OF WARREN BUFFETT
We like buying
businesses with some untapped pricing power. When we bought See’s Candies
for $25 million, I asked myself, If we raised prices by 10 cents per
pound, would sales fall off a cliff? The answer was obviously no. You can
determine the strength of a business over time by the amount of agony they
go through in raising prices. A good example is newspapers. The local
daily paper controlled the market and every year they raised the ad rates
and circulation prices it was almost a big yawn. They didn’t worry about
losing big advertisers like Sears, J.C. Penney or Wal-Mart, or losing
subscribers. They increased prices whether the price of newsprint went up
or down. Now, they agonize over price increases because they worry about
driving people to other media. That world has changed.
The problem with raw materials’ businesses is that there isn’t any brand
identity no one ever says, “I want a Coke only if it comes in an Alcoa
[Buffett] keeps no calculator on his desk, preferring to do most
calculations in his head. “I deplore false precision in math,” he says,
explaining that he does not need exact numbers for most investment
I don’t want to know the price of the company’s stock prior to my
analysis. I want to do the work and estimate a value for the stock and
then compare that to the current offering price. If I know the price in
advance, it may influence my analysis.
I cannot have an opinion on every stock every day. The market is a
psychotic, drunk, manic-depressive buying and selling 4,000 companies
every day. In one year, the [average stock’s] high can be double its low.
These businesses are no more volatile than a farm or an apartment
building, whose values do not swing so wildly.
For the first 30 years of my career, I had enough ideas that I would sell
a dollar at 60 cents because I could buy another one at 40 cents. That’s
not the case anymore. Now we only sell if the Value Investor Insight 20
Business has changed or we don’t trust management. I would not manage $150
million like this.
If you’re smart, you don’t need leverage. If you’re dumb, you have no
business using it.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the
work of genius. But Sir Isaac’s talents didn’t extend to investing: He
lost a bundle in the South Sea bubble, explaining later, “I can calculate
the movement of the stars, but not the madness of men.” If he had not been
traumatized by this loss, Sir Isaac might well have gone on to discover
the Fourth Law of Motion: For investors, as a whole, returns decrease as
The enemy of investment success is activity. I know the American investor
will not be better off if volume doubles on the New York Stock Exchange,
and I also know [a publicly-traded] NYSE will be trying to figure out how
to do that if it is trying to maximize its own earnings per share.
My broker at Citigroup told me to look through this Korean version of the
Moody’s guide – that it would look just like [the United States in] 1951,
and he was right. In six hours I put together a small portfolio of 20-25
stocks, about $100 million total. One example was Daehan Flour Mills. It
has a 25% market share in wheat flour in South Korea. Book value was
206,000 Won, the company had 201,000 Won in marketable securities and it
was trading at 2x earnings. Markets are clearly not efficient all of the
Berkshire Hathaway invested in PetroChina because it was cheap, not
because it was “China.”
We haven’t tried to evaluate, before they have a record, who will be
superstar managers. Instead, we find people who have batted .350 for 10 to
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.
We look for three things [in our managers]: intelligence, energy and
integrity. If they 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 him to be dumb and lazy.
I do not hire people I would not want as friends or as neighbours. I work
with people who make my life easier. You can’t work with people who make
your stomach grind.
A friend of mine spent twenty years looking for the perfect woman;
unfortunately, when he found her he discovered that she was looking for
the perfect man.
Too often, executive compensation in the United States is ridiculously out
of line with performance. That won’t change, moreover, because the deck is
stacked against investors when it comes to the CEO’s pay. The upshot is
that a mediocre-or-worse CEO – aided by his handpicked VP of human
relations and a consultant from the ever-accommodating firm of Rachet,
Ratchet and Bingo – all too often receives gobs of money from an
ill-designed compensation agreement.
Getting fired can produce a particularly bountiful payday for a CEO.
Indeed, he can “earn” more in that single day, while cleaning out his
desk, than an American worker earns in a lifetime of cleaning toilets.
Forget the old maxim about nothing succeeding like success: Today, in the
executive suite, the all-too prevalent rule is that nothing succeeds like
Every day, in countless ways, the competitive position of each of our
businesses grows either weaker or stronger. If we are delighting
customers, eliminating unnecessary costs and improving our products and
services, we gain strength. But if we treat customers with indifference or
tolerate bloat, our businesses will wither.
