The past couple of days leading up to my pilgrimage to Omaha had been some of the most unusual in my life. Wednesday began with an early wakeup, followed by my four-and-a-half hour Technology and Operations final exam. (Actually, not nearly as much fun as it sounds). After the final, with our first semester of business school over, logically, my class went straight to the bar. An hour later, I was home packing for a trip to Omaha, Nebraska, for lunch the next day with Warren Buffet with about sixty other members of the Harvard Business School Investment Club.
I met with friends and we drove to the airport. At the gate, classmates started accumulating. If only there had been some cash flow for us to discount. Instead we discussed how much fun it is to fly a route, Midwest flight 210, that the night before had been on the news, on fire, circling Boston and dumping fuel. Later, happy to have landed safely in Milwaukee, we did what any group of HBS students would do in the airport, we built an excel program to run a version of the new game show “Deal or No Deal” and did bad Howie Mandel impressions.
Around 1:00 a.m., we finally rolled into the Omaha Sheraton. Around 2:00 a.m., the sausage pizza arrived and around 3:00 a.m. we finally fell asleep.
The morning began with a 10:00 a.m. meeting with Buffet in the Cloud Room of his office building. For the next four hours, we had the privilege of getting to talk to him in a Q&A format at his office and later over steaks at Gorton’s. Over the course of the morning and afternoon, he offered advice on everything from investment philosophy to politics and philanthropy.
What struck me most about Warren Buffet was how immensely down to earth he was. He was like the ultimate grandpa. When we took pictures with him after lunch, at first people posed shaking his hand but things quickly deteriorated to posing with him and a copy of Graham and Dodd’s “The Intelligent Investor,” pictures of Warren pretending to whisper stock tips into their ears and, to his delight, a picture of him with all the ladies.
He is extremely humble and very grateful for what he has. Numerous times he discussed how he had won the uterine lottery, having been born a white male in America when he was. He talked at length about how if he had been born black or female he would never have been able to create the empire he has made.
Buffet also discussed the state of philanthropy in the world and how much he admires Bill and Melinda Gates for their colorblind, borderless goal of spending $1B each year with no desire for recognition and with the express purpose of saving as many lives as possible. Regarding his own philanthropy, he said that his personal strength has been as an investor, someone able to grow a substantial fortune-however, once he dies and his shares are handed over to a charitable trust, he plans for that trust to abide by what he hopes will be its core competency: spending the money rather than trying to preserve itself into perpetuity.
Buffet on Investing
Warren repeatedly mentioned you do not need to be a genius to be successful in business. If you have an IQ of 170, he said, you’re probably best off selling 45 of those points to the highest bidder. What is most important is knowing the limits of and operating within your circle of competence-the range of personal skills and strengths you are able to use to give yourself an edge in the market.
Buffet reiterated his “20-hole punch card” investing philosophy: If every graduating MBA had a punch card allowing 20 investments over the course of our lives, we would all be very wealthy one day. The implication is that excess liquidity and crowd hype make a lot of intelligent people bad investors. If you have the opportunity to only make 20 investments your entire life, you will be so diligent, patient and clear-thinking when you make them that they are likely to be great buys.
Buffet described how, when he was younger, in the late 40’s, he took the Moody’s bound hardcover book of all publicly traded stocks and started flipping through it, page by page. Nothing interested him for the first 1,437 pages, but on the 1,438 page, he saw a company with consistent earnings of about $29 per share trading for between $13 and $21 the prior year. A little investigation with the company, and he bought shares (it may have been a railroad) for a P/E of about.5. He anticipated our reaction that he began his career in a world where that sort of discovery was still possible.
Out of his briefcase he produced another book, the 2004 listing by the S&P of the Korean stock market. He explained the impact of the South-Asian crisis of 1998 on Korea was almost equivalent to 1929 in the United States. The result was what one could expect-companies overbuilt their balance sheets as the economy improved, but investors were still scared away.
Flipping through the book, he found companies such as a flour company whose name he could not pronounce, with earnings that had grown from 12,000 to 20,000 won over the past three years, and with a stock price currently around 40,000 won per share. The company produced approximately 25% of the flour for a country of over 50m people.
Reading the 1,000-plus page book, page-by-page, he uncovered about 20 companies with apparently predictable, reliable business models across a variety of sectors with P/E ratios in very low single digits. Deciding that the South Korean economy in 2004 was stable and that these companies probably weren’t going anywhere, he invested $100M. Of the 20 companies, he decided he wouldn’t be able to do great due diligence on each one, so he didn’t make more concentrated bets. Instead, he assumed that maybe two of them would be out-right frauds and go to zero; a few more would have other problems and go nowhere; a couple would be superstars; and hopefully most of them would just appreciate nicely. A year later, his portfolio of $100M was up 100 percent with a 13 percent gain from a strengthened currency against the dollar.
