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Collection of questions asked to Warren Buffett and Charlie Munger

nfwyt, quest-for-wealth80 min read

Some of the below questions and answers were copied from Buffett FAQ, its not everything from the site, only the things, i found interesting.

Table of Contents

Investing Approach

In the earlier years just getting familiar with businesses and the way I would do that is use what Phil Fisher would call, the "Scuttlebutt Approach". I would go out and talk to customers, suppliers, and maybe ex-employees in some cases. Everybody. Everytime I was interested in an industry, say it was coal, I would go around and see every coal company. I would ask every CEO, "If you could only buy stock in one coal company that was not your own, which one would it be and why? You piece those things together, you learn about the business after awhile.

Source: Lecture at the University of Florida Business School
Time: October 15th 1998

When price of business doesn't make sense its ok to let go

I knew Frank, and I knew the business. I sort of knew the basic economics of the shoe business, so I could buy it. Quantitatively, I have to decide what the price is. But, you know, that is either yes or no. I don’t fool a lot around with negotiations. If they name a price that makes sense to me, I buy it. If they don’t, I was happy the day before, so I will be happy the day after without owning it.

Source: Lecture at the University of Florida Business School
Time: October 15th 1998

  • Good management screwing up are opportunities.
  • You must be patient...good ideas tend to be clustered together, and may not come at even time intervals.

Source: Buffett Vanderbilt Notes
Time: Jan 2005

How do you get better at valuing companies?

Warren: Ben Graham taught me a way to value certain type of business, but the selection of available companies dried up. Charlie taught me about durable competitive advantage. Not how big circle of competence is, but knowing where the edges are is most important. Think about businesses in your own home town. Ask questions about the businesses. Which do you want to buy into, which are hard to compete with, talk about businesses with people. What is working, what is not? You have to ask. You would be surprised at how many companies I know nothing about. The goal is to find companies that will be around for 20 years and offer a margin of safety.

Charlie: Obviously if you want to get good at something which is competitive, you have to think about it and practice a lot. You have to keep learning because world keeps changing and competitors keep learning. You have to go to bed wiser than you got up. As you try to master what you are trying to do – people who do that almost never fail utterly. Very few have ever failed with that approach. You may rise slowly, but you are sure to rise.

Source: BRK Annual Meeting 2010 Boodell Notes
Time: 2010

What's your acquisition criteria?

We look for people who have a passion for their business. We frequently buy businesses the owners still manage, where they are monetizing a lifetime of work. They often don’t want to sell but need to for estate planning or other reasons.

They need to have a passion because we don’t have any employment contracts – because we don’t think they work – we don’t stand over them with whips, and they’re already rich. We just try not to kill or dampen their love for their business.

We also look for three things: intelligence, energy and integrity. If you don’t have the latter, then you should hope they don’t have the first two either. If someone doesn’t have integrity, then you want them to be dumb and lazy. (Laughter)

We look them in the eyes and ask, "Do they love the business or the money?" If someone wants to cash out, then we have a problem because we only have 16 people at Berkshire’s headquarters and can’t run it ourselves.

Charlie: The interesting thing is how well it [our acquisition strategy/process] has worked over a great many decades, and how few people copy it. (Laughter)

[Charlie: Our success has come from the lack of oversight we’ve provided, and our success will continue to be from a lack of oversight. (Laughter)

On acquisitions, when bankers and business people want to do a deal and then unwind it in the near future. It’s totally opposite for us. We like to build lasting relationships. I think our system will work better in the long term than flipping deals.

Source: BRK Annual Meeting 2005 Tilson Notes
Time: 2005

[A shareholder asked if he’d be interested in buying Oriental Trading Company, a direct marketer of novelties and gift items, which is based in Omaha.] I looked at Oriental Trading a few years ago. I didn’t know it was for sale again. I don’t know, but I suspect some private group bought it and is now selling it. We see that all the time. They invariably try to sell it quickly to a strategic buyer, which is another way of saying someone who pays too much. Anytime someone calls me and says we’d be a logical strategic buyer, I hang up the phone faster than Charlie would.

The idea that we’re going to find a business to buy from a guy who’s been thinking from the moment he bought only about how he’s going to spruce it up and get out, is very low.

[Charlie: In the 1930s, there was a stretch where you could borrow more against the real estate than you could sell it for. I think that’s what’s going on in today’s private- equity world.]

Source: BRK Annual Meeting 2006 Tilson Notes
Time: 2006

Do you have any investing tips?

Warren: Start with the A's and examine all of them Charlie: Dancing in and out of your favorite companies is not a good idea. Warren: Have to make two decisions right, when to buy and when to sell. Also have to pay taxes along the way. Warren: Investing is about valuing businesses. Encourage us to look at inefficiently priced businesses. Warren: Built snowball on top of a very long hill, start very young and live a long time. Keep expenses low. Warren: Find out what you know and don't know. Think for yourself Charlie: First struggle is to get to $100,000. Underspend income grossly to get there quicker. Warren: Valuation is an art Warren: Get a strong enough moat so management less of a factor Warren: Standard Deviation doesn't tell you anything Warren: Better investor if look back at decisions you make and determine if you make the right decision Warren: Pick out five to ten companies in which you understand their products, get annual reports, get every news piece on it. Ask what do I not know that I need to know. Talk to competitors and employees. Essentially be a reporter, ask questions like: If you had a silver bullet and could put it into a competitor who would it be and why. In the end you want to write the story, XYZ is worth this much because… Charlie: The question why is the most important of all.

Source: BRK Meeting 1999
Time: 1999

Warren: Reads annual reports, 10Ks, 10Qs

Advise to new investors

  • Don’t worry too much about your mistakes
  • Don’t learn too much from your mistakes:
    • Don’t become Mark Twain’s cat that never sat again on a stove after being burned
    • BUT...never be willing to play a "fatal" game
  • Don’t confuse social progress with the chance to make money – look at airlines and autos for examples
  • Law degree is not essential, but good if you think it will help in your specific career
  • Learning to think like a lawyer is a valuable trait
  • Allocate even more of your day to reading than he does
  • Read lots of K’s and Q’s – there are no good substitutes for these - Read every page
  • Ask business managers the following question: "If you could buy the stock of one of your competitors, which one would you buy? If you could short, which one would you short?"
  • Always read source (primary) data rather than secondary data
  • If you are interested in one company, get reports for competitors. "You must act like you are actually going into that business, and if you were, you’d want to know what your competitors were doing."

Source: Buffett Vanderbilt Notes
Time: Jan 2005

If you were today 20-something years old would you primarily be searching for: i'd be fully invested.

You need to divorce your mind from the crowd. The herd mentality causes all these IQ's to become paralyzed. I don't think investors are now acting more intelligently, despite the intelligence. Smart doesn't always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.

Source: Student Visit 2005
Time: May 6, 2005

  • Companies purchased by WB by going through Moodys industrial manual,

    • I found Western Insurance in Fort Scott, Kansas. The price range in Moody's financial manual...was $12-$20. Earnings were $16 a share. I ran an ad in the Fort Scott paper to buy that stock.

    • I found the Union Street Railway, in New Bedford, a bus company. At that time it was selling at about $45 and, as I remember, had $120 a share in cash and no liabilities.]

Following are points from Fortune(April 11, 1988) article written by Carol Loomis on Berkshire

  • Unusual Profitability (High ROE with Low Debt; i.e. high ROIC) - …But in his 1987 annual report, Buffett the businessman comes out of the closet to point out just how good these enterprises and their managers are. Had the Sainted Seven operated as a single business in 1987, he says, they would have employed $175 million in equity capital, paid only a net $2 million in interest, and earned, after taxes, $100 million. That's a return on equity of 57%, and it is exceptional. As Buffett says, ''You'll seldom see such a percentage anywhere, let alone at large, diversified companies with nominal leverage.''

  • Unusual Growth (Opportunities for Reinvestment of Retained Earnings) - …Some folks of the right sort, by the name of Heldman, read that ad and brought him their uniform business, Fechheimer, in 1986. The business had only about $6 million in profits, which is an operation smaller than Buffett thinks ideal. …A few hundred miles away at Fechheimer ( …1987 sales: $75 million)

  • Paying for Quality - …By 1972, Blue Chip Stamps, a Berkshire affiliate that has since been merged into the parent, was paying three times book value to buy See's Candies, and the good-business era was launched. ''I have been shaped tremendously by Charlie,'' says Buffett. ''Boy, if I had listened only to Ben, would I ever be a lot poorer.

Source: Shai Dardashti Hand-delivered Letter
Time: January 2007

What's your opinion of cigar butts vs quality businesses?

[Charlie: If See's Candy had asked $100,000 more [in the purchase price; Buffett chimed in, "$10,000 more"], Warren and I would have walked -- that's how dumb we were.]

[Ira Marshall said you guys are crazy -- there are some things you should pay up for, like quality businesses and people. You are underestimating quality. We listened to the criticism and changed our mind. This is a good lesson for anyone: the ability to take criticism constructively and learn from it. If you take the indirect lessons we learned from See's, you could say Berkshire was built on constructive criticism. Now we don't want any more today. [Laughter]]

The qualitative [evaluating management, competitive advantage, etc.] is harder to teach and understand, so why not just focus on the quantitative [e.g., cigar butt investing]? Charlie emphasized quality [of a business] much more than I did initially. He had a different background.

It makes more sense to buy a wonderful business at a fair price. We've changed over the years in this direction. It's not hard to watch businesses over 50 years and learn where the big money can be made.

Even when you get a new important idea, the old ideas are still there. There wasn't a strong line of demarcation when we moved from cigar butts to wonderful businesses. But over time, we moved.

Source: BRK Annual Meeting 2003 Tilson Notes
Time: 2003

You have to find your passion in life. I would choose the same job. I enjoy it. It is a terrible mistake to sleepwalk through your life. Unless Shirley MacLaine is right, you won’t have another one. My dad had a business with [investment] books on his shelves, and they turned me on. This was before Playboy. If he was a minister, I’m not sure I would have been as enthused. If you have obligations, you have to deal with realities. I tell students to go work for an organization you admire or an individual you admire, which usually means that most MBAs I meet become self-employed. [laughter] I went to work for Ben Graham. I never asked my salary. Get the right spouse. Charlie talks about the man who spent twenty years looking for the perfect woman and found her. Unfortunately, she was looking for the perfect man. If you are lucky, you will be happy and as a result, you will behave better. It makes it easier.

Source: BRK Annual Meeting 2008 Boodell Notes
Time: 2008

Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.

Source: Student Visit 2005
Time: May 6, 2005

How would you teach the next generation of investors?

Investing requires only two courses: How to Value a Business, and How to Think About Markets. You don’t have to know how to value all businesses. Start with a small circle of competence, things you can understand. [Look for] things that are selling for less than they’re worth. Forget about things you can’t understand. You need to understand accounting, which has enormous limitations. [You need to] understand when a competitive advantage is durable or fleeting. Learn that the market is there to serve you, not instruct you. In the investing business, if you have an IQ of 150, sell 30 points to someone else. You do not need to be a genius. You need to have emotional stability, inner peace and be able to think for yourself, [since] you’re subjected to all sorts of stimuli. It’s not a complicated game; you don’t need to understand math. It’s simple, but not easy.