[We have three managers at Berkshire who are reasonably young and fully
capable of being CEO. Any of the three would be much better at certain
management aspects of my job than I. On the minus side, none has my
crossover experience that allows me to be comfortable making decisions in
either the business arena or in investments. That problem will be solved
by having another person in the organization handle marketable securities.
That’s an interesting job at Berkshire, and the new CEO will have no
problem in hiring a talented individual to do it.
Was this onslaught of more frequent and more intense storms merely an
anomaly? Or was it caused by changes in climate, water temperature or
other variables we don’t fully understand? And could these factors be
developing in a manner that will soon produce disasters dwarfing Katrina?
Joe [Brandon], Ajit [Jain] and I don’t know the answer to these
all-important questions. What we do know is that our ignorance means we
must follow the course prescribed by Pascal in his famous wager about the
existence of God. As you may recall, he concluded that since he didn’t
know the answer, his personal gain/loss ratio dictated an affirmative
conclusion. So guided, we’ve concluded that we should now write mega-cat
policies only at prices far higher than prevailed last year and then only
with an aggregate exposure that would not cause us distress if shifts in
some important variable produce far more costly storms in the near future.
We don’t think the way homes are bought and sold will change very much.
Some will disagree, but we don’t think the Internet will change this.
[Buying and selling a home] is the biggest financial decision most people
will make and people will continue to want to have a one-on one
relationship with a real estate broker.
We’re like an incredibly rich family. We sit on the porch of our huge farm
– so big that we can’t even see the end of it – and each year, we consume
6% more than the farm produces. To pay for this, each year we sell or
mortgage a little bit of the farm that we can’t see, so we don’t even
notice. We’re very, very rich and the rest of the world is happy to buy
from us or lend to us, so each year they take a piece of our valuable
assets – and they work very hard. But we will have to service this. If it
goes on for a long time, our children will pay.
I’m concerned about our political leadership, but as Peter Lynch once
said, “Invest in businesses any idiot could run, because someday one
will.” We’ve had many bad Presidents, but have still done well. Real GDP
per capita rose seven-fold in the last century, which is remarkable.
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.
Next to the nuclear/chemical/biological weapon problem, the #1 problem we
face is making sure our educational system is providing a good education
to all children and it’s not. A big problem is that in many places, the
rich have opted out. I imagine that if I used the local golf courses, I’d
care a lot about how they were managed and maintained. It’s the same with
schools. There’s a two-tiered system right now.
Terrorism, it seems to me, is impossible to solve because there will
always be troubled people seeking to do harm to large masses of people.
The intent is surely there and knowledge of how to inflict terror is
spreading. If you have intent and knowledge, the third aspect of terrorism
is ‘materials and deliverability.’ This is harder to come by for the
terrorists and what we should be working to prevent. If I knew we could
devise a solution to terrorism, I would dedicate 100% of my foundation's
funds to this effort, but I'm just not sure there's a solution.
One principle is to address very important societal problems that do not
have a constituency ideas that are politically unpopular. For example,
John Rockefeller supported black colleges, something no one wanted to
touch. They had no wealthy alumni, so Rockefeller said, “I’ll be the
alumni. That’s the kind of thing I like.
Doing charity work is the opposite of investing we look for the most
difficult problem to solve and the ones that have the lowest probability
It’s interesting that the same people who talk about the terrible cycle of
dependency that welfare brings will then hand their kids when they emerge
from the womb a lifetime supply of food stamps. But some poor woman who’s
had two pregnancies by the time she’s 17, they say, “Oh, this is terrible
to give her anything.”
You can argue that a very significant percentage of my money has been
made. And I don't need the stock to control Berkshire, so it may make
sense to do something very significant [charity-wise] before I die.
The meaning of life is to do everything you can to make sure the people
you care about love you back.
You’re changed most by your interactions with your spouse. Who your spouse
is hugely affects your life and some people make mistakes.
An example is the best thing you can leave behind. Obviously, you want to
leave the right example. I mean, Wilt Chamberlain's tombstone may say, At
last, I sleep alone, and that's probably not the example you want to
leave. If what I've done with Berkshire running a unique and independent
company in true pursuit of shareholder value persists and people learn
from it to improve the way they invest and run their companies, that would
be a fine legacy to leave.