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Posted: 06/Feb/2007 at 11:59pm
Kulman ji,
You are our direct connection with Buffett. The articles you bring in here are excellent. Keep it up.
The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it
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Posted: 06/Feb/2007 at 8:17am
Originally posted by kulman
Q:What do you think about the prospect of the current economy and how would you change economic policy?
Warren Buffet: I pay no attention to economic forecasting. Your children are, absent of the terrorism thing, but in terms of material wealth per capita, your kids are going to live better than you and your grandchildren will live better.
And again in the 20th century, real GDP per capita, real GDP, one of seven for one in this country, just think of that, seven times. You can cash that out to fewer hours of work or more product or all kinds of things.
But it’s a wonderful, wonderful economy and it’ll get better over time. Now to make any given 20 or 30, assuming I have 20 years left, there will be a few lousy years and there will be a few so-so years and most will be pretty good years and a couple fabulous years and I don’t know in what order they are going to come. But if I’m a good golfer and I haven’t played a course here before and I knew there would be some par 5s and some par 3s, I’m going to take some more strokes on the par 5s than on the par 3s on average. The importance is that I play, that I play each hole well. In the end I will end up with a good score. I can’t just go around and play the par 3s. I can’t do that in business. I worry about being in good businesses with good people. That’s all I focus on. Never base a decision in business, I’ve never based a decision on expansion of a business or anything like that based on an economic forecast because
A) it’s not reliable and
B) it’s not important.
What is important is where we are going to be in 5 or 10 or 20 years in the country and will we be better off for this. So we don’t have any clear-cut economic forecasters. My partner Charlie and I never talk about it. We just talk about how can we put the money out in businesses that we have owned forever, with the kind of people we can trust.
These are exactly the words you would like to hear when the next interest rate scare comes along.
'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in
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Posted: 07/Feb/2007 at 9:45pm
Q:
Are you a goal oriented person? When you were in college did you set goals for yourself?
Warren Buffet: I have always liked business and wanted to be in business. This is my ledger from 1950, when I was at the University of Nebraska. It shows the investment in my golf ball business. I had $44 cash and half interest in a car. I also had a brokerage account, but had to buy stocks in my sister’s name because I was underage.
Q: Your goals were financial then?
Warren Buffet: Business, I like the process of business. Money is a way to be in business, but the real fun is the activity itself.
Life can only be understood backwards—but it must be lived forwards
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Posted: 07/Feb/2007 at 9:49am
Q:
When you are looking at a business in which to invest, what are your priorities?
Warren Buffet: You have to really understand the economics of a business and the kind of people you are getting into business with. They have to love their business. They have to feel that they have been creative, that it is their painting, I am not going to disturb it, just give them more canvas and more brushes, but its their painting, from our standpoint any way. The whole place will reflect the attitude of the person at the top, if you have someone at the top who doesn’t care, the people down below won’t care. On the other hand, if you have someone at the top who cares a great deal, that will be evident across the organization.
Q: The type of people managing the business is a very important criteria, then?
Warren Buffet: Yes, contracts don’t protect you; you have to have confidence in the people.
Q: We see a need for our graduates to develop leadership skills and be aware of ethical issues in business. What is your opinion on the need for those entering business careers to have leadership skills and developed ethical values?
Warren Buffet: The bestethical 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. I think that what you do at school by emphasizing ethical values is that you will keep those kids on track and pull in a few that aren’t.
Q: What about the value of good leadership skills and ethics in business?
Warren Buffet: I have seen plenty of people succeed that don’t have either one. And I have also seen an awful lot of people succeed that do; and those are the ones I admire and they are the ones I want to associate with. Honesty is a terrific policy. What do you look back on in terms of whether you have been a success? You have certain things you want to achieve, but if you don’t have the love and respect of people, you are always a failure. That is the one thing you must earn, it can never be bought. No one that has the love and respect of others is ever a failure.
Life can only be understood backwards—but it must be lived forwards
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Posted: 08/Feb/2007 at 10:26pm
Q:With all the storm of regulation in the last couple of years on the subject of corporate governance, could you say something about your views of the essentials of good corporate governance?
Warren Buffet: Well, I’ve got a somewhat different view. I’ve been on 19 public boards and corporate business boards over 40+ years, public companies, not counting anything Berkshire controls. And I’ve seen a lot of interaction of boards. And the problem has been overwhelmingly that boards, despite the fact that they exist in a business environment, tend to be social organizations. I think it’s very difficult for these people on the board—(I was put on the board of Coca-Cola in 1988)—to go in there and start questioning Roberto Goizueta in terms of his compensation. And incidentally we didn’t even know as board members what the compensation was. I mean you read the proxy statement unless you were on the comp committee. And they never put me on the comp committee. And I’ve been on all kinds of committees. They’ll put me on the greetings committee, the gardening committee—anything really, the dance committee. They don’t put me on the comp committee—I wonder why?
But it’s a social organization to a great degree. And generally speaking, the only thing, absent a very large shareholder who’s unhappy with something going on—the only things that really cause change is when people on the board get embarrassed. Because you get a bunch of big shots on the board. I call it “elephant-bumping” when you go to board meetings. Everybody looks around and you see all these elephants, and you think “I must be an elephant too.” It’s very reassuring. You don’t want to sit there and belch in a board meeting because it just isn’t done, like questioning comps and questioning acquisitions, and other things worse than belching (we won’t get into what that is). But it’s a social operation and the question is—how do you break out of something like that? And it’s not easy. The hardest problem is dealing with mediocrity.
