Warren Buffett has repeatedly explained his process – in a general sort of way – for decades. That gets most of the attention because people want to know the secret sauce so to speak. But it’s really only part of the reason why he’s been so successful.
I dug up an older lecture and Q&A Buffett did in 1994 at the University of Nebraska. If you’ve read other Q&A’s most of it will sound familiar. The same questions get asked over and over and he answers almost verbatim.
But one of the questions stood out – “What do you do all day?” – because his answer doesn’t get covered enough.
His answer will give you a good idea of the amount of time and effort he’s put in over the years developing his investment process and specifically his circle competence. I pulled parts of the interview below starting with how “circle of competence” fits into his investment process followed by the answer to the question above.
I don’t think at all about what the stock market will do or what given stocks will do in the very short term. We do try to own, and to look at stocks, as pieces of businesses. And, that is crucial in my view to the investing process; that is, to not think about a stock as a ticker symbol or something that goes up or down, or something of the sort, but to think about the business that you own. Same way if you were deciding on a business to buy in Lincoln. You might think about buying a dry cleaning store or a grocery store or whatever. You wouldn’t think about what this business is going to sell for tomorrow or next week or anything. You would think about whether it’s going to be a good business over a long period of time…
Our biggest single holding is Coca-Cola. We own a lot of Gillette. Those are two of the most dominant companies in the world in their field. And they are companies that are not subject to a lot of change. We don’t want to own things where the world is going to change rapidly because I don’t think I can see change that well or any better than the next fellow. So, I really want something that I think is going to be quite stable, that has very good economics going for it.
I mean, I try to sit down and figure out what the future economic prospects of a business are. I try to figure out whether the management is someone or some group I both trust and admire, and I try to figure out whether the price is right. I mean that: It’s the right business, the right people, and the right price. There are whole bunch of businesses I don’t know the answer on. If you take all the companies on the New York Stock Exchange, a couple thousand plus, I don’t have a view on a great many of them. I am familiar with them but I just don’t have the faintest idea what is going to happen in the future. So, I try to narrow down to what I call my “circle of competence.” The important thing in your circle of competence is not how big the circle is. It isn’t the area of it. It’s how well you define the perimeter. So you know when you are in it, and you know when you are outside it. And, if I have any advantage, it’s probably that I know when I know what I’m doing, and I know when I don’t know what I’m doing. That’s key in the securities business. You have to make very few correct decisions in securities to get very rich. You don’t have to do a hundred smart things.
I think a lot of people make things more complicated than they need to. There is nothing complicated about the way we invest. It is very understandable. I’ve felt that before people buy a stock, they should take a piece of pater and simply write “I’m buying General Motors at 47,” or “I’m buying US Steel at 83.” They should just write out what their reasoning is, and they should be able to to get it all on one side of one piece of paper. In fact, they should be able to get it into a paragragh. Almost all of the big, great ideas in business are very simple. Sam Walton’s idea was very simple at Walmart. It’s not hard to do. If you want to accomplish something, and this ties in a little bit with common sense maybe, you have to have focus. Mrs. B had focus. Mrs. B never went to school a day in her life, and she ran rings around all kinds of people because she’s smart and energetic. She was also focused. Tom Watson, who started IBM, was the same way. He said, “I’m no genius. I’m smart in spots, but I stay around those spots,” and there is a lot to that.
So what does Buffett do all day?
I spend an inordinate amount of time reading. I probably read at least six hours a day, maybe more. And I spend an hour or two on the telephone. And I think. That’s about it…I have created something that I enjoy: I happen to enjoy reading a lot, and I happen to enjoy thinking about things.
…everything I look at over the years, all the reading I do and everything, comes together at some point in terms of giving me the feeling that this particular decision is within my “circle of competence”. And, when it is within it, I’m willing to go very big. I do not believe in taking baby steps when you see something that you really understand. I never want to do anything on a small scale because, what’s the reason? If I’m doing it on a small scale because I’m not sure of my opinion, I’ll forget it entirely and go onto something I’m sure about.