1. Could you give us your definition of stock market risk? (BRK Annual Meeting 2004, 2007, 2001, 1994, 1997)
There are certain businesses that inherently, because of long lead time, because of heavy capital investment, basically have a lot of risk. Commodity businesses have a lot of risk unless you’re a low cost producer, because the low cost producer can put you out of business. Our textile business was not the low cost producer. We had fine management, everybody worked hard, we had cooperative unions, all kinds of things. But we weren’t the low cost producers so it was a risky business.
The guy who could sell it cheaper than we could made it risky for us. We tend to go into businesses that are inherently low risk and are capitalized in a way that that low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is that even though you identify such businesses, you pay too much for them. That risk is usually a risk of time rather than principal, unless you get into a really extravagant situation. Then the risk becomes the risk of you yourself whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market. The stock market is there to serve you and not to instruct you. That’s a key to owning a good business and getting rid of the risk that would otherwise exist in the market.
The myth that volatility of a stock somehow equates to risk was discussed. In fact, volatility often creates great opportunity, in Buffett’s view. The following comments on risk in investments were in the 1993 Annual Report, on page 14: “Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire’s capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically. Therefore, we adopted a strategy that required our being smart and not too smart at that only a very few times. Indeed, we’ll now settle for one good idea a year.
2. How much and how does risk factor into your investment decisions? Would you invest in emerging markets? (Q&A with 6 Business Schools in Feb 2009)
In general, emerging markets are not great for me because I need to put a lot of money to work. Risk does not equal beta.
Risk comes around because you don’t understand things, not because of beta. There are normally 10 filters or so that I go through when I hear an idea. The first is can I understand the business and understand the downside not just today but five to ten years from now. There have been very few times that I’ve lost 1% of my net worth. I might be risk averse but I am not action adverse. Mrs. B saved $500 over the course of 16 years to start and build Nebraska Furniture Mart. Tom Watson Sr of IBM said, “I’m smart in spots and I stay in those spots.” I just stay within my circle of confidence. When I bought Nebraska Furniture Mart in 1983, Mrs. B took cash and not Berkshire stock. Why? She didn’t understand the value of stock. She understood cash and that is what she took. I need only need to be right a few times and can let thousands of ideas go by.
3. Investors eventually repeat their mistakes. How can you prevent this through fast growth or safety? (BRK Annual Meeting 1997)
The mistakes are made when there are businesses you can understand and that are attractive and you don’t do something about them.