Unless you’re doing business with him, there are three ways to meet Warren Buffett.
- You can buy a Berkshire Hathaway share and attend his annual shareholder meeting, along with 40,000 other people.
- You can bid on the lunch he auctions off once a year for charity. Last year’s went for US$3.3 million.
- Or you can enrol in business school and elicit a slot at one of the occasional meetings he hosts for students in Omaha.
I did the last one.
As a mature student I may have been the oldest person in the room, bar one. But the opportunity to learn from Buffett doesn’t diminish with age. Few other business leaders have a set of values that are as defining as Buffett’s. His humility and honesty form the basis of a philosophy that is as relevant in life as it is in business and investing. It’s a philosophy that promotes doing your own work, keeping things simple, continually learning.
Whether it’s his values that drive his investing style or his investing style that drives his values is a question that’s open to debate. The FT recently speculated that it may be the latter: “Buffett’s plain-dealer persona is an integral part of the Berkshire enterprise. The company plays in politically and financially volatile sectors such as energy and finance, and being capitalism’s favourite grandpa has kept investors, politicians and regulators firmly onside.”
It’s easy to be cynical. Many other billionaires have achieved philosopher king status on the back of their financial success. But the entrepreneurs among them are largely funded with other people’s money. Their job is to tell a story, and they have the luxury of overpromising, captured in Bill Janeway’s First Law of Venture Capital: “All entrepreneurs lie.” As an investor, Buffett can’t lie. In the past he has said: “The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard.” Investing is such a behavioural pursuit, it is difficult to sustain success without being authentic.
Buffett was endowed with a raw wisdom, as his old letters testify, and over the years that wisdom has matured. Two and a half hours with him provides time to soak some of it up.
On investing he says, “I think it’s your philosophy more than some key insights that will get you very rich over time”. His investment philosophy is simple:
At the time of the meeting Berkshire had US$100bn cash on hand in US Treasury bills, some 5% of the total US T-bill market. Buffett estimates the right cash buffer for his business is ~US$20bn – to cover the eventuality of the US stock market being closed for a few days, as it was after 9/11. He views cash as a terrible investment at 75x earnings for an asset whose earnings can’t go up, but the optionality makes it worthwhile. Holding so much cash can make investors feel uncomfortable after a while, but “the price of the emotional stability to sit out, that’s what you’re getting paid for”.
Don’t take on leverage
In his 2017 letter Buffett writes: “Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.” At our meeting he emphasised the point: “You’re never going to be so sure of anything that you can borrow others’ money on it”.
Make few decisions
“You don’t need to make a lot of decisions in investments to get very, very, very rich”. In 2017 Buffett made just a single investment. In his 2017 shareholder letter he tells the story of his bet with Ted Seides. He bet that over a ten-year period his pick of an S&P index fund would outperform Seides’ pick of five funds-of-hedge funds. Buffett won. He speculates that over that ten-year period the 200-plus hedge fund managers that were involved on the other side of the bet made tens of thousands of buy and sell decisions. He made one. At our meeting he said,
[We] made one simple decision at the right time, in ten years. Never thought about it, not top of mind or anything. You see something that’s crazy, it’s crazy… Occasionally things are just crazy in markets … you can’t tell when they’re going to change, but you will get opportunities in your lifetime… you’ll get a half a dozen opportunities when you see things that are just nuts.
Since 1964 when Buffett took over Berkshire Hathaway, its stock has declined by 50% on four occasions. He recognises that drawdowns such as those are a natural occurrence, and his job is to take advantage when they occur. But they can’t be measured. “Sigmas don’t belong in investing… it works fine for a long, long time and then somebody will say that was a 25-sigma event or something … anything could happen in securities and investments.” Between 15th September and 7th October 2008, Buffett deployed several billion dollars of capital, and anticipates such an opportunity arising again in the future. He recalls how dumb otherwise smart people became in that major drawdown and how contagious that can be: “Fear heads for the door in a mad pack; Confidence comes back one at a time”.
The ability to make few decisions and embrace volatility requires a certain temperament. Buffett says: “Personal temperament is more important than IQ … if you’ve got a temperament that really is not affected by anything other than what you see yourself, as opposed to the opinions of other people … that’s really invaluable.” In terms of when to make a decision, he says “The right time to swing is when you can’t resist swinging”. That comment contrasts strikingly with the infamous Chuck Prince quote from 2007: “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” One comes from within; the other reflects the influence of others in the market.
Buffet concludes his analysis: “it’s not a tough game … you’ve got to pick your spots and have a philosophy of work that’s consistent with that”. The question is: if it’s not tough, why don’t more people adopt his process and replicate Buffett’s success?
The answer is partly because most fund management structures are not set up to practice Buffett’s process. Incentives are skewed to the short-term. Buffett says, “You only have to get rich once”. Many fund management structures allow managers to get there and then quit, which is why few have the tenure to match that of Buffett.
More fundamentally, the answer is also because the temperament he talks about is so rare. Buffett implicitly recognises this. He says that in his lifetime he has identified early on “maybe a dozen people” that would be superior investors. He does concede that it’s easier with fewer assets under management. But notwithstanding that active management “is such a fun game”, his advice is broadly to index.
What he didn’t say is that the temperament he seeks may be getting rarer. In this digital age of shortened attention and immediate feedback, the ability to sustain the longer-term focus that he advocates is challenging. Across multiple domains decisions are expected to yield increasingly rapid results – in communication, people expect shorter response times to email and text; in consumption, they demand shorter delivery times; in recruitment, they expect immediate impact. The behaviour this trend fosters may not be consistent with the temperament that Buffett highlights.
On seeking out good businesses, he says what’s key is “to separate businesses from which you won’t be able to get an answer from the ones in which you can get a reasonable chance of getting a range.” It could be that’s getting harder, too.
My meeting with him preceded the blow up at Kraft Heinz. But the signs of increasing competition from new entrants in the consumer goods market were already evident. I asked him how he incorporates business disruption into his investment framework across different industries and in particular in consumer goods.
He agreed that the pace of business disruption has increased. He is constantly reminded of the risk of disruption via Berkshire Hathaway itself, whose original textile business fell into decline.
But the outcome is not always clear. The newspaper industry – once regarded by Buffett as among the best around – is a case in point. “The pace of change in the newspaper industry has blown my mind.” He currently has questions around the auto industry. However well he knows the industry and is confident that demand for the product will remain robust, he is unable to predict who will be the number one and number two players in ten years. So much money is being spent on change. His only advice: that it’s more important to think ten to fifteen years out than fifty. “Disruption is going to be here forever… you should get on your knees every night and pray that it continues”.
On attaining wisdom, Buffett has a clear formula:
You should be learning all the time from what’s around you. I don’t think you can be as wise about people at twenty as you can be at fifty… You need a lot of human experiences to improve your insights. Success or failure when you’re seventy or eighty will depend a lot more on what you learned about other people, and about yourself in the process.
I’m not quite fifty yet. But in a room full of twenty- to thirty- year olds, it was encouraging to hear that some things get better with age. It seems clear that investing is one of those pursuits. In an environment where more than half of fund managers have 9 years of experience or less, those improved insights and a track record of mistakes and lessons learned should add value.