The man who as a boy collected and sold used golf balls, started a pinball machine business in high school, and later stepped in as the interim chairman and chief executive of Salomon Brothers for an annual salary of one dollar, rolled into town last week full of the honesty, insightfulness and good humor for which he is known and revered.
Before responding to student questions for almost two hours, Warren Buffett stood patiently at the bottom of a standing-room only crowd in Burden auditorium, taking pictures with awestruck students thrilled to share a Kodak moment with the man many consider to be the God of Investing.
Despite his estimated thirty-eight billion dollar fortune, Buffett, an Omaha, Nebraska native, today pays himself an annual salary of a hundred thousand and still lives in the same grey stucco house he bought forty years ago for thirty-one thousand dollars. Denied admission to HBS at the tender age of nineteen, a wisely undaunted Buffett graduated from Columbia Business School instead and went on to work for his father’s investment bank and then as a security analyst at Benjamin Graham’s investment company. Buffett soon launched his own investment company, the Buffett Partnership, which later emerged as the legendary Berkshire Hathaway we know today. The “Oracle of Omaha” quickly secured his reputation as a master of investing in undervalued companies for the long-term and from whom one can expect direct discussion, mixed with an irreverent Mid-Western sense of humor.
To get a better understanding of the magnitude of Buffett ‘s success, one need only consider that if one had been lucky enough to invest ten thousand dollars in Berkshire Hathaway in 1956, it would today be worth three hundred and fifty million dollars. Despite these outrageous returns, the firm’s investment staff remains small – 15.8 people according to Buffett – with plans to soon expand to 16.8 with the recent addition of a Columbia MBA grad who sensibly enclosed a check for five hundred dollars and offered to work for Buffett on a “reverse salary” basis. Together the firm’s subsidiaries, which include Fruit of the Loom, GEICO, International Dairy Queen, Mid-American Energy and See’s Candies, employ over one hundred fifty thousand people.
Legendary is Buffett’s annual shareholder letter through which he reports his general assessment on the market and the strengths and weaknesses of the firm’s various acquisitions, all accompanied by his illustrious wry sense of humor. In his shareholder letter in 2000 for example, Buffett reported, “Finally, there is the negative that recurs annually: Charlie Munger, Berkshire’s Vice Chairman and my partner, and I are a year older than when we last reported to you. Mitigating this adverse development is the indisputable fact that the age of your top managers is increasing at a considerably lower rate _ percentage-wise _ than is the case at almost all other major corporations. Better yet, this differential will widen in the future.”
Buffett, who claims he has never borrowed more than twenty-five percent of his net worth and even then only a few times early on in his investing career, is known for aggressively pursuing low-risk and long-term investment opportunities. Berkshire Hathaway enjoys an investment credit rating of no lower than AAA and a stock price which at last count rested at $71,950 a share. His low-risk investment strategy is, among other things, driven by the fact that his aunt, mother and several family members are all invested in his firm. Quite simply, Buffett states, “I would never want to put them in any sort of jeopardy.” Buffett himself keeps over ninety-nine percent of his net worth in Berkshire and vows that he has never sold and never will sell his shares in the firm.
Back in Burden, Buffet quickly took a casual, comfortable approach with the audience. Students leapt out of their seats to stand patiently in line to ask questions and Buffett urged them closer to the stage to ensure he didn’t miss a word. Buffett addressed a wide range of topics, from the riskiness of derivatives, to the war in Iraq, to offering career advice for soon-to-be graduates of HBS.
One of the first questions asked focused on his strong opinions of derivatives. Notorious for his stern warnings against such instruments, in this year’s letter to shareholders, Buffett stated that derivative securities serve as “financial weapons of mass destruction.” Buffett however offered a more practical assessment of the roles and risks associated with such instruments when speaking at Burden. “They are not in-themselves inherently illegal, immoral or wrong,” explained Buffett.
Rather, Buffett’s issue with derivatives lies with the fact that they are difficult to value, inherently risky, and often wildly overstated. Despite his concerns, Buffett acknowledges, “I have in fact made five hundred million off of derivatives in two recent transactions,” but, because of their inherent risk he “…simply can’t build a business out of them.”
When asked his opinion about the future performance of the U.S. economy, Buffett replied that he doesn’t consider himself an authority at predicting the future of the U.S. economy but doesn’t think he needs to be. Buffett points out that nothing Alan Greenspan could have told him would have changed his recent decision to invest in Clayton Homes.
Rather, Buffett suggests investors should focus on the fundamentals and, making an analogy to a game of bridge, “play with weak opponents for big stakes, a lot.” Famous for having remained on the sidelines of the market frenzy in technology stocks in the late nineties, he cites the Internet boom as an example of a time during which investors needed to be wary of becoming distracted. He explains that he himself could not understand how much of the new technology companies could actually add value, so he simply did not invest in them.
