Thursday, December 29, 2005

Quote of the day

"If others would think as hard as I did, then they would get similar results.''
- Newton

Paul Graham on "Good And Bad Procrastination"

I think the way to "solve" the problem of procrastination is to let delight pull you instead of making a to-do list push you. Work on an ambitious project you really enjoy, and sail as close to the wind as you can, and you'll leave the right things undone.

Excerpt from Paul Graham's "Good And Bad Procrastination"


  • Do what you enjoy most everyday and ignore the rest
  • Plan and review the ambitious project now and then

Effective habits and great tools to carry out

In his famous essay "You and Your Research", Richard Hamming suggests that you ask yourself three questions occassionally:

  • What are the most important problems in your field?
  • Are you working on one of them?
  • Why not?

I think these three questions are great tools to "Put first thing first". I suggest everyone to ask this questions every morning before you start your day.

Another good set of questions to ask to "Have an end at the beginning" (inspired by Richard Hamming's) are:

  • What path to success do I want to choose if I can only pick one for a life time?
  • What's the life style like if I choose this path?
  • What's it like every day if I choose this life style?

Preferrably ask them every weekend or every end of the month.

Deal with errands with Procrastination

In Paul Graham's "Good and Bad Procrastination", he says, "The reason it pays to put off even those errands is that real work needs two things errands don't: big chunks of time, and the right mood." Another reason I can think of is that errands are not important. You don't want to allocate you time (capital) on low-return events to your career or your life. According to Steven Covey, we should always focus on the "important but not urgent" things. This is the same philosophy as Warren Buffett's capital allocation. One is on time, one is on money.

So how do you deal with errands? Procrastinate.

Wednesday, December 28, 2005

Bill Gates on choosing people

In my case, I'd have to say my best business decisions have had to do with picking people. Deciding to go into business with Paul Allen is probably at the top of the list, and subsequently, hiring a friend--Steve Ballmer--who has been my primary business partner ever since. It's important to have someone who you totally trust, who is totally committed, who shares your vision, and yet who has a little bit different set of skills and who also acts as something of a check on you. Some of the ideas you run by him, you know he's going to say, "Hey, wait a minute, have you thought about this and that?" The benefit of sparking off somebody who's got that kind of brilliance is that it not only makes business more fun, but it really leads to a lot of success.

Warren Buffett on Aluminum

- No real opinion on it

- The problem with raw materials businesses is that there's no brand one ever says, "I want a Coke only if it comes in an Alcoa aluminum can"

- Aluminum, to a large degree, is just stored up electricity, because power is such a huge component of its production cost

Warren Buffett on Oil and natural gas

- Everyone thinks oil has moved a have to consider the weakening of the dollar...if you look at oil priced in Euros it has not moved a lot...same situation with gold

- We have seen a real increase in many raw materials...coal is a good example; very scarce right now

- WB doesn't play the game of betting on the price of oil or commodities often

- Natty - MidAmerican is looking at an Alaskan pipeline

- Alaska has 80T-90T cubic feet of natural gas (a lot)

- Trouble with Alaska opportunity:

  • $2/mcf transport costs
  • Takes 6-7 years to build pipeline - hard to make 6-7 year commitment with uncertain future price outlook
  • Same issue with LNG terminal build-out

- Most commodity companies don't trust current prices because they've been burned too many times on price

- Oil exploration in the US is tough

- Today our onshore production is 6MM barrels/day

- We used to be self-sufficient in oil production, to the point where we had to periodically shut down because we were producing too much

- US is the most explored oil province in the world and we haven't found a real elephant in the lower 48 states in 30-40 years

- BRK is not tempted to bet in the oil exploration business in any material way

If what Warren Buffett said is true, the oil price should have been going up more. If you are not comfortable with betting on oil futures, try to look for a good oil company.

Warren Buffett Musings on Coke

- The chance that Coke is not the leader in the carbonated beverage business in the future is very small

- Candy bars become very entrenched in their markets and are hard to unseat...they don't travel well into new markets

- Coke travels well into new markets

- One of the most important thing about Coke as a consumer product is that Coke does not have a "taste memory." In other words, the taste of Coke doesn't accumulate in your mouth. This is what makes it easy for some people to have 3,4,5+ Cokes each day. They never tire of it because there is no taste residue. Orange or grape soda accumulates and you get sick of it. Same thing with chocolate. There is no diminishing marginal utility of taste for Coke. WB doesn't believe there has ever been a word written about this phenomenon.

Warren Buffett on Auto industry outlook (especially GM)

- GM bonds are currently selling at B spreads

- Auto industry is a very tough business

- In the 60's GM had over 50% of the US car market...people thought they were impenetrable

- GM did dumb labor deals when the accounting didn't require accruals for costs

- GM is now a terrible life/health benefits company with an auto business attached
  • Auto business is well managed, but labor issues are just killer

- 2000 auto companies were started after Henry Ford - there are now 3 left in the US - no money has been really made over time

Warren Buffett on Competitive advantage and business model in banking

- 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

Warren Buffett on Managing Berkshire

- Focused hard on creating a company over time that he would like today...built the company around the way he likes to work

- Hates meetings, managing people, and company rituals

- BRK has no general counsel or IR

- Directors meet in person only once per year

- 17 people employed at HQ

- "I don't call managers of my businesses, they call me"

Warren Buffett on Avoiding human misjudgment

- WB said repeatedly that it doesn't take above a 125 IQ to do this¡­in 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

What Warren Buffett reads?

- Most of reading includes K's, Q's and 5 newspapers daily

- Hasn't found much worthwhile book reading outside of Graham and Fisher

Why more people don't follow Warren Buffett's advice?

- The advice doesn't promise's not a "get rich quick" scheme, which is what a lot of other philosophies promise

- WB mentioned that when he was really young he started investing using technical analysis, but found that he never could make any money with it

- "I realized that technical analysis didn't work when I turned the chart upside down and didn't get a different answer."

- After seeing that charting didn't work, he switched to made sense and it worked

Warren Buffett's Advice for new investors

- Don't worry too much about your mistakes

- Don't learn too much from your mistakes
o Don't become Mark Twain's frog that never sat again on a stove after being burned
o 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."

Warren's investment process

  • In the past some things were cheap enough WB could decide in a day (this was somewhat a function of a time period where companies would sell at 2-3x earnings)
  • Decisions should be obvious to onlookers. You should be able to explain why you bought something in a paragraph.
  • "I don't do DCF" (WB says he does a rough approximation in his mind)
  • Finding ideas is a function of cumulative knowledge over time. Something just comes along - usually an event takes place, like a good management team screwing up - that creates the opportunity (WB seems to imply here that his reading isn't specifically targeted at finding ideas, but rather that ideas jump out at him as a natural consequence of vociferous reading)
  • You must be patient...good ideas tend to be clustered together, and may not come at even time intervals...when you don't find anything for a while it can be irritating
  • WB isn't bothered by missing something outside his circle of competence
  • Missing things inside the circle is nerve racking...examples include WMT, FNM

How Warren spends his day

  • Wakes up at 6:45, reads paper at home, often doesn't make it into the office until after the market opens
  • No set schedule, WB hates having a full calendar
  • Always takes reading material home
  • Spends 80% of the day reading, 20% talking on the phone (he then said it might be more like 90/10)
  • Phone conversations are generally short

Warren Buffett's advice to students

"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.

"Follow what you are passionate about. I think it is crazy to be someplace where you feel your ethics or whatever is out of sync with your work. You really want to be in a place where you jump out of bed in the morning and you are all fired up to get to work. I have always felt that way, basically."

