More Praise for The Warren Buffett Way, First Edition

True investors are calm.
They know that stock prices, inf luenced
by all manner of forces both reasonable and unreasonable, will fall as
well as rise, and that includes stocks they own. When that happens, they
react with equanimity; they know that as long as the company retains
the qualities that attracted them as investors in the f irst place, the price
will come back up. In the meantime, they do not panic.
On this point, Buffett is blunt: Unless you can watch your stock
holdings decline by 50 percent without becoming panic-stricken, you
should not be in the stock market. In fact, he adds, as long as you feel
good about the businesses you own, you should welcome lower prices as
a way to prof itably increase your holdings.
At the opposite end of the spectrum, true investors also remain
calm in the face of what we might call the mob inf luence. When one
stock or one industry or one mutual fund suddenly lands in the spot-
light, the mob rushes in that direction. The trouble is, when everyone is
making the same choices because “everyone” knows it’s the thing to
do, then no one is in a position to prof it. In remarks reported in 
For-
tune
at the end of 1999, Buffett talked about the “can’t-miss-the-party”
factor that has infected so many bull-market investors.
2
His caution
seems to be this: True investors don’t worry about missing the party;
they worry about coming to the party unprepared.
•
True investors are patient.
Instead of being swept along in the en-
thusiasm of the crowd, true investors wait for the right opportunity.
They say no more often than yes. Buffett recalls that when he worked for
Graham-Newman, analyzing stocks for possible purchase, Ben Graham
turned down his recommendations most of the time. Graham, Buffett
says, was never willing to purchase a stock unless all the facts were in his
favor. From this experience, Buffett learned that the ability to say no is a
tremendous advantage for an investor.

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T H E W A R R E N B U F F E T T W AY
Buffett believes that too many of today’s investors feel a need to pur-
chase too many stocks, most of which are certain to be mediocre, instead
of waiting for the few exceptional companies. To reinforce Graham’s les-
son, Buffett often uses the analogy of a punch card. “An investor,” he
says, “should act as though he had a lifetime decision card with just
twenty punches on it. With every investment decision his card is
punched, and he has one fewer available for the rest of his life.”
4
If in-
vestors were restrained in this way, Buffett figures that they would be
forced to wait patiently until a great investment opportunity surfaced.
•
True investors are rational.
They approach the market, and the
world, from a base of clear thinking. They are neither unduly pessimistic
nor irrationally optimistic; they are, instead, logical and rational.
Buffett f inds it odd that so many people habitually dislike markets
that are in their best interests and favor those markets that continually
put them at a disadvantage. They feel optimistic when market prices are
rising, pessimistic when prices are going down. If they go the next step
and put those feelings into action, what do they do? Sell at lower prices
and buy at higher prices—not the most prof itable strategy.
Undue optimism rears its head when investors blithely assume that
somehow the fates will smile on them and their stock choice will be the
one in a hundred that really takes off. It is especially prevalent in bull
markets, when high expectations are commonplace. Optimists see no
need to do the fundamental research and analysis that would illuminate
the real long-term winners (e.g., finding the few keepers among all the
look-alike dot-coms) because the short-term numbers are so seductive.
Undue pessimism, whether directed at one company or the market
in general, motivates investors to sell at exactly the wrong time. In
Buffett’s view, true investors are pleased when the rest of the world turns
pessimistic, because they see it for what it really is: a perfect time to buy
We don’t have to be smarter than the rest; we have to be more
disciplined than the rest.
3
W
ARREN
B
UFFETT
, 2002

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good companies at bargain prices. Pessimism, he says, is “the most com-
mon cause of low prices. . . . We want to do business in such an environ-
ment, not because we like pessimism but because we like the prices it
produces. It’s optimism that is the enemy of the rational buyer.”
5
Whether an investor feels optimistic or pessimistic is a statement of
what that investor thinks about the future. Forecasting what is going to
happen next is tricky at best, and downright foolish when optimism (or
pessimism) is based more on emotion than on research. Buffett, who once
remarked that “the only value of stock forecasters is to make fortune
tellers look good,” makes no attempt to anticipate the periods in which
the market is likely to go up or down.
6
Instead, he keeps an eye on the
general emotional tenor of the overall market, and acts accordingly. “We
simply attempt,” he explains, “to be fearful when others are greedy and to
be greedy only when others are fearful.”
7
I N T R O D U C I N G M R . M A R K E T
To show his students how powerfully emotions are tied to stock mar-
ket f luctuations, and to help them recognize the folly of succumbing
to emotion, Graham created an allegorical character he named “Mr.
Market.” Buffett has frequently shared the story of Mr. Market with
Berkshire’s shareholders.
Imagine that you and Mr. Market are partners in a private business.
Each day without fail, Mr. Market quotes a price at which he is willing
to either buy your interest or sell you his. The business that you both
own is fortunate to have stable economic characteristics, but Mr. Mar-
ket’s quotes are anything but. For you see, Mr. Market is emotionally
unstable. Some days, he is cheerful and enormously optimistic, and can
only see brighter days ahead. On these days, he offers a very high price
for shares in your business. At other times, Mr. Market is discouraged
and terribly pessimistic; seeing nothing but trouble ahead, he quotes a
very low price for your shares in the business.
Mr. Market has another endearing characteristic, Graham said: He
does not mind being snubbed. If Mr. Market’s quotes are ignored, he
will be back again tomorrow with a new quote. Graham warned his
students that it is Mr. Market’s pocketbook, not his wisdom, that is use-
ful. If Mr. Market shows up in a foolish mood, you are free to ignore

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T H E W A R R E N B U F F E T T W AY
him or take advantage of him, but it will be disastrous if you fall under
his inf luence.
“The investor who permits himself to be stampeded or unduly wor-
ried by unjustified market declines in his holdings is perversely trans-
forming his basic advantage into a basic disadvantage,” Graham wrote.
“That man would be better off if his stocks had no market quotation at
all, for he would then be spared the mental anguish caused him by other
persons’ mistakes of judgment.”
8
To be successful, investors need good business judgment and the
ability to protect themselves from the emotional whirlwind that Mr.
Market unleashes. One is insuff icient without the other. An important
factor in Buffett’s success is that he has always been able to disengage
himself from the emotional forces of the stock market. He credits Ben
Graham and Mr. Market with teaching him how to remain insulated
from the silliness of the market.
M R . M A R K E T, M E E T C H A R L I E M U N G E R
It was more than sixty years ago that Ben Graham introduced Mr.
Market, sixty years since he began writing about the irrationality that
exists in the market. Yet in all the years since, there has been little ap-
parent change in investor behavior. Investors still act irrationally. Foolish
mistakes are still the order of the day. Fear and greed still permeate the
marketplace.
We can, through numerous academic studies and surveys, track in-
vestor foolishness. We can, if we follow Warren Buffett’s lead, turn
other people’s fear or greed to our advantage. But to fully understand
the dynamics of emotion in investing, we turn to another individual:
Charlie Munger.
Munger’s understanding of how psychology affects investors, and
his insistence on taking it into account, have greatly inf luenced the
operations of Berkshire Hathaway. It is one of his most profound con-
tributions. In particular, he stresses what he calls the psychology of
misjudgment: What is it in human nature that draws people to mis-
takes of judgment?
Munger believes a key problem is that our brain takes shortcuts in
analysis. We jump too quickly to conclusions. We are easily misled and
are prone to manipulation. To compensate, Munger has developed a

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mental habit that has served him well. “Personally, I’ve gotten so that I
now use a kind of two-track analysis,” he said in a 1994 speech reprinted
in