Berkshire Hathaway Corporate Headquarters
October 7, 2005
Mr. Warren Buffett is an energetic and charismatic man with a great sense of humor. He loves what he does and has a unique ability to absorb large amounts of information and condense it into a simple point of view.
Formatting is a bit off but content is great.
DISCLAIMER: Only the words in bold italics are direct quotes. Everything else is paraphrased.
Question: Can you comment on Alan Greenspan?s recent remarks regarding the reversal of asset values that typically occurs after prolonged periods of sustained low volatility?
? Greenspan is correct.
? There has been a compression of credit spreads. I bought billions of junk bonds a few years ago.
? Things could get real bad should interest rates continue to rise.
? ?Wall street swings in huge manners.? It will make you all rich if you can keep a level head and make rational, educated decisions.
Question: What advice can you give MBA students entering the field of investment management?
? First of all, investment management is a great field, if you like it, it won?t feel like work.? It is a field where you can get paid extraordinarily well.
? Have passion for what you do and where you work.
? Work for someone you admire.? ?I found my passion working with Ben Graham. When I first went into his office, I told him ?I?ll work for free?.? Graham promptly replied ?you are still overpriced?.?
? ?For me, the money was not that important.? The starting salary was not that important.?
? ?Alternatively, if you like investing on your own, just start digging.? Dig into companies, turn pages and wait for something to jump out at you. Research, research, research?
? ?Nobody is going to tell you about the great ideas?
? Mr. Buffett started with Western Insurance Securities. He found his opportunity in the 1951 Moody?s Banks & Finance manual. Great western insurance was trading at $3-$13 a year but was worth $20 at Book Value.
? Even if you are working for a company, invest on your own no matter how small your capital.
? Build your knowledge base because knowledge is cumulative. Had Mr. Buffett not researched insurance companies, he would not have been ready or willing to make the investments.
? Ideas should come from what make sense to you, not from what you read or from what someone else tells you. Act on what you learn yourself.
? ?Grade yourself on your temperament.? Temperament is the ability to not be swayed by the market.? See what you are supposed to see.?
? Before making an investment decision, take out a notebook and without looking at the price of a company write ?I am buying X shares in this company for Y price because??? The only reason to buy a company (or shares in a company) is that it is worth a lot more than it is selling for.? You then do your homework to find the ?range? of prices that the stock is worth.
? Investing is a ?positive sum game?: if you rule out all the bad moves you?re going to win.
? It is almost impossible to come to an exact value for a company.?
Question: How do you keep such a level head and perspective? How does bridge and exercise help you maintain this perspective?
? Being in Omaha helps. Not having Wall Street whispering 20 ideas a day into my head.
? I like to act on what I know. Things that make sense jump out at me.
? Ideas should come from what you know and have learned. Exercise and Bridge keep my head clear and sharp.
? For example, during the market bubble, the market capitalization was at 170% of GDP, with real earnings contributing to 6% of GDP. That equates to a market multiple of 30. At other times, you have seen the market trading at 70% of GDP, ?you do the math.?
Question: What do you think of white collar crime and the penalties given out recently?? Also what advice can you give about staying out of trouble in this respect?
? ?The people who have been convicted of these crimes are getting what they deserve.? But it is not a perfect justice system by a long shot.?
? On how to stay out of trouble, Mr. Buffett recalled a story he heard about a man on death row reading The Bible for the first time.? When asked what he was doing, the man responded ?I am trying to find loop holes.?Relating to a code of ethics for companies that are hundreds of pages long, there will always be loop holes.
? ?Judge every action as if a smart and slightly unfriendly reporter was writing an article about it on the front page.?
? ?There is plenty of money to be made in the center of the court.? If you feel like [the morality of the business decision] is not clear, it is probably wrong.? When it is right, you don?t question it.? Mr Buffett referred to his managers coming to him with moral ambiguity: if they are calling me it is probably wrong – they don?t call if things are morally right.
Question: Our generation is dealing with pension and social security issues, what problems do you see our children and our children?s children facing?
? From a non-economic point of view, terrorism has escalated to an entirely new level and will be with us for a while. I did some math on probability of terrorist event. 10% per year over next 50 years equates to 99% probability. 1% over next 50 years is something like 40% probable.
? Economically, we consume 6% more than we produce. I feel that a lingering issue will be the trade deficit. We consume foreign goods in exchange for paper?be it bonds or stocks?and that is going to come back to haunt us someday. There will be political consequences.
? The United States has a flat tax rate, once you account for income tax, payroll tax, strategic tax planning, etc. This has ?happened without anyone knowing it.?
Question: What role government should have in Economy/Business?
? There is definitely a role for government but it is a tight rope that must be walked carefully. For instance, when China (CNOOC) comes in and wants to buy Unocal, and the government disallowed the acquisition; that is getting to a questionable point (I realize the national security issues, but it doesn?t seem right).
? ?A pure market system does not work.?
Question: It has been stated over and over again that the U.S. Stock Market will be facing a single digit return environment. As a result, investors are looking elsewhere to get their desired returns. What are you views on this issue?
? Single digit returns aren?t all that bad. Occasionally the barometer in the stock market gets ahead of itself. It has been running a ?little rich? lately. It?s crazy to think you are going to be able to earn consistently 10% when global GDP is at 5%.
? We want to be producing things that China is consuming.
? Greenspan sent me a 1901 NYT article; Greenspan mentioned that the paper cost one cent in 1901 and now costs one dollar.? Greenspan joked that that?s only a 4% CAGR in price!
? We are living seven times better than we were 100 years ago.
Question: If we use the ?Margin of Safety? criterion so often touted by Ben Graham and Warren Buffett, is there a danger of becoming by-standers as no worthwhile investments come our way even after long waiting periods?
? Margin of Safety is the untapped pricing power in a business.
? In an investment management job, if you must pick companies to invest in, pick those that although fully valued, are still excellent companies with strong business models.
? Pick companies with enduring competitive advantage:
o i.e.,: See?s Candy and Borsheims jewelry. Items that carry an emotional value.
o When you don?t care about a product, it?s a commodity.
? Management that will do a good job:
o Love the business not the money.
o You must be able to read people.
? Buffett skips to work each day because the outcome is not known.
? He often makes decisions with out firm (hard) numbers but with firm knowledge of a good margin for safety.
? Mr. Buffett gave an excellent example of the concept of Margin of Safety. He asked if any of us would consider driving a truck weighing 9800 lbs over a bridge that can withstand a max of 10000 lbs. Of course, the resounding answer was NO. Nobody wants to take a risk of that nature. The designer of the bridge could have made slight errors when calculating the max weight capacity. Further, the bridge might not be as strong today as it once was. So, only drive a truck that is well below 10000 lbs.
Question: In a speech you made several years ago to a group of college students you stated that ?there might be more to be gained by studying business failures rather than studying business successes.?? Can you please give an example of a recent failure and share what you believe is the lesson to be learned from this example?
? Companies must have enduring economics?competitive advantage?and management you admire and trust.? I ask myself, of management, ?Do they love the money or do they love the business??? I do not try to lock in management with employment contracts at Berkshire.? I try to spot the