- Warren Buffett


  • Read and learn everything that interests you and be very good in it
  • Learn and practice use your brain and your body better every day
  • Focus your energy on what you are passionate about

A simple test of good act

"The simple test of good ethics, is how would you feel about any act, if a reasonably intelligent, but unfriendly reporter were to write it up and put it in tomorrow's paper for everyone to see. If it passes that test, it's okay, and if you have to think about it, it probably isn't the right thing to do."
- Warren Buffett

  • Ask the question Warren asks above if there's anything you want to do but not sure it's ethical

Parents and heros

"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."
- Warren Buffett

  • Choose your heros carefully and learn what you like about your heros
  • Being a good parent means behaving in a way where you expect your kids to behave

Tuesday, December 27, 2005

How Long Is A Good Nap?

THE NANO-NAP: 10 to 20 seconds Sleep studies haven't yet concluded whether there are benefits to these brief intervals, like when you nod off on someone's shoulder on the train.

THE MICRO-NAP: two to five minutes Shown to be surprisingly effective at shedding sleepiness.

THE MINI-NAP: five to 20 minutes Increases alertness, stamina, motor learning, and motor performance.

THE ORIGINAL POWER NAP: 20 minutes Includes the benefits of the micro and the mini, but additionally improves muscle memory and clears the brain of useless built-up information, which helps with long-term memory (remembering facts, events, and names).

THE LAZY MAN'S NAP: 50 to 90 minutes Includes slow-wave plus REM sleep; good for improving perceptual processing; also when the system is flooded with human growth hormone, great for repairing bones and muscles.

Excerpt from "Snooze, You Win"

How to be happy

Then the way to do it is to play out the game and do something you enjoy all your life and be associated with people you like. I only work with people I like. If I could make $100 million dollars with a guy who causes my stomach to churn, I would say no because in way that is very much like marrying for money which is probably not a very good idea in any circumstances, but if you are already rich, it is crazy. I am not going to marry for money. I would really do almost exactly what I have done except I wouldn't have bought the US Air.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

  • Identify the things you love to do all your life and align it with your career
  • Identify the kind of people you like and associate them in your life

The down market and the intelligent investor

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. Practically anybody in this room is probably more likely to be a net buyer of stocks over the next ten years than they are a net seller, so everyone of you should prefer lower prices. If you are a net eater of hamburger over the next ten years, you want hamburger to go down unless you are a cattle producer. If you are going to be a buyer of Coca-Cola and you don't own Coke stock, you hope the price of Coke goes down. You are looking for it to be on sale this weekend at your Supermarket. You want it to be down on the weekends not up on the weekends when you tend the Supermarket.

The NYSE is one big supermarket of companies. And you are going to be buying stocks, what you want to have happen? You want to have those stocks go down, way down; you will make better buys then. Later on twenty or thirty years from now when you are in a period when you are dis-saving, or when your heirs dis-save for you, then you may care about higher prices. There is Chapter 8 in Graham's Intelligent Investor about the attitude toward stock market fluctuations, that and Chapter 20 on the Margin of Safety are the two most important essays ever written on investing as far as I am concerned. Because when I read Chapter 8 when I was 19, I figured out what I just said but it is obvious, but I didn't figure it out myself. It was explained to me. I probably would have gone another 100 years and still thought it was good when my stocks were going up. We want things to go down, but I have no idea what the stock market is going to do. I never do and I never will. It is not something I think about at all.

When it goes down, I look harder at what I might buy that day because I know there is more likely to be some merchandise there to use my money effectively in.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

  • Don't predict the market
  • Take advantage of the buying opportunity when the market goes down

The most important thing about a business

We never buy something with a price target in mind. We never buy something at 30 saying if it goes to 40 we'll sell it or 50 or 60 or 100. We just don't do it that way. Anymore than when we buy a private business like See's Candy for $25 million. We don't ever say if we ever get an offer of $50 million for this business we will sell it. That is not the way to look at a business.

The way to look at a business is this going to keep producing more and more money over time? And if the answer to that is yes, you don't need to ask any more questions.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998."

  • Ask the question: "is this going to keep producing more and more money over time?" before any other questions when considering a business
  • Prepare to keep a business forever if you are preparing to buy it

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.

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.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998."

  • Stay out of opinions about the market
  • Stay inactive most of the time

The important and knowable

I don't think about the macro stuff. What you really want to in investments is figure out what is important and knowable. If it is unimportant and unknowable, you forget about it. What you talk about is important but, in my view, it is not knowable. Understanding Coca-Cola is knowable or Wrigley's or Eastman Kodak. You can understand those businesses that are knowable. Whether it turns out to be important depends where your valuation leads you and the firm's price and all that. But we have never not bought or bought a business because of any Macro feeling of any kind because it doesn't make any difference. Let's say in 1972 when we bought See's Candy, I think Nixon put on the price controls a little bit later, but so what! We would have missed a chance to buy something for $25 million that is producing $60 million pre-tax now. We don't want to pass up the chance to do something intelligent because of some prediction about something we are no good on anyway. So we don't read or listen to in relation to macro factors at all. The typical investment counselor organization goes out and they bring out their economist and they trot him out and he gives you this big macro picture. And they start working from there on down. In our view that is nonsense.

If Alan Greenspan was on the one side of me and Robert Rubin on the other side and they both were whispering in my ear exactly what they were going to do the next twelve months, it wouldn't make any difference to me what I would pay for Executive Jet or General Re or anything else I do.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

  • Focus on the company's economics, management and price instead of what the economist forecast for the next year

Learn from mistakes

We bought it because it was an attractive security. But it was not in an attractive industry. I did the same thing in Salomon. I bought an attractive security in a business I wouldn't have bought the equity in. So you could say that is one form of mistake. Buying something because you like the terms, but you don't like the business that well. I have done that in the past and will probably do that again. The bigger mistakes are the ones of omission ...... I will say this, it is better to learn from other people's mistakes as much as possible. But we don't spend any time looking back at Berkshire. I have a partner, Charlie Munger; we have been pals for forty years¡ªnever had an argument. We disagree on things a lot but we don't have arguments about it.

We never look back. We just figure there is so much to look forward to that there is no sense thinking of what we might have done. It just doesn't make any difference. You can only live life forward. You can learn something perhaps from the mistakes, but the big thing to do is to stick with the businesses you understand. So if there is a generic mistake outside your circle of competence like buying something that somebody tips you on or something of the sort. In an area you know nothing about, you should learn something from that which is to stay with what you can figure out yourself. You really want your decision making to be by looking in the mirror. Saying to yourself, "I am buying 100 shares of General Motors at $55 because¡­¡­.." It is your responsibility if you are buying it. There's gotta be a reason and if you can't state the reason, you shouldn't buy it. If it is because someone told you about it at a cocktail party, not good enough. It can't be because of the volume or a reason like the chart looks good. It has to be a reason to buy the business. That we stick to pretty carefully. That is one of the things Ben Graham taught me.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998."

  • Learn from every mistake - your own mistakes and others'; but preferrably much more from others than from yours
  • Look forward to what to do next time when the same situation appears after learning from mistakes
  • Disagree but don't argue

Short-term effect and wonderful business

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¡ªthere 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 Dec 31st 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¡ªyou 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.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

  • Study a company and its industry thoroughly so as to build up a long term (5-10 years) perspective to the company and industry
  • Ignore short-term set-backs of a company if you are sure about its long term perspective

Circle of competence and how to build the circle

Everybody has got a different circle of competence. The important thing is not how big the circle is, the important thing is not the size of the circle; the important thing is staying inside the circle. And if that circle only has 30 companies in it out of 1000s on the big board, as long as you know which 30 they are, you will be OK. And you should know those businesses well enough so you don't need to read lots of work. Now I did a lot of work 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.

