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|Warren Buffett Quotes and Teachings: March 13, 2009|
Re: current state of economy
The three basic tenets of our society are still in tact: markets, rule of law, belief in opportunity
Re: CIO succession
4 names given to the board; open call was to be able to cast an open net
Re: strengths & skills with respect to the valuing gold question Best thing to have in wild inflation is your own talent - your purchasing power
Re: future challenges
Challenges lead to progress. If horses could have voted, we wouldn't have the tractor. Need competitiveness.
Re: what is freedom
Anything not in conflict with the common good or counter to the interests of society
Re: should entrepreneurs keep their ideas in check given the current state of the economy/job market Doesn't pay to put things on hold
Re: what you need to know to teach about investments, and what biz school is lacking Need to know how to value a business, and how to think about securities and the process of investing. Oral and written communication skills are what is most lacking in biz school
Don't undervalue the importance of what you believe tying back into what you do. He won the ovarian lottery. The rich should pay their share of society's costs - would make the tax structure more progressive. Would design a world/system that you would want to be in, regardless of which "ovarian ticket" you pull.
Re: biggest risk
Every once in awhile, if you’re lucky enough, life bestows upon you a pretty special gift. These gifts come in many different forms, some more special and important than others. This gift for me will rest just a notch below my wedding day, the birth of my child, and maybe a couple more.
By a force I do not know, with luck I probably don’t deserve, I was given an opportunity to meet perhaps the world’s most influential person, and certainly, the world’s most influential investor. It will likely take me the rest of my life to fully comprehend the full depth of the experience I was just granted.
Warren Edward Buffett gave 150 business school students the experience of a lifetime this past Friday. On invitation from Buffett himself, out of several hundred schools who applied, 5 schools (Boston College, Harvard Business School, Wharton – UPenn, UC – Davis,20 and Arizona) traveled many miles to absorb the wisdom of a man whom many consider the wisest of all. After spending over 5 hours with him, including a candid Q & A, lunch at one of his favorites, and an hour plus of pictures, I feel safe in declaring that he is the most thoroughly impressive human being I have ever met. Stuffed between his obvious intelligence and business acumen is a man filled to the brink with character and humility all of us could learn from. Not a single business class nor all of my classes taken in aggregate could even come close to imparting upon me the level of enlightenment and perspective I feel I absorbed on Friday. I will spend the rest of my life attempting to impart some of the lessons I learned upon the rest of the world – we need all of the “Buffettisms” we can get.
Here is a picture with me and Mr. Buffett. This is a picture I will keep next to me for all those moments I happen to forget how lucky of a person I am.
BC Graduate Student
A Day With Warren Buffet
Jack McManus, CFA, John Barron
Boston College Carroll Graduate School of Management
March 13, 2009
Warren Buffet hosted students from Boston College, Arizona, UC-Davis, Harvard and Wharton in Omaha on March 13, 2009. After inviting us to help ourselves to all the Coke products we want, Mr. Buffet launched into a brief stand-up comedy routine…. “It’s been a tough year for Wall Street. They had to call off the Wall Street Christmas pageant because they couldn’t find three wise men. They couldn’t find a Virgin Mary either.” “Did you hear the one about the 30 year old successful investment banker? Well, he didn’t get a bonus last year and won’t get one this year. He goes home to his wife in Westchester and tells her that they need to start cutting back and that if she can learn to cook, then they can get rid of the maid. His wife replies, okay, but if I’m going to learn how to cook, then you can learn how to make love, so we can get rid of the gardener.”
Following are my recollections of what Mr. Buffet said in response to student questions. I’ve paraphrased and summarized, with the exception of a few direct quotes. Some of his commentary is omitted.
On the current economic environment:
The U.S. economic system has made America the most powerful economic force the world has ever seen. It has survived “panics,” wars and a depression. “The machine still works.” The FDIC has assisted 3600 financial institutions since it was formed.
How do you evaluate management?
