The Other Reason for Warren Buffett's Success - by Jason Zweig

Whether he buys stocks in what he calls the "auction market" or private businesses in the "negotiated market," Mr. Buffett tries to secure a margin of safety. That term, defined by his mentor Benjamin Graham, means that the price is so far below a business's underlying value that severe loss is improbable.

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"We do try to buy our businesses like we buy our stocks," Mr. Buffett told me, "and buy our stocks like we buy our businesses." By that he means, among other things, that he wants to understand how the enterprise generates cash, how well-managed it is and whether its customers would stay loyal even if it raised the prices of its goods or services. Note carefully: None of these factors are contingent on the current price of the stock.

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"Being a businessman makes me a better investor and being an investor makes me a better businessman," Mr. Buffett explained. "Most businessmen limit themselves to their own field, and most investors don't really think about businesses. And many businessmen are semi-oblivious to the yardsticks other people use outside that field. I'm always comparing everything to everything else. The question I want to answer is. 'Where do we get the most for our money in something we can understand?'"

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"I prefer, and [Berkshire Vice Chairman] Charlie [Munger] prefers, the permanent ownership of [private] businesses," Mr. Buffett added. "That's been my focus for well over 20 years. But it's just that sometimes, marketable securities are so much more compelling." Mr. Buffett didn't say whether he thinks now is one of those times, but he did state publicly earlier this month that "I've been buying American stocks."

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