Saturday, February 14, 2009

Transcript from the Warren Buffett meeting



We recently had the opportunity to represent Emory during the meeting with Warren Buffett in his hometown Omaha. The meeting this time consisted of six different universities, with around 25 students from each university.

I would describe the day as the day of surprises. I was warned by some of seniors who had been to Omaha about the sudden temperature drops. But to our surprise, it turned out to the be the warmest day of season, with temperature touching 56F at times. The day started with a tour of one of the first businesses that Buffett bought 25 years ago - Nebraska Furniture Mart. Now, if I was not there on that trip, I could have never guessed that the biggest Furniture and Electronics store in the US, is not in Texas, is not in California, but it's in Omaha!



After about an hour there, it was time then to meet the legend. This was arranged through a two hour Q&A session, where we had the opportunity to ask anything except of course, his future investments. (Since that would move markets up and down). Having read about him a lot, I was so very satisfied to find his answers exactly in the line of his writings. Once he gets into rhythm, he not only becomes more and more of a standup comedian - but every problem looks so very simple and basic when he describes it. The transcript of his responses is presented at the end of this blog entry.

It was time then to move to one of his favorite restaurants - Piccolo's. We were served a 4 course meal and to my surprise again, I found one of the best Veggie Burger's in Omaha. Although now when I think about it, I am not sure if it was the burger or the pleasure of sitting on the same table as Warren Buffett that made it taste so great. The lunch ended with a Piccolo's specialty called the Root Beer Float - a non-alcoholic carbonated drink with floating vanila ice-cream.



All in all, it was a great experience and definitely worth the long flights. On my flight back to Atlanta, I was just not able to stop myself from thinking about the simplicity in his personality and character. His two storied house with no security around it, his office so modest it could barely fit us all and his car - a simple General Motors Cadillac. I find strong similarities between him and a great businessman from India I had the pleasure of meeting - Chief Mentor & Founder of the company I worked for, Mr. Narayan Murthy.

Before I end this post, I will leave you folks with transcript from the Q&A session with Warren Buffett:

Buffett:
Did you hear they called off the Wall Street Christmas Pageant this year? They had trouble finding three wise men…and a virgin. There are many opportunities right now. The markets are very inefficient at times, and this is one of those times.

Kansas:
Would you go into the health insurance business?

Buffett:
Health insurance is so ingrained into national policy that it is a tough business. It’s pretty adversarial. I’m not really that excited about it from a business perspective. I don’t want to write policies with high loan loss ratios. That being said, I would buy the stock of an undervalued healthcare insurer.


South Dakota:
You’ve recently invested in Goldman Sachs and GE. Is the financial sector a good buy right now?

Buffett:
No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.

Creighton:
How much and how does risk factor into your investment decisions?

Buffett:
In general, emerging markets are not great for me because I need to put a lot of money to work. Risk comes around because you don’t understand things, not because of beta. There are normally 10 filters or so that I go through when I hear an idea. The first is can I understand the business and understand the downside not just today but five to ten years from now. There have been very few times that I’ve lost 1% of my net worth. I might be risk averse but I am not action adverse. Mrs. B saved $500 over the course of 16 years to start and build Nebraska Furniture Mart. I just stay within my circle of confidence. When I bought Nebraska Furniture Mart in 1983, Mrs. B took cash and not Berkshire stock. Why? She didn’t understand the value of stock. She understood cash and that is what she took. I need only need to be right a few times and can let thousands of ideas go by. I call it the “No called strike game” where unlike baseball the only strikes in investing are when you swing. I don’t have to swing. When I do invest, I don’t care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. Avoid debt. I always try to have the odds in my favor. When I go to Vegas, I’ll take bets if the guy wants to come to my room. I like those odds better.

Emory:
How do you think about value?

