Editor's note: Janet Lowe interviewed Warren Buffett for her book The Triumph of Value Investing: Smart-Money Tactics for the Postrecession Era, which appears this month.
Warren Buffett, among the richest men in the world, created his $47 billion fortune from scratch using a method called "value investing." This concept, he explains, is more than just a way to crunch numbers. It is about seeking out underpriced enterprises that have strong fundamental worth and using investments in them to create something that is of even greater value to society.
After the 2007-2008 financial crisis, Buffett wrote in an op-ed piece in the New York Times that for his personal account, he would be buying U.S. securities. Even though the economy had tough times ahead, he wrote, he still had long-term faith in the American economy and believed that American capitalism can and will continue to produce value.
"To be sure," he wrote, "investors are right to be wary of highly-leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."
Emphasizing that investors should look to the future rather than the past, he quoted ice hockey pro Wayne Gretzky: "I skate to where the puck is going to be, not to where it has been."
Buffett had some more words of advice for the everyday investor. (Read an excerpt from The Triumph of Value Investing.)
Q. You often stress the importance of investors having the right attitude. What do you mean by that?
A. We have new times and new products, but it gets back to this: The market is there to serve you and not to instruct you. Chapter 8 of The Intelligent Investor [by Buffett's late mentor Benjamin Graham] says it all. It's not about having great skills, not about knowing calculus. It's about an attitude that is fundamentally sound. It doesn't require a master's degree, but just settling into investments.
When people start out with investing they should take a class on how to buy a farm. Buying a farm is just like buying stocks. What is the worth of the property; how does that compare to other farms? Most important, what will the farm produce over time? It is the farm's earning power that brings the return. Go through the whole thing logically.