Charlie: Exactly half of future investors are going to be in the bottom 50%. There is so much that’s false and nutty in business schools. Reducing the nonsense would be a good goal.

Buffett: Emotional makeup is more important than technical skill.

What's the temperament of successful investors?

I think it's almost impossible to do well investing over time without this. If the market closed for years, we wouldn't care. Would still keep making Sees candy, Dilly bars, etc.

If you focus on the price, you're assuming that the market knows more than you do. That may be the truth, but in that case you shouldn't own it. The stock market is there to serve you, not to instruct you.

Focus on price and value. If a stock gets cheaper and you have some cash, buy more. We sometimes stop buying when prices goes up. This cost us $8 billion a few years ago when we were buying Wal-Mart. When we're buying something, we want the price to go down and down and down.

You don't have to be right on everything or 20%, 10%, or 5% of businesses. You only have to be right one or two times a year.

CM : The key is to have a "money mind," which is not IQ, and then you have to have the right temperament. If you can’t control yourself, you’re going to have disasters.

Source: BRK Annual Meeting 2003 Tilson Notes
Time: 2003

What do you think of discounted cash flow (DCF) models?

Buffett: All investing is laying out cash now to get some more back in the future. The concept of "a bird in the hand" came from Aesop in about 600 BC. 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. The question is,

  • how many birds are in the bush?
  • What is the discount rate?
  • How confident are you that you’ll get [the bird]? Et cetera.

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, it just gives you the opportunity to buy at a great price. 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 if there’s price flexibility and whether the company can gain more market share. I care about people drinking more Coke.

That’s what we do. If you need to use a computer or calculator to figure it out, you shouldn’t [buy the investment].

Source: BRK Annual Meeting 2009 Bruni Notes
Time: 2009

What are your views on diversification?

I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund, and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.

If it’s your game, diversification doesn’t make sense. It’s crazy to put money into your 20th choice rather than your 1st choice. "Lebron James" analogy. If you have Lebron James on your team, don’t take him out of the game just to make room for someone else. If you have a harem of 40 women, you never really get to know any of them well.

Charlie and I operated mostly with 5 positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest. In 1964 I found a position I was willing to go heavier into, up to 40%. I told investors they could pull their money out. None did. The position was American Express after the Salad Oil Scandal. In 1951 I put the bulk of my net worth into GEICO. Later in 1998, LTCM was in trouble. With the spread between the on-the-run versus off-the-run 30 year Treasury bonds, I would have been willing to put 75% of my portfolio into it. There were various times I would have gone up to 75%, even in the past few years. If it’s your game and you really know your business, you can load up.

Over the past 50-60 years, Charlie and I have never permanently lost more than 2% of our personal worth on a position. We’ve suffered quotational loss, 50% movements. That’s why you should never borrow money. We don’t want to get into situations where anyone can pull the rug out from under our feet.

In stocks, it’s the only place where when things go on sale, people get unhappy. If I like a business, then it makes sense to buy more at 20 than at 30. If McDonalds reduces the price of hamburgers, I think it’s great.

The question is about diversification. I have a dual answer to that. If you are not a professional investor. If your goal is not to manage money to earn a significantly better return than the world, then I believe in extreme diversification. I believe 98% - 99% who invest should extensively diversify and not trade, so that leads them to an index fund type of decision with very low costs. All they are going to do is own part of America. And they have made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all. That is the way they should approach it unless they want to bring an intensity to the game to make a decision and start evaluating businesses. Once you are in the businesses of evaluating businesses and you decide that you are going to bring the effort and intensity and time involved to get that job done, then I think diversification is a terrible mistake to any degree. I got asked that question the other day at SunTrust. If you really know businesses, you probably shouldn’t own more than six of them.

If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don’t diversify personally. All the people I’ve known that have done well with the exception of Walter Schloss, Walter diversifies a lot. I call him Noah, he has two of everything.

Charlie: Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the exact rule is the opposite. The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a life-time, you are not being rational. Very seldom do we get to buy as much of any good idea as we would like to.

Would you consider spinning off some companies to realize value? Buffett: We will not be spinning off any companies. We can’t wait to throw them [people who suggest spin offs] out of the office. We have a real advantage in allocating capital—moving money around. When we buy companies from people, we buy them for keeps. People can trust us to keep our word on this.

Charlie: Wall Street sells that stuff [spin-offs] for fees. It doesn’t really do much for anyone. Short of some regulatory change, we’re unlikely to [spin something off].

Buffett: We have listened to presentation after presentation by investment bankers, but there is always a fee.

[Comment: A similar question was asked and addressed earlier in the meeting. Short of indefinite operating losses or intractable labor problems, Buffett is not going to spin-off subsidiaries like some poker player passing cards to his right in hopes of "realizing value," when doing so would damage his reputation as a buyer (and keeper) of businesses.]

Source: Emory's Goizueta Business School and McCombs School of Business at UT Austin
Time: February 2008

  • On risk : "We regard using [a stock's] volatility as a measure of risk is nuts. Risk to us is
  1. the risk of permanent loss of capital, or
  2. the risk of inadequate return. Some great businesses have very volatile returns
  • for example, See's usually loses money in two quarters of each year
  • and some terrible businesses can have steady results.

[Charlie: "How can professors spread this? I've been waiting for this craziness to end for decades. It's been dented, but it's still out there."]

If someone starts talking to you about beta, zip up your pocketbook."

Charlie: We’d argue that what’s taught is at least 50% twaddle, but these people have high IQs. We recognized early on that very smart people do very dumb things, and we wanted to know why and who, so we could avoid them. [Laughter]

Source: BRK Annual Meeting 2001
Time: April 2001

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 decided early on that I never wanted to owe more than 25% of my net worth, and I haven’t… except for in the very beginning. I like to play from a position of strength. I always try to have the odds in my favor. When I go to Vegas, I don’t go around putting $5 dollars on the blackjack tables. If someone wants to come to my room and put $5 on my bed, well that’s fine. I like those odds better.

Source: Q&A with 6 Business Schools
Time: Feb 2009

What do you think of setting an asset allocation?

We don’t hold any committee meetings. The business of saying you should have 50% in stocks, 30% in bonds…it’s nonsense.

The idea of recommending that assets should be split 60/40 [between stocks and bonds], and then have a big announcement that you’re moving to 65/35 is pure nonsense. It just doesn’t make any sense.

[Charlie: Berkshire doesn’t do much conventional asset allocation. We just search for good opportunities and don’t want to put up artificial barriers. In this sense, we’re totally out of step with modern portfolio management, but we think they’re wrong.]

Well over 80% of our assets are in the U.S.

Source: BRK Annual Meeting 2004 Tilson Notes
Time: 2004

How often do you review each position in your portfolio?

Buffett: It breaks down into two periods of my life: when I had more ideas than money, I was constantly reviewing my portfolio, figuring out which stock to unload to buy a new one.

Today, I have more money than ideas so we aren’t really thinking of selling when the alternative is cash. But we’re always collecting information on every company we own – it is a continuous process, but not with the idea that daily, weekly or monthly activity will result.

If we needed money for a very big deal, $20-, $30- or $40-billion, and we had to sell $10 billion in equities, we’d use information we’ve been collecting daily to decide what to sell.

Charlie: Even in Warren’s early days, he wasn’t thinking about his #1 choice [his single favorite stock] – he could put that aside [because he’d never sell it].

Buffett: We think about adding more to certain stocks and have done so. We add to ones that look attractive and that we can buy. If you look at the portfolio at the end of 2007 you’ll see that certain positions have been increased by billions of dollars. We like many of our positions and if they get cheap, we’ll buy more.

Sometimes there’s not enough stock or we might cross certain thresholds that cause reporting requirements or going above 10%, which triggers the short-swing rule.

Charlie: It’s not as easy as it looks to buy these big positions. When we were buying Coca-Cola, we bought every share we could – we bought 30-40% of the volume, yet it still took us a long time to accumulate our position. However, we like it better when we have these problems now than when we didn’t earlier.

Buffett: We usually feel we can buy 20% of the daily volume and not move the market too much. That means if we want to buy $5 billion, we have to wait for $25 billion to trade and not a lot of stocks trade that much.

Source: BRK Annual Meeting 2007 Tilson Notes
Time: 2007

What are your expectations for future returns on stocks?

When I closed the Buffett Partnership, I felt (and wrote to my investors) that the prospective return was about the same for equities and municipal bonds over the next decade, and I was roughly right. It’s not the same today. I’d have 100% of bonds in short-term bonds. Forced to choose between owning the S&P 500 vs. 20-year bonds, I’d buy stocks – and it would not be a close decision. But I wouldn’t have an equity investment with someone who charged high fees.

We don’t have the faintest idea where the S&P or bonds will be in three years, but over 20 years we’d prefer to own stocks.

Charlie: We think there will be a disruption not too many years ahead.

Buffett: Of course, you could have said that and have been right at any point in the past century – there are always disruptions – but stocks have still done well. We’d rather have good stocks than sit around and hope they get cheaper, so anytime we see something good, we buy, hopefully in size.

Source: BRK Annual Meeting 2007 Tilson Notes
Time: 2007

Do you expect the stock market premium to continue to be 6.5% over bonds?

I don't think that the stock market will return 6.5% over bonds in the future. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will get very cheap, but it isn't ordained in scripture that this is so. Risk premiums are mostly nonsense. The world isn't calculating risk premiums.

The best book prior to Graham was written by Edgar Lawrence Smith in 1924 called Common Stocks as Long Term Investments. It was a study that evaluated how bonds compared to stocks in various decades of the past. There weren't a whole lot of publicly traded companies back then. He thought he knew what he was going to find. He thought that he'd find that bonds outperformed stocks during periods of deflation, and stocks outperformed during inflationary times. But what he found was that stocks outperformed the bonds in nearly all cases. John M. Keynes then enumerated the reasons that this was so. He said that over time you have more capital working for you, and thus dividends would grow higher. This was novel information back then and investors then went crazy and started buying stocks for these higher returns. But then they started to get crazy, and no longer really applied the sound tactics that made the reasons given in the book true. Be careful that when you buy something for a sound reason, make sure that the reason stays sound.

If you buy GM, you need to write the price and the respective market valuation. Then write down why you are buying the business. If you can't, then you have no business doing it.

Quote from Ben Graham: "You can get in more trouble with a sound premise than an unsound premise because you'll just throw out the unsound premise".

Source: Student Visit 2005
Time: May 6, 2005

Do you think investors expect too much?