Buffett:
The formula for value was handed down from 600 BC by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out. When interest rates are 20%, you need to get it out right now. When rates are 1%, you have 10 years. Think about what the asset will produce. Look at the asset, not the beta. I don’t really care about volatility. Stock price is not that important to me. I don’t care if they close the NYSE for 5 years. I care more about the business than I do about events. I care about people drinking more Coke.
If I were running a business school I would only have 2 courses. The first would obviously be an investing class about how to value a business. The second would be how to think about the stock market and how to deal with the volatility. The stock market is funny. You have a bunch of silly people setting prices all the time. This is great. Graham’s Ch. 8 on Mr. Market is the most important thing I have ever read. Now think about the NYSE. You have thousands of companies to choose from. For me, that universe has shrunk because I need to put large dollar amounts to work. Attitude is much more important than IQ. You can really get into trouble with a high IQ, i.e. Long-Term Capital.

Penn State:
Why did you invest in Harley-Davidson?

Buffett:
I like the 15%. I measured that 15% against other credits and it looked attractive on both a relative basis and an absolute basis. Lately, the government has become the guarantor for some companies but not for others and the “haves” and “have-nots” determined by certainty of government assistance rather than the credit quality. Any company where you can get your customers to tattoo your name on their body has quite a strong brand. For this investment I had to think what is the probability that they will not pay me back and would I want to own the company if they did not. Risk premiums in the corporate bond market went from real low to real high. Right now, they’re out of whack. The flip side is that governments are overpriced. T-bills actually had a negative interest rate. I never thought I’d see that. Buying corporates and shorting the 10-year is a great idea and smart guys went broke doing it because even if you’re right, you need to be able to play out your hand. I always think about what I would do if a nuclear bomb went off or if Bernanke ran off with Paris Hilton to South America.

Texas:
Do you feel that the might of America has changed?

Buffett:
I would never bet against America. The system in the U.S. has allowed the country to unleash more for the world than any other country. Since 1776, the U.S. had a different system than the rest of the world and that system unleashed the human potential. We were not the smartest nor did we have the best resources. This is the same system we have in place today with people of similar intelligence. I have and would bet against the U.S. currency, stocks, etc. but the United States prevails over time. There are all kinds of rocky roads but we have rule of law, equality of opportunity, and a meritocracy. We have a market system and people apply energies and imagination to come up with things someone would want. Everyone in this room is working far below his/her potential.

Kansas:
We know that you are a big bridge player. Do you think that bridge correlates to investing? Are there any traits or characteristics that might carry over from one to the other?

Buffett:
Bridge is the best game there is. You’re drawing inferences from every bid and play of a card, and every card that is or isn’t played. It teaches you about partnership and other human skills. In bridge, you draw inferences from everything and that carries over well into investing. In bridge, similar to in life, you’ll never get the same hand twice but the past does have a meaning. The past does not make the future definitive but you can draw from those experiences. I think the partnership aspect of bridge is a great lesson for life. If I’m going into battle, I want to partner with the best. I was playing with a world champion and we were playing against my sister and her husband. We lost, so I took the scorepad and I ate it.

South Dakota:
What are your views on derivatives and how do you think they have affected the global market?

Buffett:
In my 2002 letter to shareholders I referred to them as “weapons of mass destruction.” Derivatives are really just a way to create a product with a very long fuse, for example, 100 years. That kind of system allows claims to be built up. AIG called me in September and told me they were about to get downgraded which would have required higher posting requirements. Now this is an enterprise that has been built up over decades and was effectively destroyed in 48 hours by these products. With derivatives, you’re exposed to counterparties and thus reliant on others. These claims built up over time to the tune of billions of dollars and when one falls, the whole system falls. It’s kind of like venereal disease in that it’s not important who you sleep with but rather who everyone else is sleeping with. Derivatives are not evil by themselves but rather everyone needs to be able to handle them. System wide, they’re poison. Berkshire holds many derivatives but we always hold the money at Berkshire.

Creighton:
What do you think about the stimulus package? Would you rather see tax cuts or government spending?

Buffett:
We’ll come out of this just fine. The idea of a stimulus is to do things that will have an impact quickly and the current proposal won’t do that. When dealing with situations like this, you can’t do just one thing but always need to ask yourself what is the next question. We have utilized monetary policy and guaranteed everything in sight. It’s a standard Keynesian prescription. Tax cuts benefit people differently in the short term. We are basically saying, we’re not going to pay for what we’re doing in terms of government spending and that we’ll just mail you some money but it’s better than doing nothing. In the end, you should buy stock in a business that an idiot can run because someday, one will.

