Tuesday, December 13, 2005

Require a Statement Before Being Allowed to Buy a Stock

You shouldn't buy a stock, in my view, for any other reason than the fact that you think it's selling for less than it's worth, considering all the factors about the business.

I used to tell the stock exchange people that before a person bought 100 shares of General Motors they should have to write out on a [piece of paper:] "I'm buying 100 shares of General Motors at X" and multiply that by the number of shares "and therefore General Motors is worth more than $32 billion" or whatever it multiplies out to, "because ... [fill in the reasons]" And if they couldn't answer that question, their order wouldn't be accepted.

That test should be applied. I should never buy anything unless I can fill out that piece of paper. I may be wrong, but I would know the answer to that. "I'm buying Coca Cola right now, 660 million shares of stock, a little under $50. The whole company costs me about $32 billion dollars." Before you buy 100 shares of stock at $48 you ought to be able to answer "I'm paying $32 billion today for the Coca Cola Company because..." [Banging the podium for emphasis.] If you can't answer that question, you shouldn't buy it. If you can answer that question, and you do it a few times, you'll make a lot of money.


Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

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