On February 17, 2017, I took 20 Peking University students to Omaha to spend a day at Berkshire Hathaway. The trip included 3 company visits, a 2.5 hour Q&A with Warren Buffett, and then a steak lunch with him. I’m writing up the whole experience and will post it shortly. This was his first meeting with Peking University and his second with a student group from China.
Here is the Q&A from the lunch session with Mr. Buffett (note: it is translated from Chinese)
Q1:What was your most difficult investment experience?
A: When I first started buying businesses, I started buying very cheap and not-so-good businesses. You can’t fix bad businesses. And it’s no fun. Berkshire Hathaway had 12,000 employees but only 3,000 when I bought it. And half of them spoke Portuguese. I took me 20 years to get out of it and the idea of “cigar butt” investing. Bad businesses are like a “leaking boat”. It is better to get into a new boat than to patch it.
Charlie told me to get great businesses. US Arrow Air Inc. (cargo airline) in 1987 was sold for more than $30 million, the company went bankrupt twice. In the world of investing, you shouldn’t worry too much about the mistakes.
Q2: You recently had a conversation with Bill Gates on AI. What is your opinion about AI’s influence on the investment industry and the stock market?
A: There is no question that AI is coming. AI is going to change some industries dramatically, but not investment. In 2013, I listened to some experts and I decided that it is still tough for AI to do some things. Investment is not only about calculation. In short-term trading, AI and computers can do the trades. But in long-term investing, AI is not changing the game much. It does not help you find investments.
Back in 1987, the stock market dropped 22% in one day. That was a computer breakdown. I will stay with my comments that the computer and AI will not change the investment sector too much.
Q3: Bill Gates once said you are the most optimistic person he has ever known. Do you think you are optimistic, and why? Is it born with or learned later?
A: Optimism is a very important quality for a good investor. The result of life getting better and stronger. Compared to the age of Jefferson (back to 1776), people did not make a lot of progress. Not much had changed in thousands of years.
But in less than 3 life times, significant changes and developments have happened. Why? Human are not smarter, nor are they working harder. The economic system and government policies have let people start to deliver unbelievable results. Compared to olden times when people died and had fewer choices, everyone in this room lives a better life. Our children, younger generations will live even better. Optimism is realistic. It is from analysis.
Q4：If you were president, how would you make the immigration policy?
A：Welcoming immigrants is a grand American tradition. The country couldn’t be here without the contributions from immigrants.
In 1939, two Jewish immigrants, Albert Einstein and Leo Szillard, wrote a letter to President Roosevelt, alerting him to Germany’s undergoing research on “extremely powerful bombs of a new type” and recommending that the U.S. begin similar research. The letter saved the US.
Steve Jobs was son of immigrant. When people come, the market comes.
President Trump is reacting to a danger (perceived?). However, the U.S. will be a better country 50 years from now if it keeps its great tradition.
Q5: Banking regulations: Banks want to deregulate, but how do you balance regulations of the industry with growth?
A: There is a great article addressing the questions you asked. It was written by Tim Geithner and published in October 16th.
Federal Deposit Insurance Corporation (FDIC) is a government corporation providing deposit insurance to depositors in US banks. When banks go broke, it is the taxpayers paying the expense. But this has never really happened. This is a good example of good regulation.
There is no question about banks needing to be regulated. When people are afraid, they run to the door. However, confidence come back one at a time.
To some extent, we need to regulate for the worst-case scenario. We must bring in the FDIC to stabilize banking system. Our economy will not work without the Fed.
Q6: Question on leadership
A: When doing business, you should not say “everybody else is doing something so we should follow”. Consider what you really need and want to do. On being a successful leader, the basic job is to put the right person at the right place and monitor the whole business. Also, always do what you promise so that your employees will trust you.
Q7: (from Peking University) What is your latest idea for investing in China? And if you are going to do investments in China, which industries will be your priorities and why?
A: China is a huge market and there are more possibilities for us there than in any other country besides the US because of its size. My partner Charles Munger looks at China a lot. We focus on not price but valuation of companies. We do close research on the companies and try to buy the whole business when we invest.
China is just as smart and works just as hard as the US. But they didn’t have the system. Now they have the secret sauce and they have compound interest working. There will be some interruptions but this will not disturb its long-term development. China and the US will become the two superpower economies in the future. We appreciate the big investment opportunities in China.
My investment in Petrochina came from reading the annual report. The government owned 90% and we bought 15% of the 10% available. The investment in BYD came from Li Lu.
Q8：You have picked many successful companies previously. And the market will see your purchase of a stock as signals of confidence. How does this influence on your positions?
A：I have signed some confidential treatments with the SEC, but not for my portfolio. We need to disclose our portfolio holdings 45 days after the end of the quarter. However, I think there is intellectual property in the ideas of what stocks we buy and these ideas should be protected.
Management likes these announcements but they cost us a lot of money and it is negative for our investment. We have to publish our intellectual property. I have made attempts to minimize disclosure in what I am buying. We keep in mind to minimize the effects on the market from our investment decisions.
Q9:Question about passive managed funds.
A: It has been 9 years since I made a 1 million bet with Protégé Partners, LLC. It is the largest bet on the website Longbets.org.
Over a ten-year period, I predicted that the S&P 500 will outperform a portfolio of hedge funds, when performance is measured on a basis net of fees, costs, and expenses.
2008 was the first year and the market went down a lot. The fund of hedge funds performed better than the index.
9 years later, the fund of hedge funds, invested in 7200 hedge funds, has had a cumulative return of 22%. The index has yielded 86%. We are in a commanding 64% lead with one year to go.
Jedge fund get rich on fees. Wall Street sells you what you will buy. Hyper activity is bad, “fees never sleep”
Q10: The speed of information is faster and faster. There are fewer mispriced securities. How has this changed your investments?