Funny, you get very similar answers as long as you ask about competitors. If you had a silver bullet and you could put it through the head of one competitor, which competitor and why? You will find who the best guy is in the industry. So there are a lot of things you can learn about a business. I have done that in the past on the business I felt I could understand so I don't have to do that anymore. The nice thing about investing is that you don't have to learn anything new. You can do it if you want to, but if you learn Wrigley's chewing gum forty years ago, you still understand Wrigley's chewing gum. There are not a lot of great insights to get of the sort as you go along. So you do get a database in your head.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

  • Read the annual reports of the company you are interested in as well as its competitors'
  • If a friend of yours is working for the company you are interested in or its competitors, ask him about the industry opinions
  • Research MSN and Yahoo for information about the interesting company and its industry

Charlie Munger on how to be successful on investing

You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge.

Excerpt from The World According to "Poor Charlie"

Management and investing

Understanding how to be a good investor makes you a better business manager and vice versa.

Warren's way of managing businesses does not take a lot of time. I would bet that something like half of our business operations have never had the foot of Warren Buffet in them. It's not a very burdensome type of business management.

The business management record of Warren is pretty damn good, and I think it's frequently underestimated. He is a better business executive for spending no time engaged in micromanagement.

Excerpt from The World According to "Poor Charlie"

Charlie Munger's working style

We have certain things in common. We both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves.

Excerpt from The World According to "Poor Charlie"

Learning points:
  • Like to read and think is a great advantage of a super investor.
  • Whatever you like to do, try to align it to your career. And then it becomes your strength.

"Untapped pricing power" and "share of mind"

We bought See's Candy in 1972, See's Candy was then selling 16 m. pounds of candy at a $1.95 a pound and it was making 2 bits a pound or $4 million pre-tax. We paid $25 million for it-6.25 x pretax or about 10x after tax. It took no capital to speak of. When we looked at that business-basically, my partner, Charlie, and I-we needed to decide if there was some untapped pricing power there. Where that $1.95 box of candy could sell for $2 to $2.25. If it could sell for $2.25 or another $0.30 per pound that was $4.8 on 16 million pounds. Which on a $25 million purchase price was fine. We never hired a consultant in our lives; our idea of consulting was to go out and buy a box of candy and eat it.

What we did know was that they had share of mind in California. There was something special. Every person in Ca. has something in mind about See's Candy and overwhelmingly it was favorable. They had taken a box on Valentine's Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See's Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything--$60 million bucks and it still doesn't take any capital.

And we make more money 10 years from now. But of that $60 million, we make $55 million in the three weeks before Christmas. And our company song is: "What a friend we have in Jesus." (Laughter). It is a good business. Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts- somebody's birthday or more likely it is a holiday. Valentine's Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three week period. Men buy on Valentine's Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt-guys are veering off the highway right and left. They won't dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine's Day is the biggest day.

Can you imagine going home on Valentine's Day-our See's Candy is now $11 a pound thanks to my brilliance. And let's say there is candy available at $6 a pound. Do you really want to walk in on Valentine's Day and hand-she has all these positive images of See's Candy over the years-and say, "Honey, this year I took the low bid." And hand her a box of candy. It just isn't going to work. So in a sense, there is untapped pricing power-it is not price dependent.

Think of Disney. Disney is selling Home Videos for $16.95 or $18.95 or whatever. All over the world-people, and we will speak particularly about Mothers in this case, have something in their mind about Disney. Everyone in this room, when you say Disney, has something in their mind about Disney. When I say Universal Pictures, if I say 20th Century Fox, you don't have anything special in your mind. Now if I say Disney, you have something special in your mind. That is true around the world.

Now picture yourself with a couple of young kids, whom you want to put away for a couple of hours every day and get some peace of mind. You know if you get one video, they will watch it twenty times. So you go to the video store or wherever to buy the video. Are you going to sit there and premier 10 different videos and watch them each for an hour and a half to decide which one your kid should watch? No. Let's say there is one there for $16.95 and the Disney one for $17.95-you know if you take the Disney video that you are going to be OK. So you buy it. You don't have to make a quality decision on something you don't want to spend the time to do. So you can get a little bit more money if you are Disney and you will sell a lot more videos. It makes it a wonderful business. It makes it very tough for the other guy.

How would you try to create a brand-Dreamworks is trying-that competes with Disney around the world and replaces the concept that people have in their minds about Disney with something that says, Universal Pictures? So a mother is going to walk in and pick out a Universal Pictures video in preference to a Disney. It is not going to happen. Coca-Cola is associated with people being happy around the world. Everyplace ¨C Disneyland, the World Cup, the Olympics-where people are happy. Happiness and Coke go together. Now you give me-I don't care how much money-and tell me that I am going to do that with RC Cola around the world and have five billion people have a favorable image in their mind about RC Cola. You can't get it done. You can fool around, you can do what you want to do. You can have price discounts on weekends. But you are not going to touch it. That is what you want to have in a business. That is the moat. You want that moat to widen.

If you are See's Candy, you want to do everything in the world to make sure that the experience basically of giving that gift leads to a favorable reaction. It means what is in the box, it means the person who sells it to you, because all of our business is done when we are terribly busy. People come in during theose weeks before Chirstmas, Valentine's Day and there are long lines.

So at five o'clock in the afternoon some woman is selling someone the last box candy and that person has been waiting in line for maybe 20 or 30 customers. And if the salesperson smiles at that last customer, our moat has widened and if she snarls at ¡®em, our moat has narrowed. We can't see it, but it is going on everyday. But it is the key to it. It is the total part of the product delivery. It is having everything associated with it say, See's Candy and something pleasant happening. That is what business is all about.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

The business Warren Buffett like

I like businesses that I can understand. Let's start with that. That narrows it down by 90%. There are all types of things I don't understand, but fortunately, there is enough I do understand. You have this big wide world out there and almost every company is publicly owned. So you have all American business practically available to you. So it makes sense to go with things you can understand.

I can understand this, anyone can understand this (Buffett holds up a bottle of Coca- Cola). Since 1886, it is a simple business, but it is not an easy business-I don't want an easy business for competitors. I want a business with a moat around it. I want a very valuable castle in the middle and then I want the Duke who is in charge of that castle to be very honest and hard working and able. Then I want a moat around that castle. The moat can be various things: The moat around our auto insurance business, Geico, is low cost.

People have to buy auto insurance so everyone is going to have one auto insurance policy per car basically. I can't sell them 20, but they have to buy one. I can sell them 1. What are they going to buy it on? (based on what criteria?) They (customers) will buy based on service and cost. Most people will assume the service is identical among companies or close enough. So they will do it on cost. So I have to be a low cost producer--that is my moat. To the extent that my costs are further below the other guy, I have thrown a couple of sharks into the moat. All the time you have this wonderful castle, there are people out there who are going to attack it and try to take it away from you. I want a castle I can understand, but I want a castle with a moat around it.

30 years ago, Eastman Kodak's moat was just as wide as Coca-Cola's moat. I mean if you were going to take a picture of your six-month old baby and you want to look at that picture 20 years from now or 50 years from now. And you are never going to get a chance-you are not a professional photographer-so you can evaluate what is going to look good 20 or 50 years ago. What is in your mind about that photography company (Share of Mind) is what counts. Because they are promising you that the picture you take today is going to be terrific 20 to 50 years from now about something that is very important to you. Well, Kodak had that in spades 30 years ago, they owned that. They had what I call share of mind. Forget about share of market, share of mind. They had something-that little yellow box-that said Kodak is the best. That is priceless. They have lost some of that. They haven't lost it all.

It is not due to George Fisher. George is doing a great job, but they let that moat narrow. They let Fuji come and start narrowing the moat in various ways. They let them get into the Olympics and take away that special aspect that only Kodak was fit to photograph the Olympics. So Fuji gets there and immediately in people's minds, Fuji becomes more into parity with Kodak.

You haven't seen that with Coke; Coke's moat is wider now than it was 30 years ago. You can't see the moat day by day but every time the infrastructure that gets built in some country that isn't yet profitable for Coke that will be 20 years from now. The moat is widening a little bit. Things are, all the time, changing a little in one direction or the other. Ten years from now, you will see the difference. Our managers of the businesses we run, I have one message to them, and we want to widen the moat. We want to throw crocs, sharks and gators-I guess-into the moat to keep away competitors. That comes about through service, through quality of product, it comes about through cost, some times through patents, and/or real estate location. So that is the business I am looking for.

