Quizzing the Sage of Omaha

Without a doubt the highlight of Mod II has been the trip in November to see Warren Buffett in Omaha. It was a great opportunity to see how his mind works to logically analyze business (and other types of) situations. I know from emails I have received due to the blog that Buffett has a large following in the blogosphere and no doubt this posting will receive a bit of attention. I therefore wish to make the disclaimer that while every attempt will be made to present an accurate portrayal of what he said on November 14th, this blog posting is by no means an official record of what he said to us.

One of the first questions asked was about good parenting. Buffett said parents’ verbal message should be consistent with their behavior. He also talked about what he values in life. He said “if you tell me who your heroes are, I can tell you how you will turn out in life. Life is not played with a rewind button, there is only a play button.” He also said one cannot decide whether one can kick a football 70 yards or dance like Fred Astaire, but can only make decisions over other matters such as whether to be generous and to be kind.

A vice that Buffett repeated warned against is greed. He said “I don’t fool around on borrowed money. I have always been happy with what I have. I don’t live any differently than I did 40 years ago, same house, same office.” He said “I think people get greedy because they think they can be happier if they have more money and can buy more things.”

Buffett talked about what types of businesses he likes. He said the worst kind of businesses to be in is the type that requires the owner to keep putting more and more money into the enterprise. He talked about his 1989 investment in U.S. Air as an example of this type of business, “as the ink was drying on the check, my money was gone.” He jokingly said he has an 800 number that he calls every time he gets the urge to buy an airline.

He talked about his investment this past summer in Forest River, a manufacturer of recreational vehicles. His negotiations began in June when he received a one and a half page fax from its owner Peter J. Liegl. When he met with Liegl, he was exactly as he had anticipated. After the deal was made Buffett wanted to hire Liegl to run the business, he asked Liegl what salary he wanted and the reply was “I don’t want to make any more than you do.” He said he tends to hire the person that sold him the business to run it. He also looks for people that like the business rather than those out for themselves or out to make money.

Buffett looks for businesses with an enduring competitive advantage that will remain relatively unchanged in the future. He gave Coca-Cola as an example of a business with such a trait. He wants the brand to be associated with happiness, and with institutions such as Disneyworld and the Olympics. He jokingly said he wants to give out Pepsi at funerals. Gillette is also another brand with an enduring competitive advantage. He likes to measure a business by whether a competitor with deep pockets can influence the market. “I can give you $5 billion and you cannot take the business from Gillette.” Another reason he likes Gillette is he can understand how the business will be like 5, 10, 15 years into the future. He said the Internets will not change the shaving business and he has no reason to believe management will change. He talked about his 2001 purchase of custom frame manufacturer Albecca, which he described as “a business with a moat around it.” He then added “I cannot tell you what Intel will be like 10 years from now but I know what this business will be like.”

Someone pointed out the extra cash his company is holding and asked whether he intends to pay a dividend to Berkshire Hathaway shareholders. He said he will consider such a move only if there is nothing intelligent to do with the money within a reasonable time. “Our experience has been that you do find things but not everyday.” His experience has been that the worst time to find value in the market is when everyone else is excited about the market. He gave the example that on the day NASDAQ hit its all time high was the same day Berkshire Hathaway stock hit its all time low. He pointed out that there is an “unusual corollary” involved with a possible dividend because heowns a large stake in Berkshire Hathaway and therefore a significant percentage of any dividend will go back to him and he would have to look for ways to invest it.” He said he wanted his company to keep at least $10 billion in cash because of the insurance business. He wants to be prepared for the “hurricane that makes Katrina look like a warm up act” and for the possibility a nuclear bomb detonation will prevent the stock markets from opening. He then said something which implied that he believes most insurance companies are not prepared enough for such possibilities by not sitting on enough cash and planning to rely on lines of credit to pay out policy holders.

His comments on inflation were “I always feel inflation is in remission, you can’t get rid of it.” He said one “guarantee” about risk is that it is not measured by beta. His definition of risk is it is incurred when you exit your circle of competence. He believes the only two courses you will ever need for investment management are one on how to value a business and another on how to think about the stock market. He recommends that we all get into the habit of walking around our neighborhoods and trying to understand the local business and the logistics behind them.

He believes that much of his wealth is attributed to luck and that he’s benefited from having been born a white man. He said society, along with geography and timing have contributed. He believes there is an advantage to being born in the United States but that advantage is not as big as it was 50 years ago. He defines wealth as “a claim on future goods and services” and said he does not believe that being born into a wealthy family should entitle one to claims on others’ goods and services.

Later on that week I met a recent Kenan-Flagler alum at a recruiting event for a major Wall Street firm. When I mentioned the trip to see Buffett he said if he had known about it, he would have taken time off from work to go with us. Getting the chance to meet Warren Buffett was truly a remarkable experience.