Warren Buffett: Notes From The Q&A Between MBA, HBA Students

Notes from the Meeting Dr. George Athanassakos and Ivey MBA and HBA students had with Mr. Warren Buffett.

Q&A with Warren Buffett

Question #1: How do you pick winners (the right people)? How do you know they are the right fit for your company?

Warren Buffett – Answer #1: I believe there are always winners but picking the right winner for my company is a challenge. I know an individual who is definitely going to outperform the S&P but he’s the last guy on earth I’d want my daughter to marry. So first and foremost, you have to feel good around them, you must enjoy their company, like a friend or a family member. If you feel good around them, it means they have characteristics you admire and are moving in the direction you want to associate with. These people represent who you’d like to be and you may perceive them even as better than yourself. You can admire their behaviour or intellect but always judge them as a human being if you want to be their friend. These people do 10 things for every 1 thing you ask for; they go above and beyond what you expect of them. You want to associate with first-class people (like William Ruane, one of the classiest individuals).

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Question #2: What is your personal definition of ‘success’? How has it changed over the course of your career?

Warren Buffett – Answer #2: The saying goes that success is about getting what you want, while happiness is about wanting what you get. For myself happiness is more important. My goal was always financial independence; working for myself and finding a job where I admire the people I work with. I was interested in being in a position to control the decision making process. At age 25, I had enough money to live off of. I had two children and the equivalent of roughly $2M in today’s money. Everything since then has been surplus.

As you move along in your career, you always want to consider your inner scorecard – how you feel about your own performance and success. You should worry more about how well you perform rather than how well the rest of the world perceives your performance. The success of Berkshire has always been more important than my own personal success in terms of financial returns. The most important takeaway is that you should always try to be a good person.

Question #3 How do you develop conviction for contrarian ideas? How do you perceive risk?

Warren Buffett – Answer #3: At Berkshire we have certain filters that have been developed. If in the course of a presentation or evaluation part of a proposal or of an idea hits a filter then there is no way I will invest. Charlie has similar filters. We don’t worry about a lot of things as we only have to be right about a certain number of things – things that are within our circle of competence. A great example is the Nebraska Furniture Mart that you visited this morning. Mrs. B took cash because she didn’t understand stocks. It is important to know what I can do. I have no idea which company will dominate in the auto industry in the next 5 years so I don’t pick. I prefer simple things in my circle of competence. Good decisions scream at you. For example in 2008 you shouldn’t have been afraid just because assets were cheap. In your entire investment lifetime you may have 6 times when this happens and it is ‘raining gold’.

With regards to risk, the Berkshire portfolio suffered a 2% loss once and had 1% losses twice in our history. This was all in 1974 and 1975 when we sold assets cheap to buy other assets cheaper. Stocks are riskless if held over a long time frame as you are simply giving up purchasing power now for later. Cash is the risky asset. Risk in stocks is not what the companies will do. Traditional finance teaches that Beta is a measure of risk but volatility isn’t risk. Risk is loss of purchasing power. Volatility declines over a long enough timeframe. It is individuals that make investments risky. In our report that is due out tomorrow I talk about how risk needs to be rethought. People think stocks are riskier than bonds, which is not true for a long time horizon.

Question #4: Have you ever made money on someone else’s ideas?

Warren Buffett – Answer #4: My preference is for my own ideas. I prefer to find good companies trading at fair prices. You can make money on cigarette butt investing but this works better with small amounts of money and was more effective years ago. You can’t build businesses out of cigar butts. I don’t read analyst reports and, although I get served up many ideas I don’t seek outside ideas. I stay within my circle of competence. Berkshire’s AUM means the universe of potential investments is smaller even though good, attractively priced ideas are often poorly covered. For instance, recently I did screening of the Korean market and found a few interesting opportunities.

I used a 1950s (1951) Moody’s manual by sector. There was some good stuff in the back on page 1433. Western Insurance was a company that I looked at. It had an EPS of $29 and the high price was $13. Nobody showed me this. So I checked it out with insurance brokers and it checked out OK so I bought into the company.
All in all, I prefer to read “raw” financial reports and talk to industry representatives.

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