Source: Smart Investors
“If you are a professional investor and confident in your abilities, I recommend a highly concentrated portfolio. For ordinary individuals who lack investment expertise, I recommend broad diversification.”
“We look for investment opportunities in businesses surrounded by wide moats, like castles built on solid economic ground.”
“Finding the right partner means you’ve already succeeded halfway. Whether in marriage or business, being overly calculating is a serious flaw.”
What does Buffett regret most in his investment career? What qualities does he value most in managers? Although Buffett has openly shared his investment philosophy, why do so few succeed in replicating it? And in Buffett’s view, what efforts are necessary to truly deserve success?
In February 2008, while answering questions from students at Emory and Austin’s business schools, Buffett addressed each of these questions directly. The Intelligent Investor translated the full Q&A transcript and curated the top 10 most insightful exchanges.
01. Professional investors should concentrate their portfolios; ordinary individuals should diversify extensively.
Question 1: With the popularity of ‘Fortune’s Formula’ and the Kelly Criterion, there’s been considerable debate in the investment community about concentration versus diversification. I know which side you support, but could you elaborate on how you allocate positions and average down your cost basis?
Buffett: On diversification, I hold two views. If you’re a professional investor and confident in your judgment, I recommend high concentration. For ordinary individuals who lack investment expertise, I recommend broad diversification.
Over the long term, the economy will inevitably improve. Ordinary investors simply need to avoid buying at inflated prices or at the wrong time. Most people should invest regularly in low-cost index funds.
If you’re an ordinary person yet still try to outsmart the market—spending just an hour a week studying investments—you’ll likely end up regretting your overconfidence.
If investing is your area of expertise, diversification doesn’t make sense. It’s illogical to allocate capital to your 20th-best opportunity when your top opportunity is available.
Take LeBron James as an example: if your team has LeBron James, you must keep him on the court—you shouldn’t substitute him out to make room for other players. If you have a harem of 40 women, there isn’t a single one you truly understand.
Charlie and I primarily invest in just five stocks. If I were managing $50 million, $100 million, or $200 million, I would allocate 80% of the portfolio to concentrate on those five stocks and assign 25% of the portfolio to my top holding.
In 1964, I found a compelling opportunity worthy of a significant bet—I was willing to allocate as much as 40% of the portfolio to it. I told my investors they could withdraw their money if they wished. Not a single investor pulled out. The opportunity I identified was American Express, which had become embroiled in the salad oil scandal.
In 1951, I invested virtually all of my personal assets into GEICO stock. At the end of 1998, Long-Term Capital Management ran into trouble. At that time, the yield spread between on-the-run and off-the-run Treasury securities widened significantly, and I was prepared to commit 75% of my personal account to capitalize on this opportunity.
There have been occasions—even within the past few years—when I was willing to allocate as much as 75% of my portfolio to a single investment. If you know how to play the game—if you truly understand business—you can afford to take concentrated positions.
Over the past 50 to 60 years, Charlie and I have made countless investments, yet not a single one has resulted in a loss exceeding 2% of our personal net worth.
We’ve only experienced paper losses due to market price fluctuations; we’ve even seen individual investments drop 50% on paper. That’s why we always say: never borrow money. We don’t want to place our fate in someone else’s hands.
When anything else is on deep discount, people rush to buy it. (Official WeChat public account of Qilehui: qlhclub) Yet when stocks go on sale, people get upset. If you believe in a company and bought at 30, and the price drops to 20, you should buy more—not less. Isn’t it a good thing when McDonald's lowers its burger prices?
Question 2: Today, with so many institutional investors and hedge funds in the market, do individual investors still have an edge when analyzing securities themselves?
Buffett: I think there aren’t many overlooked opportunities in today’s market. The issue is that I can only consider relatively large-scale investment opportunities. Because of that, you actually have a comparative advantage over me.
A few years ago, a friend recommended that I take a look at the South Korean stock market. We bought shares in POSCO, which had a price-to-earnings (P/E) ratio of only three or four times. I identified more than 20 companies with solid fundamentals and P/E ratios of just two or three times. I constructed a diversified portfolio because I wasn’t very familiar with the Korean equity market.
We are always on the lookout for exceptionally unusual opportunities. Occasionally, such anomalies do arise in the securities markets. I like to shoot fish in a barrel—and preferably when the barrel is already empty.