Responding to a question about whether the U.S. should have gone to war in Iraq, Buffett said “If you really think someone is developing weapons of mass destruction and you think they might use them against you, preempt it. It doesn’t sound crazy to me.” Buffett also pointed out that psychos have always existed. It’s only in the last fifty years, explained Buffett, that the “ability of the insane has increased exponentially.”
When discussing investment opportunities in the developing world, Buffett fondly recalled a trip to China he took several years ago with his good friend Bill Gates during which he claims to have introduced hamburgers to “all of China.” Buffett suggested that the Chinese currency is undervalued and wonders “how long it can remain undervalued.” Buffett, whose stated goal is to allocate $100 million dollars a week, suggested that while the developing world represents significant opportunity, he does not consider it critical to his investment strategy as he believes he can best apply his funds in the US which he considers the strongest market in the world.
Buffett’s advice to students when planning for their future was above all to work for an organization whose leaders they admire. Buffett strongly counseled, “You will be affected by the people around you. Therefore you should surround yourself by people who are better than you and they will make you a better person.” Buffett did caution against taking his advice to the extreme. Smiling, he recalled the last time he told an audience to work for someone they admired, he was speaking to the MBAs at Stanford. Afterwards the Stanford Dean asked him, “What did you tell these students? They have suddenly all decided to work for themselves.”
Responding to a question about the effect and impact of the recent scandals on Wall Street and beyond, Buffett reasoned that, “There will always be some crooks among us. What was unusual about the late nineties was the degree to which good people slipped.” Buffett counseled the students that anyone is susceptible to drifting, which is all the more why he believes o
ne should surround themselves with people whom they admire and who will steer and influence them in the right direction.
Buffett optimistically believes that looking forward, behavior will improve and a better morality will be achieved, in part because the Federal Government is now much more closely on the look-out and because the general public is simply more skeptical of corporate behavior.
In a candid reply to one student’s question about joy and satisfaction in his life, Buffett answered by saying, “Berkshire is my landscape that I get to paint. I love my job and I literally tap dance to work. We are sixteen people and we never have a problem. It’s quite frankly an ideal set of working conditions.” Buffett went on however to say that despite his great fortune, the quality of his life, just like yours and mine, is ultimately defined by “…the people you love that love you back. One simply can not buy love, no matter how much money one has.” Buffett recalled a friend of his in Omaha who had been in Auschwitz. He describes this friend as taking a long time to make friends because she has a simple test she applies to all potential friends. “Would this person hide me?” Buffett reflected that he knows a lot of successful, rich people that no one would hide and concluded, “If you get to my age and your own kids won’t hide you, then you have got some big problems.”
To a question regarding plans for his vast fortune, Buffett emphatically replied that ninety-nine percent of his wealth will be applied to the benefit of society through a foundation that is is expected to become the largest endowment in the country. Buffett suggested that he was incredibly lucky to have been born in the U.S. with two great parents and fundamentally wired to think and act as he does. He cites Bill Gates’ approach to philanthropy, to give one billion away each year and save as many lives as possible with that yearly donation, as his example.
However, rather than attempt to solve the world’s problems by himself, Buffett believes that his expertise would be best utilized in building an endowment fund for society, so that those who are best suited to address the world’s troubles may find a source of funds to accomplish their mission. Buffett points out that when looking for investments, he only takes a swing or two a year when he feels it is appropriate. While he is taking the easy pitches in business, philanthropy, Buffett suggests, is an entirely different ballgame as they are attacking the really difficult problems and are forced to swing for the fences. Buffett and his wife are currently in a race to the finish – if he passes away first, his wife’s intentions are to immediately give most of his fortune away to philanthropic causes. Buffett smiled sheepishly, and admitted that if he is the last one standing, it just might take him slightly longer to donate his fortune.
Whenever Buffett decides to donate his fortune he will assuredly leave a larger legacy than just his foundation. His frank and honest discussions of his conservative investment strategy is something his shareholders and investors have come to know and love. His razor focus and remarkable success at investing in undervalued, high-growth potential companies with low price-to-earnings ratios, is a record that undoubtedly will be analyzed for decades to come. Buffett, who plans to stick around for quite some time, has in fact put some planning into a succession strategy. While claiming to have picked a successor, he is not yet willing to reveal who that might be publicly. Rather, Buffett has taken great care to prepare his final letter to his shareholders which will be released the day after his death. It begins, “Dear Shareholders, Yesterday I died.
This is bad news for me but not for you.” While the long-term future success of Berkshire Hathaway is very likely, it has yet to be seen. One thing that is already well known however, is that the world itself looks a whole lot brighter and is a lot more fun with Buffett around.