Edward Quince (EQ): Warren, your early investment career, heavily influenced by Ben Graham, focused on finding undervalued "cigar butt" stocks—those with one last profitable puff. Yet, your philosophy famously pivoted. What core insight prompted you to abandon buying "fair businesses at wonderful prices" in favor of "wonderful businesses purchased at fair prices"?
Warren Buffett (WB): That shift was arguably the most important change in my investing philosophy, and I credit my late partner, Charlie Munger, as the architect. He promptly advised me to forget about ever buying another company like early Berkshire. We realized that focusing on fair businesses, which often require quick turnover to extract the last bit of value, had limits.
EQ: What is the fundamental appeal of a "wonderful business"?
WB: A wonderful business is one that has a strong, durable franchise. These businesses possess traits that allow them to deploy additional capital at high rates of return in the future. For instance, looking back, two wonderful decisions—investments in Coke and Amex—can outweigh many other mediocre decisions Berkshire has made over the years. The goal is to find businesses that have large moats around them, complete with crocodiles, sharks, and piranhas swimming around.
EQ: And how does this emphasis on quality impact the holding period? Is it still about buying cheap and selling when the price reflects value?
WB: No. If you're buying cigar butts, you must quickly get rid of them because there aren't many puffs left. But when you find a wonderful business, "Our favorite holding period is forever". We are looking to attract long-term owners who plan to stay with us indefinitely. When I buy a stock, I think of it as buying a whole company, just as if it were the store down the street. The success of the investment largely depends on the accuracy of our analysis of the company, not on market movements.
The Edward Quince Takeaway
The greatest long-term returns are generated by owning companies whose underlying economics are superb, regardless of price fluctuations. Focus your energy on finding businesses with durable competitive advantages (moats) run by "able and trustworthy" managers, because if you are right about the business, that is truly the main thing.
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