A few years ago, such an opportunity emerged between 30-year and 29.5-year U.S. Treasury bonds. Due to lower liquidity, the older bond traded at a yield 30 basis points higher (i.e., price 30 bps lower). Long-Term Capital Management initially entered the trade when the spread was only 10 basis points, but their excessive leverage ultimately led to their collapse.
Most of the time, for most securities, market pricing is efficient. Mispricings don’t come with announcements—you won’t find them on CNBC or in broker reports. You have to discover them yourself.
In 1951, right after I graduated, I pored through Moody’s Manuals and Standard & Poor’s manuals searching for investment opportunities. I went through them page by page—like a basketball coach scouting for players over six feet eight inches tall.
Height alone isn’t enough—I also need to assess coordination and other attributes. If someone who’s five-foot-five walked up to me and said, ‘Why don’t you first take a look at my basketball skills?’ I’d say, ‘No, thank you.’
On page 1,443 of Moody’s Manual, I found Western Insurance Securities. Its earnings per share for the previous two years were $21.66 and $29.09, yet its stock traded between $3 and $13 per share. I then conducted the necessary due diligence to verify whether those earnings were genuine.
Markets will eventually correct mispricings. Opportunities do exist—you don’t need many. Finding just ten in a lifetime is enough to achieve great wealth. The key is to avoid major mistakes—there must be zero catastrophic errors. No matter how large a number is, multiplying it by zero still gives zero. Never let everything vanish overnight.
02. Qualities Buffett Values Most in Managers
Question 3: Which industry do you believe has the greatest growth potential in the 21st century, and why?
Buffett: We don’t think about the issue that way. Let’s look back at the 1930s—nobody at the time could have predicted the transformative impact automobiles and airplanes would have on the world.
There were 2,000 automobile manufacturers back then; today, only three remain in the U.S., and even they are barely surviving. These companies delivered immense value to society but caused significant pain for investors. To profit from such businesses, investors not only had to pick the right company but also time their investment correctly.
Since Orville Wright invented the airplane, the airline industry has generated virtually zero net wealth for investors. If only some capitalist had shot down the Wright brothers during their first flight—it would have done a great service to all of us investors who came after.
Take television manufacturers as another example. There was a time when TV makers were everywhere—companies like RCA and GE once produced televisions. Today, you can’t find a single television manufacturer left in the United States.
What makes a good business? Coca-Cola is a good business. Its product has remained unchanged since its inception, and 122 years later, it still sells 1.5 billion servings every day. Coca-Cola has a moat. Once you own a castle, there will always be others trying to take it from you.
Gillette holds a 70% market share in razors, with an 80% gross margin, and its product has remained essentially the same. Men don’t change much—shaving is practically their only form of grooming.
Snickers has held the top spot in the candy category for the past 40 years. If you gave me $1 billion to displace Snickers, I couldn’t do it. That’s the test of a great business. Coca-Cola and Gillette are unbeatable.
Richard Branson is a marketing genius—he launched Virgin Cola, yet still failed to dent Coca-Cola’s dominance. We seek investment opportunities in businesses whose castles are surrounded by wide, durable moats.
Growth is certainly desirable, but we prefer great businesses. In this year’s annual report, there is a section titled “The Great, the Good, and the Gruesome,” where I will discuss this topic in detail.
Question 4: Among the many managers, some eventually become exceptional leaders. What qualities do such managers possess? In your view, what 'soft' and 'hard' skills do they exhibit?
Buffett: Berkshire has 45 managers. With some of them, we communicate once a year; with others, once a month; and with some, every day. I usually have dinner with the Blumkins family once a month, and we also go on vacations together because we are friends.
When selecting managers, we primarily look at whether they are passionate about their businesses. Typically, the managers come to us themselves. I have never bought a company that someone else was flipping for profit. We cannot personally run these businesses ourselves, so I hope our managers live up to the trust we place in them.
We hardly ever sign formal contracts with our managers. When a manager sells their business to me and I write the check, I expect them to continue managing the business just as they did before. The question I care about most is whether, after receiving $500 million, this manager will still get up at 6 a.m. every day to work and send the money they earn to Omaha.
I look them straight in the eyes to see whether they love their business or just love money. It’s fine to love money, but they must love their business even more. Why do I arrive at the office every morning at 7 a.m., eager to start working? Because I have the freedom to create my own work, and I also enjoy hearing applause from others.