Now what kind of businesses am I going to find like that? Well, I am going to find them in simple products because I am not going to be able to figure what the moat is going to look like for Oracle, Lotus or Microsoft, ten years from now. Gates is the best businessman I have ever run into and they have a hell of a position, but I really don't know what that business is going to look like ten years from now. I certainly don't know what his competitors will look like ten years from now. I know what the chewing business will look like ten years from now. The Internet is not going to change how we chew gum and nothing much else is going to change how we chew gum. There will lots of new products. Is Spearmint or Juicy Fruit going to evaporate? It isn't going to happen. You give me a billion dollars and tell me to go into the chewing gum business and try to make a real dent in Wrigley's. I can't do it. That is how I think about businesses. I say to myself, give me a billion dollars and how much can I hurt the guy? Give me $10 billion dollars and how much can I hurt Coca-Cola around the world? I can't do it. Those are good businesses.

Now give me some money and tell me to hurt somebody in some other fields, and I can figure out how to do it.

So I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they will be ten (10) years from now. If I can't see where they will be ten years from now, I don't want to buy it. Basically, I don't want to buy any stock where if they close the NYSE tomorrow for five years, I won't be happy owning it. I buy a farm and I don't get a quote on it for five years and I am happy if the farm does OK. I buy an apartment house and don't get a quote on it for five years, I am happy if the apartment house produces the returns that I expect. People buy a stock and they look at the price next morning and they decide to see if they are doing well or not doing well. It is crazy. They are buying a piece of the business. That is what Graham-the most fundamental part of what he taught me. You are not buying a stock, you are buying part ownership in a business. You will do well if the business does well, if you didn't pay a totally silly price. That is what it is all about. You ought to buy businesses you understand. Just like if you buy farms, you ought to buy farms you understand. It is not complicated.

Incidentally, by the way, in calling this Graham-Buffett, this is pure Graham. I was very fortunate. I picked up his book (The Intelligent Investor) when I was nineteen; I got interested in stocks when I was 6 or 7. I bought my first stock when I was eleven. But I was playing around with all this stuff-I had charts and volume and I was making all types of technical calculations and everything. Then I picked up a little book that said you are not just buying some little ticker symbol, that bounces around every day, you are buying part of a business. Soon as I started thinking about it that way, everything else followed. It is very simple. So we buy businesses we think we can understand. There is no one here who can't understand Coke.

If I was teaching a class at business school, on the final exam I would pass out the information on an Internet company and ask each student to value it. Anybody that gave me an answer, I'd flunk.

I don't know how to do it. But people do it all the time; it is more exciting. If you look at it like you are going to the races--that is a different thing--but if you are investing¡­. Investing is putting out money to be sure of getting more back later at an appropriate rate. And to do that you have to understand what you are doing at any time. You have to understand the business. You can understand some businesses but not all businesses.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

Monday, December 26, 2005

Warren Buffett's job advice

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.

Excerpt from "Buffett Talk to MBA Students at Florida University 1998"

Time and business

But time is the friend of the wonderful businesses; it is the enemy of the lousy businesses. If you are in a lousy business for a long time, you will get a lousy result even if you buy it cheap. If you are in a wonderful business for a long time, even if you pay a little bit too much going in you will get a wonderful result if you stay in a long time.

Excerpt from "Warren Buffett Talk to MBA Students at Florida University 1998"

Be the guy you want to own 100%

Ben Graham looked around at the people he admired and Ben Franklin did this before him. Ben Graham did this in his low teens and he looked around at the people he admired and he said, "I want to be admired, so why don't I behave like them?"And he found out that there was nothing impossible about behaving like them. Similarly he did the same thing on the reverse side in terms of getting rid of those qualities. I would suggest is that if you write those qualities down and think about them a while and make them habitual, you will be the one you want to buy 10% of when you are all through. And the beauty of it is that you already own 100% of yourself and you are stuck with it. So you might as well be that person, that somebody else.

Excerpt from "Warren Buffett Talk to MBA Students at Florida University 1998"

Quote of the day

"I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going."
- Peter Lynch

"My idea of a group decision is looking in a mirror."
- Warren Buffett

"I am a better investor because I am a businessman, and a better businessman because I am an investor."
- Warren Buffett

"The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much."
- Charlie Munger

Be critical at your thoughts

At the 1999 annual meeting, Buffett also warned investors about the dangers of the richly valued tech sector, using some basic and irrefutable math:

"In the whole United States -- which is, by far, the most prosperous country in the world -- there are probably around 400 companies that are earning $200 million a year after taxes, and you could probably name 350 of them.

"Five years from now, instead of 400 being on that list, there'll probably be 450 on the list -- maybe 475. And a lot of those will be companies that are earning between $150 and $200 million today. So there'll probably be 20 -- or some number like 20 -- that come from nowhere.

"If you look at the number of companies selling today at a price which implies $200 million or more of earnings right now, you'll find dozens and dozens of such companies in the high-tech arena. A very large percentage of those companies aren't going to fulfill people's expectations. And I can't tell you which ones, but I know there won't be dozens and dozens and dozens of these companies making a couple of hundred million dollars a year. And I know they're selling at prices that require them to be making that much money or more. But it just doesn't happen that often.

"It's not that easy to make lots of money in a business in a capitalistic society. There are people that are looking at what you're doing every day and trying to figure out a way to do it better, underprice you, bring out a better product or whatever it may be.

"And a few companies make it. But here in the U.S., after all of these decades and decades and decades of wonderful economic development, we still only have about 400 companies that have hit the level that would be required of a company with a market cap of $3 billion. And yet some companies are getting $3 billion of market cap virtually the day they come out. You want to think about the math of all this."

So don't hesitate to say no if you are not 100% confident to say yes.

Circle of Competence

"I don't want to play in a game where the other guy has an advantage. I could spend all my time thinking about technology for the next year and still not be the 100th, 1,000th or even the 10,000th smartest guy in the country in analyzing those businesses. In effect, that's a 7- or 8-foot bar that I can't clear. There are people who can, but I can't.

"The fact that there'll be a lot of money made by somebody doesn't bother me really. There's going to be a lot of money made by somebody in cocoa beans. But I don't know anything about 'em. There are a whole lot of areas I don't know anything about. So more power to 'em.

"I think it would be a very valid criticism if it were possible that Charlie and I, by spending a year working on it, could become well enough informed so that our judgment would be better than other people's. But that wouldn't happen. And no matter how hard I might train, I still couldn't. Therefore, it's better for us to swing at pitches [that are easy for us].

"Different people understand different businesses. The important thing is to know which ones you do understand and when you're operating within your circle of competence."

Excerpt from Berkshire Hathaway's 1998 annual meeting

Focus on the important and knownable

"We think [new technology] is very beneficial from a societal standpoint. Our own emphasis is on trying to find businesses that are predictable in a general way as to where they'll be in 10 or 15 or 20 years. That means we look for businesses that in general aren't going to be susceptible to very much change. We view change as more of a threat investment-wise than an opportunity. That's quite contrary to the way most people are looking at equities right now. With a few exceptions, we do not get enthused about change as a way to make a lot of money. We're looking for the absence of change to protect ways that are already making a lot of money and allow them to make even more in the future.

"When we look at a business and see lots of change coming, 9 times out of 10, we're going to pass -- whereas when we see something that is very likely to look the same 10-20 years from now, we feel much more confident about predicting it. Take Coca-Cola. It's still selling a product very, very similar to one that was sold 110+ years ago. The fundamentals of distribution, talking to the consumer and all that sort of thing haven't changed at all. Your analysis of Coca-Cola 50 years ago could pretty well serve as an analysis today.

