The Intelligent Investor

The most distinguishing trait of Buffet's investment philosophy is the clear understanding that, by owning shares of stock, he owns businesses, not pieces of paper. The idea of buying stock without understanding the company's operating functions - including a company's products and services, capital reinvestment requirements, inventories, receivables, and working capital needs - is unconscionable, says Buffet. This mentality if reflected in the attitude of a business owner as apposed to a stock owner. In the summation of The Intelligent Investor Benjamin Graham wrote, "Investing is most intelligent when it is most businesslike." These words are, Buffet says, "the nine most important works ever written about investing."

A person who holds stocks has the choice to become the owner of a business or the bearer of tradable securities. Owners of common stocks who perceive that they merely own a piece of paper are far removed from the company's financial statements. These owners behave as if the market's ever-changing price is a more accurate reflecton of their stock's value than the businesses' balance sheet and income statement. They draw or discard stocks like playing cards. For Buffett, the activities of a common-stock holder and a businessperson are intimately connected. Both should look at ownership of a business in the same way. "I am a better investor because I am a businessman," confesses Buffett, "and a better businessman because I am an investor."

Buffett is often asked what types of companies he will purchase in the future. First, he says, he will avoid commodity businesses and managers in which he has little confidence. What he will purchase is the type of company that he understands, one that posseses good economics and i run by trustworthy managers. "A good business is not always a good purchase," Buffett says, "although it is a good place to look for one."