This is Part 2 about our trip to Omaha with 20 Peking University students. In Part 1, I went through the visit to the Nebraska Furniture Mart. After which we headed back to the hotel for the big Q&A.
The Q&A with Warren Buffett
Back in the Hilton lobby, we all realized nobody was sure exactly what room the event was in. But suddenly Warren Buffett was walking through the lobby on the way to the room. So we all just followed him. This led to the weird spectacle of Warren Buffett winding his way through the lobby with a +100 person line following him like a snake. It was a strange sight.
About 140 -160 students ended up at tables filling the Blackstone ballroom on the second floor. And Peking University was at the front which was pretty awesome (but to be fair, we did travel the furthest to attend). Stanford (my alma mater) was right next to us. And at the front of the ballroom was a raised platform with a chair, a couple books and two Cherry Cokes. Again, whenever you are at a Warren Buffett event just look for the spot with the Cherry Coke waiting.
There were strict rules against recording and photos. So I don’t have any video or audio for the Q&A. The below is my summary of the Q&A. It is not a transcription. Just my notes and take-aways. Note: none of the below are direct quotes unless they are in quotation marks.
Question: How would you have changed your career if you were starting out today?
He explained how he started by selling securities. After business school, he had made an offer to work for Ben Graham for free but was told he was over-priced. So he went back to Omaha and started selling securities. He said at the time he looked 17 and acted 12. He later went back to New York to work for Ben Graham for a period.
His answer to the question was that he would still “want to manage money”. He said he started managing money on May 5, 1956. He had raised the first $100,000 from relatives and friends. He put in $100 himself. At the time, he had no record and no “master plan”.
He said you need an audited track record. He also mentioned that how you achieve the record is as important as what it is. And you need to attract people to join you (i.e., give you money to manage). Having rich relatives is good for this.
But his advice to students was to look for the job you would take if you didn’t need a job. He noted that is getting social security now so he doesn’t need to work. Just have fun along the way.
Question: What characteristics indicate a company’s ability to grow?
He answered with a reference to Aesop. Basically, that a bird in the hand is worth two in the bush. So the key is to know when the birds will appear? How many will they be? And how far away is the bush?
You need to know what the company can “earn and distribute” in 5, 10 and 15 years. That is easy in something like utilities where the rates are set. But that also means a lot of people can figure it out so you won’t make much money. You need to decide what businesses you can understand. What is your circle of competence?
He gave an example of buying Apple stock. He said the key question is figuring out how durable the smartphone business is? There are also questions like when is competition coming along? How much excess cash do they have ($250B)? Will they repatriate their cash from abroad? How much is their ecosystem worth? What additional services will they launch?
He also talked about how management behaves. Will the management stil be excited after selling 80%?
He said “it’s kind of like a treasure hunt”. But you “can wait for a ball in the sweet spot”. He repeated his analogy of have a punch card with 20 slots.
Question: Newspapers used to be the best business. What is the best type of business now?
He said 30-40 years ago, newspapers were the best business. They became natural monopolies. And not just in English. There were foreign language newspaper monopolies as well. In a city, there was no need for a second newspaper.
At the time, these were the “only megaphone for retailers”. Local retailers make big investments and then need a way to talk to local consumers. How do you do that? Back then you couldn’t pay for TV spots just to reach Council Bluffs. So you would waste 75% if you did tv advertising. You had to do it through local newspapers. Although TV later diminished this power with smaller tv stations.
Back then, the newspaper had classified for jobs and real estate, baseball scores, financials, and so on. Today, there are lots of resources for finding out stuff. Every piece of “news” is now scattered. Additionally, newspapers also cost by line by line. But the internet is free no matter how much you publish.
When he bought the Washington Post, it was the worst of 5 newspapers in Washington DC. It was just out of bankruptcy. But it also owned 4 tv stations, Newsweek and other assets. It was selling for like $80M but was easily worth $400-500M. Berkshire bought 10%. It became a 100x return.
As for what is the best business today, he said “I wish I knew. But then I wouldn’t tell you.”
He talked about how you want a castle with a moat that nobody can cross. He mentioned that some great businesses are dispersed in lots of communities. So people don’t notice them and competitors don’t target them. That is getting rarer with all the information.
He mentioned AOL as an example of a great business 20 years ago. He joked how everyone hated them but they kept growing. That is a good indication of a great business.
He also mentioned Google as an example of a great business. He said GEICO pays like $10 for each click-through from Google for car insurance. It’s a “wonderful business” and is “invaluable to users”. He made a joke about how Bing stands for “But It’s Not Google”.
Question: How much does your life and views affect your business?