The problem is the starting point in predicting modest returns for equity investors. [Expectations were too high.] In 1999, a Gallup poll showed people expected 15% [returns from stocks] in a low inflation environment. In a low inflation environment, how much will GDP grow? If there's 2% inflation and 3% [real] growth, that's 5%. This will be the rate of corporate growth, so if you add dividends, you get 6-7% [annualized returns] before frictional costs -- and investors incur high frictional costs (they don't have to, but they do) -- which adds up to 1.5%. [This 4.5-5.5% is] not bad.

[Charlie: My attitude is slightly more negative than Warren's.]

It [6-7% growth] is not the end of the world. If we get 5-6% of the pie -- those of us who put our capital out -- I don't know if it's exactly what someone who designed the universe would come up with, but I don't think that's crazy in either direction. It provides a pretty decent real return in a period of low inflation. If you get high inflation, you could get very low real returns, even negative.

Source: BRK Annual Meeting 2003 Tilson Notes
Time: 2003

The enemy of investment success is activity.

Investors eventually repeat their mistakes. How can you prevent this--through fast growth or safety?

If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need. If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the Grand Canyon, you may feel you want a little larger margin of safety in terms of driving only drive a 4,000 pound truck across. It depends on the nature of the underlying risk. We don't get the margin of safety now that we got in the 1970s.

The best thing is to learn from other guys' mistakes. Patton used to say, "It's an honor to die for your country; make sure the other guy gets the honor." There are a lot of mistakes that I've repeated. The biggest one, the biggest category over time, is being reluctant to pay up a little for a business that I knew was really outstanding. The cost of that I think is in the billions, and I'll probably keep making that mistake. The mistakes are made when there are businesses you can understand and that are attractive and you don't do something about them. I don't worry at all about the mistakes that come about like when I met Bill Gates and didn't buy Microsoft or something like that. Most of our mistakes have been mistakes of omission rather than commission.

Source: BRK Annual Meeting 1997
Time: 1997

We don't care if a company is large cap, small cap, middle cap, micro cap. It doesn't make any difference. The only questions that matter to us:

  • Do we understand the business?
  • Do we like the people running it?
  • And does it sell for a price that is attractive?

Source: Lecture at the University of Florida Business School
Time: October 15th 1998

Importance of filtering out the noise?

[Charlie: Part of [having uncommon sense] is being able to tune out folly, as opposed to recognizing wisdom. If you bat away many things, you don’t clutter yourself.]

People get frustrated because they start to pitch something to us and when they get halfway through the first sentence, we say we’re not interested. We don’t waste a lot of time on bad ideas.

When humans compete against computers in chess, how can human compete? The human eliminates 99% of possibilities without even thinking about it – they get right down to few possibilities that have any chance of success. They get rid of the nonsense.

When people call you with bad idea, don’t be polite and waste 10 minutes.

Source: BRK Annual Meeting 2004 Tilson Notes
Time: 2004

What is the benefit of being an out-of-towner as opposed to being on Wall Street?

I worked on Wall Street for a couple of years and I have my best friends on both coasts. I like seeing them. I get ideas when I go there. But the best way to think about investments is to be in a room with no one else and just think. And if that doesn’t work, nothing else is going to work. The disadvantage of being in any type of market environment like Wall Street in the extreme is that you get over-stimulated. You think you have to do something every day. The Chandler family paid $2,000 for this company (Coke). You don’t have to do much else if you pick one of those. And the trick then is not to do anything else. Even not to sell at 1919, which the family did later on. So what you are looking for is some way to get one good idea a year. And then ride it to its full potential and that is very hard to do in an environment where people are shouting prices back and forth every five minutes and shoving reports in front of your nose and all that. Wall Street makes its money on activity. You make your money on inactivity.

Wall Street makes its money on activity. You make your money on inactivity.

If everyone in this room trades their portfolio around every day with every other person, you will all end up broke. And the intermediary will end up with all the money. If you all own stock in a group of average businesses and just sit here for the next 50 years, you will end up with a fair amount of money and your broker will be broke. He is like the Doctor who gets paid on how often to get you to change pills. If he gave you one pill that cures you the rest of your life, he would make one sale, one transaction and that is it. But if he can convince you that changing pills every day is the way to great health, it will be great for him and the prescriptionists. You won’t be any healthier and you will be a lot worse off financially. You want to stay away from any environment that stimulates activity. And Wall Street would have the effective of doing that.

When I went back to Omaha, I would go back with a whole list of companies I wanted to check out and I would get my money’s worth out of those trips, but then I would go back to Omaha and think about it.

Source: Lecture at the University of Florida Business School
Time: October 15th 1998

There’s just too much money floating around. It’s a different world with more modest expectations.

How do you avoid misjudgement?

WB said repeatedly that it doesn’t take above a 125 IQ to do fact, IQ over this amount is pretty much wasted. It’s not really about IQ. - Staying within circle of competence is paramount - When you are within the circle, keep these things in mind:

  • Don’t get in a hurry
  • You are better off not talking to others
  • Just keep looking until you find something (don’t give up)
  • Good ideas come in clumps – by time, by sector, by asset class

Source: Buffett Vanderbilt Notes
Time: Jan 2005

You can improve your value by 50% by improving your oral and written communication

Don't you have a lot of competition to buy great businesses? For example, from private equity funds?

You are absolutely correct that the private equity funds are a form of competition for Berkshire. Stocks sometimes trade well below intrinsic value, but businesses are sold in a negotiated transaction, so pricing doesn’t get as extreme. But our strong preference is to buy entire businesses at a fair price rather than stocks, even if stocks [can be acquired] a bit cheaper.

If someone wants what we are offering, we are pretty much one-of-a-kind. People can sell their company to us, yet continue to run it as they please as long as they want. So, if someone needs liquidity for tax or inheritance or other reasons, but doesn’t want to auction their business off like a piece of meat, they can come to us and they know they’ll get the response they want. We don’t get super bargains this way, but it allows us to put money to work at a sensible price.

Acquisitions don’t come along every day.

If I owned a business that my father had started and wanted to monetize it, I would sell to Berkshire because I wouldn’t want to split it up to auction it off, just as it would be silly to auction your daughter off to the man who bids the most.

There is no-one else who can make the promises we can make [not to ever sell the acquired company]. Most big companies can’t do that because what if the board decides it wants a pure play? I tell sellers that I’m the only one who can double cross you – nobody else can. We don’t have consultants or Wall Street advisors.

But, yes, we do have a lot of competition.

[Charlie: We’ve had private equity competitors for a long time, but one way or another we’ve managed to buy quite a few things.]

Source: BRK Annual Meeting 2004 Tilson Notes
Time: 2004

How do you learn who to trust and who not to trust?

Buffett: I get letters all the time from people who have been taken advantage of in financial transactions. It’s sad. A lot isn’t fraud – just the frictional costs and the baloney. Charlie and I have had very good luck buying businesses and putting our trust in people – it’s been overwhelmingly good, but we filter out a lot of people. People give themselves away and maybe it’s an advantage being around awhile and seeing how people give themselves away by what they talk about and what’s important and not important to them. We’ve had a batting average I wouldn’t have thought we’d have. We haven’t batted 100%, but it’s above 90%.

Charlie: We’re deeply suspicious if the proposition sounds too good to be true. I recall a deal that was pitched to us by someone who said the company only wrote fire insurance on concrete bridges covered by water. It’s like taking candy from a baby. [Laughter] We stay away from businesses like that.

Source: BRK Annual Meeting 2007 Tilson Notes
Time: 2007


What valuation metrics do you use?

The appropriate multiple for a business compared to the S&P 500 depends on its return on equity and return on incremental invested capital. I wouldn't look at a single valuation metric like relative P/E ratio. I don't think price-to-earnings, price-to-book or price-to-sales ratios tell you very much. People want a formula, but it's not that easy. To value something, you simply have to take its free cash flows from now until kingdom come and then discount them back to the present using an appropriate discount rate. All cash is equal. You just need to evaluate a business's economic characteristics.

Source: BRK Annual Meeting 2002 Tilson Notes
Time: 2002

We own stocks in Germany and 4% of POSCO, which is based in South Korea – it’s now worth over $1 billion. I can think of a half dozen investments [we currently have] outside the U.S. We don’t have to report them in our [SEC Form] 13F, so they don’t get picked up like our domestic investments.

We have to report our holdings in Germany once we reach 3% ownership. So if we buy a $10 billion [market-cap] company, that means once we buy $300 million worth we have to tell the world, and Charlie and I don’t like doing that. It screws up our future buying, so the 3% rule is a real minus.

Source: BRK Annual Meeting 2007 Tilson Notes
Time: 2007

What is the ideal business?

The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth. But there are very very few businesses like this. Coke has high returns on capital, but incremental capital doesn't earn anything like its current returns. We love businesses that can earn high rates on even more capital than it earns. Most of our businesses generate lots of money, but can't generate high returns on incremental capital -- for example, See's and Buffalo News. We look for them [areas to wisely reinvest capital], but they don't exist.

So, what we do is take money and move it around into other businesses. The newspaper business earned great returns but not on incremental capital. But the people in the industry only knew how to reinvest it [so they squandered a lot of capital]. But our structure allows us to take excess capital and invest it elsewhere, wherever it makes the most sense. It's an enormous advantage.

See's has produced $1 billion pre-tax for us over time. If we'd deployed that in the candy business, the returns would have been terrible, but instead we took the money out of the business and redeployed it elsewhere. Look at the results!

[Charlie: There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested -- there's never any cash. It reminds me of the guy who looks at all of his equipment and says, "There's all of my profit." We hate that kind of business.]

We like to be able to move cash around and find it's best use. We'd love to have our companies redeploy cash, but they can't. Gillette has a great business, but can't sensibly reinvest all of the profit.

Source: BRK Annual Meeting 2003 Tilson Notes
Time: 2003


Cynthia: When you are looking at a business in which to invest, what are your priorities? Warren: You have to really understand the economics of a business and the kind of people you are getting into business with. They have to love their business. They have to feel that they have been creative, that it is their painting, I am not going to disturb it, just give them more canvas and more brushes, but its their painting, from our standpoint any way. The whole place will reflect the attitude of the person at the top, if you have someone at the top who doesn’t care, the people down below won’t care. On the other hand, if you have someone at the top who cares a great deal, that will be evident across the organization. [The type of people managing the business is a very important criteria, then?] Yes, contracts don’t protect you; you have to have confidence in the people.

Cynthia: The type of people managing the business is a very important criteria, then? Warren: Yes, contracts don’t protect you; you have to have confidence in the people.

Cynthia: We are making a big investment in ethics and leadership. We just hired a nationally known scholar in leadership to head our Center for Advanced Leadership Studies. We are searching for a faculty member with a reputation in the field of ethical leadership to work with our Center of Ethics and our Center for Leadership. Obviously, we see a need for our graduates to develop leadership skills and be aware of ethical issues in business. What is your opinion on the need for those entering business careers to have leadership skills and developed ethical values? Warren: The best ethical leadership people receive is from their parents. Every kid wants heroes, and they may pick the wrong ones. The natural heroes are the parents. Kids usually emulate their parents, and if the parents behave well, the kids are very, very likely to behave well.