I acquired a jewelry retailer, Ben Bridge. The company is now in its fourth generation of family ownership and operates over 100 stores. They only wanted to sell to Berkshire. Both the founding family and employees were unwilling to sell the company to anyone else—they chose Berkshire exclusively.
At Borsheims, one of Berkshire’s subsidiaries, we have a manager from Zimbabwe who never attended business school. We don’t consider academic degrees, test scores, or HR recommendations—we look for passion for the business. We also offer fair and reasonable compensation, as we don’t want our managers to harbor resentment due to perceived unfairness.
(He then went on to talk about Pete from Forest River and Mrs. B of Nebraska Furniture Mart.) ……
People like this cannot be hired at any salary. We are honored that, from 1965 to the present, not a single one of our managers has defected to a competitor. Some have retired, and a few have been let go. In any case, we hand over the canvas to our managers and give them the freedom to express themselves.
03. The Biggest Regret in My Investment Career
Question 5: In your investment career, have you ever been tempted to deviate from your investment strategy? If so, how did you handle it?
Buffett: I’m not the kind of person with extraordinary self-discipline. By nature, I only want to do things that make logical sense. The same applies to my personal life—I don’t care how other wealthy people live.
I wouldn’t buy a 405-foot luxury yacht just because someone else has a 400-foot one. Some of my friends own luxury yachts. On their yachts, 55 crew members serve 14 guests.
Among those 55 crew members, some steal, others engage in inappropriate relationships—I certainly don’t want to deal with all that mess. Besides, since my friends have luxury yachts, I can enjoy them for free, which is great.
I don’t need multiple large villas either. If I wanted to do something wild or outrageous, I could—but unfortunately, Anna Nicole Smith is no longer with us. I recall a joke: an old man aged 60 married a 25-year-old woman. His friend asked him, ‘How did you manage that?’ He replied, ‘I told her I was 90.’
Question 6: What would you say is your most serious mistake? What do you regret the most?
Buffett: We’ve made many mistakes—when we’re wrong, we’re wrong, and I don’t dwell on it. We don’t really have regrets. Investing involves making countless decisions; it’s impossible not to make errors. There are investments we should have made but didn’t, costing us $10 billion in missed gains. Such mistakes don’t appear on financial statements and are invisible to outsiders.
In 1994, we used Berkshire Hathaway stock to acquire a footwear company. That company is now worth zero, while the Berkshire shares we paid with are currently valued at $3.5 billion. Now, when Berkshire’s stock price declines, I actually feel a bit better—because the cost of my past mistake appears smaller when the stock is down.
In 1973, Tom Murphy recommended acquiring NBC for $35 million, and we declined. Failing to act when we should have—that was a major mistake.
As for my personal life, there are always things I could have handled differently. But so many good things have come my way—it’s simply not worth dwelling on the few things that caused unhappiness.
Finding a good partner means you’ve already succeeded halfway. As long as you’re in good health and have a happy family, you’ll have a good life. Not being admitted to Harvard Business School was one of the luckiest things that ever happened to me—sometimes, what seems like a setback turns out to be a blessing in disguise.
04. Advice for Achieving Success: Never Be Petty
Question 7: Although you have publicly shared your investment approach, very few people have been able to replicate your success. Why is that?
Buffett: I once asked Graham the same question. Many people attended his lectures at Columbia University. He used actual stocks of the time as examples in his teaching.
After one semester of his course, students could construct an investment portfolio using Graham’s examples that would almost certainly make money.
Graham lived a life of sharing. Because he shared so openly, he may have accumulated less wealth—but he lived more happily. Money is merely numbers on paper; there’s little difference between dying with $86 million or $42 million. Of all the students who took Graham’s class, 90% ultimately went into other fields.
I began investing at age 11, purchasing three shares of Cities Service preferred stock for my first investment. I read every book on investing available at the Omaha public library. Initially, I studied price charts and learned technical analysis. I was obsessed with technical analysis, but it never made me any money.
At age 19, I read Graham’s The Intelligent Investor—a book that changed my life. Did Graham suffer any loss because I read it? Perhaps. We competed against each other in investing, so he may have earned less as a result—but Graham didn’t care.
Those who were receptive to Graham’s philosophy understood it immediately; those who weren’t receptive couldn’t grasp it no matter how many times it was explained. Ultimately, it comes down to differences in personality. Everyone wants to get rich quickly—but that’s not how money is made.
