Buffett Group Meets its Namesake
The Oracle of Omaha Offers Insights on Business, Politics, and the Afterlife
Andrew Van Fossen
Issue date: 5/27/05 Section: GSB News
Warren Buffett, Chairman of the Board of Berkshire Hathaway and the second-wealthiest person in the world, met with 80 GSB students in an event organized by the Buffett Club. The Oracle of Omaha very generously gave the students two hours in which he would answer any questions asked of him, and said that no subject matter, from religion, to investing, to personal questions, was off-limits. Mr. Buffett's only request was not to prompt him "to say anything libelous." Following the Q&A session, Mr. Buffett treated the entire group to lunch at Gorat's, the self-proclaimed "World's Best Steakhouse."
Investment Philosophies
When asked which items taught at business schools were most valuable and least valuable in becoming an astute investor, Mr. Buffett struck deep at the GSB's heart by saying he didn't give a lot of credence to the efficient markets theory or the importance of beta. Rather, he said, the first thing he looks for are companies with business models that he could thoroughly understand. This allows him to focus on companies like American Express and Coca-Cola, and excludes some of the higher-technology companies.
To further describe his philosophy, Mr. Buffett explained that his investment decisions are based on identifying significantly undervalued companies that can offer substantial returns in the future. He recounted when he invested in The Washington Post in the early 1970s. At the time the company was valued at $100 million when it fell out of favor with President Nixon. He said, "If an auction for the company was held in the middle of the Atlantic Ocean on a cold winter day, people would swim out to bid at least $500 million for it," based on the Post's newspaper and television station assets. At the time, Mr. Buffett took a 10% position in the firm, which today is worth over $1 billion.
Personal Qualities for Success
A couple of GSB students asked Mr. Buffett what personal qualities he possesses that have allowed him to achieve his incredible investing record. He said that at the top of the list were his temperament and patience. He drew an analogy to a batter in baseball who will succeed if he knows which pitches not to swing at. Similarly, he made sure that he only invested in companies which he thought were terrific investments, regardless of whether such opportunities presented themselves everyday or only once per year. This stance has required significant discipline as of late, in light of Berkshire Hathaway's current $40 billion cash position.
Another characteristic he noted as very important was thinking independently about investments: not selling when everyone else is convinced the market has peaked and not jumping on the bandwagon of the latest fad or trend (translation: technology bubble of the late 1990s). Interestingly, he said that having the ability to resist such trends wasn't necessarily a result of mere intelligence. He recalled how Isaac Newton, "arguably the smartest person in history, lost his shirt" in a stock bubble during the 1600s. All this being said, Mr. Buffett was quick to point out that he didn't consider himself a contrarian, just an objective and calculating investor.
Succession Issues
Heralded by many as the greatest stock investor ever, Mr. Buffett knows that an important issue for Berkshire Hathaway is who will succeed him after he passes away. He joked that he used to carry the name of his successor in an envelope he would take to board meetings. One day he opened the envelope for the board and read its contents: "Check my pulse again."
More seriously, Mr. Buffett has identified three people at Berkshire, any of whom he is very confident would perform excellently as his successor. Furthermore, Mr. Buffett asks the CEOs of each of his subsidiary businesses to identify potential successors and assess their strengths and weaknesses so that their respective businesses will still remain strong even as its people move on, whether it be to Florida or that great big Florida in the sky.
Bringing the conversation full circle, Mr. Buffett said he is most committed to a smooth succession because over 98% of his net worth is in Berkshire stock, and he plans to leave the bulk of his fortune to charity. If the value of the stock diminished upon his death, much of the good that could be done with his fortune would dissipate. It is this good that Mr. Buffett hopes will be his legacy.
In a move that surprised everyone, Mr. Buffett actually named one of the GSB students in attendance as his successor with a ceremonial "handing over of his wallet." (Just kidding, but the photo is true!)
Social Responsibility
A final topic Mr. Buffett addressed was social responsibility, both as it related to investing in companies and in a broader sense. With regard to companies that he chooses to purchase as a subsidiary or invest in, Mr. Buffett said that social responsibility is not the first priority for consideration. However, he did relate a story where he was looking to acquire a chewing tobacco company which "had great numbers"; but which he and Mr. Munger ended up passing on because it didn't seem right. On the other hand, he said he does not object to taking equity positions in beer or tobacco companies, or companies "like Wal-Mart or Costco" that sell such items.