I mean, if Frank Solich at Nebraska has a mediocre quarterback or whatever, he’s gotta do something about it or he won’t be coaching next year. When a Fortune 500 company has a mediocre CEO—a perfectly decent guy, good family man, a friend of yours or picked you for the board, what’s your incentive to, perhaps, you know, to get rid of him? It isn’t going to happen. It just doesn’t make that much difference. And of course when you get to the comp committee, it’s ridiculous, because you have a CEO on one side to whom this whole thing is terribly important and then you have a comp committee for whom it’s play money. I mean that’s what I call it—play money—because it doesn’t mean anything to him.
So you have an inequality of marketing intensity that’s very difficult to write rules to solve, frankly. But I think the ideal quarterback (and we talk about this when we talk about the annual report), but you want somebody that’s business-savvy. There are a lot of people on boards that are very smart people but they don’t know anything about business. And if I was on a hospital board, I wouldn’t know a thing about running a hospital or medicine. And I wouldn’t after a year or two if a bunch of guys came in in white coats every meeting and explained something to me for an hour or with a power point demo—I wouldn’t know anything about it. I just wouldn’t understand it. I could be sold any bill of goods they wanted to sell me. And the same would be true if I was at Cal Tech and they were talking physics. And it’s not that I’m not smart enough to do crossword puzzles or something. But I just don’t know the game. And there are loads of those people on corporate boards in America that have big names and they have no idea how to run a lemonade stand. And it’s nothing wrong with them—they know how to do very well what they do. So you need business savvy, you need a shareholder orientation, which is lacking in a great many directors. You need interest, they’ve gotta want to show up because they’re actually interested in the business, and not because they’re interested in the fee or something.
And then you do need something called independence. But independence has statutory defined just does not work for them. We at Berkshire have a whole bunch of people who would meet every statutory test of independence, but if we paid them a lot of money (which we don’t at Berkshire for reasons I’ll get into—it may be obvious if you know me). But if we paid them $75,000 a year and their total income’s $200,000, we’ll say, and they’re hoping to get on one more board and get another 75—they are not independent. But real independence comes from an independence of mind and partly, at Berkshire we pay our directors basically nothing. We don’t buy directors and officers insurance. They’re not taking home insurance. We’re just about the only ones on the New York Stock Exchange who don’t buy it. We want directors who have a lot of their own money in the stock. Not options. Not stock grants. Their own money. Just like I do and just like a lot of other people—and like our owners do. We want them to have no interest in the fees they’re getting so we don’t pay them anything. We want them on the hook for bad decisions. If they’ve got the wrong guy running it we want them to suffer just like the shareholders do. So we leave them with a downside. And we’ve got some very business-savvy people. They know business and in each case they’ve got at least a million dollars in stock and they get $900 a year. So their interests are aligned with the shareholders. And I could have ten people who met the stock exchange definition. They’d all have prominent names. And if the money was important to them they’re not independent. They’re not any more independent than the salaried employee of Berkshire if they’re getting a third or a fourth of their income from it.
So it’s a difficult question to tackle. There are two functions, really, that a board has to look at—you want to have the right CEO and you want to make sure he or she doesn’t overreach. And if you get that job done, that’s all you need. You need the right players at bat and then you’ve got to make sure they’re not taking advantage of the people who are on the team, basically. And the right CEO question is very tough, if you’re on the board and you’ve got a reasonably good person, but you know you could go out and get better.
And the overreaching has been very tough in recent years. Frankly people want to appraise something. They’ve brought in consultants and the consultants were basically hired by the management. And if they weren’t they still do what the management wants so they’ll get recommended to other firms. And it’s been a one-sided, dice is loaded game. And I know what our approach has been at Berkshire in order to tackle that. And it’s been quite unorthodox. But we’ll do it. We still have to follow the rules. I have to make sure we qualify in other ways too. But I don’t pay any attention except to make sure we follow the law. But that is not the way we select directors. And interestingly enough, I said in the annual report we have to get some more. And I heard from about 30 people and I said they had to have owned their stock for some time. And these people had millions of dollars, each one of them, and they were willing to take the job. And they were interested in the business. And we picked a couple and we may pick another one or two.
I think some companies are making some progress. I think Jeff Immelt, for example, at GE is leading the way to some degree in terms of trying to set up the company’s governance in a way that makes the most sense to the shareholders of General Electric. And he’s taken the lead in that. He wants to do the right thing and he’s going to be around there for 15 or 20 years and it’s interesting to me—that kind of person. And you’ll find that. But basically, most CEOs have learned how the game assists them and they’re not going to give it up willingly.
Is there anybody I’ve forgotten to offend?
Life can only be understood backwards—but it must be lived forwards
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Posted: 08/Feb/2007 at 9:52am
Q:
Do you think an MBA is an important degree for students to have today?
Warren Buffet: If you are interested in business, or likely to be in business, an MBA is very useful. But, what is really important is what you bring to a class in terms of being interested in the subject. If you view a course like accounting as a drudge and a requirement, you are missing the whole game. Any course can be exciting. Mastering accounting is like mastering a new language, it can be so much fun. The attitude should be one of discovery, that you are coming there and discovering. Accounting is the Rosetta Stone of business.
Economics is fascinating, the first page of economics describes how mankind deals with insatiable wants and creates the systems to fulfill these wants. It’s great stuff. Really how the world works. Business is a subsection, a fairly understandable subsection, not like black holes, which are fairly hard to visualize, but business is every day stuff and you are learning how the world works. You are 18-19 years old and learning about the world, understanding how this great world works. The GDP per capita in the 20th century increased 6 to 1. Think of that, six times. Why does that work here in the U.S., why doesn’t it work other places? The U.S. is a small part of the universe, but a very important part and understanding that and seeing everything else against that backdrop for the rest of your life is fabulous.
Life can only be understood backwards—but it must be lived forwards
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