Emory:
How do you think differently today than you did twenty years ago? Where do you expect to see the greatest differences in 2030?

Buffett:
The fundamental things about investing that I learned when I was younger haven’t changed. I am lucky to have picked up a book at 19 that gave structure to investing and investment decisions. Over time, I learned different ways to apply it. I have learned what it is outside my circle of confidence. I bought See’s in 1972 and I think understanding the value of brand helped drive the decision to buy Coca-Cola in 1988. Through experience, I have gotten smarter on predicting and evaluating human behavior. I really enjoy doing what I do and I get to do what I want. I enjoy talking to groups like these. The Blumkins are some of my best friends and I continue to add friends by buying businesses.

Penn State:
What advice would you give the average person in the U.S.?

Buffett:
It’s hard to give advice to someone who might lose their job. My Dad went to work on August 13, 1931 to find out his company had closed. He had no job and two kids. You want to be as prepared as you can and you just don’t want to have debt. Medical problems cause a lot of the grief and lots of credit card debt. Credit cards are poison. You should be ahead of the game all the time rather than behind as it is harder to work your way out of a hole. You want to play the game from strength, and you have to think ahead. People don’t always want to hear advice when things are going well. People risked everything they had and needed for something they didn’t have or need. Charlie once said, “The problem isn’t getting rich, it’s staying sane.

Texas:
What are the biggest challenges that this country faces?

Buffett:
The biggest problem is probably weapons of mass destruction. We have always had people who were ill-fitted to society and wished harm on others. In 1945 the atom bomb was unlocked, and that changed everything. What you could do with the wrong kind of infectious disease is incredible. You can transmit things much faster today. Governments, individuals and organizations can’t control security. It’s what I would spend all of my money on if I could fix it. Everyone here in this room won what I call the ovarian lottery. You were born at the right time and we were all very, very lucky. We are in the luckiest 1% of humanity.

Kansas:
What are some of the mistakes that Secretary Paulson made during the sub-prime crisis?

Buffett:
Hank is a great guy and great friend. He’s extremely smart about markets but not so smart about politics. I sympathize with Hank. Hank Paulson was not the supreme commander. The whole situation has developed faster and at an extreme pace, more than anyone thought. The first TARP program got voted down, which changed the dynamic. All variables affect other variables. Congress did not appreciate how severe the problem was. I call it an “Economic Pearl Harbor” in September. FDR essentially had a blank check and that what people think is important and believing it makes it so. He restored confidence in the banking system. Paulson’s job may have been almost impossible given the circumstances. He was used to operating in a sphere that did not require consensus (Goldman Sachs). People that take that on [public service jobs] are laying themselves open to be unfairly attacked, criticized and scrutinized. In hindsight, letting Lehman fail was probably not the right thing but it was difficult to tell at the time. It created trust problems as money market funds fell apart soon thereafter. People want to be led at this point, but fall back into old habits very easily.

South Dakota:
What do you think about the U.S. trade deficit?

Buffett:
I talked to Barack back in August, and said: “I have good news and bad news. The good news is that the economy will be terrible, so you’ll definitely get elected. The bad news is that the economy will be even worse at inauguration.” He asked, “Do you think it’s too late to throw the election?” The trade situation is there and it causes problem and could exacerbate the situation.
We create sovereign wealth funds, buying more goods and services than everyone else in the world. The decline in the oil price has helped the trade deficit but nothing will get better until everyone feels better. Every day, we buy $2 billion of goods and service more than we produce and export. We give the exporting nations USD. The trade deficit creates claims on the United States. Sometimes we’re a little hypocritical. For example, three years ago, the Chinese wanted to buy Unocal (a small oil company in California) and Congress wanted to condemn China for wanting to buy the oil company with the money we gave them (through U.S. imports). The trade deficit creates a situation because we give people claim checks, then we get upset when they want to use them. It’s not useful to fan those flames, and that’s what’s wrong with “Buy America.” The trade deficit will come up big time when we get past the current problems.