We are looking for people who have a passion for their business, not the money. I love what I do, which is why I “tap dance to work every day” at age 78. I had to select someone to run Solomon Brothers in 1991. Among the 12 candidates interviewed, the choice came down to who I would want to go into a fox hole with, not who had the highest IQ.
On Berkshire’s succession plan:
The Board knows who it would call to fill the CEO position if need be. The Board also has a list of four people who would be willing and able to fill the investment officer position if called. They may decide to select more than one person to fill that role. Money is not the driving factor behind the desire of these people to join Berkshire.
How do you go about valuing gold?
I don’t think anyone knows how to value gold. If we all go back to living in caves, it will be a lot more useful than paper money. Gold is what people run to when they are scared or during periods of high inflation, but it is a terrible investment over time- it just sits there and stares at you. Gold has very little utility. You have to dig it up and pay insurance and storage costs to maintain it. It does have a mystical quality. The best thing to have in an environment of wild inflation is your own earning power- be good at what you do. The second great investment in high inflation is something that people will keep doing regardless of the inflation rate. [Buffet holds up a Cherry Coke.] This is a simple pleasure that people will always be willing to trade a few minutes of their labor for.
On competitive global economic environment:
Competition is good. America will be up to the challenge of global competitiveness. We’ve got the right system. Capitalism is the system that leads to Mike Tyson fighting for the heavyweight title and Jack Welch managing GE. Under a central planning system, you could end up with Jack Welch fighting for the heavyweight title and Mike Tyson running GE. “Creative destruction” is a useful force. However, it is important that society also has a big safety net for individuals such that workers are retrained.
On how he thinks about freedom:
Individuals should have freedom, but with constraints. People should be able to do anything that is not in conflict with the common good. The U.S. has a good system, and many other countries are moving toward what we have.
Advice for entrepreneurs:
Don’t put your plans on hold simply because of the economic environment. Life is too short to put things on hold. However, don’t over-leverage yourself financially to try to reach your goals sooner. I started right away because I was able, but Charlie had to work as a lawyer for a little while to support his wife and kids.
What topics are business schools failing to teach?
The two courses that are essential are 1) How to value a business? and 2) How to think about securities? It is also important to understand accounting, which is the language of business. What is not taught enough is how to communicate orally and in writing. These are hugely important skills. Business schools often assume that teaching these skills is “beneath” them. I need to be an effective writer to create a culture at Berkshire. I had to learn to communicate effectively because public speaking used to frighten me. I enrolled in a Dale Carnegie course and taught college courses to improve my communication skills. Work on your communications skills, whether through courses at school or by joining a toastmasters club.
On ensuring that subsidiary companies share his values:
You reinforce values by living them. Authenticity is important. We don’t have mandatory manager meetings. I write a short letter to managers every 2 years reminding them of Berkshire’s goals. I tell managers of our companies to run the business as if it’s the only asset your family can own for 100 years. When we make business decisions, we don’t operate on the fringes of morality, but rather we focus on playing within the boundaries at center court. You never want to do anything that you’d be ashamed of reading on the front page of the newspaper. We cannot afford to trade an ounce of our reputation for money.
When a manager needs to be replaced:
I talk to a manager if they start losing it. For example, Lou Vincenti of Wesco developed Alzheimer’s. This was a very difficult conversation to have. I have tended to wait too long to have these types of conversations, but I don’t plan to change his approach. I would rather be late than early in telling someone that they can’t get the job done anymore. It just so happened that Wesco enjoyed some of its best results while Vincenti was developing Alzheimer’s. “We want to own a business so good that someone with Alzheimer’s can run it.”
On emerging markets:
Most emerging market companies are too small for Berkshire to consider them, because they wouldn’t move the dial. (Publicly traded companies typically need to have at least $10 billion in market cap and $75M in pretax earnings for Berkshire to consider owning a piece of them.) I do most of the investing for Berkshire, so I don’t have time to be intimately familiar with every emerging market. PetroChina and Posco in Korea have been good emerging markets investments.
On valuing a business:
I don’t like to know the price of an investment before I value the business. I do not want to suffer from anchoring. For example, with PetroChina I evaluated the business at $100B and then saw the ticker value of $35B.
