“If we can’t find things within our circle of competence, we don’t expand the circle. We’ll wait.”
Warren relies on a circle of competence in making investments. If a company is within his circle, he might buy it if it is selling at the right price; if it isn’t within his circle, he won’t even look at it. Remember, he is buying into businesses that are not popular at the moment, and he has to know the underlying economics of the business well enough to determine what its future will look like. He can’t do this with a business that he doesn’t understand. And if he can’t find an investment he understands and that is selling at an attractive price, he will wait, and wait, and wait, till one shows up. In 1967 he wrote to his investment partners telling them that he was returning their money since it was getting harder and harder to find investments that he understood and that were selling at attractive prices. He then stood on the sidelines until 1973, when the entire stock market collapsed and suddenly even the best companies were selling at bargain prices. In the investment game it pays to be stubborn and principled and patient in choosing a company to invest in. Pick the wrong company at the right price and you lose; pick the right company at the wrong price and you lose. You have to pick the right company at the right price to win. And to do that you sometimes have to wait and wait and wait…along with Warren. Patience, in this game, pays.