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Know How: How to Put Buffett’s Philosophy into Practice

Lessons from this year’s Berkshire Hathaway meeting.

Matthew Coffina, CFA, 06/11/2013

Year after year, shareholders return to Omaha to hear Warren Buffett and Charlie Munger expound on topics large and small. Here are some of the enduring lessons that came up in this year’s Berkshire Hathaway meeting.

1 It’s OK to pay a fair price for a company with very strong, growing competitive advantages.

Buffett credits Munger with teaching him that “it is far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.” In my opinion, investors are far more likely to lose money by compromising on quality to buy an apparently “cheap” stock than by purchasing a fairly valued company with a very strong competitive position (what Morningstar calls a wide moat).

2 Stay sane while others go crazy.

Buffett said the average investor can expect to see four or five serious market dislocations in a lifetime. The challenge is to have the “mental fortitude” to take advantage of them.

3 Investing is about much more than just numbers.

Investing involves a large degree of subjective judgment. Buffett and Munger don’t buy stocks solely based on financial ratios; they need to understand how the business actually works.

4 Think like an owner.

Matthew Coffina is a stock analyst at Morningstar.

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