Hearing this, I couldn’t help but wonder, as I assume every generation does, whether the great opportunities and alphas have already been taken from the market by those who came before us. Meeting with Buffet and hearing about quality U.S. stocks trading for P/Es of less than 1 may have reinforced that idea for many, but I think we have the same or better opportunities to find success today than he did over the last 50 years. A few reasons why:
? Unprecedented liquidity
? Unprecedented ability to raise funds and access capital
? Unprecedented access to foreign markets
? Unprecedented numbers of diverse new businesses being started and needing capital, from companies overseas in China, India, Latin America and Eastern Europe to companies at home like Google. The more different ideas out there, the more chances to get ahead of the curve and make some money.
Buffet on Jokes
“Earlier this year I started to worry that my partner Charlie Munger was going deaf, but I didn’t want to bring up the issue with him because I didn’t want him to get defensive and stir up some trouble. So, I went to my doctor and asked him what I should do to see if Charlie was losing his hearing. He told me to say something in a normal voice from across the room and see if Charlie could hear me and if he couldn’t, I should do something about it. The next day I was in Charlie’s office and he was reading the paper. From across the room I said, “Charlie, should we buy Microsoft at $26?” and he didn’t say anything. I walked halfway across the room and said again, “Charlie, what do you think about Microsoft at $26?” and again, nothing from him. So now I’m worried about how bad his hearing loss is so I go right next to him and say, “Charlie, should we be buying Microsoft at $26?” and he says to me, “For the third time, YES.”
“When you ask me questions, make sure they are one-part questions. I can only do one thing at a time. It is like the octogenarian couple that is sitting on the couch one d
ay when the wife starts to feel frisky and bats her eyes at her husband and says, “How about we go upstairs and make love?” and he turns to her and says, “Pick one or the other because I can’t do both.”
“I have room for four people in my car, so let’s make it two guys and two girls to be fair. I could possibly take five people but don’t want to create some sort of imbalance. but if there are any transvestites that want to come along, that works well.”
“You have to love investing and your investment ideas. When I was buying Gillette, I went to sleep dreaming about the men out there growing facial hair that they needed to shave and just counting the faces instead of sheep. I would have counted women’s legs, but then I never would have gotten to bed.”
Buffet on his Posse
Warren runs with an extremely cool circle of friends. You aren’t pompous when you’re Warren Buffet, you are just discussing your life when you talk about Alan’s favorite type of stories and hanging out with Bill and Bono for a photo shoot. When asked about his passions outside of investing, he talked about how he loves just spending time with friends, whether that is golfing as the highest-handicapped member of Augusta or enjoying time on someone else’s boat (he would never buy his own, but enjoys accepting invitations). One of his largest passions is bridge, and Warren plays online in his pajamas about 12 hours a week. He often plays with Bill (Gates), who goes by the screename “Chalengr”
While I did not expect to eat at a Manhattan-type of upscale steakhouse (think 21 Club), I expected the famous Gorat’s to be more of a Peter Luger type place. It is more like a “99,” built in an old bowling alley, the marquee outside is missing several letters, the carpeting on the steps is worn threadbare and the sign on the door says “Shirts and Shoes Required. No Tank Tops.” I loved it.
The question “Why Omaha?” was raised and his answer fit-because it has everything he needs and none of the noise he doesn’t want. The waitresses at Gorat’s had certainly seen the show we were participating in before and didn’t give him a second glance. The building he works in is nondescript, centrally located and one could imagine that the commute never gets burdensome. I think the amount of your life that you lose to commuting is one of the saddest things about being a professional.
Buffet on Having Good Heroes
When asked what helped him do so much beyond his personal love of investing, he cited having good heroes: his parents and Benjamin Graham, his professor at Columbia Business School, as well as his first boss on Wall Street. He then discussed the role of parents as heroes in the lives of their children, mentioning how even people his age were often screwed up inside because of the way their parents had been negative or sarcastic toward them as children. He said it should be the role of every parent to help their kids have opportunities to be happier and wealthier than they were; although, he qualified, in his case, they weren’t going to be any wealthier.
On the subject of Benjamin Graham-in the class Warren took at Columbia, he sat near Bill Ruane (founder of Sequoia), who in turn, sat next to Julian Robertson (founder of Tiger). Graham, Buffet, Ruane and Robertson. Quite the classroom.