"Wall Street makes its money on activity, you make your money on inactivity."
The opening quote for this clip of Warren Buffett's M.B.A. talk series was derived from his response when a student asked about the benefits of being an outsider of Wall Street. Buffett further states that he avoids environments that encourage too much activity, with Wall Street being the epitome of that. These environments cause over-stimulation. Ultimately, all that one needs is a single great investment a year.
Essentially, brokers make most of the money through activity. Therefore, they encourage investors to trade within their portfolios frequently. This is not needed to be a successful investor, however, being in an atmosphere like Wall Street, allows you to think otherwise.
Another student asked this question:
How can an investor value shares of Berkshire Hathaway if the company does not pay dividends?
"The question is if Berkshire can retain $1.00 in earnings and earn more than $1.00 at a decent rate. That's what they try to do."
"It is run for its owners, but not run to give them dividends because so far, every dollar we have earned and could have paid out, we have turned into more than a dollar; it is worth more than a dollar to keep it."
Many have questioned Warren Buffett on his dividend policy, or lack thereof. I think there is a misconception where many believe that all companies should pay dividends. In studying this in graduate school, dividend payout makes the most sense when a company is unable to earn a high rate of return on retained earnings and should therefore distribute this to shareholders, so that they can do so themselves. However, Berkshire shareholders have the world's greatest investor and capital allocator investing for them, so expecting a dividend at this point in time does not make sense. And as he said, the bigger the company gets, the more difficult it is for him to invest capital, so at some point in the future, dividends may be a possibility. I am happy to have Mr. Buffett working for me, and he continues to add value and measures themselves by performance. Can't get it any better than that.
A third student asked:
How do you know when a business has reached its full potential?
Buffett, consistent with his investing philosophy of buy and hold forever, says that they do not buy businesses with a price target in mind. The best businesses are the ones that you can hold on to forever.
"The way to look at a business is, is it going to produce more and more and more over time? If the answer to that question is yes, then you do not need to ask any more questions."
When you find great businesses with excellent future economics and able and honest management, he previously mentioned that there should not be an exit strategy. These are businesses that are so rare to be found, that it makes no sense to sell them once you find them. He speaks about this on many occasions at meetings with students and frequently says that it took him a long time to understand that concept. In an age where there is so much more access to information and a constant bombardment from all sorts of media, inactivity has really become a challenge to those 'patient' investors. However, these are the investors that are most successful.
I do believe in this strategy of inactivity, but one must have truly understood the business initially, for this to hold up. On the other hand, Buffett did mention that there were times where sales were necessary; for example, in the purchase of a more appealing deal, or something drastic occurs that changes the overall dynamics of the business.
This clip reminded me of another one of Warren Buffett's famous quotes.
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely."
This is really a lesson in understanding what you are doing, not swaying from those principles and being patient. For such an exciting field, investing, having a certain degree of temperament is very crucial to one's success. I suppose it makes a lot of sense to be because it suites my personality. However, I do believe that investing is way more simple that it is made out to be and Warren Buffett's philosophy resonates with me because of that fact. Beyond the betas, deltas, alphas, standard deviations, models, theories, there is an underlying strategy that is simple. I agree with the principle known as Occam's Razor: The simplest answer is often correct. The same with life; life is very simple, we just make it complicated. Live a simple life and it will be reflected in all your experiences.
Warren Buffett MBA Talk | Part 1: Integrity
Warren Buffett MBA Talk | Part 2: Smart Choices
Warren Buffett MBA Talk | Part 3: Choosing Businesses
Warren Buffett MBA Talk | Part 4: Share of Mind
Warren Buffett MBA Talk | Part 5: Circle of Competence
Warren Buffett MBA Talk | Part 6: Macroeconomic Factors
Warren Buffett MBA Talk | Part 7: Inactivity & Dividends
Warren Buffett MBA Talk | Part 8: Diversification
Warren Buffett MBA Talk | Part 9: Market Cap
Warren Buffett MBA Talk | Part 10: Ovarian Lottery