When looking at the world through lenses other than those specifically for investment, Mr. Buffett said his biggest fear regards the threat of weapons of mass destruction. He noted that while the prospect of terrorists acquiring chemical, biological, or nuclear weapons was horrifying, sovereign nations posed as grave a threat. He recalled when the US dropped nuclear bombs on Hiroshima and Nagasaki to end World War II, and how the general population in America felt such an attack were justified if it brought an end to fighting sooner. He pondered whether the reactions of the citizenry of Iran or North Korea would be any different if they felt threatened. Certainly something to think about.
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Investment Philosophies
When asked which items taught at business schools were most valuable and least valuable in becoming an astute investor, Mr. Buffett struck deep at the GSB's heart by saying he didn't give a lot of credence to the efficient markets theory or the importance of beta. Rather, he said, the first thing he looks for are companies with business models that he could thoroughly understand. This allows him to focus on companies like American Express and Coca-Cola, and excludes some of the higher-technology companies.
To further describe his philosophy, Mr. Buffett explained that his investment decisions are based on identifying significantly undervalued companies that can offer substantial returns in the future. He recounted when he invested in The Washington Post in the early 1970s. At the time the company was valued at $100 million when it fell out of favor with President Nixon. He said, "If an auction for the company was held in the middle of the Atlantic Ocean on a cold winter day, people would swim out to bid at least $500 million for it," based on the Post's newspaper and television station assets. At the time, Mr. Buffett took a 10% position in the firm, which today is worth over $1 billion.
Personal Qualities for Success
A couple of GSB students asked Mr. Buffett what personal qualities he possesses that have allowed him to achieve his incredible investing record. He said that at the top of the list were his temperament and patience. He drew an analogy to a batter in baseball who will succeed if he knows which pitches not to swing at. Similarly, he made sure that he only invested in companies which he thought were terrific investments, regardless of whether such opportunities presented themselves everyday or only once per year. This stance has required significant discipline as of late, in light of Berkshire Hathaway's current $40 billion cash position.
Another characteristic he noted as very important was thinking independently about investments: not selling when everyone else is convinced the market has peaked and not jumping on the bandwagon of the latest fad or trend (translation: technology bubble of the late 1990s). Interestingly, he said that having the ability to resist such trends wasn't necessarily a result of mere intelligence. He recalled how Isaac Newton, "arguably the smartest person in history, lost his shirt" in a stock bubble during the 1600s. All this being said, Mr. Buffett was quick to point out that he didn't consider himself a contrarian, just an objective and calculating investor.
 |
Succession Issues
Heralded by many as the greatest stock investor ever, Mr. Buffett knows that an important issue for Berkshire Hathaway is who will succeed him after he passes away. He joked that he used to carry the name of his successor in an envelope he would take to board meetings. One day he opened the envelope for the board and read its contents: "Check my pulse again."
More seriously, Mr. Buffett has identified three people at Berkshire, any of whom he is very confident would perform excellently as his successor. Furthermore, Mr. Buffett asks the CEOs of each of his subsidiary businesses to identify potential successors and assess their strengths and weaknesses so that their respective businesses will still remain strong even as its people move on, whether it be to Florida or that great big Florida in the sky.
Bringing the conversation full circle, Mr. Buffett said he is most committed to a smooth succession because over 98% of his net worth is in Berkshire stock, and he plans to leave the bulk of his fortune to charity. If the value of the stock diminished upon his death, much of the good that could be done with his fortune would dissipate. It is this good that Mr. Buffett hopes will be his legacy.
In a move that surprised everyone, Mr. Buffett actually named one of the GSB students in attendance as his successor with a ceremonial "handing over of his wallet." (Just kidding, but the photo is true!)
Social Responsibility
A final topic Mr. Buffett addressed was social responsibility, both as it related to investing in companies and in a broader sense. With regard to companies that he chooses to purchase as a subsidiary or invest in, Mr. Buffett said that social responsibility is not the first priority for consideration. However, he did relate a story where he was looking to acquire a chewing tobacco company which "had great numbers"; but which he and Mr. Munger ended up passing on because it didn't seem right. On the other hand, he said he does not object to taking equity positions in beer or tobacco companies, or companies "like Wal-Mart or Costco" that sell such items.
When looking at the world through lenses other than those specifically for investment, Mr. Buffett said his biggest fear regards the threat of weapons of mass destruction. He noted that while the prospect of terrorists acquiring chemical, biological, or nuclear weapons was horrifying, sovereign nations posed as grave a threat. He recalled when the US dropped nuclear bombs on Hiroshima and Nagasaki to end World War II, and how the general population in America felt such an attack were justified if it brought an end to fighting sooner. He pondered whether the reactions of the citizenry of Iran or North Korea would be any different if they felt threatened. Certainly something to think about.