Student Road Diaries
Getting Chummy with the Oracle of Omaha
Speaking from the "Cloud Room" in his Omaha headquarters, Warren Buffett first made one thing perfectly clear: he was not and is not, a philanthropist. This was a startling proclamation coming from someone who had recently pledged about $37 billion to the world's largest philanthropic organization, the Bill & Melinda Gates Foundation.
That was on Friday, April 20th, when a group of Johnson School students were privileged to be in Mr. Buffett's presence, due largely to the negotiation skills of renowned second-year, Jared Goodman. (The inside details of this exclusive attroupement have yet to be disclosed.)
We were primed! After a brief delay, waiting for a few unnamed students who found themselves locked in the store, we set on our way to Berkshire. Omaha, even on such a gorgeous spring day as we were blessed with, is quiet and unassuming, much like The Oracle's HQ itself. We unloaded from the bus and ascended to the building's top floor (the 14th), where we were soon rewarded for our long trek that had started in Upstate New York.
Buffett didn't waste any time. He has played the host for many business schools in the past, and he knew his lines by heart. Many would start the story of financial markets with the origin of the NYSE, with the signing of the Buttonwood Agreement in 1792. But Warren took us a little further back, to 600 BC. He said Aesop's claim that "a bird in the hand is worth two in the bush" was actually a good start for understanding investing, although he (Warren) would have added, "but how sure are you about the two in the bush, and what are the current interest rates?" The Oracle is ever a pragmatist.
Buffett then described what he saw as the key factor to valuing a company: it comes down to the people. Prior to buying a business, (he usually keeps the current management in charge of operations after the acquisition), he asks himself, "Do they love the money or love the business? If they love the business, then they are jumping out of bed to go to work in the morning."
His primary example was the founder of Nebraska Furniture Mart, Rose Blumkin. After coming to America in 1937, she started her business without being able to speak a word of English. Mrs. Blumkin's advantage was her "circle of competence." She dealt with what she knew--furniture and carpet. Rose Blumkin was always at her store. Once, when Buffett visited her at home, he noticed that she had little green price tags hanging from all of the lamps. She said it reminded her of work, where she was the most comfortable. Indeed, Mrs. Blumkin worked until she was 103, and died one year later.
Buffet explained that his managers' success, and Mrs. Blumkin's, was not due to sheer intellect, but to a "business gene" that they all have in common. In a recent article in Fortune magazine, Buffett explained his view of the origin of his success.
"When we got married in 1952, I told [my wife] I was going to be rich. That wasn't going to be because of any special virtues of mine or even because of hard work, but simply because I was born with the right skills, in the right place, at the right time. I was wired at birth to allocate capital and was lucky enough to have people around me early on? who helped me to make the most of that."
For the next two hours, Buffett took questions from the students and answered them with a delightful concoction of one part fact and two parts story. Regarding a question on the housing bubble he again, good or bad, put the responsibility at the people's feet.
"People invest in something because they see the stock increasing, instead of basing their decision on what the asset was worth. Huge inflows of money heat up the competition, but that doesn't change the actual business." Choosing your battles and only making bets on things you understand very well is the key. "Anyone can beat Bobby Fisher in ping pong, even me, but not in chess."
On oil and energy issues, he focused on a business' need for profit and making a long-term strategy. "A company [in the energy sector] can't profit on price anymore, only finding costs. They must decrease the costs to increase their profits. It's hard to change the mix of energy sources overnight. Such changes take the world cooperating. Most politicians are myopic, because they have to answer to their current constituency."
Hedge funds have never been on Warren Buffett's good side. He described the three stages that usually take place in the hedge fund market. First, you have the innovators, then the imitators, and then the "swarming incompetence." The main problem is that hedge fund investors are saying that they have the market figured out, which is nearly impossible, with any acceptable accuracy. As for Fund of Funds, he only had three words: "world gone bad".
Buffett ended the question-and-answer session with his framework of how to live life. He has coined this way of life process as the "Ovarian Lottery." Suppose a genie visits you 24 hours before your birth, and asks you to design the world into which you are going to be born. However, to decide who you will be, you must pick a ticket at random from a barrel containing billions of tickets. The ticket will determine whether you are male or female, rich or poor, black or white, and so on. What kind of world would you design given that you could be anyone from any social level?
This was not a statement based on attempted humility or a way of soliciting even more praise (the man has had plenty of that in his lifetime). Buffett was simply applying one of his most important credos: being honest.
–Noah Candela, MBA '08
