Thursday, January 19, 2006

Learning from Warren Buffett's lectures to University of Kansas students

The Lotus Sermon of Warren Buffett

* Your inner scorecard is more important than your outer scorecard. It's very important for people to evaluate how they behave over a lifetime morally and ethically and not be overly concerned with other people's impressions. Keep an inner scorecard: judge yourself by your own standards. This keeps you focused when you have many people giving you advice.
* You should do the job you love whether or not you are getting paid for it. I didn't know my salary when I went to work for Graham until I got his first paycheck. Do what you love and don't even think about the money.
* If there is a place that is warm in the winter and cool in the summer, and you do what you love doing, you will do fine. I will take a trip on Paul Allen's Octopus ($400M yacht), but wouldn't want one for myself. A 60 man crew is needed. They could be stealing, sleeping with each other, etc.


Zen and the Art of Inner Happiness

* You're rich if you are working around people you like. You will make money if you are energetic and intelligent. This society lets smart people with drive earn a very good living. You will be no exception.
* Hang around people who are better than you all the time. You do pick up the behavior of people who are around you. It will make you a better person. Marry upward. That is the person who is going to have the biggest effect on you. A relationship like that over the decades will do nothing but good.
* A person must have a passion for the business they are in - they have to prefer going to work that day than any other option in the world. I consider myself unable to ever retire because what I do for a living is not a job in my eyes. I don't work.
* I was lucky because I knew what I loved at an early age. I was wired in a certain way when I was born, and I was lucky enough to stumble upon some books at a library at a very early age. In 1930, I won the ovarian lottery. If I had been born 2000 years ago, I'd have been somebody's lunch (laugh). I wasn't strong and I couldn't run fast.


Learn from Past and Focus on the Present

* My biggest mistakes were errors of omission vs. commission. Berkshire Hathaway was also a big mistake.
* Sometimes the opportunity costs of keeping money in something (like a lousy textile business) can be a drag on Berkshire's performance. We didn't learn from the previous mistake and bought another textile mill (Womback Mills) 6-7 years after buying Berkshire Hathaway. Meanwhile, I couldn't run the one in New Bedford.
* Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too many mistakes.
* Don't take yourself out of the game because you are fearful of making mistakes. You have to be able to make mistakes to make decisions.


Ignore the Macro Stuff

* Risk premiums are mostly nonsense. The world isn't calculating risk premiums. I don't think that the stock market will return 6.5% over bonds in the future. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will get very cheap, but it isn't ordained in scripture that this is so.
* There is a recent WSJ article written by Jeremy Siegel that discussed funds flowing out of investments because baby boomers will need to cash in their investments during retirement. I respect Siegel, but I don't find fund flows data useful.
* We aren't big on demographic trends. It's difficult to translate that information into profitable decisions. It is hard to figure out what businesses will prosper in the future, based on macro trends. See's candy is for anyone and Fruit of the Loom is for people who need underwear today.


Focus on the Present "Here and Now"

* We want to be right on something that will work right now, not something that might work in the future. I doubt that Wal-Mart spends a lot of time on demographics. They instead focus on where to put the store and what to put on the shelves. I've never found those kinds of [demographic] stats useful. People were all excited to go into stocks 6 years ago, but it wasn't because of demographic trends.
* There is no rerun button in life...the time to do things you want to do is today. If there is a job you want to do - do it today. It's important in life for students not to worry about building a resume they think others want to see.
* [Editor's note: A single-minded focus on the present moment, here and now, is the central idea of the oriental wisdom of Zen.]


The Financial World Is Full of Illusions

* There is no doubt that there are far more "investment professionals" and way more IQ in the field, as it didn't use to look that promising. Investment data are available more conveniently and faster today. But the behavior of investors will not be more intelligent than in the past, despite all this.
* How people react will not change - their psychological makeup stays constant. You need to divorce your mind from the crowd. The herd mentality causes all these IQ's to become paralyzed. I don't think investors are now acting more intelligently, despite the intelligence.
* Smart doesn't always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.
* Do you think Ponzi was crazy? The tech and telecom madness that existed just 6 years ago is right up there with the craziest mania's that have ever happened. Huge training in capital management didn't help.
* Take Long Term Capital Management. They had hundreds of millions of their own money, and had all of that experience. The list included Nobel Prize winners. They probably had the highest IQ of any 100 people working together in the country, yet the place still blew up. It went to zero in a matter of days. How can people who are rich and no longer need more money do such foolish things?
* Humans are still made up of the same psychological makeup, and opportunities will always present themselves. All these people have not gotten more rational. They are moved by fear and greed. (Note: Buddha said, people are suffering from illusions and delusions. An awakening or enlightenment is needed to free the mind from fear and greed.)


Excerpt from "Buffett - The Ultimate Financial Zen Master" By Brian Zen

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