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. Last Updated: 07/27/2016

Don't Buy Stocks, Buy Business, Warns Buffett

WASHINGTON -- Warren Buffett, who is probably the greatest investor of all time, did something a few months ago that must be unprecedented in the annals of finance. His company, Berkshire Hathaway Inc., announced it was issuing 517,500 shares of new Class B stock to the public, and Buffett did his best to discourage investors from buying.

The prospectus for the May 9 sale carried a warning: "Warren Buffett, as Berkshire's chairman, and Charles Munger, as Berkshire's vice-chairman, want you to know the following -- and urge you to ignore anyone telling you that these statements are 'boilerplate' or unimportant."

It continued, "Mr. Buffett and Mr. Munger believe that Berkshire's ... common stock is not undervalued at the market price stated above. Neither Mr. Buffett nor Mr. Munger would currently buy Berkshire shares at that price. ... Buyers hoping to capture quick profits are almost certain to be disappointed."

As usual, Buffett was right. The new shares came out at $1,100 each and jumped to $1,200 the next day. Then they headed down, closing Friday at $1,060.

Buffett hadn't wanted to issue the new shares in the first place, but his policy of never splitting the stock had gotten out of hand. A single A share was trading at $38,000 in March, up from $13 in 1965, and Wall Street packagers were planning to set up trusts to sell fractional shares of Berkshire at affordable prices.

So Buffett raised $565 million for his company with the new B shares. The A shares, valued at roughly 30 times the B shares, were trading at $32,000 each on Friday, down 16 percent from their high, but still up 29 percent for the past 12 months. Buffett owns about a half million of these A shares, worth about $16 billion.

Whatever the cost of the stock, I would try to own at least one share of Berkshire, A or B, just to be able to attend the annual meeting in Omaha, Nebraska, and receive Buffett's brilliant annual report. That way, you can glean some of the master's wisdom while making money on the stock.

A 22-page excerpt from the question-and-answer portion of the May 6 meeting appears in the new issue of my favorite newsletter, Outstanding Investor Digest. The excerpt, quoted here with the newsletter's permission, contains better general advice on investing than you'll find anywhere. For example, Buffett argues against diversification: "The great fortunes in this country weren't built on a portfolio of 50 companies," he told his shareholders. "They were built by someone who identified one wonderful business." That should be the goal of small investors as well -- to become a partner, through their purchase of stock on the open market, in "one wonderful business." Or perhaps a few more.

"Let's just say there was no stock market. And the owner of the best business in your home town came to you and said, 'My brother just died. He owned 20 percent of the business. And I want somebody to go in with me and buy that 20 percent. The price looks a little high maybe. But that's what I think I can get for it. And if you want to buy in ... '

"If you know and like the business and you like the person and the price sounds reasonable, I think the thing probably to do is to take it. You wouldn't worry about how it's quoted -- because it wouldn't be. I think people's investments would be more intelligent if stocks were quoted once a year.''

Re-read those paragraphs. They express the most important investing lesson. It was one of the "big ideas" Buffett says, his mentor, the late Benjamin Graham, taught him: "Think of investing as owning a business and not as buying something that wiggles around in price.''