NEW YORK (Real Money) -- Warren Buffett's common sense is so out of step with the current zeitgeist that you can only marvel how he can even bear talking about stocks with anyone anymore.
That's what I felt the whole time I watched in awe at the interview our own Rhonda Schaffler snared with the Oracle this weekend at the annual Berkshire pilgrimage.
Take this gem right at the beginning of the interview: "(i)t's going to go down some time if you are going to buy a stock."
I know, pretty logical, simple, yet completely misunderstood by so many in this current generation of stock owners, if we can call them that. Most people who comment on their stocks, at least on Twitter, seem to think that only bad stocks go down and that good stocks are immune to everything. Buffett accepts that stocks do go down and says if you can't handle that, it is your problem, not the problem of the stock!
Buffett may not have known it, but throughout the interview he was offering a radical refutation of how people comment on stocks in this current age of social media. Buyers these days often think that there is a wicked conspiracy against them when their stocks go down and that only losers own stocks that go down and therefore they are losers and they need to blame someone for their loserdom.
Buffett famously doesn't pay attention to the day-to-day fluctuations in his portfolio.
"It's a terrible mistake to pay attention to those bobs ups and downs," he says, because you will drive yourself crazy if you do so and become an inferior investor. But this current generation drives itself bonkers with this stuff. Every bob down defines them. Every decline of any magnitude is a tragedy.
Now we know Buffett is the ultimate long-term owner, and he explained his rationale, again, quite clearly to Rhonda: "(W)e buy businesses we understand at prices we like and then we hold them for a long time and we usually make money, but not always."
Here, too, there's something very out of step with the current zeitgeist. Many people now buy shares in businesses that they don't know at prices that they end up not liking and yet presume that over a short time they will always make money. That's why they give up and sell low. They aren't cognizant of the process of investing, only the fact that they have seem to have lost money because the stock failed to go higher.
What was doubly compelling for me about Buffett's analysis in the interview is that he was being asked about IBM (IBM), one of his big four investments, along with American Express (AXP), Coca-Cola (KO) and Wells Fargo (WFC), when he gave that answer about buying businesses he understands at the right price. IBM's not yet paid off as an investment for him, but it almost doesn't seem to matter at all because he knows the business and he likes the price. In other words, those factors absolve the short-term pain of underperformance.
Schaffler went on to ask him whether he wishes he bought Apple (AAPL) instead, and the genial soul that he is he played along a bit, but then went back to his mantra about buying what you know. To me he was saying, "Look, I didn't know Apple, so I didn't buy it because I wasn't comfortable with it." Somehow, he is so confident in his long-term abilities that he is as happy with IBM not doing well, at least short term, as long as he understands it and thinks he bought it at the right price, as he would be with Apple doing well instantly. He doesn't indict himself for picking IBM because he doesn't think he has done anything wrong to begin with.
Now, let's step back for a second and think about what Buffett's advising here in this interview. He's basically talking about mindset. He's talking about not grading yourself so hard. He's talking about not making money overnight. Before you say, "Well, he's rich and he can say whatever he wants," remember that there are such things as actuarial tables and his analysis of IBM has to take them into account. He's not disturbed by the lack of progress, again, because he is confident in his own judgment.
To me, the beauty of the man and the interview is that he is telling you not what to buy, but how to approach successful investing. There's no reproach, no harsh judgments, just a sense of, "I have done the work and the work has produced excellent results over time and maybe this one won't pay off, but most of the time they do provided I do the work."
The emphasis is on the rigor of the process of selection, not on the company's shares themselves.
The ultimate takeaway, to me, is that if you don't have a process that you are confident can produce a result, then you simply shouldn't own stocks because you will end up buying stocks of companies you don't know and losing money doing so.
Watch the interview. Do you have a process? Do you know what you own? Do you have patience once you have worked the idea through your process and pulled the trigger? If you don't, then I think Buffett's making it very clear individual stock ownership isn't for you.
But if it is, you can do well if you are true to your methods that have worked for you over time.
I couldn't agree more. I just wish that more people would obey the master rather than just listen to him and nod in agreement. They would be making a heck of a lot more money if they did. Or they could have someone else make a heck of a lot more doing it for them.
Originally published on May 3 at 6:39 p.m. EDT on RealMoney.com