Cynthia: We have 3200 students in the Business College, just beginning their paths to a career. What advice would you give students who are preparing for a business career? Warren: My advice generally is to sop up everything you can. You’re not going to run out of storage room in your brain, so take advantage of everything that is of interest. You will never have another opportunity like this in your lifetime. I ask students what they would do, if when they were sixteen, a genie came to them and told them that they could have the car of their dreams. The only catch is that it is the only car they will ever have. I know what I would do; I would study the owner’s manual until I had it memorized, and do everything I could to keep the car in the best shape possible. When you are sixteen, you only have one brain and one body and that is all you are ever going to get.

Honesty is a terrific policy.

Buffett: Capital-intensive industries outside the utility sector scare me more. We get decent returns on equity. You won’t get rich, but you won’t go broke either. You are better off in businesses that are not capital intensive.

I think that honesty, brains, and hard work are very important qualities. People who demonstrate these consistently, will usually be successful in whatever they do.

You must have an attitude where you aren’t influenced by the market. You need a mind- set, and you need to have the attitude to divorce your- self from letting the market influence you.

Alternatives to Common Stock

What's your opinion of gold as an investment?

We’re not enthused about gold. People say it’s a hedge against inflation, but that’s also true of oil, land, Coca-Cola, See’s Candies, etc. I’d much prefer to own land in Nebraska or an apartment house or an index fund as a store of value. We’d rather own an asset that will be useful even if the currency drops to 10 cents on the dollar. People will always need to drink and eat [referring to Coke and See’s]. We wouldn’t trade ownership of businesses for a hunk of yellow metal.

Gold would be way down my list as a store of value. I’d much rather own 100 acres of land in Nebraska or an apartment house or an index fund.

The Dow went from 66 to 11,000 or 12,000 during the last century, and you got paid a lot of dividends along the way. Gold went from $20 in 1900 to $400 in 2000, plus you’d have to pay insurance and storage costs, so it’s not a good store of value.

Gold has done very badly [as an investment] in the past and I see no reason why it will work well in the future. All that happens is that it is taken out of the ground in South Africa and put back in the ground in Fort Knox. (Laughter)

Source: BRK Annual Meeting 2005 Tilson Notes
Time: 2005

Buffett: If your wife is going to have a baby, you’d be better to call an obstetrician than do it yourself. If your pipes leak, you should call a plumber. Most professions add value beyond what the average person can do for themselves. But in aggregate, the investment profession does not do this – despite $140 billion in total annual compensation. It’s hard to think of another business like that. Can you, Charlie?

Warren: You can't take utilities with a cost of X, invite new producers in with a cost of 3X, and expect prices to go down. The old system strikes me as better for society.

[Charlie: "The old system had the NIMBY [not in my back yard] problem. If you let unreasonable, self-centered people make decisions, you'll get into trouble. We may be making the same mistake today with oil refineries."]


What do you think of the banking business model?

  • Banking is a good business - many banks earn high returns on tangible equity
  • "Charlie and I have been surprised at how much profitability banks have, given that it seems like a commodity business."
  • Underestimated how sticky customers are and how unaware they are of fees banks charge them
  • WFC - $4.00 per share after full taxes on $15 of tangible equity
  • If you have a well run bank, you don’t need to be the #1 bank in an area
  • Bank ROA is not highly correlated to size
  • You may have to pay 3x tangible equity to buy a bank
  • Only problem with banks is that sometimes they get crazy and do dumb things...’91 was a good example
  • If a bank doesn’t do dumb things on the asset side, it will make good money

Source: Buffett Vanderbilt Notes
Time: Jan 2005

Financial companies are more difficult to analyze than other companies. They can report whatever earnings they want – it’s an easy game to play. For banks, earnings depend on loans and the reserves set aside. It’s easy to change and manipulate the reserves.

Charlie and I were on the board of Salomon and Charlie was on the audit committee, and [it’s just impossible to evaluate thousands of transactions]. You’ll just have to accept that with insurance companies, banks and other financial companies – it’s just a more dangerous field to analyze.

[Charlie: Where you have complexity, by nature you can have fraud and mistakes. You’ll have more of that than in a company that shovels sand from a river and sells it. This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world.]

There was a wise man that said there are more banks than bankers. If you think about that a while, you will get my point.
-- Warren

[Charlie: Berkshire in its history has made money betting on sure things.]

Would there be a compelling price at which Buffett would add another newspaper to Berkshire’s portfolio?

Buffett: There’s an evolutionary situation with newspapers. I read five a day and so does Charlie. We’ll be the last people reading a newspaper, with a land line by our sides. [laughter] Most newspapers in the U.S. we would not buy at any price. Twenty to forty years ago, they were essential to customers and advertisers. They had pricing power, but they’ve lost their essential nature—essentiality has eroded. Erosion accelerated dramatically, and it won’t end based on anything on the horizon. We do not see anything to reverse it. They are essential to advertisers only as long as they’re essential to readers. Ten years ago, the head of The Buffalo News said that on an economic basis, Berkshire should sell The Buffalo News. We could have sold the business for hundreds of millions. Not so today. As long as we’re not losing money forever and there are no union problems, we won’t sell. There are around 1,400 daily U.S. papers, and nobody has found the model that works. We’ll play it out as long as we can.

Charlie: One hundred percent right. Monopoly daily newspapers were impregnable. It’s a national tragedy for newspapers to die off. They kept government more honest than they otherwise would be. What replaces it will be less desirable.

Source: BRK Annual Meeting 2009 Bruni Notes
Time: 2009

Buffett: A durable advantage is that we can act fast. We went from a noontime phone call to a formal offer for Constellation [Energy] by that evening. It didn’t work out. We don’t ask the lawyers before we do it, we just do it. We can move fast when the time [is right]. We’ve got the money, and we’ve got the managers to handle the properties.

What industry will be the next growth driver in the 21st century and what do you see that supports that?

We don’t worry too much about that. If you’d look at the 1930s, nobody could have predicted how much the automobile and airplane would transform the world. There were 2000 car companies, but now only 3 left in the US and they are hanging on barely. It was tremendous for society, but horrible for investors. Investors would have had to not only identify the right companies, but also identify the right time. The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, would have done us a huge favor. Or look at TV manufacturers. There are hundreds of millions of TV’s, RCA & GE used to produce them, but now there are no American manufacturers left.

If you want a great business, take Coca-Cola. The product is unchanged, they sell 1.5 billion 8 ounce servings per day 122 years later. They have a moat; if you have a castle, someone’s going to come after you.

Gillette accounts for 70% of razor sales at 80% gross margins and it is the same over time. Men don’t change much. Shaving might be the only creative thing they do, like painting the Sistine Chapel.

Snickers has been the #1 candy bar for the past 40 years. If you gave me $1 billion to knock off Snickers, I can’t do it. That’s the test of a good business. You don’t knock off Coke or Gilette. Richard Branson is a marketing genius. He came in with Virgin Cola, we’re not sure what the name means, perhaps it turns you back into one, but he couldn’t knock off Coke. We look for wide moats around great economic castles. Growth is good too, but we prefer strong economics. In the upcoming annual report I have a section titled "The Great, the Good, and the Gruesome" where I talk about these.

Source: Emory's Goizueta Business School and McCombs School of Business at UT Austin
Time: February 2008

Specific Businesses

What was your thinking behind the purchase of Berkshire Hathaway?

Berkshire made a lot of money after WWII (more than Pfizer and Merck) and then it steadily went downhill. Between 1955 and 1965 Berkshire went from 12 mills to 2 mills and they bought their own stock as mills closed. We bought 100,000 shares out of 1 million in 1962 at $7 3/8 and the company had $10-11/share in working capital...I knew I wouldn’t lose money because of the working capital. It was losing money but it was also liquefying assets by closing mills.

Calculations :

  • Working capital - Difference between a company's current assets, such as cash, accounts receivable (customers' unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.

  • A company's NCAV is calculated by subtracting total liabilities from all current assets, thus: Dividing this NCAV by the number of shares outstanding gives us the NCAV per share.

NCAV = current assets / total liabilities NCAVPS = (current assets / total liabilities)/shares outstanding

  • Working capital per share also known as "Net Current Asset Value Per Share (NCAVPS)"

Should check NCAVPS < CMP

Source: Student Visit 2007
Time: January 2007

What is your analysis of Coca-Cola?

Well, basically I love it, but because the market for Coca-Cola products will grow far faster over the next twenty years internationally than it will in the United States. It will grow in the U.S. on a per capita basis. The fact that it will be a tough period for who knows—three months or three years—but it won’t be tough for twenty years. People will still be going to be working productively around the world and they are going to find this is a bargain product in terms of a portion of their working day that they have to give up in order to have one of these, better yet, five of them a day like I do.

This is a product that in 1936 when I first bought 6 of those for a quarter and sold them for a nickel each. It was in a 6.5 oz bottle and you paid a two cents deposit on the bottle. That was a 6.5 oz. bottle for a nickel at that time; it is now a 12 oz. can which if you buy it on Weekends or if you buy it in bigger quantities, so much money doesn’t go to packaging—you essentially can buy the 12 ozs. for not much more than 20 cents. So you are paying not much more than twice the per oz. price of 1936. This is a product that has gotten cheaper and cheaper relative to people’s earning power over the years. And which people love. And in 200 countries, you have the per capita consumption use going up every year for a product that is over 100 years old that dominates the market. That is unbelievable.

One thing that people don’t understand is one thing that makes this product worth 10s and 10s of billions of dollars is one simple fact about really all colas, but we will call it Coca-Cola for the moment. It happens to be a name that I like. Cola has no taste memory. You can drink one of these at 9 O’clock, 10 O’clock, 1 O’clock and 5 O’clock. The one at 5 o’clock will taste as good to you as the one you drank early in the morning, you can’t do that with Cream Soda, Root Beer, Orange, Grape. All of those things accumulate on you. Most foods and beverages accumulate; you get sick of them after a while. And if you eat See’s Candy—we get these people who go to work for us at See’s Candy and the first day they go crazy, but after a week they are eating the same amount as if they were buying it, because chocolate accumulates on you. There is no taste memory to Cola and that means you get people around the world who will be heavy users—who will drink five a day, or for Diet Coke, 7 or even 8 a day. They will never do that with other products. So you get this incredible per capita consumption. The average person in this part of the world or maybe a little north of here drinks 64 ozs. of liquid a day. You can have 64 ozs. of that be Coke and you will not get fed up with Coke if you like it to start with in the least. But if you do that with anything else; if you eat just one product all day, you will get a little sick of it after a while.