On the failure of the ratings agencies to appropriately value mortgage related securities (Berkshire holds a large stake in Moody’s):
Rating agencies were dead wrong on mortgages. There was a mass delusion in the U.S. about housing, and the ratings agencies participated in that delusion. I did not see what was coming either. Anybody else might have made the same mistakes that the rating agencies did. A lesson to take away is that “you’ve got to be responsible for your own decisions.” “We never pay attention to ratings.” People are subject to mass delusions and will take on leverage if they can get it. You have to be able to sit in a room and think for yourself in investing.
Government is the only one that can leverage up when the world is leveraging down.
Impact of credit crisis on non-profits:
Americans give roughly 2% of their income to non-profits, but there will definitely be less giving as a result of the economy. The Gates Foundation won’t cut down on what it is giving too much despite the downturn.
What is the most valuable thing you’ve learned?
I figured out investments by the time I was 25 years old. Since then, the most valuable thing I’ve learned is human behavior.
On importance of personal qualities:
“Don’t keep score.” You want to be the kind of person that people want to do things for. Give and you’ll get back. Family is more important than beta.
Here’s a question for you. Which classmate would you select if you could get 10% of their future income? Everyone here is pretty smart and there’s no great difference between an IQ of 130 or 142. You need to be likeable and fun to be around because everyone is smart. Ben Graham would write down characteristics that he liked and disliked and then try to exemplify the ones he liked and only associate with people who shared similar traits. Now, which classmate would sell short?
A few years back I found that I was paying a lower effective tax rate than almost all of my employees. I was paying 17%. The 400 top earners in the country earned an average of $256 million last year. “You don’t know these people. I do.” They paid an effective tax rate of 17%, down from 29% a few years back. About 40% of tax receipts are from payroll taxes, which stop at $100,000. I favor a considerably more progressive tax code. “Trickle down didn’t trickle down.”
Do you still think that the Goldman Sachs deal was a good deal, given that they have now become a bank holding company?
I still think it was a good deal. There are other deals that I wish I hadn’t made, but I’m glad I made that one. That was an extraordinary scenario where Goldman needed to do a deal that day. Top people in financial circles were more scared in September than they are today, whereas most people are more scared today than they were back in September. In doing the deal, I had to believe two things: 1) the Federal Reserve and government would step in and 2) have faith in Goldman Sachs management. I did make a mistake buying Conoco Philips when oil was trading near its peak; however, I expect oil prices to move higher over time so it may work out.
What is the biggest risk faced by our generation?
The biggest risk is crazy people or more specifically, terrorists with nuclear weapons. There are only four things that they need: 1) intent, 2) materials, 3) knowledge, and 4) delivery method. Fortunately, it’s very hard to get your hands on nuclear materials.
Will the current zero interest rate policy lead to another bubble?
This is a great time to own a bank, if you didn’t own that bank three years ago. It is a mistake to get wrapped up in anti-bank rhetoric. M2 is moving up big time, which raises the specter of significant inflation. Treasuries are almost certainly a bad investment, though I don’t want to be shorting Treasuries. Berkshire can’t become a bank holding company, for a number of reasons, so I haven’t figured out how to get access to the 0% financing.
Interesting Notes from Lunch with Mr. Buffet:
Buffet’s favorite film is The Godfather. He spends 80% of his time in Omaha. He tries to leave his days unstructured as opposed to scheduling meetings. Buffet spends 2 hours every morning reading newspapers and three hours every night playing bridge online. His screen name is “tbone” while Bill Gates’ screen name is “chalengr”. He drives his own car, which is an escalade.
March 19th, 2009 (Brendan Kaisershot Blog)
Warren Buffet Trip
We flew to Omaha last Thursday for the Warren Buffet trip. I ate separately from the group (fortuitously, it was my mom’s birthday, so I ate with my parents and ate one of the best steaks I’ve ever had) but met up with them afterward for a Thirsty Thursday Omaha-style. Some people complain when Thirsty Thursday is several miles from B.C.; we traveled 1400 miles!
