich society, enormously rich society, and it’ll get richer.

Everyone isn’t going to participate in that. Some won’t participate because of physical disabilities, others because of mental disabilities, others because of shortcomings in the education they received when they were growing up, all kinds of reasons. We have a prosperous enough society to be able to take care of those people, and we should take care of them.

And how we do it so that they feel most useful in life, and how we do it so that we continue to encourage people to be more productive themselves — those are not easy questions, but that shouldn’t take our eye off the ball of feeling we should do something about it.

The Ovarian Lottery

I often pose this problem to people. I say, let’s assume that it’s twenty-four hours before you’re born, and all of you can take this test. Twenty-four hours before you’re born.

And a genie comes to you, and the genie says, “What was your name again out there?” Whatever. We’ll call you Joe. And the genie says, “Joe, you look pretty promising to me. I think you’ve got kind of a sense of fair play and a good mind. And so I’m going to let you have an extraordinary opportunity. I’m going to let you design the world into which you’re going to be born in twenty-four hours. It’s yours. You pick out the political rules. You pick out the economic rules. You pick out the social rules. You design the world. And when you’re born in twenty-four hours, you’re going to be born into that world. And that’s the world that’s going to exist for your lifetime, for your children’s lifetime, for your grandchildren’s lifetime.”

And you, having heard of some of these genie jokes in the past, would say, “What’s the catch?”

The genie says, “Well, it’s a very slight catch. When you’re born in twenty-four hours, you’re going to emerge in this world you designed, but what you don’t know is whether you’re going to be born black or white, male or female, rich or poor, bright or retarded, able-bodied or infirm, in the United States or Afghanistan. All you know is that you’re going to reach into this barrel, which now has six billion balls representing every person in the world, and you’re going to participate in what I call the ovarian lottery. You’re going to take one ball out of that barrel, and you’re never going to get another ball. That’s you. You’re going to get one ball, and now you’re going to emerge.”

Now, what kind of rules do you want to have for that society, not knowing which ball you’re going to get? Now, that, I put to you, is the way I think people should think about social policy.

Designing a Fair Society

And if you’re lucky enough to be born in this country, you’ve won the lottery already. But we should have a system, in my view, that encourages the Jack Welches and the Bill Gateses and all of that to work far beyond the time when it has any economic significance to them. We want people commanding those resources who are extremely able to command them. That’s how the standard of living moves forward.

So we should want Tom Osborne coaching in Nebraska. We should want Bill Gates designing software, and we don’t want to mix up those two. We don’t want to get Bill coaching in Nebraska.

So you want a system that directs and gets people to their potential and puts them in the position where they can do the most good for society. But you also want a system for the people who get the wrong ball. I mean, somebody’s going to get the ball that says low IQ. Somebody’s going to get the ball that says this disease or that disease earlier in life that cripples them. And we’ve got a rich enough society that we can take care of those people.

And I think that, to get back to your question, I think that this society will move more and more in that direction. It has the capability of moving more and more in that direction as our resources and our output increases. And I think that it has the will to do that in a general way. Although, like I said, there have always been lots of fits and starts.

So there is no shortage in the United States of resources. There’s no shortage of output. You have to have a system that encourages people to behave to the limit of their abilities and puts them in the right place, but then you have to make sure that everybody gets taken care of too.

Now we can do one more and then we will wrap things up. I’ll let the fellow with the microphone or woman here make the decision.

The Media’s Economic Impact

BEN GOLD: Hi. My name is Ben Gold. I go to Brenna Talbot, and I wanted to know how you think the media affects the world economically today.

WARREN BUFFETT: Well, it’s a small question. What it obviously does, simply because it’s moved so far technologically, is it’s brought it together in a big way. I was over in China a few years ago, right after the time of the women’s conference in Beijing. And I was reading the Chinese coverage of that conference, and of course it had nothing to do with what was taking place, but the Internet was coming in.

And you can access the Washington Post or the New York Times. I get the Washington Post at nine-thirty here at night, in effect. I never could get it the next day through physical delivery, but I buy electronic delivery. I can read it probably earlier than most people in Washington are reading it.

So the ability to communicate and the degree to which the world can have awareness of what’s going on everywhere in the world — it’s been a quantum leap. And that will have — there are a lot of things that come out of that. And net, they’re a plus over time.

The ability of information to be available to everyone worldwide almost instantaneously — it can be huge advances in things like medicine, for example, just to pick one. So it’s a net plus. It has a big effect, and the definition of media has now been expanded enormously.

I mean, there were three television networks in the early nineteen sixties, and that was it. There were three highways information traveled electronically. And if the three pieces of information were I Love Lucy and something else and something else, those were the three choices of information or entertainment that you had for tens and tens of millions of people sitting there looking at a tube. Now it’s unlimited, and that’s only, what, three or so decades. So it’s just exploded, and it’ll continue to explode.

And net, I think it’s a plus.

I think it’s one o’clock. I want to thank you all. I wish you well. You’re going to do terrific. Thanks.

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