It is a huge factor. So today over 1 billion of Coca-Cola product servings will be sold in the world and that will grow year by year. It will grow in every country virtually, and it will grow on a per capita basis. And twenty years from now it will grow a lot faster internationally than in the U.S., so I really like that market better, because there is more growth there over time. But it will hurt them in the short term right now, but that doesn’t mean anything. Coca-Cola went public in 1919; the stock sold for $40 per share. The Chandler family bought the whole business for $2,000 back in the late 1880s. So now he goes public in 1919, $40 per share. One year later it is selling for $19 per share. It has gone down 50% in one year. You might think it is some kind of disaster and you might think sugar prices increased and the bottlers were rebellious. And a whole bunch of things. You can always find reasons that weren't the ideal moment to buy it. Years later you would have seen the Great Depression, WW II and sugar rationing and thermonuclear weapons and the whole thing—there is always a reason.

But in the end if you had bought one share at $40 per share and reinvested the dividends, it would be worth $5 million now ($40 compounding at 14.63% for 86 years!). That factor so overrides anything else. If you are right about the business you will make a lot of money. The timing part of it is very tricky thing so I don’t worry about any given event if I got a wonderful business what it does next year or something of the sort. Price controls have been in this country at various times and that has fouled up even the best of businesses. I wouldn’t be able to raise prices Dec31st on See’s Candy.But that doesn’t make it a lousy business if that happens to happen, because you are not going to have price controls forever. We had price controls in the early 70s.

The wonderful business—you can figure what will happen, you can’t figure out when it will happen. You don’t want to focus too much on when but you want to focus on what. If you are right about what, you don’t have to worry about when very much.

Source: Lecture at the University of Florida Business School
Time: October 15th 1998

Is it really a good idea to buy stocks in unhealthy products? e.g. Coca-Cola

I don’t have any problem with buying stock or bonds of companies that engage in activities that I wouldn’t endorse myself, but I’d have a problem with owning outright and directing the activities myself.

Every retailer sells cigarettes, but it doesn’t bother me to own the retailer.

, there’s a culture in America that says that anything that won’t send you to prison is OK.

Eating hamburgers or drinking Coke – that’s a choice. If one lives to 75 eating what they want or 85 eating carrots and broccoli – who’s lived a better life? I know where I come out on that. [Laughter.]

Source: BRK Annual Meeting 2004 Tilson Notes
Time: 2004

I think P&G and Gillette will be stronger as a combined enterprise, given the strength of the Wal-Marts and Costcos of the world.

Reasoning behind the PetroChina investment?

[Q - In 2002, you invested in PetroChina and all you did was read the annual report. Most professional investors have more resources at hand. Wouldn’t you want to do more research? What do you look for in an annual like that? How could you make the investment only on a report?]

Warren: I read it in the spring of 2002, and I never asked anyone else their opinion. I thought it was worth $100 billion after reading the report. I then checked the price, and it was selling for $35 billion. What is the sense of talking to management? It doesn’t make any difference. If the market value was $40 billion, you would need to refine the analysis. We don’t like things you have to carry out to 3 decimal places. If someone weighed somewhere between 300-350 pounds, I wouldn’t need precision — I would know they were fat. If you can’t make a decision on PetroChina off the figures, you go on to the next one. You weren’t going to learn more if you thought their big [oil] field was going to decline out slightly faster, etc.

Charlie: We have lower due diligence expenses than anyone in America. I know of a place that pays over $200 million to its accountants every year, and I know we are safer because we think like engineers — we want margins of reliability. It is a very dicey process.

Warren: If you think the auditors know more about an acquisition, then they should run the business and you should take up auditing. When we got the call on Mars-Wrigley I wasn’t going to look at labor costs or leases. The value of Wrigley does not depend on the value of the lease or an environmental problem. There is a whole lot of trivia that doesn’t mean anything. I never made an investment that would have been avoided due to conventional due diligence. We would have lost deals. On big deals, people rely more and more on process. When people want a deal, they will come to us. Mars only wanted to deal with Berkshire — there were no lawyers involved and no Directors involved. I got a call, it made sense, and I said yes. There was no material adverse change clause. Our $6.5 billion will be available regardless, even if Ben Bernanke runs off to South America with Paris Hilton. [eruption of laughter] That assurance is worth something. If you say, ‘I’ll do it, but I need X, Y, Z, etc.’— that is costly.

Source: BRK Annual Meeting 2008 Boodell Notes
Time: 2008

We never fired anyone – the decline in headcount was solely due to retirements. The key is you can’t fire people if they don’t write business, or they’ll write business. You must be able to tell them that if they write no business, their job is not in jeopardy.

Reasoning behind the National Indemnity investment?

We are very big in insurance and having the wrong incentives in place could be very harmful.

[Buffett had prepared slides and had them put up on the screens in the convention center. Slide 1 showed Berkshire Hathaway’s balance sheet shortly before it bought National Indemnity.]

For 15 minutes each year, Jack Greenwald [the owner of National Indemnity] would get frustrated with something and want to sell his company. I told Charlie that the next time he was in heat, bring him to me. So, we bought it in ’67 for $7 million.

[Slide 2 showed premium volume for National Indemnity from 1980 through 2003. It was $80 million in 1980, rose to $366 million in 1986, then declined nearly every year down to $54 million in 1999, and then spiked up to $595 million in 2003. Buffett highlighted the decline from 1986 to 1999 and asked:]

How many public companies in America would see premiums go down every year for such an extended period?

[Slide 3 showed the number of employees at National Indemnity from 1980-2003. The number rose from 1980-86 and then declined from 1986-99, but much more slowly than premiums declined. Buffett noted:]

We never fired anyone – the decline in headcount was solely due to retirements. The key is you can’t fire people if they don’t write business, or they’ll write business. You must be able to tell them that if they write no business, their job is not in jeopardy.

[Slide 4 showed National Indemnity’s expense ratio from 1980-2003, which was as low as 25.9% in a peak year, and as high as 41% in the worst year, 1999. Buffett noted that:]

Some companies would feel that this is unacceptable. [We don’t.] We can take an expense ratio that’s out of line, but can’t take writing bad business.

[Slide 5 showed the combined ratio at National Indemnity from 1980-2003. The combined ratio exceed 100 during a few bad years for the industry in the early 1980s, which is what led to the hard market that peaked in 1986, but National Indemnity’s combined ratio has been below 100 – e.g., the business has been profitable – in every year for the past 20. Buffett pointed out:]

In 1986, our combined ratio was only 69.3 because we did the most volume ever that year, up to that point [the company has done more volume in the past few years]. We coined money when we wrote a lot of business, and made a little when we didn’t. We’re the only company like this. We’ll have a high expense ratio when business is slow.

National Indemnity was a no-name company when we bought it, and has no copyrights, patents, etc. to distinguish it, but they have a record like no-one else because they had discipline.

You can’t run an auto or steel company this way, but it’s the best way to run an insurance company.

[Charlie: Nobody else does it, but to me it’s obviously the only way to go. A lot about Berkshire is like this. Being controlling owners is key – it would be hard for a committee to make these kinds of decisions.]

Source: BRK Annual Meeting 2004 Tilson Notes
Time: 2004

Reasoning behind the Geico investment? (and thoughts on low cost producers)

Right after yearend, we completed the purchase of 100% of GEICO, the seventh largest auto insurer in the United States, with about 3.7 million cars insured. I’ve had a 45-year association with GEICO, and though the story has been told before, it’s worth a short recap here.

I attended Columbia University’s business school in 1950-51, not because I cared about the degree it offered, but because I wanted to study under Ben Graham, then teaching there. The time I spent in Ben’s classes was a personal high, and quickly induced me to learn all I could about my hero. I turned first to Who’s Who in America, finding there, among other things, that Ben was Chairman of Government Employees Insurance Company, to me an unknown company in an unfamiliar industry.

A librarian next referred me to Best’s Fire and Casualty insurance manual, where I learned that GEICO was based in Washington, DC. So on a Saturday in January, 1951, I took the train to Washington and headed for GEICO’s downtown headquarters. To my dismay, the building was closed, but I pounded on the door until a custodian appeared. I asked this puzzled fellow if there was anyone in the office I could talk to, and he said he’d seen one man working on the sixth floor.

And thus I met Lorimer Davidson, Assistant to the President, who was later to become CEO. Though my only credentials were that I was a student of Graham’s, "Davy" graciously spent four hours or so showering me with both kindness and instruction. No one has ever received a better half-day course in how the insurance industry functions nor in the factors that enable one company to excel over others. As Davy made clear, GEICO’s method of selling – direct marketing – gave it an enormous cost advantage over competitors that sold through agents, a form of distribution so ingrained in the business of these insurers that it was impossible for them to give it up. After my session with Davy, I was more excited about GEICO than I have ever been about a stock.

When I finished at Columbia some months later and returned to Omaha to sell securities, I naturally focused almost exclusively on GEICO. My first sales call – on my Aunt Alice, who always supported me 100% – was successful. But I was then a skinny, unpolished 20-year-old who looked about 17, and my pitch usually failed. Undaunted, I wrote a short report late in 1951 about GEICO for "The Security I Like Best" column in The Commercial and Financial Chronicle, a leading financial publication of the time. More important, I bought stock for my own account.

You may think this odd, but I have kept copies of every tax return I filed, starting with the return for 1944. Checking back, I find that I purchased GEICO shares on four occasions during 1951, the last purchase being made on September 26. This pattern of persistence suggests to me that my tendency toward self-intoxication was developed early. I probably came back on that September day from unsuccessfully trying to sell some prospect and decided – despite my already having more than 50% of my net worth in GEICO – to load up further. In any event, I accumulated 350 shares of GEICO during the year, at a cost of $10,282. At yearend, this holding was worth $13,125, more than 65% of my net worth.

You can see why GEICO was my first business love. Furthermore, just to complete this stroll down memory lane, I should add that I earned most of the funds I used to buy GEICO shares by delivering The Washington Post, the chief product of a company that much later made it possible for Berkshire to turn $10 million into $500 million.

Alas, I sold my entire GEICO position in 1952 for $15,259, primarily to switch into Western Insurance Securities. This act of infidelity can partially be excused by the fact that Western was selling for slightly more than one times its current earnings, a p/e ratio that for some reason caught my eye. But in the next 20 years, the GEICO stock I sold grew in value to about $1.3 million, which taught me a lesson about the inadvisability of selling a stake in an identifiably-wonderful company.

In the early 1970’s, after Davy retired, the executives running GEICO made some serious errors in estimating their claims costs, a mistake that led the company to underprice its policies – and that almost caused it to go bankrupt. The company was saved only because Jack Byrne came in as CEO in 1976 and took drastic remedial measures.

Because I believed both in Jack and in GEICO’s fundamental competitive strength, Berkshire purchased a large interest in the company during the second half of 1976, and also made smaller purchases later. By yearend 1980, we had put $45.7 million into GEICO and owned 33.3% of its shares. During the next 15 years, we did not make further purchases. Our interest in the company, nonetheless, grew to about 50% because it was a big repurchaser of its own shares.