Friday morning the day started. We first got a tour of Nebraska Furniture Mart, the largest home furnishing store in the country and a Berkshire Hathaway subsidiary. The founder’s grandson talked about working for Warren Buffet and the challenges of operating such an enormous furniture store. There was something funny about seeing other people on the tour snapping pictures of a place I’ve been about a dozen times. To them its an investment of one of the second richest man in the world. To me it’s where my parents buy their carpet.
We then hurried over to Kiewit Plaza to get a good seat for the Q&A (there were four or five other schools there as well). We got seated, and Warren wandered in with no pretense. After being hooked up to a microphone by his assistant, we had him to ourselves.
He started off with a couple jokes, and I was a little surprised at how bawdy he was. Not in an inappropriate way, but as an amusing way to break the ice. He also invited us to help ourselves to Cokes or Dasani, as Berkshire gets money from 1 out of every 12 (they own 8% of Coke). As he said, “I don’t care whether you drink them or not. Pour them on your neighbor’s head.”
Then we dove into the questions. I read recently that great leaders are great storytellers (I can’t remember where), and it is clear that he is a terrific storyteller. He did not give any glib responses, and most answers were probably three to five minutes long, leading to related topics. I was only too happy to listen.
Among the topics he addressed:
• What is success? In Snowball¸ he said the measure of success is how many people love you when your life is over. He gave a slightly different response here. He related the story of a Holocaust survivor who said she considers her friends those people who would hide her in the event of another such atrocity. So he said the greatest measure of success is how many people would “hide” you.
• Entrepreneurs: He said he doesn’t think people should put off the things they really want to do. As he put it, that “is like putting off sex until old age.”
• The greatest attribute to look for in a spouse is low expectations!
• Someone from another school (I won’t name which one, but it would probably be your first guess) asked him the inane question “How do you value gold?” Really? You have the rare chance to ask a question of one of the greatest business minds ever, and that is your question? Not to mention he has addressed this issue in his books. Short answer: he doesn’t think it’s a worthwhile investment. Anyway, at least it did lead to this nugget: In a time of wild inflation, the best thing to have is talent. The second best is something people will still want and consume regardless of currency or income issues.
• What topics are business schools failing to teach? I thought this was a great question (no, it wasn’t one of ours). He said that business schools are failing to teach writing and oral presentation. Without the ability to communicate your ideas and persuade people of their value, those ideas get lost in the shuffle. Full disclosure, BC does not have specific classes on these two subjects, either, although you do a lot of writing, and there are oral presentations in a number of classes, most notably the consulting and business plan competitions. But I agree with him on the need to emphasize these skills. And I liked that he specifically said these are more important than modern portfolio theory.
• Evaluating management: When buying companies, he wants managers who have a passion for their business rather than just for the income, and who will stay around to run that subsidiary after the purchase because of that passion.
• The current economic climate: The economic system in this country has survived countless panics, wars, recessions, and a depression, but “the machine still works.” He pointed out that FDIC has assisted over 3600 financial institutions since its formation.
• What is your ideal tax system? He said he favors a progressive tax system and that people who have won “the ovarian lottery” should not benefit disproportionately. He conducted a survey of the people in his office as to what percentage of their income they pay to the government as taxes, including payroll taxes (which are often conveniently left out of such calculations since people making over $106,000 stop paying them). He pays 17%, the lowest of anyone in his office. His secretary pays 32%. He also favors the estate tax and thinks a nation as wealthy as ours should have adequate safety nets. There is more detail about his thoughts on these in his biography, Snowball. Fair warning, though, that book is quite a slog to get through. Stick to his corporate essays.
We all brought books for him to sign, and afterwards his assistant asked a couple of us from BC if we could help carry the books down to his office. Sure! We got a rare look at the inner sanctum of Berkshire Hathaway. There is some sports memorabilia, including a football signed by former BC coach Jeff Jagodzinski. The walls are lined with impressive wildlife photos (presumably taken by his son, Howard, who is a wildlife photographer). The offices are perfectly nice, but nothing approaching lavish. The offices I worked in at law firms before returning to business school were certainly nicer. I got a peek at Warren’s office, which is wallpapered with $100 bills (okay, I made that part up).