Creighton:
Why do you live the way that you do?

Buffett:
Do you mean, why am I frugal? You can’t buy health and you can’t buy love. I’m the highest handicap member of Augusta. I’d rather play golf here with people I like than at the fanciest golf course in the world. I can do anything that I want, and I do. I buy everything I want to have. I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living. Bella Eidenberg was a Polish Jew who was at Auschwitz and some of her family didn’t make it. Twenty years ago she said she was slow to make friends, and that the real question in her mind was always, “Would they hide me?” If you have a lot of people that would hide you, you’ve had a very successful life. That can’t be bought. I know people that have billions of dollars and their children would say, “he’s in the attic.”
I estimate that I live on $100,000 per year, except for my plane which costs me about $1 to $1.5 million. I like the plane, it improves my life. My computer and my airplane changed my life in a big way and I’m not sure, if I had to choose, which one I’d give up. If I took out $3 billion of Berkshire stock, I could have paid 30,000 people $100,000 per year to paint my portrait every day. I could have paid 50,000 people $60,000 per year to dress in loin cloths and haul rocks to create the Buffett tomb. That’s not me. I believe in giving my kids enough so they can do anything, but not so much that they can do nothing.

Penn State:
What do you think of the good bank, bad bank idea?

Buffett:
It is tough to do but if it were done well, it could do a lot. Call the bad bank an “Aggregator Bank.” There is a lot to be said in cleaning out past problems. There are 7,000 banks in the U.S. with such varying degrees of conditions so it is tough to provide a sweeping overhaul. The biggest thing they’re wrestling with is pricing what goes into the aggregator bank. These are smart, well-intentioned people working enormously hard.

Emory:
You take great pride in keeping your schedule wide open. Do you believe that corporate America is overscheduled and overstretched?

Buffett:
[Showed his blank schedule book]. Bill Gates is overscheduled. I am extremely lucky and I can say no to anything because there isn’t an entity that can use economic pressure to make me do something. A lot of CEOs get into a lot of the rituals that are part of the job. I would rather deliver papers than be the CEO of GE. They have too much stuff to do that is a big pain. Don’t get me wrong, CEOs have it pretty good. I’d imagine that every CEO in the Fortune 500 would be willing to take the job for half of the money. The 76 or so CEOs that run companies at Berkshire don’t have to deal with bankers or lawyers. At Berkshire, we’ve never had a meeting for all of them anywhere. There are no presentations and no committees. They can be more productive, and it makes it attractive when they can do what they like to do best.

Kansas:
What are three traits of successful managers?

Buffett:
Passion is the number one thing that I look for in a manager. IQ is not really that important. They need to be able to work well with others and the ability to get people to do what you want them to do. I’d say intelligence, energy, integrity. If you don’t have the last one, the first one will kill you. All you have is a crook who works hard.
If you could put 10% of your future earnings on one of your classmates, you would pick the one that’s most effective at working with people. These are qualities that are elective. If you could pick one to sell short, it would be the person that no one wants to work with. You can elect to be the kind of person you want to be. Look at those qualities of the two people you’ve selected (one long and one short). They’re all qualities that you possess. It’s like marriage. If you want a marriage that’s going to last, look for someone with low expectations. Don’t keep score. Keeping score doesn’t build organizations, homes, etc. I have never had one fight with Charlie. When I took over Solomon I had to pick the best person to run it. I interviewed 15 people and I asked myself, “Who would I go into a foxhole with?” I never look at grades or where you went to school.
Chains of habit are too light to be felt until they’re too heavy to be broken. In terms of picking people how do you lead your life in a way that I’d pick you?

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2 Comments:

Blogger Pete Murphy said...

Thanks for the fascinating Buffett quotes. Regarding what he had to say about the trade deficit, he is exactly right. It's going to be a huge issue. Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today's recession is just a preview of what's to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"

6:21 AM  
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6:39 AM  

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