Introduction Warren Buffett gave a talk to MBA students at The University of Florida in 1998. This article is the third of a 5 part series on the videos. Included in this article are take aways from his talk.
Featured in this article are a short thesis on The Coca-Cola Company, Fannie Mae, US Airways Group and several of Berkshire Hathaway Inc other holdings that Warren was so kind as to discuss them.
Part 1 can be found here:
http://www.gurufocus.com/news.php?id=69071
Part 2 can be found here:
http://www.gurufocus.com/news.php?id=69249
Video 6
Q-06 (continued): continued from video 5.
A:He continues to talk about The Coca-Cola Company. Coke is growing a lot faster internationally than in the US. The Asian crisis is a short term issue so it is fairly meaningless.
Coke went public in 1919 for $40/share. A year later it was selling for $19/share, a 50% drop. There must have been a disaster. Perhaps sugar prices increased and the bottlers were rebellious. Those are short term concerns. Years later you will see the great depression, world war 2 and nuclear weapons. All these thing effect the short term. But if you ignored the short term, and reinvested the dividends in Coke stock, you’d have about $4,000,000 today. If you are right about the business, you will make a lot of money. Don’t worry about any single event if you have a wonderful business.
Price controls existed in the past and that would affect something like See’s Candy. See’s Candy went though this in the 1970s. Berkshire Hathaway Inc wouldn’t be able to raise prices every year with price controls, but that is simply a short term issue. Price controls won’t be around forever. And they no longer existed in the 1980s. These short term concerns do not affect the overall business.
Q-07: What investment mistakes have you made?
A: The mistakes were not mistakes of Charlie Munger and Warren Buffett were not of commission but omission. There are a lot of times where they knew enough about a business but did nothing. He says he has missed out on billions. He doesn’t care that he “missed out” on MSFT because he doesn’t understand it. But he understands health care and he should have made a ton of money when the Clinton health care plan was proposed and health care stocks tanked.
He also understands Fannie Mae (ticker FNM) and should have made a lot of money from it in the 1980s.
He has made mistakes when he bought also. He bought US Air preferred stock several years ago. He had a lot of cash lying around and he made a mistake and did something dumb. He failed to practice his assiduity, a term Charlie Munger is known for. Charlie Munger tells Warren to go to the bar when he has to much money because he’ll loose less money. BRK almost lost all of the money put into US Air preferred but didn’t. He admits that he bought because it was an attractive security not because it was an attractive business. He admits that he deserved to loose all his investment in US Air. He made the same exact error with Solomon. Buying when you like the terms and not the business is a mistake.
This is a good time to remember that it is best to learn from others mistakes, not your own.
Buffett and Munger never argue over mistakes. They only live life going forward. You can learn from your mistakes but don’t dwell. Learn and move on.
Don’t buy stocks based on tips you get when those stocks are outside your business. Look in the mirror and say “I am buying GM for $55 per share because …..” and know that “I am buying GM for $55 per share because someone told me to at a party” is not the reason. If it is, you are in for trouble. Invest in what you can figure out yourself and your decision in the end needs to be made by looking into the mirror. There has to be a reason you are buying the business. This is a lesson that Ben Graham taught Warren Buffett.
Q-08: What’s going to happen to interest rates (remember this is 1998)?
A: Warren once again says that he doesn’t think about macroeconomics. In investments you have to focus on what is important and knowable. Future interest rates are important but not knowable.
What you do with investments is figure out what is knowable and important. If its unimportant or unknowable, you forget about it. With Coke, Eastman Kodak or Wrigley, these businesses are knowable. Whether it is important comes down to valuation. If Coke or Eastman or Kodak are overvalued, you still know the business, but what you know isn’t important (at the time). You know the business but that is not a reason to invest. You also have to buy at fair or discounted price.
BRK has never bought a business or not bought a business because of some sort of macro prediction. Warren claims to not even read or listen about macro predictions. Interest rates have zero importance. It’s non-sense.
The typical investment consoling organization brings out their economist and tells you about their big macro picture than breaks down the pieces for you. It’s non-sense. If Alan Greenspan were whispering in Warren Buffet’s ear about what they were doing over the next 12 months, it wouldn’t make any difference in terms of his decision making.
VIDEO 7:
Q-09: What’s the benefit of being an out of towner (not working on Wall Street)?
A:The best way to think about investments is to be in a room alone with no one to bother you. If that doesn’t work, nothing will. The disadvantage of any Wall Street like environment is that you are over stimulated. You think you need to do something every day. The trick is to not do anything every day.
The way to go is to get one good idea a year and ride it to its full potential. It’s very hard to do this where people are constantly giving stock tips.
Frequent trading would be a zero sum game if it were not for one fatal flaw. Trading requires an intermediary. If you put traders in a room together with an intermediary, ultimately, they will all leave the room broke and with the intermediary having all their money. Frequent trading benefits only one person and it’s not the trader. Wall Street makes its money on activity; you make your money via inactivity.
