WARREN BUFFETT: Q&A WITH STUDENTS

From the University of Georgia, Terry: College of Business, Warren Buffett, Chairman of Berkshire Hathaway, talks about vocation, job, and life once again to students aspiring a better future someday.

In the world of careers, it’s best to find an admirable institution or an individual. Taking in between jobs is not wise and mature after all. Just because they look good on the resume or there’s a little higher starting pay mean it will contribute to success.

Berkshire Hathaway looks for three things when hiring: intelligence, infinitive and integrity.

From the University of Georgia, Terry: College of Business, Warren Buffett, Chairman of Berkshire Hathaway, talks about career, business, and life once again to students aspiring a better future someday.

WHO WOULD YOU CHOOSE TO GET SALARY FROM?

In the world of careers, it’s best to find an admirable institution or an individual. Taking in between jobs is not wise and mature after all. Just because they look good on the resume or there’s a little higher starting pay mean it will contribute to success.

Somebody picked up Warren Buffett from the airport from Harvard Business School saying he is an undergrad working for Company XYZ. He stated, “I thought I’d really round up my resume if I desired to work today for a big management consulting company.” Buffett asked, “Is that what you desire to do?” He replied, “No, but that’s the perfect resume.” Buffett replied, “When will you embark on doing what you like?” A brace of weeks later, Harvard called up Buffett and said, “What did you do to those children? They all became self-employed.”

Buffett had the students of UGA to pretend for a moment that he made them a great offer: they could pick anyone of their classmates. They would get 10% of their earnings for the rest of their lives from the classmate whom they chose.

He asked, “What goes through your mind in determining which one of those you would pick?” It is neither about the one with the richest father nor the one with the highest grade in the class. Those two aren’t just the quality that sets apart a big wonder from the rest of the pack. Buffett emphasized the question more, “Think about who you’d pick and why.” Once they get through it, they’ll figure out in the end that they probably have chosen an individual with the ability, energy, initiative, and intelligence. However, some students are bigger winners than the others; that is reality. It comes down to a lot of qualities, interestingly enough, that are self-made. There’s a set of qualities that comes out after much evaluation – integrity, honesty, generosity, and being willing to do more than the usual share.

On the other side of the ledger, however, each student has to sell short one of their classmates and pay 10%. Who would do worst in class? Again, just like how it isn’t the person with the highest grade who gets picked, it is the same the person with the lowest grade. He isn’t automatically the one who’d fare worse. Who would? The person who just doesn’t shape up in the character department.

THE QUALITY TO QUALIFY AT BERKSHIRE

Berkshire Hathaway looks for three things when hiring: intelligence, infinitive and integrity. Without integrity, the first two can kill. Everything about integrity is a choice. Buffett said, “You can’t change the way you are wired much, but you can change a lot of what you do with that wiring. It’s the habits that you generate now on those qualities or those negative qualities.” The person will always climb for things that they didn’t do – they cut corners that they can’t cut on. Those are habit patterns. The time to form the right habit is during teenage and young adults’ years.

Buffett illustrated a great picture to explain what he just said. If he took his golf lessons now, that wouldn’t be of much impact, but if he had taken it when he was a teenager, he probably would be great now. The change of habit is too likely to be felt until they’re too heavy to be broken. Most of the time, it’s unchangeable and people are imprisoned by that.

Buffett encouraged the students by saying that they are imprisoned by anything. When they write down the quality of the person they’d like to buy 10%, they need to ask themselves if there’s anything that needs to be done. They will soon find out that there won’t be any. Once they look at their of person, they sell short. When they see qualities that they don’t like in that person and when they see it in themselves, it’s unavoidable. That is not ordained.

Ben Graham looked around and said, “Who do I hire? Why do I admire these other people? If I admire them for those reasons, maybe people would admire me if I behaved in a similar manner.” If everyone just follows that, everyone will find the person they want to buy 10%. That’s achievable by everybody.

MAKE MONEY LIKE BUFFETT

Buffett has an old-fashioned belief to make money strictly only in things that he understands. By saying he understands, it doesn’t mean what the product does or anything like that. It means understanding what the economics of the business are likely to look like 10 years from now. The economics with Wrigley’s Chewing Gum 10 years from now won’t change the way people chew gum even if the internet is already everywhere. An owner of a chewing gum business in the market has all kinds of gum – chewing gum, bubble gum, mint gum, and all sorts. Those brands will still be around 10 years from now.

Evaluating the company is what Buffett calls his circle for capitals. He understands what they do – their economics and the competitive aspects of the business.

THE IMPACT OF AUTOMOTIVE, TELEVISIONS, AND AIRLINES

There are going to be all kinds of company that will have a wonderful future, but the way Buffett figured it all out many years ago is by carrying with him a 70-page tightly printed list that shows 2,000 auto companies. For the start of the 20th century, the automotive industry showcased an impressive effect in the country. Everyone knew where the business would go and how it run. Now, out of the 2,000 auto companies, how did Buffett pick the “pre-winners”? It wasn’t so easy to do. Looking back is easier, looking forward isn’t as easy.

