2015: Does value investing work outside of the US?

AUDIENCE MEMBER: Very exciting to see my superstars here. I’m Leo (inaudible) from China and a loyal fan of you and Charlie.

Many Chinese investors feel all kinds of performance pressure, question, and even laughing, at value investing.

Many also believe that value investing, that doesn’t apply to China, where the stock market just doubled over the last six months.

I would like to ask Mr. Buffett, do you think value investment can be widely applied in all markets, or just the (inaudible) markets, just as the ones in the United States?

Do you have any suggestions for value investors to hold against pressure and to be much happy? Thank you.

WARREN BUFFETT: I’m not sure I got all of it, but Charlie will help me.

I certainly think investment principles do not stop at borders. So if I were investing in China or any place else — India, UK, Germany — I would apply exactly the same sort of principles that I learned from “The Intelligent Investor.”

I would think of stocks as a small piece of a business. I would think of investment fluctuations being there to benefit me, rather than to hurt me. And I would try to focus my attention on businesses where I thought I understood the competitive advantage they had and where they would — what they would — look like in five or ten years.

So I don’t think I would change the principles at all. I’m not sure I got all of the question.

Maybe Charlie can elaborate on the rest.

CHARLIE MUNGER: Well, the Chinese have a history of being very entrepreneurial and gambling very heavily when they have the opportunity, and it has created great volatility in the Chinese stock markets.

And when things get bouncy and prosperous, like our Internet craze here in the United States, China looks a lot like Silicon Valley.

I think China would be way better to be more value investor minded and less absorbed in waves of speculation.

So I think the more China copies the way Berkshire operates, I think the better it will be for China. (Applause)

WARREN BUFFETT: Yeah. There’s a certain irony, in that we will — we would — do the best, over decades, if we operated in a market where people operated very foolishly.

And the more people respond to short term events and exaggerated things or — anything that causes people to get wildly enthusiastic or wildly depressed, actually, is what allows people to make lots of money in securities.

And, on the other hand, it’s not the greatest thing for a society. And Charlie and I have benefited enormously by the fact that over a 50-year period, there have been a few periods, probably the most extraordinary being 1973 and ’74, where you could buy stocks unbelievably cheap, cheaper than happened in 2008 and 2009.

And, you know, it doesn’t make sense to have that much volatility in the market, but humans behave the way humans behave, and they’re going to continue to behave that way in the next 50 years.

I mean, if you’re a young investor, and you can sort of stand back and value stocks as businesses and invest when things are very cheap, no matter what anybody is saying on television or what you’re reading, and perhaps, if you wish, sell when people get terribly enthused, it is really not a very tough intellectual game. It’s an easy game, if you can control your emotions.

And as Charlie says, we’ve talked about a little bit that the Chinese market may be more — there may be more speculative influences in it, even than in the United States, because it’s a relatively new development and it may lend itself to greater extremes, and that should produce great opportunities. Charlie?

CHARLIE MUNGER: Yeah. But there’s great opportunities for excess and nasty contractions after unnatural booms and so on.

I think China is wise to dampen the speculative booms and to — and I think the Chinese — I don’t think that value investing will ever go out of style. Who in the hell doesn’t want value when you buy something? How can there be anything else that makes any sense except value investing?

WARREN BUFFETT: It never gets that popular though. (Laughs)

CHARLIE MUNGER: People are looking for an easier way.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And that’s a mistake. It looks easier, but, in fact, it’s harder. And there’s a lot of misery to be obtained by misusing stocks.

WARREN BUFFETT: Yeah. Nobody buys a farm to make a lot of money next week or next month, or they buy, you know, an apartment house. They buy it based on what they think the long-term future is. And if they get a — if they make a reasoned calculation of that and the purchase price looks attractive, they buy it and then they don’t get a quote on it every day or every week or every month or even every year, and that’s probably a better way to look at stocks.