Stay away from any environment that stimulates activity. As an aside, there is something to realize. This sentiment includes Mad Money with Jim Cramer. Realize that he makes money by stimulating trading activity. As proof, don’t pay attention to the show Mad Money but the commercials that are broadcast during Mad Money. You’ll quickly realize how Mr. Cramer makes his money. That is by keeping his advertisers happy.
Buffet worked on Wall Street for a few years so he speaks from experience.
Q-10: The question is in regards to evaluating Berkshire when it doesn’t pay dividends.
A: The real question according to Buffett is whether BRK can continue retaining dollar bills and turning them into more than a dollar at a reasonable rate. This is all that Berkshire tries to do. It gets harder all the time. The larger Berkshire gets the harder it gets to get good returns.
The reason Berkshire doesn’t pay dividends is simply because each dollar retained is returned into more than one dollar. Even if dividends were tax free, it would still be a mistake for Berkshire to pay dividends. So far a dollar retained has turned into more than a dollar. That is what the business is about.
Berkshire Hathaway does not measure the success of the company by the size of the home office building. In 1998, the home office is 3500 square feet and employs 12 people. Berkshire employed 45,000 people back then.
Q-11: How does Warren determine if a business has reached its full potential?
A: Ideally, you buy businesses where you think that will never happen. He doesn’t buy Coke thinking that this ever happens. He measures Berkshire by how little activity there is in it. Liquidity does not translate into returns necessarily. He buys businesses that he is happy to own virtually forever.
He never buys a stock thinking that they will buy it for $40 and sell it for $60. When he buys a private business like See’s Candy for $25,000,000 there is no notion that if someone comes along and offers $50,000,000 that he would sell. People should not think about stocks any differently. That’s not how to look at a business. According to Buffet the only question is, “Will the business generate more capital over time and if the answer is yes, there is nothing else to think about.”
Q-12: Why did he enter Solomon and Long Term Capital Management and how did he determine value?
A: Regarding Solomon, That year, he sold a lot of stuff (the Dow was up 35%). He found an attractive security form to invest in when he would never buy the common stock. It was a mistake. He says he should have just bought more Coke at the time even though it was a bit overvalued at the time. Anyone that owns Coke or is thinking about it would be well served to look at Coke during Buffet’s Soloman purchase time frame to see what it takes for Buffet to consider Coke to be a bit overvalued.
Regarding Long Term Capital, he said he knew enough about the long term positions, in particular the top 10 positions. He didn’t know everything about the top 10 but he knew enough that he thought he could make some money at the right price. It was basically arbitrage where they should have made money if their offer was accepted but they might have lost money. They just would have needed to ride the positions out till they became profitable. The odds were with Berkshire and Warren states that this type of investment activity is within his circle of competence.
Part 4 can be found here.
Part 5 can be found here.
Featured in this article are a short thesis on The Coca-Cola Company, Fannie Mae, US Airways Group and several of Berkshire Hathaway Inc other holdings that Warren was so kind as to discuss them.
Part 1 can be found here:
http://www.gurufocus.com/news.php?id=69071
Part 2 can be found here:
http://www.gurufocus.com/news.php?id=69249
Video 6
Q-06 (continued): continued from video 5.
A:He continues to talk about The Coca-Cola Company. Coke is growing a lot faster internationally than in the US. The Asian crisis is a short term issue so it is fairly meaningless.
Coke went public in 1919 for $40/share. A year later it was selling for $19/share, a 50% drop. There must have been a disaster. Perhaps sugar prices increased and the bottlers were rebellious. Those are short term concerns. Years later you will see the great depression, world war 2 and nuclear weapons. All these thing effect the short term. But if you ignored the short term, and reinvested the dividends in Coke stock, you’d have about $4,000,000 today. If you are right about the business, you will make a lot of money. Don’t worry about any single event if you have a wonderful business.
Price controls existed in the past and that would affect something like See’s Candy. See’s Candy went though this in the 1970s. Berkshire Hathaway Inc wouldn’t be able to raise prices every year with price controls, but that is simply a short term issue. Price controls won’t be around forever. And they no longer existed in the 1980s. These short term concerns do not affect the overall business.
Q-07: What investment mistakes have you made?
A: The mistakes were not mistakes of Charlie Munger and Warren Buffett were not of commission but omission. There are a lot of times where they knew enough about a business but did nothing. He says he has missed out on billions. He doesn’t care that he “missed out” on MSFT because he doesn’t understand it. But he understands health care and he should have made a ton of money when the Clinton health care plan was proposed and health care stocks tanked.
He also understands Fannie Mae (ticker FNM) and should have made a lot of money from it in the 1980s.
He has made mistakes when he bought also. He bought US Air preferred stock several years ago. He had a lot of cash lying around and he made a mistake and did something dumb. He failed to practice his assiduity, a term Charlie Munger is known for. Charlie Munger tells Warren to go to the bar when he has to much money because he’ll loose less money. BRK almost lost all of the money put into US Air preferred but didn’t. He admits that he bought because it was an attractive security not because it was an attractive business. He admits that he deserved to loose all his investment in US Air. He made the same exact error with Solomon. Buying when you like the terms and not the business is a mistake.
This is a good time to remember that it is best to learn from others mistakes, not your own.