If everyone could remember, horses used to be the main form of transportation until the automotive business came. The losers are the horse; the winners are the autos. Out of the 2,000 auto companies, there were two auto companies in the Dow industry also in the 1920s and 1930s. They didn’t make money, but one day they were in the Dow 30s. Figuring out the economic characteristics about the winners and a wonderful business is not easy.

The future of the airline business from the 1930s forward and how that would’ve transformed things would have made more people excited about buying it. However, come to think of it. Adding up all earnings from all airline companies can’t be less than 0. The number of passengers went up every year. The importance of the industry has dramatically increased decade by decade and nobody made any money. That is an economic consequence hard to explain.

There are 20 to 25 million television sets sold in a year in the United States in the 20th century. What a wonderful business! Almost nobody had a TV in the 1950s; there were only about 45 to 50 households. Now, everybody has it! However, nobody in the United States made money. Those companies are now all out of business.

DEFINING THE CIRCLE OF COMPETENCE

The economic characteristic of the businesses is different than predicting the fact that the industry is going to do wonderfully. The internet business is a marvelous thing according to Buffett. He orders his books from Amazon, but he can’t say now if it’s going to win in the long run. Unless he knows it’s going to win, he is not interested in investing.

Defining the circle of competence is the most important asset in investing. It’s neither how large the circle is nor the level of expertise on everything is, but knowing where the perimeter of the circle of what will survive and what will not, and staying inside it is what’s important.

Tom Watsons of IBM said, “I’m no genius, but I’m smart in spots. I stay in those spots.” That is exactly the key. If Buffett understands a few things, he’ and his business will be fine. If he doesn’t understand, but he gets excited about it because people are talking about it, he’d start fooling around prices and he gets chained.

Just by simply looking at a bond can tell what an investor is going to get back. Once he gets the interest payments, the principal, it’s very easy to figure out the value of a bond. The cash flows are printed on it. BUT the cash flows don’t print on the certificate. Someone has to print out the chains and stocks and certificates that will present interests in the business, change it into bonds, and say, “These will change the future.”

It isn’t how many analysts you’re going to recommend, not the volume of the stock, and not what the chart looks like. It’s how much the chart is going to give you. It’s true with whatever financial assets.

As the value of the business increases, we can command internally. Berkshire is selling billions now. If someone is going to buy the company for 105 billion, can they distribute enough cash soon enough make it sensible at present interest rates? Anyone who can’t answer that isn’t qualified to buy the stock. You can gamble if you want, but if you don’t answer that question, you can’t answer that at all.

THE BIRD, THE BUSH, AND THE BUSINESS

In 600 B.C., the smart men weren’t smart enough to know that it was 600 B.C. Aesop found time to write about the birth and he said a bird and a hand is worth doing the bush. That isn’t quite compete, because the question is, “How sure you are that he’s doing the bush?” He probably knew that, but he didn’t have time. He was halfway there, though. That’s all there is to investing. How many birds are in the bush? When are you going to get them out? How sure are you? If interest rates are 15%, roughly, you’ve got to get 2 birds in the bush in 5 years, but if interest rates are 3% and you can get 2 birds out 20 years, it still makes sense to give up the bird in the hand because it all gets back to discounting an interest rate.

Buying Berkshire is a mistake because Berkshire was a lousy textile business bought at a very cheap price. Ben Graham taught Buffett to buy things on a quality basis and look for cheap things. Buffett then went around looking for what he calls “a bunch of stocks”.

The approach is to walk down the street and look around for it until Buffett finds this terrible looking soggy ugly looking cigar – one puff left in it and it’s done. It’s disgusting, but it’s free and cheap. He looks around again for one puff. That’s what he did for years. It was a mistake, even though Berkshire made money doing it. Now, Buffett buys a wonderful business at a fair price.

TIME AS A FRIEND AND AS AN ENEMY

Time is the friend of the wonderful business. It keeps compounding and making more money. Time also is the enemy of a lousy business. Buffett could have sold Berkshire and made a quick little profit, but staying with those kinds of business is a big mistake. Buffett learned something out of that mistake, but he would have been better setting up a new business than running Berkshire. Good thing everything turned out well after all.

Buffett went to the US air and bought a preferred stock in 1989. As soon as he got his check cleared, the company went into the red and never got out. Whenever he thought of buying an airline stock, they talked him down! It took hours of time, but it was worth it! Buffett just got blessed buying an airline stock, but it was a dumb decision.

No one gets 500 great opportunities at a lifetime, so you need to grab it when they come. Buffett said to the students at UGA, “You’d be better off when you get out of school later. You get a punch card with 20 punches on it. You use up a punch for every big financial decision. Because you’d think of it very hard, you’d be very rich. You’d make good ones and you’d make big ones, you probably wouldn’t even have to use 20 punches.”

