Warren Buffett: How to make $3.5bn on a $500m investment

In this interview, Warren Buffett, expands upon how he chooses stocks to buy, what influences his decision and when he knows it’s time to sell. The particular example used in this instance is the $3.5 billion profit that was made on PetroChina stocks, and despite the recent downward spiral of the oil price, the essence of this interview with the Oracle of Omaha highlights the crux of sound investment methodology – buy low, sell high and don’t get ahead of yourself. – LF

WARREN BUFFETT:  We sold it from 160 to 200 or something like that.

INTERVIEWER:  A nice, tidy profit.

WARREN BUFFETT:  Yeah, we made about $3.5bn on a $500m investment, as it turned out.  I still sold it way, too soon.  Since I sold it, they must have gone off and said ‘Warren sold.  It’s time to let it go up’.

INTERVIEWER:  Yes, you lost money on the table.

WARREN BUFFETT:  A lot of money.

INTERVIEWER:  Dummy.  That’s what Charlie Munger would say.

WARREN BUFFETT:  Dummy.  That’s exactly right.  Charlie would say ‘you’ve done it again’.

INTERVIEWER:  But you can’t always, keep trying.  For the average person, who’s maybe never bought a stock before, what’s your advice about that?  You can’t constantly sit there and wait, and say ‘it’s going to go higher’.

WARREN BUFFETT:  We don’t even think about that.  What we think about is ‘how much is it selling for’ and ‘how much do we think it’s worth’.  We bought it at 35-billion, effectively.  I thought the company was worth at least, $100bn.

INTERVIEWER:  How did it come to your attention?  How do you find a stock like PetroChina?

WARREN BUFFETT:  I sat there in my office and I read an annual report, which fortunately, was in English and it described a very good company.  It talked about the oil reserves, talked about the refining, and talked about the chemical and everything else.  I sat there and read it, and thought to myself ‘this company’s worth about 100-billion’.  Now, I didn’t look at the price first.  I look at the business first, and try to figure out what it’s worth because if I look at the price first I’ll be influenced by that.  I look at the company first.  I try to value it.  Then I look at the price and if the price is way less than what I’ve just valued it at, I’m going to buy it.

INTERVIEWER:  How do you value it?

WARREN BUFFETT:  Well, that’s the trick.  It’s essentially, what I would pay for the whole business if I could buy it.  When we sold the stock, it was valued at probably 250 to 275-billion and we thought that was a fair price.  Now oil had gone up from $30.00 per barrel to $75.00 per barrel – and now it’s up even further.  Today…well, yesterday anyway, I believe PetroChina is the second most highly valued company in the world – higher than VE – next to ExxonMobil.

INTERVIEWER:  Have you sold the entire stake?

WARREN BUFFETT:  Yeah, I have.  I wish I hadn’t, but I have.

INTERVIEWER:  As of when?

WARREN BUFFETT:  Well, we sold it over a period of time.  If it goes down a lot, we’d buy it back.

INTERVIEWER:  Would you ever buy or sell a stock, based on political pressure?

WARREN BUFFETT:  No.

INTERVIEWER:  People, being upset about Darfur had nothing to do with why you sold the stock.

WARREN BUFFETT:  No.  The Chinese Government owns 88 percent of PetroChina.  They also own control 29 out of 30 of the largest companies in China.  The Chinese Government is the one that has a position in relation to the Sudan.  If you own any one of the 30 largest publicly traded companies in China, you would have the Chinese Government as your majority partner.  The question is: are you responsible for their actions?

INTERVIEWER:  You’re going to China next week for a ribbon-cutting ceremony.

WARREN BUFFETT:  That’s sort of the limit of my abilities.  That’s what they use me for.

INTERVIEWER:  You’re pretty good at cutting ribbons.

WARREN BUFFETT:  I’ve gotten used to it, yes.

INTERVIEWER:  Are you looking at other companies in China?

WARREN BUFFETT:  The answer is, pretty much, no.  I don’t look based on countries or that sort of thing.  I just read any report I can and I try to figure out whether something is cheap.

INTERVIEWER:  But how would you have found a report like PetroChina four years ago?  This was not a name that many people would have heard.

WARREN BUFFETT:  Other guys read Playboy.  I read annual reports.