Warren Buffett shares his top 10 stock market investing rules in this rare 1985 interview. These rules helped Warren Buffett make Berkshire Hathaway (BRK-A, BRK-B) the most successful investing partnership in the world and Warren Buffett one of the richest and wealthiest in the world. All you need to know about investing in stocks.

Video length: 00:07:29

All you need to know about investing in stocks:
0:00 Introduction
1:00 The first rule of investing
1:12 Most important quality for an investor
1:58 Own a piece of the business
3:02 Living in Omaha
4:26 Intellectual process
4:48 Technology companies
5:25 Decision making
6:05 Investing is boring
6:30 Investing is simple
7:00 Don’t manipulate data

Transcript

Others with a more secular approach have also been very successful. Let's take Warren Buffett of Omaha Nebraska. If you would have put ten thousand dollars in 1965 into his company Berkshire Hathaway,you would have one million dollars today. Warren was a chapter in my 1972 book "Super Money," so I've known him a long time. He learned his trade with Ben Graham the original dean of security analysis at Columbia University.

I don't think Warren has ever been on television until this interview. And he has certainly never courted publicity. But recently he got a lot of it when he emerged as the key figure in the takeover of ABC (DIS) by Capital Cities. Warren will be the largest shareholder of the new company and his own net worth is now far in excess of 500 million dollars. But when I spoke with him last fall in his office in Omaha, he very characteristically made his investment style seem so perfectly simple:

Buffett: The first rule of investing is don't lose. And the second rule of investing is don't forget the first rule, and that's all the rules there are.

I mean that if you buy things for far below what they're worth and you buy a group of them you basically don't lose money.

Interviewer: And what do you consider the most important quality for an investment manager?

Buffett: It's a temperamental quality not an intellectual quality. You don't need tons of IQ in this business. I mean you have to have enough IQ to get from here to downtown Omaha. But you do not have to be able to play three dimensional chess or be in the top leagues in terms of bridge playing or something of that sort.

You need a stable personality you need a temperament that neither derives great pleasure from being with the crowd or against the crowd. Because this is not a business where you take polls it's a business where you think. Ben Graham would say that you're not right or wrong because a thousand people agree with you and you're not right or wrong because a thousand people disagree with you. You're right because your facts and your reasoning are right.

Interviewer: What do you do that's different than 90 percent of the money managers who are in the market?

Buffett: Certainly most of the professional investors focus on what the stock is likely to do in the next year or two. All kinds of all kinds of arcane methods of approaching that. But they do not really think of themselves as owning a piece of a business.

The real test of whether you're investing from a value standpoint or not is whether you care whether the stock market is open tomorrow. If you're making a good investment in a security it shouldn't bother you if they closed down the stock market for five years. All the ticker tells me as the price and I can look at the price occasionally to see whether the prices are outlandishly cheap or outlandishly high. But prices don't tell me anything about a business. Business figures themselves tell me something about a business. But the price of a stock doesn't tell me anything about a business. I would rather value a stock or a business first and not even know the price so that I'm not influenced by the price and establishing my valuation, and then look at the price later to see whether it's way out of line with what my value is.

So Buffett chose to stay in this world - Omaha Nebraska - where corn grows just minutes from downtown, Omaha is a nice town but nobody claims it's a world financial center. Here, the only "Thundering Herd" is actually (cattle) on four feet. 

Interviewer: Don't you find Omaha a little bit off the beaten track for the investment world?

Buffett: Well, believe it or not we get mail here and we get periodicals. We get all the facts needed to make decisions. And unlike Wall Street, notice we don't have 50 people coming up and whispering in our ear that we should be doing this or that this afternoon.

Interviewer:  You appreciate the lack of stimuli here?

Buffett: I like the lack of stimulation we get facts not stimulation here.

Interviewer: How can you stay away from Wall Street?

Buffett: Well that if I were on Wall Street I'd probably be a lot poorer... uh, you get a overstimulated in Wall Street and you hear lots of things. And you may, you may shorten your focus and a short focus is not conducive to a long bravis and here I can just focus on what businesses are worth. I don't need to be in Washtington to figure out what the Washington Post is worth. It is an intellectual process and the less static there is in that intellectual process really the better of you are.

Interviewer: What is the intellectual process

Buffett: The intellectual process is defining your area of competence in valuing businesses. And then within that area of competence finding whatever sells at that cheapest price in relation to value.And there are all kinds of things I'm not competent to value.

Interviewer: Have you ever bought a technology company? Interviewer:

Buffett: No, I really haven't.

Interviewer: In thirty years of investing, not one?

Buffett: I haven't understood any of them.

Interviwer: So you haven't ever owned for example, IBM (IBM)?

Buffett: Never owned IBM. Marvelous company, a sensational company, but I haven't ever owned IBM.

Interviewer: So here is this technological revolution going on and you are not participating.

Buffett (laughing): It's going right past me.

Interviewer: Is that alright with you?

Buffett: It's alright with me. I don't have to make money in every game, I mean I don't know what cocoa beans are going to do. There are all kinds of things I don't know about. That may be too bad, but why should I know about them? I haven't worked that hard on them. 

In the securities business you literally, every day, have thousands of the major American corporations offered you at a price, and a price that changes daily, and you don't have to make any decisions, nothing is forced upon you. There are no called strikes in the business, the pitcher just stands and throws balls at you.  And if you are playing real baseball and it's between the knees and the shoulders, you either swing or you can get a strike called on you. And if you get too many called on you, you are out. In the securities business you sit there and they throw US Steel at $25 and they throw General Motors at $16, you don't have to swing at any of them. They might be wonderful pitches but if you don't know enough you don't have to swing. And you can sit there and watch thousands of pitches and finally you get one right where you want it, something you understand, and then you swing.

Interviewer: So you might not swing for 6 months?

Buffett (laughing): I might not swing for two years. 

Interviewer: Is that boring?

Buffett: It would bore most people and certainly boredom is a problem with most professional money managers. If they try to sit out an inning or two, not only do they get somewhat antsy but their clients start saying 'swing you bum' from the stands. That's very tough for people to do.

Interviewer: Warren, your approach seems so simple, why doesn't everybody do it?

Buffett: I think partly because it is so simple. The academics for example focus on all kinds of variables.

Interviewer: By academics you mean professors and business school?

Buffett: Sure, and the data is there. So they focus on whether you buy stocks on Tuesday and sell them on Friday you are better off, or if you buy them in election years and sell them in other years, or if you buy small companies... all these variables because the data is there and they learn to manipulate data.And as a friend of mine says 'to a man with a hammer everything looks like a nail' and once you have these skills you are just dying to utilize them in some way. But they aren't important. If I were being asked to participate in a business opportunity would it make any difference to me whether it was a Tuesday or a Saturday or an election year or something? It is not what a business man thinks about in buying businesses so why think about it when buying stocks because stocks are just pieces of businesses.