Warren starts off by talking to the students prior to the Q&A session which is the focus of his discussion. He goes on to say that integrity, intelligence, and energy are all important aspects of a person. These are all required to be successful. There is more then intelligence and energy to success. Without integrity, a person can become dumb and lazy.
To the students, he made a pungent point. If you had to pick one classmate to own 10% of the rest of your life, who do you choose? The highest IQ? The best grades? The most energy? What you would pick is the person with the leadership qualities that you respond to. The honest person. The one that can get others to carry out their interests. The one that gives credit to others, etc. Of course, if you have to go long one classmate, you also have to short another. Who would it be? Not necessarily the lowest IQ or someone that is always tired. You’d pick the one that turned you off for some reason. Perhaps someone that is egotistical, greedy or dishonest would be shorted. What matters isn’t the things that can be judged by numbers. You don’t think about the grades of the person or their IQ. You look for qualities of behavior and temperament. These qualities are obtainable.
Warren reminded the students that the “chains of habit are too light to be felt until they are too heavy to be broken.” He sees to many older people that are creatures of habit and the chains have gotten heavy. And these people often tend to turn people off.
When Ben Graham and Ben Franklin were young, they determined at a young age that they wanted to have the characteristics of those that are admired. They studied those characteristics and made them a part of themselves. This is a large part of the reason as to why they were well liked.
Q-01: Thoughts on Japan?
A: Warren quickly admits to not being a macro guy. He can borrow at 1% in Japan. It seems like it is easy to make money when you borrow at 1%.. But to do so, he’d have to invest in something Yen denominated investments are a must to prevent currency risk. In terms of return on equity, Japan doesn’t have wonderful companies though so even though you can barrow at low rates, there is no where good to invest in his opinion.
He goes on to say that time is the friend of the wonderful business and the enemy of the bad business. Even if you pay a little too much for a wonderful business, you will still do well over the very long term. If you are in a lousy business for a long time though, you will get a lousy return even if you paid a good price.
Q-02: What was BRKs play in “Long Term Capital ”?
A: WEB did not answer this question, but he did give some insight into this failed hedge fund.
The whole story behind Long Term Capital Management is that the leadership of the company had a lot of experience and were some of the brightest people in the business. Even saying that their average IQ was probably the highest average IQ of leadership at any company. He even said that these people were nice people that he’s done business with in the past via Saloman.
Warren Buffet said, “to make money they didn’t have and didn’t need, they risked what they did have and did need.” It’s plain foolish. People use leverage financially all the time and it is foolish. The downside is loosing all your money. It’s also disgrace and humiliation when you face your peers and family when you risk and loose it all. You can make superior returns for a while using leverage but eventually you will loose. Sadly, the people that lost money in Long Term Capital Management are the ones that knew nothing and the ones that knew everything. Read more about Long Term Capital Management here:
Warren also mentions some things about life to the MBA students. He goes onto say, don’t pick jobs that are resume builders. Pick jobs that let you do what you love. Working certain jobs as resume builders is like saving up sex for your old age.
Q-03: What do you look for in a company?
A: Only invest in what you understand. This will quickly narrow things down.
He raised a can of Coke and says that it is easy to understand. It is a simple business. Not easy, but simple. A business needs to have a moat around it and a wonderful and valuable castle in the center. And a person running the business needs to be honest, hard working and capable.
The moat can be low cost in a company like in Geico. People have to buy auto insurance. People can’t buy 20 policies, but they have to buy one since they usually have one automobile. People have to buy it based on service and cost. People assume that the service at any auto insurance company is the same so all you can do is compete on cost. Being the lowest cost producer is the moat.
30 years ago, Eastman Kodak’s moat was just as wide as Cokes moat. Kodak was the go to brand in cameras. Everyone had the vision in their head that Kodak was the best. But Kodak let Fuji into their castle due to an error where Fuji advertised via the Olympics instead of Kodak. Fuji eventually was viewed to be at parity with Kodak eventually.
Coke’s moat is wider than it was 30 years ago. Every day that Coke enters a new marketplace, the moat gets a little bigger. You don’t see it every day but over the long term you can see it.
Moats can exist due to things like:
2) Quality of Product
5) Real Estate location
6) It needs to be obvious that people can not easily enter the market
Where can you find these things:
1) Simple products
2) Businesses where you can see the moat out 10 years and see that the moat will get bigger.
The most valuable thing WEB learned from Ben Graham is that you are not buying a stock, you are buying part ownership in a business. It is not complicated.
No one can value an internet stock. People only value internet stocks because it is exciting, not because they can. People investing in internet stocks were not doing so because they wanted to earn a return at an appropriate rate but because they thought it was exciting. For emotional reasons rather than logical. 1998 was the beginning of the internet stock bubble, known as the dot-com bubble or tech bubble.
Part 2 can be found here.
Part 3 can be found here.
Part 4 can be found here.
Part 5 can be found here.