Warren Buffett's New Words of Wisdom

Nati Harnik / AP Photo On the heels of Berkshire Hathaway's worst year in history, the 78-year-old Sage of Omaha is struggling to convince shareholders he's still got his mojo. Hedge-fund manager—and battered Berkshire shareholder—Whitney Tilson reports from Omaha on the highlights of this year's Buffettpalooza, aka the company's annual meeting.

In 2000, near the peak of the Internet bubble, the standard critique of Berkshire Hathaway Chairman Warren Buffett and Vice Chairman Charlie Munger was that they failed to foresee and appreciate the rise of the “new economy” and were irrationally clinging to their boring “old economy” companies that were surely destined for the dustbin of history. Today, critics charge, Buffett and Munger failed to foresee and fully appreciate the impact of the bursting of the housing bubble and the resulting credit crunch and severe recession. Much of this year's meeting was spent struggling to reassure investors that the new batch of critics will ultimately be proved just as wrong about the company's long-term prospects.

“I was disappointed when Moody’s downgraded us... We think we’re triple-A and we run it so nobody is stronger than us. We treat our obligations as sacred. I would say the Moody’s downgrade won’t be material for Berkshire, but still it irritates me.”

Before I dive into some of the specific things Buffett and Munger said during Saturday's daylong meeting, I want to share two big impressions: First, despite their advanced years—Buffett is 78 and Munger is 85—they show no signs whatsoever of slowing down. To the contrary, I’ve never seen them more engaged, energetic, witty, and thoughtful. Mentally, they are at the top of their games and seem to be getting better with age. Second, I'm struck by their consistency. Despite the chaotic external environment dominated by the worldwide economic crisis, as well as Berkshire’s declining earnings and share price, Buffett and Munger are calm, cool, collected, and haven’t changed their timeless investment style one iota. Below, my observations on the five most interesting moments from the meeting.

1. Why IQ Is Irelevant

At every annual meeting, Buffett and Munger reinforce their guiding principles: Focus solely on intrinsic value and seek to buy with a huge margin of safety, taking advantage of other investors’ irrationality. Buffett commented that “Picking [stock market] bottoms isn’t our game. Pricing is our game. It’s not so difficult, whereas picking bottoms is impossible.”

He continued: “To be a successful investor, you don’t need to understand higher math or law. It’s simple, but not easy. You do have to have an emotional stability that will take you through almost anything. If you have 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius. What’s most important is inner peace; you have to be able to think for yourself. It’s not a complicated game.”

Munger added: “There is so much that is false and nutty in modern investment practice. If you just reduce the nonsense, you’ll do well. If you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120.”

Later, in response to another question, Munger warned that businesses with truly sustainable competitive advantages are increasingly rare and noted, “Unfortunately, a lot of [competitive] moats are filling up with sand, such as daily newspapers and network television stations.”

2. Breaking the Rules on Wells Fargo

Buffett and Munger spoke at great length about Wells Fargo, praising its management team, the company’s low cost of capital, etc. Munger concluded, “I think Wells Fargo is going to come out of this [economic crisis] way stronger.” Buffett agreed, saying, “When Wells Fargo’s stock fell below $9, I broke my rule about not talking about specific stocks and told a group of students visiting me that day that if I had to put my entire net worth into one stock, that would be it.”