"We're more comfortable in that kind of business. It means we miss a lot of very big winners. But we wouldn't know how to pick them out anyway. It also means we have very few big losers -- and that's quite helpful over time. We're perfectly willing to trade away a big payoff for a certain payoff."

Excerpt from Berkshire Hathaway's 1999 annual meeting

Thursday, December 22, 2005

About competitive advantage

So how does one identify companies with powerful, sustainable competitive advantages? Look for companies with sensible, consistent, well-defined strategies, because strategy is the root of competitive advantage for most companies.

Here are some excerpts from Michael Potter's latest thinking, which is available for free online in an interview published in Fast Company.

  • "Only strategy can create sustainable advantage. And strategy must start with a different value proposition. A strategy delineates a territory in which a company seeks to be unique. Strategy 101 is about choices: You can't be all things to all people."
  • "Many [companies] have abandoned strategy almost completely. Executives won't say that, of course... Typically, their 'strategy' is to produce the highest-quality products at the lowest cost or to consolidate their industry. They're just trying to improve on best practices. That's not a strategy."
  • "There's a fundamental distinction between strategy and operational effectiveness. Strategy is about making choices, trade-offs; it's about deliberately choosing to be different. Operational effectiveness is about things that you really shouldn't have to make choices on; it's about what's good for everybody and about what every business should be doing. Lately, leaders have tended to dwell on operational effectiveness."
  • "If all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful. It's incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long. That's especially true today, when the flow of information and capital is incredibly fast. It's extremely dangerous to bet on the incompetence of your competitors -- and that's what you're doing when you're competing on operational effectiveness."
  • "The underlying principles of strategy are enduring, regardless of technology or the pace of change. Consider the Internet. Whether you're on the Net or not, your profitability is still determined by the structure of your industry. If there are no barriers to entry, if customers have all the power, and if rivalry is based on price, then the Net doesn't matter -- you won't be very profitable."
  • "The error that some managers make is that they see all of the change and all of the new technology out there, and they say, "God, I've just got to get out there and implement like hell." They forget that if you don't have a direction, if you don't have something distinctive at the end of the day, it's going to be very hard to win."
  • "A leader ... has to make sure that everyone understands the strategy. Strategy used to be thought of as some mystical vision that only the people at the top understood. But that violated the most fundamental purpose of a strategy, which is to inform each of the many thousands of things that get done in an organization every day, and to make sure that those things are all aligned in the same basic direction."
  • "In great companies, strategy becomes a cause. That's because a strategy is about being different. So if you have a really great strategy, people are fired up."

Who to work for after school

Warren Buffett's advice to students when planning for their future was above all to work for an organization whose leaders they admire. Buffett strongly counseled, "You will be affected by the people around you. Therefore you should surround yourself by people who are better than you and they will make you a better person." Buffett did caution against taking his advice to the extreme. Smiling, he recalled the last time he told an audience to work for someone they admired, he was speaking to the MBAs at Stanford. Afterwards the Stanford Dean asked him, "What did you tell these students? They have suddenly all decided to work for themselves."

Quote of the day

"We act as though comfort and luxury were the chief requirements of life, when all that we need to make us happy is something to be enthusiastic about."- Einstein

"Premature optimization is the root of all evil (or at least most of it) in programming."- Donald Knuth

How to be more creative in daily life

Here are two things you can do immediately to be more creative.

First, see yourself as a professional problem-solver and look upon every difficulty or challenge as an opportunity to develop your creative powers.

Second, look for problems you can solve and obstacles you can overcome. The more you seek for answers and ideas, the smarter and more creative you become.

Excerpt from "Get Smart!" By Brian Tracy

Wednesday, December 21, 2005

Warren Buffett on regrets

"It would be a mistake to look back and say that I should have turned right or left. If you hit a hole in one on every hole, you wouldn't play golf for very long. I believe that it pays to look forward. "

It's important to get on the right train early in your career, how do you identify the right train?

"Don't pay attention to beginning salaries. My first job with Benjamin Graham I accepted before I even knew what the salary was. Do what you're passionate about."

- Warren Buffett

Warren Buffett on identifying extraordinary business ability

"Firstly, 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."

Warren Buffett on becoming a successful general manager

"The first thing is that you have to know how you are wired. You have to pick the right environment. I can't imagine being responsible for hundreds of people and going to meetings all day, so I work with 17 other individuals. And, you have to have a passion for what you do."

Warren Buffett's secrets to keep investment simple

"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.

"Back in 1951 Moody's published thick handbooks by industry of every stock in circulation. I went through all of them, thousands of pages, motivated by the hope that a great idea was just on the next page. I found companies like National American Insurance and Western Insurance Securities Company that nobody was paying attention to that were trading for far less than their intrinsic values. Last year we found a steel company on the Korean Stock Exchange that had no analyst coverage, no research, but was the most profitable steel company in the world."

Warren Buffett's career advice

"Do what you would do for free, having passion for what you do is the most important thing. I love what I do; I'm not even that busy. I got a total of five phone calls all day yesterday and one of them was a wrong number. Ms. B from NFM had passion, that's why she was successful. A few months ago I was talking to another MBA student, a very talented man, about 30 years old from a great school with a great resume. I asked him what he wanted to do for his career, and he replied that he wanted to go into a particular field, but thought he should work for McKinsey for a few years first to add to his resume. To me that's like saving sex for your old age. It makes no sense."

Monday, December 19, 2005

Read minds!

"If you're giving a speech the next day, review it before falling asleep," says Candi Heimgartner, an instructor of biological sciences at the University of Idaho. Since most memory consolidation happens during sleep, anything you read right before bed is more likely to be encoded as long-term memory.

Sunday, December 18, 2005

Franchise: durability and strength

The durability and strength of the franchise is the most important thing in figuring out [whether it's a good business]. If you think a business is going to be around 10 or 20 years from now, and that they're going to be able to price advantageously, that's going to be a good business. And if somebody has to have a prayer session every time they want to raise the price a dollar a pound on whatever they're selling, that's not going to be a good business.

What's the highest priced daily newspaper in the United States? Most of you are familiar with it. The highest priced daily newspaper in the United States, with any circulation at all, is the Daily
Racing Form. It sells about 150,000 copies a day, and it has for about 50 years, and it's either $2.00 or $2.25 (they keep raising prices) and it's essential. If you're heading to the racetrack and you've got a choice between betting on your wife's birthday, and Joe's Little Green Sheet, and the Daily Racing Form, if you're a serious racing handicapper, you want The Form. You can charge $2.00 for The Form, you can charge $1.50, you can charge $2.50 and people are going to buy it. It's like selling needles to addicts, basically. It's an essential business. It will be an essential business five or 10 years from now. You have to decide whether horse racing will be around five or 10 years from now, and you have to decide whether there's any way people will get their information about past performances of different horses from different sources. But you've only got about two questions to answer, and if you answer them, you know the business will make a lot of money. The Form has huge profit margins, incidentally. Wider than any other newspaper. They charge what they want to basically. It's an easy to understand business - so easy to understand.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Favorite companies

The only thing we favor is industries we can understand. And then, we like businesses with what I call "moats" around them. We like businesses that are protected in some way from competition. If you go in the drugstore and say "I want to buy a Hershey bar" and the guy says "I've got an unmarked chocolate bar that's a nickel cheaper," you'll buy the Hershey bar or you'll go across the street.

One of the interesting things to do is walk through a supermarket sometime and think about who's got pricing power, and who's got a franchise, and who doesn't. If you go buy Oreo cookies, and I'm going to take home Oreo cookies or something that looks like Oreo cookies for the kids, or your spouse, or whomever, you'll buy the Oreo cookies. If the other is three cents a package cheaper, you'll still buy the Oreo cookies. You'll buy Jello instead of some other. You'll buy Kool Aid instead of Wyler's powdered soft drink. But, if you go to buy milk, it doesn't make any difference whether its Borden's, or Sealtest, or whatever. And you will not pay a premium to buy one milk over another. You will not pay a premium to buy one [brand of] frozen peas over another, probably. It's the difference between having a wonderful business and not a wonderful business. The milk business is not a good business.