Buffett and Munger never argue over mistakes. They only live life going forward. You can learn from your mistakes but don’t dwell. Learn and move on.
Don’t buy stocks based on tips you get when those stocks are outside your business. Look in the mirror and say “I am buying GM for $55 per share because …..” and know that “I am buying GM for $55 per share because someone told me to at a party” is not the reason. If it is, you are in for trouble. Invest in what you can figure out yourself and your decision in the end needs to be made by looking into the mirror. There has to be a reason you are buying the business. This is a lesson that Ben Graham taught Warren Buffett.
Q-08: What’s going to happen to interest rates (remember this is 1998)?
A: Warren once again says that he doesn’t think about macroeconomics. In investments you have to focus on what is important and knowable. Future interest rates are important but not knowable.
What you do with investments is figure out what is knowable and important. If its unimportant or unknowable, you forget about it. With Coke, Eastman Kodak or Wrigley, these businesses are knowable. Whether it is important comes down to valuation. If Coke or Eastman or Kodak are overvalued, you still know the business, but what you know isn’t important (at the time). You know the business but that is not a reason to invest. You also have to buy at fair or discounted price.
BRK has never bought a business or not bought a business because of some sort of macro prediction. Warren claims to not even read or listen about macro predictions. Interest rates have zero importance. It’s non-sense.
The typical investment consoling organization brings out their economist and tells you about their big macro picture than breaks down the pieces for you. It’s non-sense. If Alan Greenspan were whispering in Warren Buffet’s ear about what they were doing over the next 12 months, it wouldn’t make any difference in terms of his decision making.
VIDEO 7:
Q-09: What’s the benefit of being an out of towner (not working on Wall Street)?
A:The best way to think about investments is to be in a room alone with no one to bother you. If that doesn’t work, nothing will. The disadvantage of any Wall Street like environment is that you are over stimulated. You think you need to do something every day. The trick is to not do anything every day.
The way to go is to get one good idea a year and ride it to its full potential. It’s very hard to do this where people are constantly giving stock tips.
Frequent trading would be a zero sum game if it were not for one fatal flaw. Trading requires an intermediary. If you put traders in a room together with an intermediary, ultimately, they will all leave the room broke and with the intermediary having all their money. Frequent trading benefits only one person and it’s not the trader. Wall Street makes its money on activity; you make your money via inactivity.
Stay away from any environment that stimulates activity. As an aside, there is something to realize. This sentiment includes Mad Money with Jim Cramer. Realize that he makes money by stimulating trading activity. As proof, don’t pay attention to the show Mad Money but the commercials that are broadcast during Mad Money. You’ll quickly realize how Mr. Cramer makes his money. That is by keeping his advertisers happy.
Buffet worked on Wall Street for a few years so he speaks from experience.
Q-10: The question is in regards to evaluating Berkshire when it doesn’t pay dividends.
A: The real question according to Buffett is whether BRK can continue retaining dollar bills and turning them into more than a dollar at a reasonable rate. This is all that Berkshire tries to do. It gets harder all the time. The larger Berkshire gets the harder it gets to get good returns.
The reason Berkshire doesn’t pay dividends is simply because each dollar retained is returned into more than one dollar. Even if dividends were tax free, it would still be a mistake for Berkshire to pay dividends. So far a dollar retained has turned into more than a dollar. That is what the business is about.
Berkshire Hathaway does not measure the success of the company by the size of the home office building. In 1998, the home office is 3500 square feet and employs 12 people. Berkshire employed 45,000 people back then.
Q-11: How does Warren determine if a business has reached its full potential?
A: Ideally, you buy businesses where you think that will never happen. He doesn’t buy Coke thinking that this ever happens. He measures Berkshire by how little activity there is in it. Liquidity does not translate into returns necessarily. He buys businesses that he is happy to own virtually forever.
He never buys a stock thinking that they will buy it for $40 and sell it for $60. When he buys a private business like See’s Candy for $25,000,000 there is no notion that if someone comes along and offers $50,000,000 that he would sell. People should not think about stocks any differently. That’s not how to look at a business. According to Buffet the only question is, “Will the business generate more capital over time and if the answer is yes, there is nothing else to think about.”
Q-12: Why did he enter Solomon and Long Term Capital Management and how did he determine value?
A: Regarding Solomon, That year, he sold a lot of stuff (the Dow was up 35%). He found an attractive security form to invest in when he would never buy the common stock. It was a mistake. He says he should have just bought more Coke at the time even though it was a bit overvalued at the time. Anyone that owns Coke or is thinking about it would be well served to look at Coke during Buffet’s Soloman purchase time frame to see what it takes for Buffet to consider Coke to be a bit overvalued.
Regarding Long Term Capital, he said he knew enough about the long term positions, in particular the top 10 positions. He didn’t know everything about the top 10 but he knew enough that he thought he could make some money at the right price. It was basically arbitrage where they should have made money if their offer was accepted but they might have lost money. They just would have needed to ride the positions out till they became profitable. The odds were with Berkshire and Warren states that this type of investment activity is within his circle of competence.
Part 4 can be found here.
Part 5 can be found here.