He said he is 100% rational in business. But not in his personal life. That would probably alienate or annoy a lot of people.
If you want to have a happy life, that is about the people you are with. And mostly your spouse. But “good human relationships are vital in both areas”.
He mentioned he has worked with Charlie Munger since 1959 and they have never had an argument. He also pointed out that for 6 years, he sat in a little room off his bedroom and did his investments. But it’s more fun with partners.
He talked about how if you surround yourself with good people, people better than yourself, you will naturally move in their direction. Marry someone better than yourself. “Look for someone who brings out the best in you.” You will be ‘helped in appreciable ways by friends and spouses.”.
But don’t expect spouses or businesses to change. You cannot put passion into someone – or a business. But you can squelch it. He gave an example of Wells Fargo as an attempt to make people successful that went wrong. It showed that “incentives do work”.
He talked more about having a passion for what you do. How he spends his life painting on a canvas. It’s his own painting. And it is on a canvas without borders. He can just keep going.
So he loves what he does. But he said he also likes applause. He likes people cheering him on.
Question: You emphasize having an inner score card. How does it change over time? How do you prioritize its parts?
He says you will definitely have an outer scorecard in life. But it is the inner one that really counts. If you are satisfied with yourself, all will be ok.
He said his inner scorecard hasn’t changed much from what his father gave him.
In terms of prioritization, raising children is the most important. You are the source of wisdom and warmth for your children. Although they learn mostly from what you do, not what you say
He explained that he was unhappy at age 13. It was after they had moved from Omaha to Washington DC. He had “adopted the standards of others”. He stole things and got in trouble. He remembers his father telling him “You can do better than this.” And that was it and he changed. There were no penalties, just what he said.
You should hold yourself to “high but not impossible standards.” This will keep you aiming toward the person you want to be.
He gave the example of choosing one of your fellow students to invest in. Buy 10% of one person for the rest of their life (and income). Who would you choose? You would not choose the highest IQ. Or the highest grades. You would think about personal qualities. You would look for “effectiveness”.
Another interesting question is what one classmate would you sell short? Probably the person that “turns you off”.
Try to be the person people would choose. Avoid being the person that would be sold short.
These are things you can choose to be. You can be the jerk. You can be charitable. These are “qualities you can develop.” And you want to “avoid qualities that turn people off”. “Concentrate on one habit” to change. It will come back to you.
And if you can become a better person, things will flow back to you. “Human behavior is not complicated”. “People will want to work with you. To play with you.”
When you deal with someone, ask yourself “would this person hire me?”
He mentioned Tom Murphy. Someone virtually everyone likes. Compare him to someone who is self-centered and unfair.
Question about any plans to invest more in Canada.
He was asked about Berkshire’s investment in Holm Capital Group (check). He said that was opportunistic. In April / May 2017, there was a run on this savings bank in Canada. In the USA, the FDIC stops this. Berkshire made an offer to provide a line of credit to help stop the run. The bank had other offers but with tougher terms. Berkshire offered better terms – plus an investment and an association with Berkshire, which would help end the run.
He said Canada is a good place to put money.
He mentioned in 1977-78, he offered to buy a bridge in Canada for $20M. It was publically traded company and owned one of the main bridges.
He said “I get excited when the phone rings…This is how things happen.” He said he can often tell in 2 minutes if he’s going to do the deal.
He also brought that two prominent men at Stanford had recently died (I think Stanford asked this question). James Macdonnel (checkxxx) and RJ Miller. RJ Miller was one of Robert MacNamara’s (check) whiz kids. He was from Omaha. He became head of Ford.
Question: Berkshire paid $400M for a REIT. How did they get comfortable with low interest rates and monetary policy changes?
He said at Berkshire they never make a decision based on macroeconomic considerations. It doesn’t make any difference, but is a fascinating game to watch.
He talked about the long growth the US economy. “I’ve lived under 15 Presidents, one third of all of them…America business is doing great over time.” He talked about how all the American assets you see came from nothing in a couple of lifetimes. “It’s a winner’s game and you want to be in it.”
In 1942, he bought his first stock. At that time, the US was losing the war in the Pacific. If you had invested about $114 then it would be worth $400,000 today. There is a huge tailwind, so short-term gusts just don’t matter.
“Look at where we are versus 1776. If you don’t see a trendline, you need glasses.” “Don’t dance in and out of a game with a big tailwind”. You “care about what the asset is going to produce over time.” You are in a winning game over time. You don’t need a newspaper subscription. You just need Moody’s manuals.
Question: In your speech in Sun Valley in 1999, you spoke of an overvalued market. Is today a similar situation?