We like to be in businesses I can understand. There are all kinds of businesses I don't understand, but we're not going to own them. Thomas Watson Sr., of IBM, in that book "Father, Son, and Company, that his son wrote, quoted his father as saying "I'm no genius, but I'm smart in spots, and I stay around those spots." The real trick is knowing what you know, and what you don't know. It isn't how much you know, it's whether you can define it well, so you know when you can take a swing at the ball, and you know when you've got no business swinging.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

"Does the current recession change our attitude toward investing?"

"Does the current recession change our attitude toward investing?" It doesn't change it a nickel's worth. If something comes along tomorrow that's interesting, I will do it tomorrow. And it will be by exactly the same yardsticks I used whenever the business cycle was at its peak. We don't care what businesses are doing. If the Chairman of the Federal Reserve called me tonight and said "I am really panicking and things are terrible," I don't care. We will do exactly what we were going to do tomorrow morning. The truth is, on balance, we will do more business when people are pessimistic. Not because we like pessimism, but because it makes for prices that are much more attractive. If you all have filling stations to sell in South Bend, I want to do business with whomever is most negative about filling stations. And that's were I'm going to make the best buy. Times are really good and times are really bad, over a period of time. We don't quit selling candy in July just because it isn't Christmas. We pay no attention to economic forecasts. I don't read anything [along those lines]. I read annual reports, but I don't read anybody's opinion about what's going to happen next week, or next month or next year.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"


"Can you really explain to a fish what it's like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value."

- Warren Buffett

Buffet on management

One of the main parts of my job is to figure out, when I'm sitting across the table from John Smith and I'm going to hand him a check for $50 or $100 million, I have to decide whether he's going to get out of bed the next morning. And it's very important to me that he is just as interested in running his business, and he thinks of it as his business, the next day, and the next year, and the next decade, as he was when he owned it all himself. With a lot of people, there's no way to buy that. You can't set up an incentive compensation scheme that accomplishes that because they've already got all the money they need. You really have to make a judgment as to whether they run their business because they love business or because they love money. If they love money, we don't have a chance. We can pay them a lot of money, but they've already got a lot of money. They never need to come to work another day in their life after they sell out to us, and yet virtually all of them works harder now than they've ever worked before. The main reason for this is that they're that type - that is the way they're put together.

Secondarily, we try to provide an environment for them which is exactly like what we'd want if we were running a business. The main thing we would want is we would not want a lot of second guessing, we would not want a lot of home office meetings, we would not want a lot of supervision from some group Vice President at headquarters. We just would not want a lot of nonsense. We would like to run our own business in our own way. If you were a great golfer, and let's just say, going back to my generation, you were Arnold Palmer, you'd basically play golf because you like to play golf. But if he was playing golf, and we were doing it for money, and in some way I owned him, and I kept saying ¡°why don't you use a four iron instead of a five iron, and why don't you aim a littler further to the right¡± after a while he'd wrap the club around my neck. And rightly so. If you get really talented people, you've got to give them a chance to do their own thing.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

What Warren Do daily

I read all kinds of business publications. I read a lot of industry publications. Coming in today on the plane (garbled). I'll grab whatever comes in the morning. American Banker comes every day, so I'll read that. I'll read the Wall Street Journal. Obviously. I'll read Editor and Publisher, I'll read Broadcasting, I'll read Property Casualty Review, I'll read Jeffrey Meyer's Beverage Digest. I'll read everything. And I own 100 shares of almost every stock I can think of just so I know I'll get all the reports. And I carry around prospectuses and proxy material. Don't read broker's reports. You should be very careful with those.

I think the Wall Street Journal is essential. I spend 45 minutes a day with the Wall Street Journal. Actually, I got up the night before, about 11:00... I frequently read it at night. But I'll read anything. Actually, I probably spend five or six hours a day on reading. We have no meetings at Berkshire. We have a directors meeting once a year, after the shareholders meeting, at lunch. And at the end, I say ¡°I'll see you next year.¡± It's a very economical operation. We don't have a slide projector. We don't have a calculator. We do not have meetings on anything. If I take Ike Friedman, and bring him to a meeting, I've probably lost $20,000 or something. He should be out there selling. There just isn't anything to meet about. He's having meetings in his head all the time about the jewelry store. I'm having meetings in my head about what to do with the money.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Friday, December 16, 2005

Another billion-dollar question

That's one of the things I always ask myself: If you give someone hundreds of millions of dollars, or billions of dollars, [can you hurt a particular business?] You can't hurt the Furniture Mart or Borsheim's.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Independent thinking

Every time somebody big does something dumb, other people can hardly wait to copy it. If you do nothing else when you get out of here, do things only when they make sense to you. You ought to be able to write "I am going to work for General Motors because ... "I am buying 100 shares of Coca Coals stock because..." And if you can't write an intelligent answer to those questions, don't do it.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Thursday, December 15, 2005

Quote of the day

"You shouldn't buy a stock, in my view, for any other reason than the fact that you think it's selling for less than it's worth, considering all the factors about the business."

- Warren Buffett

The most important thing in evaludating a business

The most important thing with me in evaluating businesses is figuring out how big the moat is around the business. I want to know how big the capital is on the inside and then I want to know how big the moat is around it. What you love is big capital and a big moat. Obviously. World Book has a real moat. Kirby has a real moat. You can figure that out if you [studied] the distribution process and everything.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Wednesday, December 14, 2005

Being smart and thinking you are smart

Do you remember the Millennium Celebrations? Y2K? Was that really five years ago? What were you doing five years ago... most likely something different from what you're doing today. As we now enter the second half of this decade, my question to you is ¨C what will you be doing in five years time? Where will you be in 2010? If this is half time, how has the first half gone for you, and what do you plan to change your approach in the second half?

As a nerdy 13 year old, my claim to fame was being in the school chess club. I had been taught that being brainy was good, and the most brainy game to play was chess. Or so I thought until one chess-playing afternoon, after a particularly grueling exam, I posed a question to my chess buddies: "If chess is so smart, why is the leader the weakest piece?"
"If chess is so smart, why is the leader the weakest piece?"

Everyone stared at the king for a moment, and then started to try and outdo each other with the ways in which chess was so different from the intellectual competition we were facing at school: "Why do we sometimes win by sacrificing the strongest pieces?", "Why does the game end not because the winning player has all the options, but because the losing player has run out of options?", "Why is the best player not the one who sees what's there, but sees what's next?", "How does a game that looks so black and white remain so grey?"

I forgot about our conversation for years, while we continued to get our grades, pass our exams, and fight for our college places. We put our heads down and worked at being the smartest, the cleverest, the strongest. In fact, it was 10 years later before I was reminded of that conversation.

I had left university and started my entrepreneurial career. Being a fast mover, I had already achieved two business failures and was heading for my third when a wealthy property developer, Michael Braunstein, gave me a word of advice: "The reason you won't be successful is because you still think you're smart." Huh? I asked him to elaborate. He said: "You think you're smart, so you try and do everything yourself. As for me, I know I'm stupid, so I have no choice but to hire smart people like you to do everything for me."

In academic circles, everyone competes to be the smartest. In entrepreneurial circles, it's quite the opposite. When I graduated from Cambridge I was conditioned to think I was special. It took me years to realize that this thought was the biggest thing stopping my entrepreneurial success.
Entrepreneurs do not think they're special: Their customers are special, their team is special. As long as I was the strongest piece, I wasn't even playing the game.

