2007: What's the best way to become a better investor?

AUDIENCE MEMBER: Good morning. I’m Thomas Gamay (PH) from San Francisco. I’m 17-years-old and this is my tenth consecutive annual meeting. (Applause)

WARREN BUFFETT: You must be a Ph.D. by now at least.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, I’m curious about what you think is the best way to become a better investor.

Should I get an MBA? Get more work experience? Read more Charlie Munger almanacs or merely is it genetic and out of my hands?

WARREN BUFFETT: Well, I think you should read everything you can.

I can tell you in my own case, I think by the time I was — well, I know by the time I was ten — I’d read every book in the Omaha Public Library that had anything to do with investing, and many of them I’d read twice.

So I don’t think there’s anything like reading, and not just as limited to investing at all. But you’ve just got to fill up your mind with various competing thoughts and sort them out as to what really makes sense over time.

And then once you’ve done a lot of that, I think you have to jump in the water, because investing on paper and doing — you know, and investing with real money, you know, is like the difference between reading a romance novel and doing something else. (Laughter)

There is nothing like actually having a little experience in investing. And you soon find out whether you like it. If you like it, if it turns you on, you know, you’re probably going to do well on it.

And the earlier you start, the better, in terms of reading. But, you know, I read a book at age 19 that formed my framework for thinking about investments ever since.

I mean, what I’m doing today at 76 is running things through the same thought pattern that I got from a book I read when I was 19.

And I read all the other books, too, but if you — and you have to read a lot of them to know which ones really do jump out at you and which ideas jump out at you over time.

So I would say that read and then, on a small scale in a way that can’t hurt you financially, do some of it yourself.

Charlie?

CHARLIE MUNGER: Well, Sandy Gottesman, who is a Berkshire director, runs a large and successful investment operation, and you can tell what he thinks causes people to learn to be good investors by noticing his employment practices.

When a young man comes to Sandy, he asks a very simple question, no matter how young the man is. He says, “What do you own and why do you own it?” And if you haven’t been interested enough in the subject to have that involvement already, why, he’d rather you go somewhere else.

WARREN BUFFETT: Yeah. It’s very — that whole idea that you own a business, you know, is vital to the investment process.

If you were going to buy a farm, you’d say, I’m buying this 160-acre farm because I expect that the farm will produce 120 bushels an acre of corn or 45 bushels an acre of soybeans and I can buy — you know, you go through the whole process.

It’d be a quantitative decision and it would be based on pretty solid stuff. It would not be based on, you know, what you saw on television that day. It would not be based on, you know, what your neighbor said to you or anything of the sort.

It’s the same thing with stocks. I used to always recommend to my students that they take a yellow pad like this and if they’re buying a hundred shares of General Motors at 30 and General Motors has whatever it has out, 600 million shares or a little less, that they say, “I’m going to buy the General Motors company for $18 billion, and here’s why.”

And if they can’t give a good essay on that subject, they’ve got no business buying 100 shares or ten shares or one share at $30 per share because they are not subjecting it to business tests.

And to get in the habit of thinking that way, you know, Sandy would have followed it up with the questions, based on how you answered the first two questions, that made you defend exactly why you thought that business was cheap at the price at which you are buying it. And any other answer, you’d flunk.