IF BERKSHIRE WAS CHRONICALLY SHORT OF FUNDS

If Berkshire was chronically short of funds and there are all kinds of opportunism coming, they might somehow have a different approach. They were on the earliest ones to go in for low income tax housing credits. They actually talked with former President Bush about that. That benefits them to a mile degree. It’s not a big element of Berkshire, but it is an ordained tax benefit that the congress decided to offer businesses, because they think it’s the best way to generate low income housing. Berkshire participated, but it’s not a big factor in what they do. There is nothing wrong with that. Going to tax evasion is a whole different thing. Anyone can save a lot of taxes, but certainly, there are other tests that need to be met. Berkshire has not done it.

About 99% of Buffett’s net worth will go to a foundation after he leaves the world. He wrote a letter to his very few trustees regarding that. A whole bunch of trustees just marginalizes themselves to the certain lowest common denominators. He tells his trustees to try and do it. If they fail, it doesn’t bother him at all. If they gave a million bucks, they’re not going to sleep, because he would haunt them. Buffett doesn’t want the dropper approach used for philanthropy. He wants them to use that judgment to look at important problems that do not have natural funding constituency. The government should be funding important problems.

20TH CENTURY AND BEYOND

The 20th county was unbelievable for the states. Sometimes people talk about the GDP of United States versus that of Europe’s, but Europe’s population is the same every year. The Unites States’ goes up every year. The GDP per capita in the 20th century was 610%. On a quantity bass, it went up every single decade – including the 30s. In the 100 years, the US citizen rate was improving a lot decade by decade. It was up 13% in the 30s. The best decade was during the World War 2 in the 1940s. The worst decade was during the World War 1. It was huge period.

The wellbeing of the country kept a lot more than 10% during that first 21 years. As for the development from September 1929 to 1948, the Dow went from 381 to 180 – it was cut in half for 18 long years. Yet, the per capita GDP was moving right up. The economy was doing fine. From 65-81, the Dow went down literally again per capita GDP. The last period worked on terrifically.

For the whole 100 years, the Dow went from 180 to 1, but 43 in three quarter’s years were those three huge markets. 56 in a quarter’s years was a period of stagnation. All of the country was doing fine. 56 and a quarter years, the Dow was down a couple of hundred points in the period. Citizens were living better than the one that preceded it. It was a huge change, and yet long periods of stagnation as well. 10 years is a long time to do nothing.

The answer is that investors behaved in very human ways in which they got very excited during markets. They look at it and say, “I made money last year. I’m going to make more money this year.” When they look at the rearview mirror and see that a lot money are being made, they push and push. When they see no money having been made, they just say, “This is a lousy place to be, so I don’t care what’s going on.” It’s astounding. That makes for a huge opportunity!

Buffett has lived half of his life investing. He has had a long period of stagnation from 65 to 82 – 17 years. He wrote an article for Forbes in 1975. ”How can this be?“ They will behave very peculiarly in terms of the reaction. They’re human beings. They get excited. They get greedy. They get fearful. They’ll continue to do so. The country will do very well over time.

THE REAL ASSET OF THE BUSINESS

At Berkshire Hathaway’s headquarters, there are 13.8 people working. Some people work 4 days a week. 112,000 people in the headquarters that’s all. They intentionally keep their units small, because they want them to have the responsiveness of the customer particularly. They’ll turn them essentially more than an asset than anything the scale of having a little more of a purchasing power.

By thinking about the customers, they are what businesses compete for. A good business owner thinks about in the morning when he gets, up, “How do I take care of my customers?”

Buffett has a business in Omaha – the largest furnishing store in the world. That business comes about as an investment of $500 in 1937 by a woman who walked out of Russia in 1921. She couldn’t speak one word of English and couldn’t pick up the language. She felt like dummy for 2 years in Seattle, so he went to Omaha because there were Russians, so at least she had some people to talk to. A little girl would come to school and would teach her mother the words she learned in school that day. That is how the woman learned English.

Every time she saved 50 bucks, she sold used clothing. By 1967, 16 years after she got to Omaha, she saved $500. She rod a train to Chicago to go to the American Furniture Mart. She was smart, but she talked like a peasant. She bought $2,000 worth of merchandise. All the way back to Omaha, she worried because she felt she owed $1500 when she had $500 equity.

She got to Omaha and took a bed, a sofa, and a refrigerator out of her own home to sell fast so she can get the money and pay on time. She took that business and built it. From that start, no one would sell to her. She went to court 4 times because the manufactures tried to stop her from selling at a discount. It’s like, “Look, I paid $3 a year for this carpet. Branded sells it at $6.98. I sell it at $3.98. Just tell me, judge, how much do you want me to rob people?” The next day, the judge bought carpets from her.

She worked till she was 103. She sold Buffett the business when she was 89. She didn’t own a balance because she never had accounting, but she understood the nature of business. She died at 104. After everything, she couldn’t read or write. No, she can’t. She never went to school.

You can’t be that. You can’t replicate that. In General Motors, you can’t institutionalize that. That person who brings that kind of drive in business and does it day after day will surely develop a healthy company.