Value Investing

Warren Buffett Lecture At The University Of Florida School Of Business October 15, 1998

Warren Buffett Lecture At The University Of Florida School Of Business October 15, 1998 by CSInvesting

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This speech was the first in a series sponsored by the Graham-Buffett Teaching Endowment, established in 1997 by a $1 million gift from (1970 UF graduate) Mason Hawkins. More on Mr. Hawkins and his firm, Longleaf Partners here.

Youtube videos of the lecture start here.

This lecture is one of Buffett’s best on his principles of living and how he analyzes businesses. Note his analysis of Coke and P&G.

Warren Buffett Lecture At The University Of Florida School Of Business October 15, 1998 - Introduction:

The Graham-Buffett Course sequence is important to this college because it enables us to attract students who want this perspective on investing and managing corporations—a perspective that has been successfully employed by Warren Buffett, Mr. Hawkins and before them, Benjamin Graham.

This perspective is quite simple but is sometimes lost in the complexity of our University analysis. The perspective is that you have to understand the underlying economics of the businesses that you invest in, work in. You have to be clear-eyed and not be swayed by the crowd or passing fancies of the moment. And you have to learn and stick to disciplined principles of business valuation.

In the long run this disciplined approach will more often than not bring success or more importantly avoid spectacular failures.

Hopefully at the University of Florida we can successfully convey those principles and create a program for the very best students and in time the very best employers as well. We thank Mr. Hawkins for his gift ($1 million) and share his thoughts today.

Mason Hawkins: He is someone I have admired tremendously for the last 30 years. In addition, he is someone each of us could pattern our lives after as a role model. It is my honor to introduce our lifetime's best long-term investor……


Warren Buffett: (holds mic) Testing: One million $, two million $….three million.

I would like to say a few words primarily and then the highlight for me will be getting your questions. I want to talk about what is on your mind.

Warren Buffett - Your Future

I would like to talk for just one minute to the students about your future when you leave here. Because you will learn a tremendous amount about investments, you all have the ability to do well; you all have the IQ to do well. You all have the energy and initiative to do well or you wouldn't be here. Most of you will succeed in meeting your aspirations. But in determining whether you succeed there is more to it than intellect and energy. I would like to talk just a second about that. In fact, there was a guy, Pete Kiewit in Omaha, who used to say, he looked for three things in hiring people: integrity, intelligence and energy. And he said if the person did not have the first two, the later two would kill him, because if they don't have integrity, you want them dumb and lazy.

We want to talk about the first two because we know you have the last two. You are all second-year MBA students, so you have gotten to know your classmates. Think for a moment that I granted you the right--you can buy 10% of one of your classmate‘s earnings for the rest of their lifetime. You can't pick someone with a rich father; you have to pick someone who is going to do it on his or her own merit. And I gave you an hour to think about it.

Will you give them an IQ test and pick the one with the highest IQ? I doubt it. Will you pick the one with the best grades? The most energetic? You will start looking for qualitative factors, in addition to (the quantitative) because everyone has enough brains and energy. You would probably pick the one you responded the best to, the one who has the leadership qualities, the one who is able to get other people to carry out their interests. That would be the person who is generous, honest and who gave credit to other people for their own ideas. All types of qualities…whomever you admire the most in the class. Then I would throw in a hooker. In addition to this person you had to go short one of your classmates.

That is more fun. Who do I want to go short? You wouldn't pick the person with the lowest IQ, you would think about the person who turned you off, the person who is egotistical, who is greedy, who cuts corners, who is slightly dishonest.

As you look at those qualities on the left and right hand side, there is one interesting thing about them, it is not the ability to throw a football 60 yards, it is not the ability the run the 100 yard dash in 9.3 seconds, it is not being the best looking person in the class, they are all qualities that if you really want to have the ones on the left hand side, you can have them.

They are qualities of behavior, temperament, character that are achievable, they are not forbidden to anybody in this group. And if you look at the qualities on the right hand side the ones that turn you off in other people, there is not a quality there that you have to have. You can get rid of it. You can get rid of it a lot easier at your age than at my age, because most behaviors are habitual. The chains of habit are too light to be felt until they are too heavy to be broken. There is no question about it. I see people with these self-destructive behavior patterns at my age or even twenty years younger and they really are entrapped by them.

They go around and do things that turn off other people right and left. They don't need to be that way but by a certain point they get so they can hardly change it. But at your age you can have any habits, any patterns of behavior that you wish. It is simply a question of which you decide.

If you did this…Ben Graham looked around at the people he admired and Ben Franklin did this before him. Ben Graham did this in his low teens and he looked around at the people he admired and he said, "I want to be admired, so why don't I behave like them?" And he found out that there was nothing impossible about behaving like them. Similarly he did the same thing on the reverse side in terms of getting rid of those qualities. I would suggest is that if you write those qualities down and think about them a while and make them habitual, you will be the one you want to buy 10% of when you are all through. And the beauty of it is that you already own 100% of yourself and you are stuck with it. So you might as well be that person, that somebody else.

Well that is a short little sermon. So let's get on with what you are interested in. Let's start with questions………..

Warren Buffett - Investing in Japan

Question: What about Japan? Your thoughts about Japan?

Warren Buffett: My thoughts about Japan? I am not a macro guy. Now I say to myself Berkshire Hathaway can borrow money in Japan for 10 years at one percent. One percent! I say gee, I took Graham's class 45 years ago and I have been working hard at this all my life maybe I can earn more than 1% annually, it doesn't seem impossible. I wouldn't want to get involved in currency risk, so it would have to be Yen-denominated. I would have to be in Japanese Real Estate or Japanese companies or something of the sort and all I have to do is beat one percent. That is all the money is going to cost me and I can get it for 10 years. So far I haven't found anything. It is kind of interesting. The Japanese businesses earn very low returns on equity - 4% to 5% - 6% on equity and it is very hard to earn a lot as an investor when the business you are in doesn't earn very much money.

Now some people do it. In fact, I have a friend, Walter Schloss, who worked at Graham/Newman at the same time I did. And it was the first way I went at stocks to buy stocks selling way below working capital. A very cheap, quantitative approach to stocks. I call it the cigar butt approach to investing. You walk down the street and you look around for a cigar butt someplace. Finally you see one and it is soggy and kind of repulsive, but there is one puff left in it. So you pick it up and the puff is free--it is a cigar butt stock. You get one free puff on it and then you throw it away and try another one. It is not elegant. But it works. Those are low return businesses.

But time is the friend of the wonderful business; it is the enemy of the lousy business. If you are in a lousy business for a long time, you will get a lousy result even if you buy it cheap. If you are in a wonderful business for a long time, even if you pay a little bit too much going in you will get a wonderful result if you stay in a long time.

I find very few wonderful businesses in Japan at present. They may change the culture in some way so that management gets more share holder responsive over there and stock returns are higher. At the present time you will find a lot of low return businesses and that was true even when the Japanese economy was booming. It is amazing; they had an incredible market without incredible companies. They were incredible in terms of doing a lot of business, but they were not incredible in terms of the return on equity that they achieved and that has finally caught up with them. So we have so far done nothing there. But as long as money is 1% there, we will keep looking.

Warren Buffett Lecture At The University Of Florida School Of Business October 15, 1998
Source: Wikimedia Commons

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