“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

–Warren Buffett

“In investing, what is comfortable is rarely profitable.”

–Robert Arnott

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

–Sir John Templeton

“Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass.”

–John Bogle

“You make most of your money in a bear market, you just don’t realize it at the time.”

–Shelby Cullom Davis

“To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don’t when they don’t.”

–Seth Klarman

With the passing of Steve Jobs, we wanted to share three of his ideas that you may find helpful.

Steve Jobs’ business career is remarkable by any standard. His ability to go from boy wonder co-founder of Apple Computer, to Chairman and CEO of Pixar, to the largest individual shareholder of The Walt Disney Company, to ousted executive who returned to save Apple and turn it into a seemingly unbeatable brand, is simply amazing. While he made plenty of mistakes in his youth, he matured into a very successful businessman with some insightful thoughts on success. Here are three of his ideas worth sharing:

“Connect the dots.”

Over time, all of us have incredible life experiences – some positive, and some not. Regardless of the outcome, they ultimately shaped the person you are today. Everything that has happened to you in your past has the ability to positively affect you in the present – if you connect the dots.

At a 2005 Commencement address at Stanford University, Jobs told a story about how on a whim, he dropped in on a calligraphy class while attending Reed College back in the early 1970s. At the time, he found the class utterly fascinating, but totally useless. It wasn’t until 10 years later, when he was designing the Macintosh computer, that he was able to connect the dots. The result: the Macintosh became the first computer with beautiful typography and it became a huge hit in the desktop publishing industry.

Think for a moment about some of your life experiences. What lessons have you learned? What stories can you create from these lessons that you can share with your family, friends, or business associates? Stories are one of the best ways to connect with people so consider connecting the dots of your life experiences and turn them into a meaningful message.

“Say no.”

There is no shortage of opportunities in life. However, there is often a shortage of conviction. Rather than trying a little bit of everything and successfully completing nothing, Jobs did the opposite. He was an obsessive focuser on a small number of things that were truly important to him.

Apple sells essentially just four products: the Macintosh computer, the iPod, the iPhone, and the iPad. With just four main product lines, Jobs led Apple to the world’s most valuable company with a $350 billion market value, according to The Wall Street Journal. Despite the temptation, Jobs resisted the call to offer a multitude of lower-end products and milk the company’s great brand. He said, “It’s only by saying no that you can concentrate on the things that are really important.”

Ask yourself, what can you say “no” to in your personal or business life so you have room to say “yes” with complete conviction to something else that’s more important?

“Quality, not quantity.”

At Pixar, where Jobs built the firm from peanuts into a company that he sold to The Walt Disney Company for $7.4 billion, there is no 80/20 rule. It’s more like the rule of 100—every effort gets 100 percent support. Accordingly, Pixar delivered an average of only one movie every 18 months; a weak pace by major movie studio standards. However, the result was anything but weak. Pixar has generated more than $7.0 billion in worldwide box office receipts since 1995 – and they’ve had no bombs, according to The Numbers.

Like Pixar, life is not about quantity. It’s about quality. When you spend more time focusing on quality – such as in relationships – life satisfaction will multiply.

In a 2004 BusinessWeek interview, Jobs reflected on his personal growth that resulted from him successfully bouncing back from cancer. He said, “I realized that I loved my life. I really do. I’ve got the greatest family in the world, and I’ve got my work. I love my family, and I love running Apple, and I love Pixar. And I get to do that. I’m very lucky.”

By following these simple ideas – connecting the dots, saying no to the unimportant and focusing on quality, not quantity – you, too, can end up with a life you love. Do that and you’ll be one of the lucky few in this life who can look back at the end of their days and say with great conviction, “It was a life well lived.” RIP.

Berkshire Hathaway released its 2010 annual report last weekend, including the letter to shareholders from Chairman Warren Buffett that is always eagerly awaited by the investment community. We are gratified to find that Mr. Buffett’s legendary ability to simplify complex issues remains undiminished and his trademark wit is as sharp as ever.

Financial journalists, eager for clues that might reveal Buffett’s thoughts on where markets are headed, focused on Buffett’s optimistic outlook for the future (“America’s best days lie ahead”) and his appetite to make further large acquisitions (“my trigger finger is itchy”).

We prefer to focus on a number of issues touched on in the letter that offer investment wisdom that should be just as useful ten years from now as it is today.

