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Buffett: Everyone Has Ideas, but the Best Only Act on 1 or 2

Every investor has a lot of investment ideas, but to be able to stand out in a crowded field, the best only act on one or two. That's the message Warren Buffett (Trades, Portfolio) tried to get across in a lecture to University of Notre Dame students in the spring of 1991.

Acting on one idea

Buffett recounted his experience of buying the Western Casualty and Surety Co. when he was 20 years old.

The Oracle of Omaha told the students he went through the Moody's Bank and Finance Manual several times to find undervalued stocks. He eventually settled on Western Casualty because it was cheap.

The security wasn't easy to buy, however. It was trading at less than one times earnings according to Buffett (earnings per share of $20, but a stock price of $16), but there was no market for the stock.

The ever-entrepreneurial Buffett decided to take out ads in a local paper to try and buy the stock. It had just 300 or 400 shareholders and Buffett eventually put in half of his net worth.

This was one of the first stocks the young Buffett bought, and he used it as an example of why it's important to throw your weight behind your most convincing investment ideas. Here's what he told his audience:

"I would say that almost everybody I know in Wall Street has had as many good ideas as I have, they just had a lot of [bad] ideas too. And I'm serious about that. I mean when I bought Western Insurance Security selling at $16 and earning $20 per share, I put half my net worth into it. I checked it out first - I went down to the insurance commission and got out the convention statements, I read Best's and I did a lot of things first. But, I mean, my Dad wasn't in it, I'd only had one insurance class at Columbia - but it was not beyond my capabilities to do that, and it isn't beyond your capabilities."

As Buffett went on to explain, with many of his greatest investments, he has not been the most informed person in the room. For example, with regard to his American Express (NYSE:AXP) investment in 1962, he said, "I'm not saying that every insight that I have is an insight that somebody else could have, but there were all kinds of people that could have understood American Express Company as well as I understood it in '62."

However, what separated Buffett from the rest of Wall Street then, and still does now, was his temperament. He was able to take advantage of the decline in American Express' share price because the rest of the market was paralyzed with fear. They didn't want to be caught holding a company that looked as if it was on the verge of bankruptcy.

Buffett, on the other hand, didn't care. He was perfectly happy to hold shares of American Express and Western Insurance because he understood why these businesses were undervalued and what the rest of the market was missing. He said:

"But what I did have was an intense interest, and I was willing, when I saw something I wanted to do, to do it. And if I couldn't see something to do, to not do anything. By far, the most important quality is not how much IQ you've got. IQ is not the scarce factor. You need a reasonable amount of intelligence, but the temperament is 90% of it."

The CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) went on to explain that he learned this temperament from Benjamin Graham's second book, "The Intelligent Investor," which discusses "the qualities of temperament you have to bring to the game, and that is the game."

Disclosure: The author owns shares of Berkshire Hathaway.

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This article first appeared on GuruFocus.