A crowd overflowing Burden Auditorium on Thursday evening heard wit and investment wisdom from Warren Buffett, the Chairman and CEO of Berkshire Hathaway, Inc., a man ranked as the world’s second wealthiest person by Forbes, with a net worth of $32 billion. The question and answer session covered a wide variety of topics, from his hobby of playing bridge online with the nickname “T-bone” to a formerly Buffett-owned paper, the Omaha Sun, which won a Pulitzer Prize for an investigative piece he suggested.
Buffett appeared in the auditorium a half-hour before the discussion and received rock-star treatment. Students sought autographs from, and more importantly photos with the man who has become an American icon for his common sense investing practices.
Buffett began his talk with a story of how he chose a new CEO for Salomon Brothers after the company’s bond scandal in 1991. He wanted a person with “intelligence, energy and integrity” but stated that integrity was the most important. “If a person doesn’t have the last one, the first two will kill you,” Buffett said as he encouraged the audience to emulate the qualities of the people they admire.
“The most important thing you’ll learn at Harvard is not what you’ll learn in the classroom, but it’s the habits, behaviors and qualities you pick up from people you admire. With the right qualities, the sky’s the limit,” Buffett said. “It’s very important who your heroes are. Tell me who your heroes are, and I’ll tell you how you’ll turn out.”
Readers of Berkshire’s annual reports recognized some of the themes of his talk. Buffett limits his investments to within his “circle of competence”, or those areas he understands well. “I listened to Bill Gates for ten hours explaining why Microsoft is a good company in the early 1990’s and still didn’t invest, but it doesn’t bother me because technology is outside of my circle of competence,” he said.
He also mentioned Mrs. Rose Blumkin, the Russian immigrant founder of the Buffett-owned Nebraska Furniture Mart, whose circle of competence was carpet, home furnishings and people skills. Blumkin built the largest single home furnishings store in the United States within that “circle of competence”, even though she couldn’t read or write.
Asked about mistakes he has made, Buffett said that he has often made “mistakes of omission”, or not buying companies within his circle of competence when they were selling cheaply, that have cost Berkshire “tens of billions of dollars.” He has also made mistakes of commission that weren’t as costly. “I once invested 20f my net worth in a Sinclair gas station and lost it all,” the billionaire said. “The opportunity cost of that money is now about $6 billion.” Nonetheless, Buffett said the mistakes keep investing interesting. “If I knew I would never be wrong again, it wouldn’t be interesting.”
Buffett spoke of the process of buying private companies-how the prior owners continue to manage their business within Berkshire after the sale, and how they stay motivated. “First of all, I make sure that they love their business more than they love the check I’m about to give them. And with their compensation, I want them to be happy so I ask them to tell me what compensation would make them happy; I’ll figure it into the deal, and tell them how much I’ll pay for the company,” Buffett said.
“I also tell them that I have the ability to double-cross them after the deal, but unlike other potential buyers I’m the only person who can double-cross them. I won’t have a Board or a McKinsey study to blame later on so they only have to worry about trusting one person-me.” He said he has written a letter that prevents Berkshire from selling Berkshire companies after his death because he wants to honor his agreements with his companies’ prior owners.
Buffett also commented on his longstanding friendship with the late Katharine Graham, chairman and publisher of the Washington Post. “Her autobiography, Personal History, is the best biography I’ve ever read, and the history happened exactly as she wrote it,” he said. “Jack Welch’s is pretty good also, but Kay’s is the best. Kay would be an outstanding hero for anyone to emulate.”