• As of year-end 2010, Berkshire held positions in excess of $1 billion in fourteen common stocks. Five of these were non-U.S. firms: BYD Company Ltd. (China), Munich Re (Germany), POSCO (South Korea), Sanofi-Aventis (France), and Tesco plc (UK). Five years ago a similar list of twelve companies contained just one non-U.S. firm, and ten years ago there were none. In his comments about the future of America, Mr. Buffett remarked that “human potential is far from exhausted” and that, despite many setbacks, the American system “has worked wonders for over two centuries.” Judging by Berkshire’s portfolio, it appears this notion applies with equal force throughout the world.
• Berkshire has willingly shouldered some unusual risks over the years. It acquired building products maker Johns Manville in 2000 despite the stigma of asbestos-related liabilities, invested over $15 billion in various financial firms in the tumultuous weeks following the Lehman Brothers bankruptcy in 2008, and once insured an internet firm against the possibility of awarding a $1 billion prize associated with a marketing promotion. Many investors might assume that such adventurous and unconventional thinking in equity assets would be matched by an equally unorthodox approach in fixed income. On the contrary, Buffett’s strategy for investing Berkshire’s cash ($38 billion at year-end) is so conservative that some might accuse him of excessive caution. We suspect any institutional money manager with a balanced account mandate who maintained most of the fixed income assets in Treasury bills despite yields approaching zero would be fired for lack of imagination. Such an approach only makes sense if the role of fixed income is to preserve liquidity and limit the potential damage associated with riskier equities, rather than to generate satisfying returns. Mr. Buffett cites an observation from financial writer Raymond DeVoe that “more money has been lost reaching for yield than at the point of a gun.”
• For those who ponder why it is that stocks are expected to provide a positive rate of return even if they pay no current dividend, one number cited in the letter offers a clue: $1 billion. That is the approximate amount of cash that shows up in Berkshire’s mailbox each month from its collection of seventy-six businesses. Mr. Buffett’s job is to invest that cash in new projects that carry an attractive rate of return, and history shows that these may come in a variety of shapes and sizes. Last year, for example, Berkshire spent $50 million to buy Alabama’s largest brick manufacturer and $22 billion to complete its acquisition of the nation’s largest freight railroad. Mr. Buffett reports that the rail acquisition is working out “even better than I expected,” and to the extent any chief executive can invest a firm’s retained earnings more profitably than we can, dividends are not just unnecessary, they are undesirable.

Since taking control of a floundering Massachusetts textile mill in 1965, Warren Buffett has assembled an extraordinary record of business success. His oft-stated goal has been to grow Berkshire’s book value at a faster rate than the total return of the S&P 500 Index, and he has certainly succeeded. While many have focused on his facility with numbers and his ability to identify attractive business opportunities, it seems to us there is a lot more to the story. Mr. Buffett may never forget a number you give him, but he also appears to be an astute judge of character and has a knack for quickly sizing up individuals whose business acumen and management style will make for a good fit within the Berkshire confederation.

What are the investment implications of this appealing story? Should we be confident that Berkshire shares will continue to outperform the market, at least as long as Mr. Buffett is at the helm?

To address this question, we should consider to what extent Mr. Buffett’s skills are already reflected in Berkshire Hathaway’s stock price and whether the S&P 500 Index is the most useful basis of comparison. Let us first acknowledge that Berkshire’s long-run price performance relative to almost any benchmark is sensational—over the last 25 years it has compounded at 16.9% per year compared to 9.93% for the S&P 500 Index with reinvested dividends. The margin of superiority relative to the S&P 500 narrows for more recent time periods, however, and disappears altogether in comparison with broader-based equity strategies. Over the last fifteen years, for example, Berkshire shares have still outperformed the S&P 500 by 276 basis points per year, but fall a smidgen behind a globally diversified Dimensional Balanced Equity Index (16 basis points). Over the last ten years, Berkshire shares have underperformed the Balanced Index by an even larger amount: 295 basis points per year. Some might be tempted to conclude from these results that Mr. Buffett’s legendary skills are waning, but if markets are working properly the numbers should come as no surprise and are no reflection on Mr. Buffett’s talents. Berkshire’s book value has grown from $48 million in 1965 to $157 billion in 2010, making it larger, by this measure, than oil giant Exxon Mobil. Mr. Buffett has gone from piloting a speedboat to commanding an aircraft carrier; the ever-increasing amount of capital Berkshire oversees makes it difficult to earn above-average returns. Moreover, Berkshire Hathaway is not a mutual fund, but a public company with a share price that reflects expectations for the future. Now that Mr. Buffett’s admirable qualities are understood and acknowledged by so many market participants, it seems likely that his perceived value is already reflected in Berkshire’s stock price, just as Apple’s current stock price reflects the genius of founder Steve Jobs.

We wish Mr. Buffett well and hope to be reading his letters for many years in the future. And investors who have a soft spot for Berkshire Hathaway shares can take comfort in the knowledge that if they own a truly diversified equity strategy, they own a piece of Berkshire.