Warren Buffett on ABC Nightline - Investment Philosophy, Lifestyle, and Philanthropy

Warren Buffett explains why he maintains a modest lifestyle despite being America's second richest man. He lives in the same house for 40 years, enjoys simple pleasures like Dairy Queen, and sees no value in accumulating possessions. His philosophy is that having five cars wouldn't bring more happiness than having one.

Buffett describes his job as allocating capital and keeping talented managers excited about working. Berkshire Hathaway owns diverse businesses from candy to insurance to newspapers, plus stakes in companies like Gillette and Coca-Cola. When businesses earn money, they send it to Omaha, and Buffett decides the most intelligent use for shareholders.

Buffett explains his investment approach: buying businesses to keep them, not to flip them. He only invests in businesses he can understand and likes the people running them. He compares working with people who make you uncomfortable to marrying for money - a bad idea under any circumstances but especially crazy if you're already rich.

Buffett reveals why Berkshire Hathaway stock trades at over $70,000 per share without splitting. By keeping the price high, he filters out investors who think stock splits create value - they don't, like cutting a pizza into eight slices instead of four. His philosophy: better to have shareholders who are pleasantly surprised than disappointed. He jokes that the secret to a lasting marriage is 'low expectations.'

Buffett contrasts his approach with typical internet investors and day traders. He doesn't use a computer at the office because it doesn't help him buy pieces of businesses at attractive prices. While acknowledging speculation has always existed, he warns strongly against using borrowed money (margin) to invest, as many will come to a bad end when things don't go up forever.

Buffett describes his investment approach as elephant hunting - sitting patiently in tall grass with an elephant gun until the right opportunity comes along. He views every stock as part of a business and only invests when he understands what the business will look like 10-15 years from now. Companies like Gillette, Coca-Cola, and Wrigley's chewing gum fit this criteria. He hasn't had a quote on See's Candy since buying it in 1972 because he knows the business is doing okay.

Buffett warns that the market in 2000 is in dangerous territory with high valuations and unprecedented speculation. While the 15-year bull market since 1982 was driven by falling interest rates and rising returns on equity, recent years have seen excessive speculation. He knows valuations are high by historic standards but admits no one knows when it will end. Amateur investors will get flushed out easily compared to people who really want to buy businesses.

For a 25-year-old making $25,000-30,000 per year, Buffett advises: first, pay off all credit card debt before buying securities because you're paying 18% interest. Then, either pick stocks of businesses you understand or put a little money every month into an index fund for the next 30 years. Never buy on borrowed money.

Buffett explains why 99.75% of his wealth is in his business and will eventually go to charity. He enjoys building an endowment fund for society - if he had given it away 15 years ago, society would have received a few hundred million dollars, but by waiting until his death, they'll receive $30 billion. Six trustees will handle the money with guidelines to tackle big problems that don't have a funding constituency, particularly issues government and traditional philanthropy aren't addressing.

Buffett identifies the spread of nuclear knowledge as mankind's number one problem - the greatest danger is that more people will know how to build weapons of incredible destruction. While he doesn't know how to attack this problem with money, he's supporting Lee Butler, former commander-in-chief of Strategic Air Command, who formed an organization called Second Chance. In philanthropy, unlike investing, you take on big intractable problems knowing your failure rate will be higher.

Buffett doesn't believe in the 'divine right of the womb' - just because someone wins the ovarian lottery doesn't entitle them to command society's resources for 50 years. He believes in meritocracy: if we pick Olympic teams based on merit, we should handle resources the same way. He compares inherited wealth to welfare - instead of a welfare officer you have a trust officer, instead of food stamps you have dividends, but it's the same cycle of dependency. His kids got a better education but won't inherit billions.