Then, in 1995, we agreed to pay $2.3 billion for the half of the company we didn’t own. That is a steep price. But it gives us full ownership of a growing enterprise whose business remains exceptional for precisely the same reasons that prevailed in 1951. In addition, GEICO has two extraordinary managers: Tony Nicely, who runs the insurance side of the operation, and Lou Simpson, who runs investments.

Tony, 52, has been with GEICO for 34 years. There’s no one I would rather have managing GEICO’s insurance operation. He has brains, energy, integrity and focus. If we’re lucky, he’ll stay another 34 years.

Lou runs investments just as ably. Between 1980 and 1995, the equities under Lou’s management returned an average of 22.8% annually vs. 15.7% for the S&P. Lou takes the same conservative, concentrated approach to investments that we do at Berkshire, and it is an enormous plus for us to have him on board. One point that goes beyond Lou’s GEICO work: His presence on the scene assures us that Berkshire would have an extraordinary professional immediately available to handle its investments if something were to happen to Charlie and me.

GEICO, of course, must continue both to attract good policyholders and keep them happy. It must also reserve and price properly. But the ultimate key to the company’s success is its rock-bottom operating costs, which virtually no competitor can match. In 1995, moreover, Tony and his management team pushed underwriting and loss adjustment expenses down further to 23.6% of premiums, nearly one percentage point below 1994’s ratio. In business, I look for economic castles protected by unbreachable "moats." Thanks to Tony and his management team, GEICO’s moat widened in 1995.

Finally, let me bring you up to date on Davy. He’s now 93 and remains my friend and teacher. He continues to pay close attention to GEICO and has always been there when the company’s CEOs – Jack Byrne, Bill Snyder and Tony – have needed him. Our acquisition of 100% of GEICO caused Davy to incur a large tax. Characteristically, he still warmly supported the transaction.

Davy has been one of my heroes for the 45 years I’ve known him, and he’s never let me down. You should understand that Berkshire would not be where it is today if Davy had not been so generous with his time on a cold Saturday in 1951. I’ve often thanked him privately, but it is fitting that I use this report to thank him on behalf of Berkshire’s shareholders.

Source: BRK Annual Meeting 2004 Tilson Notes
Time: 2004

On NetJets

Charlie: The product integrity is so extreme between NetJets [and its competition]. For example, NetJets’ pilots are subjected to real oxygen withdrawal so they’ll recognize the symptoms. Not everybody does that because it’s expensive. They’re obsessive about product integrity. My guess is that this will be rewarded eventually.

Munger while answering for NetJets relates to management.

Charlie: Yes, but I believe the episode should be reviewed in context. If we buy 30 businesses and let the managers run them without interference, where 95% of the time it works well, then it is not a bad failure record. So, they will not change the management approach at all. They will continue to trust people to manage their own companies. This is how it has worked for years.

Buffett: This doesn't change our management strategy. We let managers do their stuff. And we will keep doing it.

Source: BRK Annual Meeting 2006 Tilson Notes
Time: 2006

What was the thinking behind the McLane purchase?

Yesterday we announced a deal to buy McLane from Wal-Mart. Wal-Mart announced that the price for the two deals it did -- one was a small trucking company -- was $1.5 billion. [It's been reported that the purchase price McLane was $1.45 billion.] McLane is a wholesaler to convenience stores, quick-serve restaurants, Wal-Mart, movie theaters and so forth. It will have about $22 billion in revenues this year. Wal-Mart had owned it since 1990 and it grew substantially while they owned it. It is run by a terrific manager, Grady Rosier, and under his leadership, it grew from $3 billion to $22 billion.

Wal-Mart, for very good reasons, wants to specialize on what they do extremely well. We were approached by Goldman Sachs to buy the business a week ago. It makes sense for both sides. It was a sideline business for Wal-Mart. Their ownership of McLane resulted in certain people who would be logical customers not to do business with McLane because they didn't want to do business with a competitor. We'll be seeing them soon to explain that they can sleep well at night buying from us.

A representative of Wal-Mart, the CFO, came up to Omaha last Thursday. In one hour, we had a deal and shook hands, and when you shake hands with Wal-Mart, the deal is done. There needs to be regulatory review, but we fully expect that in just a few weeks, McLane will become part of Berkshire.

It serves presently 36,000 of the 125,000 convenience stores in the United States, and has 58% share among the largest chains. To each store, it sells about $300,000 of products/year. McLane also serves 18,000 quick-serve restaurants, mainly those operated by YUM Brands (Taco Bell, Pizza Hut and KFC).

It's a tough business. You have Hershey and Mars on one side and 7-11 Eleven on the other side, so you have to work hard to earn 1% pretax. [Tilson - If McLane earns 1% pre-tax on $22 billion in sales, that's $220 million, so Buffett may have bought this business for 6.6x pre-tax earnings. I think this is a good price, especially if the business can grow substantially under Berkshire, but not a steal -- the guys at Wal-Mart aren't fools. But I think they let it go for a below-market price to Buffett because their biggest concern is that the business continue to be a reliable supplier to their stores. Such a low-margin business has little room for error, and it could get into trouble (as other similar companies have) under the ownership of a financial buyer that used too much leverage or tried to tinker with its operations.]

Source: BRK Annual Meeting 2003 Tilson Notes
Time: 2003

How did the Clayton Homes purchase come about?

Clayton Homes is the class of the manufactured home industry. The deal came about in an unusual way. Every year, a class (about 40 students) from the University of Tennessee comes to Omaha. They visit some sights and then we a have classroom session for a couple of hours. Afterward, they typically give me a football or basketball. Last year, Bill Gates happened to be in town. This year, we had a good session and when they got through, they gave me a book, the autobiography of Jim Clayton, the founder of Clayton Homes. He'd written a nice inscription. I said to the students that I was an admirer of Jim's. I read the book and called Kevin Clayton, Jim's son, and said how much I'd enjoyed his dad's book. I said if they ever decided to do anything [regarding selling the company], we'd be interested and I told him what price I'd be willing to pay. A few phone calls later, we had a deal. That's the way things tend to happen at Berkshire.

Source: BRK Annual Meeting 2003 Tilson Notes
Time: 2003

How did you decide to invest in Salomon?

Salomon like I said, I went into that because it was a 9% security in 1987 in September 1987 and the Dow was up 35% and we sold a lot of stuff. And I had a lot of money around and it looked to me like we would never get to do anything, so I took an attractive security form in a business I would never buy the common stock of. I went in because of that and I think generally it is a mistake. It worked out OK finally on that. But it is not what I should have been doing. I either should have waited in which case I could have bought more Coca-Cola a year later or thereabouts or I should have even bought Coke at the prices it was selling at even though it was selling at a pretty good price at the time. So that was a mistake.

On Long-Term Capital that is—we have owned other businesses associated with securities over the years-–One of them is arbitrage. I’ve done arbitrage for 45 years and Graham did it for 30 years before that. That is a business unfortunately I have to be near a phone for. I have to really run it (arbitrage operations) out of the office myself, because it requires being more market-attuned because I don’t want to do that anymore. So unless a really big arbitrage situation came along that I understood, I won’t be doing much of that. But I’ve probably participated in about 300 arbitrage situations at least in my life maybe more. It was a good business, a perfectly good business.

Source: Lecture at the University of Florida Business School
Time: October 15th 1998

You were rumored to be one of the rescue buyers of Long Term Capital, what was the play there, what did you see?

The Fortune Magazine that has Rupert Murdoch on the cover. It tells the whole story of our involvement; it is kind of an interesting story. I got the really serious call about LTCM on a Friday afternoon that things were getting serious. I know those people most of them pretty well--most of them at Salomon when I was there. And the place was imploding and the FED was sending people up that weekend. Between that Friday and the following Wed. when the NY Fed, in effect, orchestrated a rescue effort but without any Federal money involved. I was quite active but I was having a terrible time reaching anybody.

We put in a bid on Wednesday morning. I talked to Bill McDonough at the NY Fed. We made a bid for 250 million for the net assets but we would have put in 3 and 3/4 billion on top of that. $3 billion from Berkshire, $700 mil. from AIG and $300 million. from Goldman Sachs. And we submitted that but we put a very short time limit on that because when you are bidding on 100 billion worth of securities that are moving around, you don't want to leave a fixed price bid out there for very long.

In the end the bankers made the deal, but it was an interesting period. The whole LTCM is really fascinating because if you take Larry Hillenbrand, Eric Rosenfeld, John Meriwether and the two Nobel prize winners. If you take the 16 of them, they have about as high an IQ as any 16 people working together in one business in the country, including Microsoft. An incredible amount of intellect in one room. Now you combine that with the fact that those people had extensive experience in the field they were operating in. These were not a bunch of guys who had made their money selling men’s clothing and all of a sudden went into the securities business. They had in aggregate, the 16, had 300 or 400 years of experience doing exactly what they were doing and then you throw in the third factor that most of them had most of their very substantial net worth’s in the businesses. Hundreds and hundreds of millions of their own money up (at risk), super high intellect and working in a field that they knew. Essentially they went broke. That to me is absolutely fascinating.

If I ever write a book it will be called, Why Smart People Do Dumb Things. My partner says it should be autobiographical. But this might be an interesting illustration. They are perfectly decent guys. I respect them and they helped me out when I had problems at Salomon. They are not bad people at all.

But to make money they didn’t have and didn’t need, they risked what they did have and what they did need. That is just plain foolish; it doesn’t matter what your IQ is. If you risk something that is important to you for something that is unimportant to you it just doesn’t make sense. I don’t care if the odds you succeed are 99 to 1 or 1000 to 1 that you succeed. If you hand me a gun with a million chambers with one bullet in a chamber and put it up to your temple and I am paid to pull the trigger, it doesn’t matter how much I would be paid. I would not pull the trigger. You can name any sum you want, but it doesn’t do anything for me on the upside and I think the downside is fairly clear. Yet people do it financially very much without thinking.

There was a lousy book with a great title written by Walter Gutman—You Only Have to Get Rich Once. Now that seems pretty fundamental. If you have $100 million at the beginning of the year and you will make 10% if you are unleveraged and 20% if you are leveraged 99 times out of a 100, what difference if at the end of the year, you have $110 million or $120 million? It makes no difference. If you die at the end of the year, the guy who makes up the story may make a typo, he may have said 110 even though you had a 120. You have gained nothing at all. It makes absolutely no difference. It makes nodifference to your family or anybody else.

The downside, especially if you are managing other people’s money, is not only losing all your money, but it is disgrace, humiliation and facing friends whose money you have lost. Yet 16 guys with very high IQs entered into that game. I think it is madness. It is produced by an over reliance to some extent on things. Those guys would tell me back at Salomon; a six Sigma event wouldn’t touch us. But they were wrong. History does not tell you of future things happening. They had a great reliance on mathematics. They thought that the Beta of the stock told you something about the risk of the stock. It doesn’t tell you a damn thing about the risk of the stock in my view.

Sigma’s do not tell you about the risk of going broke in my view and maybe now in their view too. But I don’t like to use them as an example. The same thing in a different way could happen to any of us, where we really have a blind spot about something that is crucial, because we know a whole lot of something else. It is like Henry Kauffman said, "The ones who are going broke in this situation are of two types, the ones who know nothing and the ones who know everything." It is sad in a way.