A: It is true that the market today is a lot more competitive than 50 years ago. It is also true that information can be accessed faster and easier. When I was at school in 1957, I gained information from the annual report of companies. At that time, the annual reports and the Moody’s and S&P manuals provided the key information on companies (Buffet brought a binder out). On page 1433, the book showed the financial report for the insurance company NWLI. In 1950, the company earned 21.66 dollars per share and this grew to 29.09 dollars per share one year after. But the share was selling 3.13 dollars per share. The company had a terribly small float, but I was as small investor at that time. It wasn’t difficult to buy stocks at that time.
Years later, somebody told me that I should pay attention to the Korean market. I read a report from Citi where one stock was introduced on each page. You can get a lot of information from this. I found 15-20 stocks trading at about 2x earnings and bought them as a group. It took about three hours of work on a Sunday.
You don’t need an information edge. You need a willingness to act.
Q11: What is your view of the newspaper industry?
A：In the old times, the advertisements in newspaper were a source of information and it spread everything. Nowadays, the industry is declining and the classified sections do not help anymore. They are losing print circulation, and thus their advertising revenue. The internet is accelerating the change in newspapers.
The New York Times and Wall Street Journal have viable digital businesses which allows them to keep some print circulation (joint cost synergy). The Washington Post has also increased online activity a few years ago. But most newspapers have not found a feasible way of being paid online.
Q12：What is the most important improvement you have made in investing?
A：I was focusing on technical analysis when I was young. The intelligent investor, the book written by Benjamin Graham, reset my whole investment thinking. It taught me how to think about the stock market.
From my perspective, there are two courses that should be taught in all business schools: how to think about the stock market and how to value companies. Margin of safety is always the main principle of investment.
The formula of investing never changes. First, how sure you are? Second, how soon it will to get you there? Third, what to do to achieve it?
Investing is buying a piece of a business. What will you invest in? Maybe a fast-food restaurant since people need to have food every day. You go through the ideas in your mind, look at things, and grab information. That is why investing is amazing: you only need to make decisions rather than do it (build the business) yourself. Since the market prices change every day, opportunities are always there. Mr. Market is there to serve you. You should utilize it when he goes crazy rather than let him put pressure on you.
Q13: If you graduated in 2016, what would be your initial step to build your career?
You need an audited record. Even if its tiny. Have 5 years of what you have done and how it was done. I selected two people to come into Berkshire, each now managing $10 billion. These two managers have qualities that are rare. They had track records.
Don’t postpone things in life for money or career. After graduation, I would do what I would do if I didn’t need to have a job. Pretend you are rich. I don’t want to sleep walk to work. I would not worry about starting salary. I would do things that I really like in life. If not, I would end up looking at the clock after 3:00 and 3:10.
Q14: What are the top three challenges faced by boards of directors?
A:I think their primary job is to pick the right CEO and then to make sure he or she doesn’t over-reach.
Also they face challenges in acquisitions. Usually, an acquisition is a one-sided presentation with CEOs presenting why and how the companies is going to benefit. I have witnessed over a hundred acquisition presentations and the majority were impossible to stop. I would suggest the system where one investment banker points out why the deal should be go through and another one points out why the deal should not go through. Only the winner gets paid. This would ensure the reasoning for acquisition would be evenhanded. Killing deals in unpleasant and you don’t get invited back. Most CEOs know little about acquisitions but it is important for them to know it well.
Q15: (from Peking University)：You are one of the richest men in the world, as well as one of the most generous. What is your view of wealth? Is it established at the very beginning at a young age, or is it developed through different phases of your life?
A：This is a good question. Money can buy most things, but it cannot buy time and love. I have only one thing that I count as a luxury—a private jet. Other things are the same as yours. Money has no utility beyond a certain point and the usage is the same to everyone. If you buy ten houses, you have gone intot he hotel business. Are you happier with ten cars than one good one?
Money can change the life of many people. I hoard money because it can grow faster with me. But otherwise there is no reason to hard it. My wife and I both agree that we should spend money to solve the important societal problems. Especially if there is no ability to raise money. For example, universities in the US have external funding, but curing diseases in Africa may not have funding.
Money can buy many interesting experiences. I enjoy this game of investing. However, more stuff does not make me happier. Money cannot buy love. When people try to control their kids through money, it can also bring disasters. I believe taking care of family is very important.
Money is like manure. If you pile it up, it stinks. If you spread it around things grow.
Q16：What is your best investment, favorite investment and learned-most investment in your life?
A：The best investment is in yourself. On my wall of the office, there is a certificate degree of Dale Carnegie Course, which I signed up for for giving public talking. This was one of the best investments in my life.
Also we should invest in the right friends. Associating with great friends will shape your life. The right friends or a spouse can make a huge difference in your life, such as my partner Charlie Munger.
GEICO was my best investment. When I was a student, I went to an insurance company, GEICO, in Washington DC on a Saturday afternoon. And I pounded on the door and the custodian let me in. He introduced me to the only person at the office at that time and he gave me a 4 hour brief about the insurance business, which changed my life. I did not know much about insurance before this.
When I want to know about coal industry, I will ask people in coal companies, which competitor’s stock would you buy and which would you short and why? That is very useful for research since people love to talk about their competitors.
- Focus on what the numbers will be in 5 years, not today.
- I would have failed as a person without my wife.
- GEICO was the first stock he recommended. The first one makes a big difference.
- His lifetime formula is to let other people do the work while he just sits and thinks.
- Investing is about knowing a business well enough that you can predict how many birds will be in the bus, and when they will appear.
—–end of Q&A—-
That’s it. I am writing up the entire day and will post it shortly. Here are some of my own personal lessons from the day. Cheers, jeff