Warren Buffett’s Guide To Hiring

Warren Buffett’s Guide To Hiring by John Szramiak was originally published on Vintage Value Investing
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The Warren Buffett Guide to Hiring

Warren Buffett is one of the greatest investors of all-time.

 

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But his wisdom runs much deeper than just investing.

Warren Buffett is also an incredible businessman and manager, and it’s really these qualities – in addition to his investing skill – that’s helped him build Berkshire Hathaway into one of the largest and most profitable companies in the world.

But despite what most people think, he didn’t do it alone.

Warren Buffett had a lot of help from people like his partner Charlie Munger, and he’s been able to hire, recruit, and incentivize amazing managers like Ajit Jain and Greg Abel.

How has Warren Buffett been able to build such a formidable team, and in turn such a successful company?

The secret lies in what Warren Buffett looks for in people when he hires them: integrity, intelligence, and energy.

Warren Buffett’s 10% Sermon

Warren Buffett loves to teach. The following is a “sermon” that Buffett has often gives to MBA students when he comes talk to them – including first at the University of Florida (download a transcript of Buffett’s full lecture here) and again later at the University of Georgia. Here Warren Buffett breaks down why those three qualities are so important:

Play one game a little bit with me for just a minute…

I’d like for the moment to have you pretend I’ve made you a great offer, and I’ve told you that you could pick any one of your classmates – and you now know each other probably pretty well after being here for a while. You have 24 hours to think it over and you can pick any one of your classmates, and you get 10 percent of their earnings for the rest of their lives. And I ask you, what goes through your mind in determining which one of those you would pick? You can’t pick the one with the richest father, that doesn’t count. I mean, you’ve got to do this on merit. But, you probably wouldn’t pick the person that gets the highest grades in the class.

I mean, there’s nothing wrong with getting the highest grades in the class, but that isn’t going to be the quality that sets apart a big winner from the rest of the pack. Think about who you would pick and why. And I think you’ll find when you get through, you’ll pick some individual – you’ve all got the ability, you wouldn’t be here otherwise. And you’ve all got the energy. I mean, the initiative is here, the intelligence is here throughout the class. But some of you are going to be bigger winners than others.

And it gets down to a bunch of qualities that, interestingly enough, are self-made. I mean it’s not how tall you are. It’s not whether you can kick a football 60 yards. It’s not whether you can run the 100 yard dash in 10 seconds. It’s not whether you’re the best looking person in the room. It’s a whole bunch of qualities that really come out of Ben Franklin, or the Boy Scout codes, or whatever it may be. I mean, it’s integrity, it’s honesty, it’s generosity, it’s being willing to do more than your share, it’s just all those qualities that are self-selected.

And then if you look on the other side of the ledger, because there’s always a catch to these free gifts and genie jokes. So, you also have to – and this is the fun part – you also have to sell short one of your classmates and pay 10 percent of what they do. So, who do you think is going to do the worst in the class? This is way more fun. And think about it again. And again, it isn’t the person with the lowest grades or anything of the sort. It’s the person who just doesn’t shape up in the character department.

We look for three things when we hire people. We look for intelligence, we look for initiative or energy, and we look for integrity. And if they don’t have the latter, the first two will kill you, because if you’re going to get someone without integrity, you want them lazy and dumb. I mean, you don’t want a spark of energy out of them. So it’s that third quality. But everything about that quality is your choice.

You know, you can’t change the way you were wired much, but you can change a lot of what you do with that wiring. And it’s the habits that you generate now on those qualities, or those negatives qualities. I mean the person who always claims credit for things they didn’t do, that always cuts corners, that you can’t count on. In the end those are habit patterns, and the time to form the right habits is when you’re your age. I mean it doesn’t do me much good to get golf lessons now. If I’d gotten golf lessons when I was your age I might be a decent golfer.

But, someone once said “the chains of habit are too light to be felt until they’re too heavy to be broken.” And I see that all the time. I see people with habit patterns that are self-destructive when they’re 50 or 60 and they really can’t change then, they’re imprisoned by them. But you’re not imprisoned by anything. So, when you write down the qualities of that person that you’d like to buy 10 percent of, look at that list and ask yourself, is there anything on that list I couldn’t do?

And the answer is there won’t be. And when you look at the person you sell short, and you look at those qualities that you don’t like, if you see any of those in yourself – egotism, whatever it may be, selfishness – you can get rid of that. That is not ordained. And if you follow that, and Ben Franklin did this and my old boss Ben Graham did this at early ages in their young teens, Ben Graham looked around and he said, “Who do I admire?” And he wanted to be admired himself and he said, “Why do I admire these other people?” And he said, “If I admire them for these reasons, maybe other people would admire me if I behave in a similar manner.” And he decided what kind of a person he wanted to be.

And if you follow that, at the end you’ll be the person you want to buy 10 percent of. I mean that’s the goal in the end, and it’s something that’s achievable by everybody in this room. So that’s the end of the sermon.

How to Get a Job from Warren Buffett

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If you want to get a job from Warren Buffett, you just need to show him that you have three things: integrity, intelligence, and energy.

Intelligence

The intelligence component is obvious – you need the mental capacity to do the job. But as Buffett points out in his sermon, there are many smart people around (Buffett even notes that every one of the MBA students he was speaking to were already smart enough to succeed). But the person “who you would want 10% of” isn’t necessarily the person who gets the highest grades.

In fact, Buffett has made this point several times:

“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

“If you are in the investment business and have an IQ of 150, sell 30 points to someone else.”

Energy

Having energy is also an obvious choice. (Don’t worry, this doesn’t mean you have to be someone who is jumping up and down all day – Buffett clarifies that by energy he means someone who takes initiative). Clearly, you can’t succeed if you’re lazy. You have to take initiative, you have to be entrepreneurial, and you have to make things happen – either for yourself or your company.

IntegrityThe Warren Buffett Guide to Hiring

Integrity is the missing piece of the puzzle. If you want to become someone who Warren Buffett would hire, this is the most important quality that you should develop.

Think about it. Would you want to work with someone who is intelligent and driven, but who doesn’t have integrity? Of course not! In fact, that is probably the absolute last person you would want to work with (*ahem*…ever hear of Slytherin?). Buffett jokes that if someone doesn’t have integrity, then at least you want them to be dumb and stupid.

The best part about this quality is that it’s completely self-selected.

You can’t control your height, your looks, or how fast you run. But you can completely control whether or not you have integrity, if you’re honest, if you’re generous, and if you’re willing to do more than your fair share.

Summary

Everyone wants to hire and work with smart people. So intelligence is often a baseline requirement to do any job.

The next step toward a successful hire is finding someone who is driven and shows initiative. Warren Buffett isn’t the only person who does this. Famous fellow value investor Mario Gabelli says that he looks for PHDs: people who are “poor, hungry, and driven.” Even legendary basketball coach Rick Pitino looks for PHDs too.

What I love about Warren Buffett is that he specifically looks for a third key intangible – integrity. Without it, intelligence and energy don’t matter (and can actually be harmful). And I’m fairly certain that it’s Buffett focus on integrity and reputation – and not just on intelligence, energy, and profits – that has helped him and Berkshire Hathaway become so successful.

Do you look for integrity, intelligence, and energy when hiring people? Do you think Buffett is missing any key qualities? Share your thoughts in the comments section below (or just say hi)!

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…