Graham’s philosophy doesn’t deliver what many investors desire. According to Graham, investors aren’t supposed to predict the future—they should simply stay within their circle of competence and wait for clearly attractive opportunities. Compared to gambling on whether a stock will rise or fall the next day, Graham’s method isn’t exciting enough.
Most people buying internet companies don’t even know their market capitalization. They buy because they feel the stock will go up. If you ask them to write down, 'I am buying XYZ Company, which has a $6 billion market cap, because…,' they simply can’t articulate a reason.
It’s still the lesson of the tortoise and the hare—the tortoise always wins in the end. Charlie and I talk about investing, and in doing so, we’ve cultivated competitors. However, most people don’t compete with us. Even those who do—it doesn’t matter; we already have more money than we could ever spend.
Question 8: At last year’s Wesco annual meeting, Charlie said, ‘The best way to achieve success is to make yourself worthy of it.’ Based on your experience, what efforts have you made to become worthy of success? Could you please offer some advice on how we can make ourselves worthy of success?
Buffett: Most importantly, always act with integrity. Right after I graduated, I offered to work for Graham for free, and he told me I was too expensive even at no cost. I never gave up—I kept trying to find ways to contribute to Graham and stayed visible in his eyes. I continually provided him with stock ideas and maintained regular contact with him.
Doing good always brings good returns. Never be petty in life. Tom Murphy was never calculating—he always did so much for me that I could never repay him. Whether in marriage or business, being overly calculating is a serious flaw.
I always put myself in others’ shoes. Most people are grateful and reciprocate kindness. If you do one thing for someone else, they’ll often do two things for you.
Very few people work through lunch or arrive first thing in the morning. Going the extra mile is always noticed by others. Do it without expecting praise or reward—just be willing to take initiative.
In 1959, Charlie and I began partnering in investments. We often held differing views. We had disagreements, but we never argued. When something went wrong, we never blamed each other. I recommend everyone read 'Poor Charlie’s Almanack.'
05. Buffett’s Secret to Maintaining Work-Life Balance
Question 9: You have achieved tremendous success in business, amassed great wealth, and become a public figure. Why are you still so approachable and humble? Who or what experiences in your life have had the greatest impact on your worldview and philosophy?
Buffett: I’ve been very fortunate to have had the right role models guiding me. Tell me who your role models are, and I’ll tell you what kind of person you’ll become.
One of the most important jobs in life is raising children. No matter how much knowledge schools impart, it pales in comparison to what children learn from their parents. My father had an especially profound influence on me, and later Benjamin Graham also greatly influenced me. My role models have never let me down.
I have nothing to do with the success I’ve achieved today. My father was a stockbroker, and after the crash, he had no work to do.
I was born in the United States in 1930, right in the midst of the country’s worst capital market crisis. From birth, I possessed an innate ability for asset allocation. I was born into an era where my talents could truly flourish. My temperament is a crucial part of that talent.
I was naturally gifted at investing, and later refined this ability through practice. I have nothing to be proud of. Bill Gates once said that if I’d been born in primitive society, I would have long since become prey for wild animals.
I can’t run fast or climb high. If I tried explaining asset allocation to a wild animal, it would simply eat me. Everyone here has won the ovarian lottery.
I’ve never donated a single cent that could possibly affect my lifestyle. Some people genuinely make sacrifices in their daily lives to give. They skip dining out or forgo taking their kids to Disneyland because they’ve donated to their church or elsewhere. When so much is beyond your control, what justification is there for arrogance?
Question 10: Some say part of your success stems from living in Omaha, far from the noise of Wall Street. Which do you consider more important—work or life—and how do you maintain balance between them?
Buffett: I enjoy my work immensely. For me, work isn’t work—I’m free to do exactly what I love. My wife took care of the children. We both accepted this arrangement, which aligns with Adam Smith’s principle of 'division of labor.' Women had limited choices back then; gender equality wasn’t what it is today.
In my own life, I’ve never participated in social events or meetings I didn’t enjoy. Once my career got on track, I never had to choose between work and personal life.
My leisure activity is simple: I play bridge online for 12 hours a week. I play with Bill—he goes by 'chalengr,' and I go by 'tbone.'
Once, during a speech at Harvard University, I told the students to work for someone they admire most. After hearing this, all the students went off and started their own businesses. When looking for a job, you should always seek out a boss and a company you truly admire. Men rarely face the difficult choice between work and personal life, whereas women often confront this dilemma.
Editor /rice