He said the current situation is not comparable to 1999. In 1999, Paine Webber did a survey on what people expected to earn on an equity investment over ten years. The answer was over 15% annually for 10 years That was very optimistic.
Other discussion was on how to find great companies.
He said there are thousands of companies. Just find 1 or 2. Look at the business and value. If you can’t find anything, just hold.
He talked about how he used to read the Moody’s and S&P compendiums. These books are under industrial, transportation and other sectors. He went through them all.
He told the story of how he came across Western Capital Insurance in these manuals. In 1950, the EPS was $21. But the price was $13. That just jumps out at you. From there you go and investigate. And he found there was nothing wrong with the company.
He also told a story about reading the Korean Stock Manual on a Sunday, which was sent to him by Citibank. There was 1 page per stock in the book. And he found 20 stocks that were cheap. One was selling at 2x earnings. He bought 20 different stocks, which he didn’t know much about individually. But statistically it was a cheap.
He spoke a little bit about risk not equating with volatility. However, opportunity does equate with volatility.
Question: What are your thoughts on social impact investing?
He said you should concentrate your political and philanthropic efforts into social efforts. You have a responsibility to participate.
But to rank the S&P by that is a “lost cause”. Don’t try to make investment decisions by social responsibility. Investors don’t bear the responsibility for all the actions of a company.
He told the story of how he had the opportunity to buy a chewing tobacco company in Texas. Charlie and he looked at it and had never seen a business with better economics. But they didn’t end up buying. Buying the business would have made them participants. They didn’t want that. But they would be ok with owning the stock of a company like RJR.
He also mentioned how Costco is Charlie Munger’s favorite company. And they sell cigarettes.
The way to fight is through the political system. Not a stock portfolio. Ranking is very tough.
Question: What are the pressing challenges for future business leaders?
Capital and business will do well in this country. It is an “entrepreneurs’ dream”.
He told the story of Jack Taylor. Born in 1922 in St. Louis. Went to World War II. Then became a used car salesman. Then did some car leasing. And eventually did car rentals, starting with 17 cars. This later became Enterprise Rental car, which hires more US college graduates than any other company.
He mentioned weapons of mass destruction as the biggest risk.
Question: What challenges are there to maintain the economic health of the USA?
He said in his lifetime, there has been a 6x improvement in the GDP per capita of the USA ($59,000). This is due to the opening up of human potential. The USA is like a “super-rich family”. Everyone should work. Everyone should be able to have a couple of kids. And get a decent education. And have a decent life. However, not everyone hasskills that are valuable in a market system. That is an important question.
The key “challenge is to keep the motivation, the culture and the atmosphere”. This will continue to unleash the potential of those who fit well in a market system.
When everyone was working on a farm, Steve Jobs and Bill Gates didn’t pick vegetables any better than anyone else.
Question: What reading is essential outside of 10k’s?
On 10k’s, “I read them by the hundreds.”
But he says that is not the best source. It’s important to go out. Personal experiences can be very important. For a company:
- Why do people go there to shop? What do they do there?
- Does this company have a moat around it? How wide is it?
- What is the castle worth?
Coca-Cola has a huge moat. But cultural changes, changes in tastes and new taxes are changing. This is changing the value of the castle.
He also looks for “untapped pricing power”. When they bought Sees candy, one question was “is there pricing flexibility?”. That product is not very price sensitive. It’s a lot about giving to a girlfriend or wife. You need to get into the mindset of the customer and the competitor.
Sees also has an “installed base” Although it doesn’t “travel well”.
He said you want to try and see the 10k for 10 years from now.
Question about Artificial Intelligence
He said computers are good at doing things fast. They can do rapid trading and front running. There is danger in letting machines make decisions in an investment portfolio.
But very few investors can do better than the market average, especially if they have big money. Big wealth is about getting into the right business at the right price.
Question: What is the hardest lesson you have learned?
His answer was that except for illness, almost everything bad that happens to you will turn out to be ok over time.
“Treasure the people that bring out the best of you.” Who you associate with, starting with your spouse, is the most important decision you make. You will learn from them.
Material success correlates with receptivity with others.
Learn about how to get the best of yourself and others.
“Attitude is so huge in life”. People with negative attitudes tend to hang out with people with negative attitudes.
That was the end of the Q&A. It was pretty fantastic.
Warren then came to sit at our table. We all had steak and chicken. Warren’s lunch was a Cherry Coke and an ice cream sundae. He spent the next hour or so talking with all our students. They were completely thrilled and everyone got a chance to chat.
Thanks for reading, Jeff
A special thanks to the incomparable Shujun Ma, Robert Bao and everyone at the Peking University International and External Relations Department for making this all happen. This was a team project. I just happen to be the one who blogs.
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
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