I urge you. We basically never borrow money. I never borrowed money even when I had $10,000 basically, what difference did it make. I was having fun as I went along it didn’t matter whether I had $10,000 or $100,000 or $1,000,000 unless I had a medical emergency come along.

I was going to do the same things when I had a little bit of money as when I had a lot of money. If you think of the difference between me and you, we wear the same clothes basically (SunTrust gives me mine), we eat similar food—we all go to McDonald’s or better yet, Dairy Queen, and we live in a house that is warm in winter and cool in summer. We watch the Nebraska (football) game on big screen TV. You see it the same way I see it. We do everything the same—our lives are not that different. The only thing we do is we travel differently. What can I do that you can’t do?

I get to work in a job that I love, but I have always worked at a job that I loved. I loved it just as much when I thought it was a big deal to make $1,000. I urge you to work in jobs that you love. I think you are out of your mind if you keep taking jobs that you don’t like because you think it will look good on your resume. I was with a fellow at Harvard the other day who was taking me over to talk. He was 28 and he was telling me all that he had done in life, which was terrific. And then I said, "What will you do next?" "Well," he said, "Maybe after I get my MBA I will go to work for a consulting firm because it will look good on my resume." I said, "Look, you are 28 and you have been doing all these things, you have a resume 10 times than anybody I have ever seen. Isn’t that a little like saving up sex for your old age?

There comes a time when you ought to start doing what you want. Take a job that you love. You will jump out of bed in the morning. When I first got out of Columbia Business School, I wanted to go to work for Graham immediately for nothing. He thought I was over-priced. But I kept pestering him. I sold securities for three years and I kept writing him and finally I went to work for him for a couple of years. It was a great experience. But I always worked in a job that I loved doing. You really should take a job that if you were independently wealthy that would be the job you would take. You will learn something, you will be excited about, and you will jump out of bed. You can’t miss. You may try something else later on, but you will get way more out of it and I don’t care what the starting salary is.

When you get out of here take a job you love, not a job you think will look good on your resume. You ought to find something you like.

If you think you will be happier getting 2x instead of 1x, you are probably making a mistake. You will get in trouble if you think making 10x or 20x will make you happier because then you will borrow money when you shouldn’t or cut corners on things. It just doesn’t make sense and you won’t like it when you look back.

Source: Lecture at the University of Florida Business School
Time: October 15th 1998

Warren: We should buy the most attractive amongst the ones we understand and like. Stocks give you bargains, but individual owners won’t. But we will do it at a fair price. We aren’t going to look for a given confectionary company.

Charlie: We don’t do anything when the phrase ‘regardless of price’ enters the equation. I watched a man who sold a business to a known crook just for a higher price, but who you knew would ruin the business. It’s better to sell companies you created to someone who would be a good steward at a lower price.

Source: BRK Annual Meeting 2008 Boodell Notes
Time: 2008

BNSF deal. You have discussed the certainty of allowable returns in the industry. How are these calculated?

Buffett: The authorities (the Service Transportation Board) have adopted a 10.5% ROIC as the agreed upon amount. Of course this could be adjusted if there was a huge change in interest rates. Utilities often get 12% ROE. Railroads go to returns on invested capital. I don't think this is a crazy standard. Railroads, unlike the electric utilities where you are guaranteed a rate of return, are more volatile due to the risk of large economic contractions. If you behave yourself in electric utility, you will almost always make your returns. Railroads have more up and down, more downside. In general, you want railroads investing a lot more than depreciation to improve the transportation system. 10.5% is inducement enough. CThe country as a whole and the railroad systems have a common interest in not earning a huge profit but generating a fair return that allows for continued investment. If Service Transportation Board says 10.5%, that is not a crazy number.

Source: BRK Annual Meeting 2010 Boodell & Claremon Notes
Time: 2010

Decisions are usually made with a pessimistic attitude and it is projected that the trend will continue to accelerate.

Warren: Most big food businesses are good businesses in that they earn good returns on tangible assets. If you own important branded assets in this country, and you have good assets, it is not easy to take on those products.


What do you tell your managers at Berkshire?

I send one message out every year and a half or two years. They get one letter from me every couple of years. And basically it says, run this business like it's the only business that your family can own for the next 100 years. You can't sell it. But every year don't measure it by the earnings in the quarter that year. Measure it by whether the moat around that business, what gives it competitive advantage over time has widened or narrowed. If you keep doing that for 100 years, it's going to work out very well. Then I tell them basically if the reason for doing something is everybody else is doing it, it's not good enough. If you have to use that as a reason, forget it. You don't have a good reason for doing something. Never use that.

Source: Buffett & Gates at Columbia Business School
Time: November 12th 2009

In terms of not paying dividends, we don't pay dividends because we think we can turn every dollar we make into more than a dollar in market value. The only reason for us to keep your money is to make it worth more by us keeping it than it would be worth if we gave it to you. That's the test, if we come to the conclusion that we can't do that, we should distribute it to you.

How does Berkshire compensate it's managers?

[Charlie: As the shareholders know, our system is different from most big corporations. We think it's less capricious. The stock option system may give extraordinary rewards to some people who did nothing, and give nothing to those who deserve a lot. Except where we inherit it [a stock option program], we don't use it.]

We inherited stock options, primarily with Gen Re. Those options turned out to be quite valuable. Would not have been if Gen Re had been a stand-alone. Not to criticize anyone, but some people made a lot of money who contributed nothing. Options are a royalty on the passage of time. They put management's interests contrary to the interests of shareholders.

We believe in tying incentives to things under management's control. To give a lottery ticket to someone who runs 1% of Berkshire is really crazy. We saw more crazy stuff in the 1990s than in the previous 100 years. There was wealth transfer that has never been experienced before. I'll accept lottery tickets, but they would have no impact on my decisions or behavior.

A properly designed option system, tied to performance, can be sensible. But to just pass them out, give a 10-year ride and grant more if the stock goes down, doesn't make sense.

[Charlie: If we're right, then it has considerable implications. [It would mean that] more than 99% of corporate compensation systems are more than a little crazy. We're not against vast rewards for people who deserve them, but [most stock options programs don't achieve this.]]

We love to see people at Berkshire making money, but only if they're making money for you. Compensation is an interesting subject and I'm going to write about it next year.

It's not a market system. Compensation people say it's like baseball negotiation [between a team owner and a star player], but it's not. The player is negotiating with someone who's paying the money. But at large corporations, on one side is guy who really cares and on the other side is the compensation committee -- generally people who are not picked for their strong spines -- to them, it's play money. It's almost meaningless to the guy on one side if the CEO gets 100,000 shares of restricted stock or one million, but the guy on the other side cares a lot. You get parity in negotiations with unions -- that's real negotiation.

I've never seen a compensation consultant say that the Board should reduce the CEO's salary or get rid of this bozo. They'd never get hired again. It's a bad system and needs improvement. There have been some improvements. It [improvement in this area] is the acid test of corporate reform.

Over time, a vast disparity in pay has arisen, and there's a disconnect between performance and pay. So arise, shareholders!

Source: BRK Annual Meeting 2003 Tilson Notes
Time: 2003

Charlie: Invest in a business any fool can run, because someday a fool will. If it won’t stand a little mismanagement, it’s not much of a business. We’re not looking for mismanagement, even if we can withstand it.

Managers are allowed to operate without interference with Omaha. What would happen if BRK found illegal activity? Would you intervene?

Buffett: I send a letter every 2 years and asks each manager. A letter goes out every two years, it is 1.5 pages. It asks each managers who they would select to replace them if they died that night and the reasons why I should choose this person. I also remind them that we have all the money we need. We don’t have a shred more of reputation than we need. It doesn’t hurt to repeat Solomon story. If the only reason you are doing something is the other guy is doing it, then don’t. I say to call me. Most realize that if they are thinking about calling me, it’s too close a call and should be avoided. We can cure any problem if we hear about it soon enough, but if allowed to fester it worsens. With 260k people I hope we hear about them fast. We care very much to protect reputation of Berkshire. We have all the money in the world, but we don’t have enough reputation.

Charlie: Averaged out our reputation is good, and that is precious to us. We care more about reputation than business mistakes for sure. Protecting BRK’s reputation is essential. In a sense, you people are part of culture. The ideal is not to make as much money as possible within legal limits. We celebrate wealth only when it is fairly won and wisely used. That culture pervades the place, and we think is very helpful to us.

Source: BRK Annual Meeting 2010 Boodell & Claremon Notes
Time: 2010

Why don't you split the stock?

We have the best investors and the lowest turnover of any major company. Why? It’s a self-selection process. People who say they’re not interested in a stock that trades for thousands of dollars per share, simply for this reason, are probably not as intelligent or as in-sync as this group [referring to Berkshire’s current shareholders]. It’s a sign, a symptom.

By not splitting, we’ve helped attract the best shareholders – people who don’t care if the stock is at $90,000 or $9.

[Charlie: I think the notion that liquidity of tradable common stock is a great contributor to capitalism is mostly twaddle. The liquidity gives us these crazy booms, so it has as many problems as virtues.

After the South Sea bubble, England banned tradable stocks and England did fine during this period. If you think liquidity is a great contributor to civilization, then you probably think all real estate in America, which is mostly illiquid, is a problem.]

Berkshire trades $50 million per day, so very few people will have problem selling.

[Charlie: But we’re trying to create more people who have the problem of owning stock worth so much that liquidity is an issue.]

Source: BRK Annual Meeting 2004 Tilson Notes
Time: 2004

The Market

Views on the market and where it's going?

I have no idea were the market is going to go. I prefer it going down. But my preferences have nothing to do with it. The market knows nothing about my feelings. That is one of the first things you have to learn about a stock. You buy 100 shares of General Motors (GM). Now all of a sudden you have this feeling about GM. It goes down, you may be mad at it. You may say, "Well, if it just goes up for what I paid for it, my life will be wonderful again." Or if it goes up, you may say how smart you were and how you and GM have this love affair. You have got all these feelings. The stock doesn't know you own it.

The stock just sits there; it doesn't care what you paid or the fact that you own it. Any feeling I have about the market is not reciprocated. I mean it is the ultimate cold shoulder we are talking about here.

Source: Lecture at the University of Florida Business School
Time: October 15th 1998


Buffett thinks there are two main factors in assessing management:

  • How have their results been?
  • How do they treat the company's shareholders? Look also at how management treats themselves relative to the shareholder by reading the proxy circular.

Buffett said that he advocates "finding the 0.400 batters, and letting them swing". Buffett later went on to say that one of the two or three most important things a Chief Executive Officer does is to allocate capital (i.e., invest money - either retained earnings or new outside capital). Yet few CEO's are trained for capital allocation because they rose through other streams in the business such as operations, sales or finance. Referring still to capital allocation, Buffett said most CEO's, when they get the top job, are "like a concert pianist arriving at Carnegie Hall - only to be handed a violin".