My friend, Todd, got to ride over to the restaurant afterward in Warren’s car. It made me think of my Financial Statement Analysis class last year, where two of our guest speakers were guys who ran their own investment fund and showed up in a Maybach with a driver. Warren, who is richer than them by several orders of magnitude, drives his own Cadillac.
Todd sat by Warren at lunch and related the story that one guy from another school (hint: the same school as the inane “gold question!”) who pitched Warren on a hedge fund that he is planning on starting and then asked if Warren wanted to invest $10 million! Wow. What a tool. Berkshire Hathaway does not invest in other people’s funds, and it has access to better deals than anyone else (see their investments in Harley, Goldman Sachs, and GE; those aren’t terms available to just any company!). And he doesn’t think investment funds add value to the economy. Too bad this guy hadn’t bothered to read anything that Buffet has written (by the way, he declined to invest).
After lunch, we moved outside to a small parking lot across the street for pictures with Warren. This is where we really got to see what kind of person he is. This lot was next to a house with a bunch of children’s toys littering the yard. There is a red minivan in the background of all our pictures. Warren doesn’t care about image. He nailed home that point by willingly taking pictures in any pose people requested. He acted out a mock proposal to one girl, whispered stock tips to others, took a boxing pose with other guys…it was all pretty funny to watch. I couldn’t think of anything too clever to ask him to do, so I asked him to act like he was laughing at one of my jokes. And he did.
We helped him put some stuff in his car and then watched him drive off. It was funny to think that he could very well have returned to his office and then invested $5 billion in some company. Just hours after he treated us to New York strips and chicken parmesan.
We took our bus to the airport, and I looked out at the buildings in my hometown. It is strange to return to Omaha, as I do several times each year, after having lived in New England for 12 years. Parts of Omaha, such as the Old Market area where we dined and drank Thursday night, have a lot of character and charm. The riverfront area is beautiful with some new parks, a new stadium under construction for the College World Series, and the new pedestrian footbridge across the Missouri River that resembles the Zakim Bridge in Boston. But much of the city, architecturally, is rather unremarkable. I hate writing that about my hometown, but it speaks to a larger point. I never noticed that before I left for college, and neither do most other people who live there. Wealth generally is not flaunted, even with businesses. Contrast this with Wall Street. The concentration of so many wealthy people in such a small area has a perverse effect: the least wealthy of the wealthy do not feel wealthy at all. I imagine it would be difficult to not focus on your relative wealth when the people you work with, dine near, hear speaking in the elevator, are one step ahead of you in the keeping-up-with-the-Joneses sweepstakes. Having a long view in that kind of environment is difficult, and I can’t imagine that sort of emphasis on the near term –both on personal level and a firm level - didn’t play into Wall Street’s recent missteps.
Warren Buffet accumulated his wealth with an eye toward long-term cash generation, and often had long periods where Berkshire Hathaway invested in nothing. The late 90s comes to mind, a period when Buffet refused to invest in technologies he didn’t understand or to buy into the accepted notion that the internet justified record valuations. He was right and pretty much everyone else was wrong. I have to think that having offices 1,244 miles from Wall Street helped muffle the loud voices of those who said he was now irrelevant. He has been famously frugal his whole life, but if he ever had an inkling to keep up with the Joneses, the Joneses he would know in Omaha wouldn’t be living a Wall Street lifestyle.
I don’t think someone like Warren Buffet could happen in a place unlike Omaha. I’m proud BC gave me the chance to return home to meet him.
Robert F. Radin, Ph.D.
Carroll School of Management
Fulton Hall, Room 226
140 Commonwealth Ave
Chestnut Hill, MA 02467-3808
Honesty and Integrity...Mutual Respect...Pursuit of Excellence...Personal Accountability