"It is well to remember that the entire universe,with one trifling exception, is composed of others ."~ John Andrew Holmes

From that day forward my thinking changed. When I had a bright new idea, instead of thinking "I've had a bright new idea" I would think "Who would already have had this idea?" and I would make the effort to find them and learn from them. When something needed to be done, instead of asking "What do I need to do?" I would ask "Who can do this?". Instead of thinking I knew, I'd look for who knew more. I started to spend more time valuing the strength of those around me and the moves they made.

As the American Industrialist, Andrew Carnegie said "No man will make a great leader who wants to do it all himself or get all the credit for doing it".

When we choose to make ourselves the weakest in the team ¨C by surrounding ourselves with others who are each superior in their own strengths ¨C we also realize the game is not to try and be successful, but to make others successful. If you want to find a billionaire, look for a large group of millionaires and you'll find the billionaire in the middle. Focus on success and it will elude you. Focus on the success of others and the favour is soon returned. There's a saying: "It's lonely at the top". Of course it isn't if you've made sure everyone else gets there first.

In my late twenties, as I found myself increasingly surrounded by strong teams that allowed me to step back and view the game, I realized the extra time allowed me to look further ahead for the benefit of everyone. Moving less meant seeing more. It reminded me of another of our 13 year old comments: "Why is the best player not the one who sees what's there, but sees what's next?".

We are five years into this new millennium. How will you play the game in the next five years? As an academic or an entrepreneur? What resources will you access? As their primary resource, academics use their knowledge, while entrepreneurs use their network. Academics need to know in order to do. Entrepreneurs need to do in order to know. Academics study the past, while entrepreneurs study the future. In these next five years, will you be choosing to live in the past, or in the future?

"If past history was all there was to the game,The richest people would be librarians ."~ Warren Buffett

Back at school, we were all taught to compete against each other and demonstrate just how smart we were on our own. Demonstrating our smartness was the key to our survival. Ten years later, I was being told that this winning formula was now a losing formula. How should I now reconcile this? Did I really need to choose now between book smart and street smart? Did I need to choose between academic or entrepreneur? Was it really that black & white?

I thought back to chess. No one piece can win the game on its own. We're all a part of each other's game, so we win or lose together. I thought about Michael Braunstein's words ""The reason you won't be successful is because you still think you're smart." Hmm.. not because I was smart, but because I still thought I was smart. Some people think they know. Some know they don't know. This time the answer was black and white: The smart entrepreneurs have the certainty to know and ¨C at the same time ¨C they have the humility to know they don't know.

"And in knowing that you know nothing,That makes you the smartest of all ."~ Socrates

Excerpt from Roger Hamilton's newsletter

Keys to Avoiding Trouble and Leading a Happy Life

You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing. I've never borrowed a significant amount of money in my life. Never. Never will. I've got no interest in it. The other reason is I never thought I would be way happier when I had 2X instead of X. You ought to have a good time all the time as you go along. If you say "I'm taking this job - I don't really like this job but in three years it will lead to this," forget it. Find one you like right now.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Independent thinking with reasoning

You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

The best business to work for

If you have a choice between going to work for a wonderful business that is not capital intensive, and one that is capital intensive, I suggest that you look at the one that is not capital intensive. I took 25 years to figure that out, incidentally.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Tuesday, December 13, 2005

Tests of a Good Business

A couple of fast tests about how good a business is. First question is "how long does the management have to think before they decide to raise prices?" You're looking at marvelous business when you look in the mirror and say "mirror, mirror on the wall, how much should I charge for Coke this fall?" [And the mirror replies, "More."] That's a great business. When you say, like we used to in the textile business, when you get down on your knees, call in all the priests, rabbis, and everyone else, [and say] "just another half cent a yard." Then you get up and they say "We won't pay it." It's just night and day. I mean, if you walk into a drugstore, and you say "I'd like a Hershey bar" and the man says "I don't have any Hershey bars, but I've got this unmarked chocolate bar, and it's a nickel cheaper than a Hershey bar" you just go across the street and buy a Hershey bar. That is a good business.

The ability to raise prices - the ability to differentiate yourself in a real way, and a real way means you can charge a different price - that makes a great business.

I'll try this on the students later: What's the highest price of a daily newspaper in the United States? [Pause] [This is what he said to the students later: Most of you are familiar with it. The highest priced daily newspaper in the United States, with any circulation at all, is the Daily Racing Form. It sells about 150,000 copies a day, and it has for about 50 years, and it's either $2.00 or $2.25 (they keep raising prices) and it's essential. If you're heading to the racetrack and you've got a choice between betting on your wife's birthday, and Joe's Little Green Sheet, and the Daily Racing Form, if you're a serious racing handicapper, you want The Form. You can charge $2.00 for The Form, you can charge $1.50, you can charge $2.50 and people are going to buy it. It's like selling needles to addicts, basically. It's an essential business. It will be an essential business five or 10 years from now. You have to decide whether horse racing will be around five or 10 years from now, and you have to decide whether there's any way people will get their information about past performances of different horses from different sources.

But you've only got about two questions to answer, and if you answer them, you know the business will make a lot of money. The Form has huge profit margins, incidentally. Wider than any other newspaper. They charge what they want to basically. It's an easy to understand business - so easy to understand.]

There are products like that, and there are products like sheet steel. And they're night and day.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Require a Statement Before Being Allowed to Buy a Stock

You shouldn't buy a stock, in my view, for any other reason than the fact that you think it's selling for less than it's worth, considering all the factors about the business.

I used to tell the stock exchange people that before a person bought 100 shares of General Motors they should have to write out on a [piece of paper:] "I'm buying 100 shares of General Motors at X" and multiply that by the number of shares "and therefore General Motors is worth more than $32 billion" or whatever it multiplies out to, "because ... [fill in the reasons]" And if they couldn't answer that question, their order wouldn't be accepted.

That test should be applied. I should never buy anything unless I can fill out that piece of paper. I may be wrong, but I would know the answer to that. "I'm buying Coca Cola right now, 660 million shares of stock, a little under $50. The whole company costs me about $32 billion dollars." Before you buy 100 shares of stock at $48 you ought to be able to answer "I'm paying $32 billion today for the Coca Cola Company because..." [Banging the podium for emphasis.] If you can't answer that question, you shouldn't buy it. If you can answer that question, and you do it a few times, you'll make a lot of money.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Differences between Warren and the norm

I'm not saying that every insight that I have is an insight that somebody else could have, but there were all kinds of people that could have understood American Express Company as well as I understood it in ¡®62. They may have been...they may have had a different temperament than I did, so that they were paralyzed by fear, or that they wanted the crowd to be with them, or something like that, but I didn't know anything about credit cards that they didn't know, or about travelers checks. Those are not hard products to understand. But what I did have was an intense interest and I was willing, when I saw something I wanted to do, to do it. And if I couldn't see something to do, to not do anything. By far, the most important quality is not how much IQ you've got. IQ is not the scarce factor. You need a reasonable amount of intelligence, but the temperament is 90% of it.

Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

Quote of the day

"If your actions inspire others to dream more, learn more, do more and become more, you are a leader." - The 6th president of the United States

Monday, December 12, 2005

Buffett on Public education

A major reason for the success of the United States is the equality of opportunities compared to the rest of the world. It's a bad situation when some kids have great families, caring teachers, good schools, etc., but less advantaged kids have teachers that just push their students through the system, in schools where other students are doing bad things...

This [failure of the educational system] shouldn't be allowed in a country with almost $40,000 of GDP per capita.

America vs. the Rest of the World, who's right?

Buffett: What we do is no secret. The relative importance of America will diminish. The rest of the world is catching on and adopting our best practices. But our castle will grow. It's good for us if the rest of the world does well, and they're growing from a lower base. I don't think their success comes out of our hide.

Munger: In 50-100 years, if we're a poor third to some countries in Asia, I wouldn't be surprised. If I had to bet, the part of the world that will do best will be Asia.

Personally, I hope Munger is right.