Often CEOs who are inexperienced in the field of capital allocation will rely on so called "experts" Buffett sees this as extremely dangerous.

Source: BRK Annual Meeting 1994
Time: 1994

Buffett: We haven’t tried to evaluate, before they have a record, who will be superstar managers. Instead, we find people who’ve batted .350 for 10-50 years. We just assume we won’t screw it up by hiring them. We take people who play the game very well and allow them to play.

I recall a study that correlated business success with the age at which a manager started. It turns out that those who started young did best. Of course, if you work with what you have, you can develop over time, but a lot of it is wiring – I’ve come to believe more so than I did 4-5 years ago. I’ve never heard Charlie say anything dumb about business – except when he disagrees with me. (Laughter) And I’ve never heard [GEICO CEO] Tony Nicely say anything dumb about business, ever.

What are three traits of successful managers?

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 two will kill you. All you have is a crook who works hard. If a person doesn’t have integrity, you want them dumb and lazy.

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 12 people for 15 minutes each and I asked myself, "Who would I go into a foxhole with?" I never look at grades or where you went to school. When I picked Deryck Maughan, he never asked me about pay or options or indemnity. He went to work.

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?

Source: Q&A with 6 Business Schools
Time: Feb 2009

If two people had the same knowledge base but one had two-years experience and one had ten-years experience, which one would do a better job? [Charlie: The scale of experience matters.]

One of the things that would be helpful for the person with ten-years experience would be the ability to construct models on observations, and the ten-year veteran would have more observations than the two-year.

Any advice for spotting crooked managements?

[Charlie: I want to make an apology. Last night, referring to some of our modern business tycoons – specifically, Armand Hammer – I said that when they’re talking, they’re lying, and when they’re quiet, they’re stealing. This wasn’t my witticism; it was used [long ago] to describe the robber barons.

At Borsheims we have a woman from Zimbabwe. She didn’t even have the benefit of an MBA. We didn’t look at a resume, or grades, or HR recommendations, but were looking for passion and we’ll pay fairly because we don’t want the resent that comes with unfairness. We want people that will work regardless.

Your thoughts on management compensation? Management compensation in a cyclical industry?

We have a wide range of businesses at Berkshire – some are easy to run and some not. We have a wide range of compensation systems. Most people, left to select their own compensation systems, [will pick one that gives them big guaranteed rewards].

If we owned a copper-mining company in its entirely, we’d base compensation on costs of production, which management has control over, rather than things based on market prices, which they don’t control. Costs won’t fluctuate a lot. Compensation should tie to what is under the control of management. Try to understand what management can have impact on.

At GEICO, we measure and compensate management and employees on two factors: unit growth and the profitability of seasoned business. (New business initially costs us money and we want it, so we don’t penalize for it.)

If oil goes from $30 to $60, there’s no reason to pay [an oil company executive] for that. If they have low finding costs, which they can control, I’d pay them like crazy for that. That is the job you hire them for. To hand them huge checks for something they have no control over is crazy, and it’s equally crazy to penalize them if oil prices go down. If oil prices went down and my CEO had low finding costs, we’d pay him like crazy.

Source: BRK Annual Meeting 2006 Tilson Notes
Time: 2006

Buffett: There are more problems with having the wrong manager than the wrong compensation system. It’s enormously difficult to run a big company, so the greater sin is having the wrong person [as CEO vs. overpaying that person].

Buffett: We read a lot, 10Ks, etc.

If we buy the entire business, we care very much about management and whether they’ll behave in the future as they have in the past. We’ve had good luck with this.

But in marketable securities, we read the annual reports. Charlie and I read an annual report recently – it was very fancy – for an oil company that didn’t talk about finding costs per MCF [million cubic feet of gas] or barrel [of oil]. The most important metric, over time, wasn’t even discussed and when it was touched on, it was in a dishonest manner. That tells us a lot about the individual running the company.

Charlie: Two things matter: if the quality of the business is good enough, it can carry bad management. The reverse isn’t true, though. It’s very rare for a great manager to take over a bad business, say the textile business, and make it great. You shouldn’t look for Warrens.

Buffett: It took me 20 years [to get out of the textile business]. If you asked me to run a tough business, I wouldn’t do it. It’s too tough. Even the best manager in the world couldn’t fix it. If you gave me first draft pick of all CEOs in America and you said it was my job to run Ford Motor now, I wouldn’t do it.

Source: BRK Annual Meeting 2007 Tilson Notes
Time: 2007

We buy businesses with great management in place. We have seen their record. They come with the business. Our job is not to select great managers; our job is to retain them. A majority of them are wealthy. They don’t have a monetary reason to work in many cases. We have 19 people at head- quarters and 250,000 around the world. Our job is to make sure they have the same enthusiasm. We have to see passion in their eyes and believe the passion will remain, but we can create an environment to keep them happy. At these annual meetings, we tell them what a great job they did and make them feel appreciated. We don’t have contracts — it doesn’t work. Our managers are appreciated.

Charlie: Story of Howard Amundsen; a young man asked him how do you get ahead? He replied, ‘I always keep a few million dollars lying around just in case a good opportunity shows up.’

Source: BRK Annual Meeting 2008 Boodell Notes
Time: 2008

The crisis was started by lack of integrity. -- Charlie Munger

You want structures that eliminate bad behavior, that minimize human weakness. -- Warren Buffett

Source: BRK Annual Meeting 2010 Boodell Notes
Time: 2010

To get rich, you find businesses with durable competitive advantage and you don't overpay for them. Technology is based o­n change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles.

Source: 2005 Tuck School of Business Trip to Omaha
Time: 2005

How will the expensing of stock options affect entrepreneurship and small business?

Warren: Not much at all. Berkshire has never used options as compensation in our companies. At The Pampered Chef [a Berkshire acquired cooking utensil company], our employees value travel awards as a kind of extra compensation. Often the recipients of stock options don't place the same value o­n them as the giver does, or should. In the 90's when we were involved with Salomon Brothers instead of granting stock options to employees I offered to sell them options at 80% of their present value. They turned it down.

In your letters you speak frequently of the importance of not over-complicating things. What are your secrets to keeping your life simple?

Warren: When making investments, pretend in life you have a punch-card with o­nly 20 boxes, and every time you make an investment you punch a slot. It will discipline you to o­nly make investments you have extreme confidence in. Big money is made by obvious things. If using a discount rate of 8% vs. 10% is going to make or break an investment idea, it's probably not a good idea.

How do you identify extraordinary business ability?

Warren: Again, passion. When Ms. B's son was fighting in World War II, they exchanged letters every day…about the furniture business. When Berkshire acquired a 90% stake in NFM in the 80's, Ms. B and I shook hands and signed a two-page agreement. There was no audit of the books, no due diligence, I trusted her integrity. When Wal-Mart sold me o­ne of their operating units, their CFO came to my office, I gave him a price, he called Bentonville [Arkansas - Wal-Mart headquarters], and that day the deal was done. I know how Wal-Mart conducts business [very well], and when we took over the division, it was exactly how they described it. So integrity is a requirement. o­ne of Berkshire's businesses is FlightSafety, the founder is dedicated to preventing deaths, he's not motivated by the next quarter's numbers.

How would you define your character? And what portion of your character do you believe contributed the most to your success?

The important qualities you need are intelligence, patience, and interest, but the biggest thing is to be rational. In ‘97-8, people weren’t rational. People got caught up with what other people were doing. Don’t get caught up with what other people are doing. Being a contrarian isn’t the key, but being a crowd follower isn’t either. You need to detach yourself emotionally. You need to think about what is going on around you. Being in Omaha helps me in that regard. When I was in NYC, I had 50 people whispering in my ear before noon. It’s hard sometimes, like when the Internet craze hit. Nobody likes to see their neighbor doing stupid things and getting rich. It was like Cinderella’s ball, I think I’ll just have one more dance, it’s not midnight yet. Sounds simple – but it is hard to leave the party. The problem with stocks is they don’t have clocks. You don’t know when it will be midnight so you can leave the party. My partner Charlie Munger and Tony Nicely at Geico are always rational. 160 IQs can say stupid things that sound good. People do silly things, whether they have 120 IQ or 160. You can always improve your rational thought. Rationality is the only thing that helps you. One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down "I am buying Microsoft @ $300B because…" Force yourself to write this down. It clarifies your mind and discipline. This exercise makes you more rational.

Source: Student Visit 2007
Time: January 2007

The difference between potential and output comes from human qualities. -- Warren Buffett

My biggest mistakes were errors of omission vs. commission. Berkshire Hathaway was also a big mistake. Sometimes the opportunity costs of keeping money in something (like a lousy textile business) can be a drag on Berkshire's performance. We didn't learn from the previous mistake and bought another textile mill (Womback Mills) 6-7 years after buying Berkshire Hathaway. Meanwhile, I couldn't run the one in New Bedford.

We have never lost lots of money in things, except in insurance after 9/11. We don't do the kinds of things that lose you a lot of money. We just might not be finding the "best" opportunities.

Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too many mistakes.

Side note: Warren once asked Bill Gates, "If you could only hire from one place, where would it be?" Gate's reply was Indian Institute of Technology.

Source: Student Visit 2005
Time: May 6, 2005

You’re going to make mistakes. You can’t play in the game without making any mistakes. I don’t think about it, I just move on. Most business mistakes are irreversible setbacks, but you get another chance. There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children. Business, you just go on. It’s a mistake to dwell on mistakes, it’s unproductive. It’s like Mark Twain’s story about the cat that sat on a hot stove – he never sat on a hot stove again, but he never sat on a cold one again either.

Source: Student Visit 2007
Time: January 2007

What's the best way to prepare for the future?

Imagine that you had a car and that was the only car you'd have for your entire lifetime. Of course, you'd care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body. Prepare them for life, care for them. You can enhance your mind over time. A person's main asset is themselves, so preserve and enhance yourself.

Source: BRK Annual Meeting 2002 Tilson Notes
Time: 2002

How should we take care of those who are harmed by the system, like your former textile mill workers?

I would start with the tax system. It would not be easy to implement, but some form of a steeply progressive consumption tax for the wealthy makes a lot of sense to me. For instance, when I fly my private jet I use hundreds of gallons of jet fuel but I'm not taxed at a higher rate. Flying in a private jet is usually unnecessary, excessive consumption and I should be taxed appropriately via a higher consumption tax. Here's another example: I could easily hire 20,000 people and pay them $50,000 per year to sit here and paint portraits of me all day in search of the perfect o­ne. Not o­nly would that be ridiculous, but it would pull 20,000 productive contributors out of system and I should pay highly for that. Other than figuring out ways of reallocating money to the 'bottom 20%,' we need to focus o­n finding ways to help people be useful and feel useful. This means finding people jobs, keeping them involved in society, and the like.

Source: 2005 Tuck School of Business Trip to Omaha
Time: 2005

# References