The evil of a for-profit exchange

"The enemy of investment success is activity. The exchange of yesterday will be better for the American investor. I know the American investor will not be better off if volume doubles on the NYSE, and I know the NYSE will be trying to figure out how to do that if it is trying to maximize its own earnings per share.

"Trading is the frictional cost of capitalism. GM or IBM will not earn more money if their stock turns over more actively, but a for-profit NYSE will."

- Warren Buffett

Bearish on Gold

"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.

"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.

"I'm not advocating paper money - it's good to worry about this. But I'd rather sell one pound of candy. That will retain its value even if the currency is seashells."

- Warren Buffett

Quote of the day

"It's better to pay attention to something being scorned than championed."

- Warren Buffett

The Best Business

The best businesses can maintain their earnings without continued reinvestment, whereas in the worst you have to keep pouring money into a money-losing business.

The best business is being the best surgeon in town. You don't have to do any reinvestment - the investment was the education. The surgeon will retain his earnings power, regardless of inflation.

Excerpt from "2005 Berkshire Hathaway Annual Meeting"

Market views

Regardless of the market, I will keep buying businesses. We like low prices.

We're not good at forecasting markets. Charlie and I spend no time thinking about where the market's going. We do know when we're getting good value [when we're buying a stock or business].

There are always going to be some good and bad things happening.

I've seen more people lose more money by getting focused too much on one factor. We've never not bought something due to macroeconomic concerns.

Excerpt from "2005 Berkshire Hathaway Annual Meeting"

Untapped Pricing Power - The Measure of a Great Business

We like buying businesses with some untapped pricing power. For example, when we bought See's 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 [advertising] rates and circulation prices - it was almost a big yawn. They didn't worry about losing big advertisers like Sears, JC 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 mediums. That world has changed.

You can learn a lot about the durable economics of a business by watching price behavior. The beer industry is able to raise prices, but it's getting tougher.

Excerpt from "2005 Berkshire Hathaway Annual Meeting"

Learning to be a Good Investor

When I was seven years old, I first took an interest in stocks. My dad was in the business, so I'd go with him to the office and I saw interesting things. [When I was a little older,] I went to the library and read every book on markets and investing.

When I was 11, I bought my first stock - three shares. I was following charts. When I was 19, I read The Intelligent Investor and it changed my whole framework.

My advice is to read a lot. There are no secrets in the business that only the priesthood knows. It's all right there.

It requires qualities of temperament way more than qualities of intellect.

Once you have a 125 IQ, much more doesn't matter. Look for opportunities that fit your framework. Try to learn every day, but you can't act every day. It's important to enjoy the game, just as it is to enjoy bridge or baseball [if you're going to play those games seriously].

Excerpt from "2005 Berkshire Hathaway Annual Meeting"

Being a bit more clever over a long time

"You don't have to have perfect wisdom to get very rich - just a bit better than average over a long period of time." - Charlie Munger


We bought it a few years ago, investing $400 million. It was my first investment in a Chinese stock.

I read the annual report. They produce 3% of the world's oil, about 80% as much as Exxon Mobil. Last year, it earned $12 billion in profit - only maybe five US companies earned as much last year.

The total market value when I bought it was around $35 billion, so I paid only three times last year's earnings. The company does not have unusually large amounts of leverage and - this is unusual - has a stated policy of paying out 45% of its earnings in cash, so that's a 15% cash yield [based on last year's earnings, since Berkshire bought it at 3x those earnings].

The Chinese government owns 90% and we own 1.3%, so if we vote with them, together we control the business. (Laughter)

Unfortunately, we don't own the same shares [as the Chinese government]. [We own another class of shares such that] we had to report our interest [in the company] at 1.3%. We would have liked to buy more, but the price jumped up [after our ownership stake was disclosed].

Munger: It would be nice if this [finding really cheap stocks] happened all the time. Unfortunately, it doesn't.

Buffett: I simply read the annual report. I had no contact with management nor did I attend any management presentations. I just sat in my office and invested $400 million, which is worth $1.2 billion today.

I also looked at Yukos, the big Russian oil company [at the time I bought PetroChina] and compared the two at the time. PetroChina was far cheaper and I thought the economic climate was likely to be better in China. Yes, there was risk of tax laws or ownership rights changing, but the price was ridiculous.

Excerpt from "2005 Berkshire Hathaway Annual Meeting"

Dell's mistake reflects on the Oracle's wisdoms

"We don't worry about our businesses. We have a diverse group of good businesses with great managers. What we worry about is something going wrong. We have 180,000 employees, so it's guaranteed that something will go wrong. We know it will happen. We just try to have - we do have - the right incentives in place.

For example, when I get on a NetJets flight, even if I'm in a hurry, I don't say to the pilot, ¡°Hey, I'm in a hurry. Can you speed it up.¡± The last thing I want is a pilot rushing through his pre-flight checklist, etc.

But companies do this all the time in the way they incent people. They should not have a system that encourages a focus on quarterly earnings. Our managers have no quarterly budgets - I don't know what our numbers are going to be next quarter. I'm also careful not to communicate anything to the contrary via body language.

Insurance companies in particular can report pretty much any numbers that they want. With $44 billion of reserves, it would be easy to adjust the reserves to show whatever profit was desired.

Even if quarterly numbers weren't tied to our managers' compensation, if I went to Wall Street and promised X, the managers, who wouldn't want to let me down, might play some games to achieve X.

Munger: What we don't like in modern capitalism is the expectations game. It's not the kissing cousin of evil; it's the blood brother.

Buffett: People who predict precisely are either kidding themselves or others. We've seen people get their egos involved. And everyone in the organization knows what the CEO has promised in public. It's setting up a system that sets up financial or psychological pressure for people to do things they probably don't want to do. It's a terrible mistake."

Dell Inc. is making the mistake recently. Trying to achieve the CEO's grant target - 80 billions in 2008, both their product and service qualities went down.

Sunday, December 11, 2005

We've Picked Great Managers By Only Picking Proven Winners

It would be tough to evaluate a class of MBAs and pick which ones would prove to be the best managers, just like it would be tough to pick the best golfer by watching them hit on the practice range.

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.

Munger: Part of it is intelligence, partly temperament. Rick Guerin, for example, wanted to be rich, he was smart and had the right approach [so I knew he would be very successful]. [Guerin was one of the Superinvestors of Graham and Doddsville that Buffett profiled is this speech.]

Buffett: It's interesting to think about the odds that the NCAA basketball Final Four will be cancelled [referring to his comment elsewhere that Berkshire had written a $75 million policy on the Final Four being cancelled]. Some people like thinking about this. My dad wouldn't let me be a bookie, so I went into investing.

Excerpt from "2005 Berkshire Hathaway Annual Meeting"

Keys to Berkshire's Success With Acquisitions

We criticize it [acquisitions], but then we do it. But we have different motivations.

We've been reasonably successful in having people run their businesses with the same passion as before we bought them.

Gillette, the oil companies, etc. all went out and bought a lot of businesses and tried to run them themselves. We're under no illusions that we can do that. We think that having lots of Executive Vice Presidents, directives from headquarters, centralized Human Resources etc. can destroy the incentives of the people who've already gotten rich, and we're counting on them making us rich.

The successor to me will come from Berkshire, knows our system, has seen that it works, and will be surrounded by people who believe in it. So it's not going to be so hard to keep this train going down the tracks at 90 miles per hour.

Munger: 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)

But if you're going to provide minimal oversight, you have to buy carefully.

It's a different model from GE's. GE's works - it's just very different from ours.

Buffett: We are a conglomerate - and we hope to become more of a conglomerate.

We're successful because of simplicity itself: We let people who play the game very well keep doing it. Our successor won't change this. The big worry is that the culture is tampered with and there's oversteering. But our board and owners won't allow this.

Excerpt from "2005 Berkshire Hathaway Annual Meeting"