The People Who Run Berkshire Hathaway

ISCAR

“The culture of ISCAR was set by my father,” said Mr Wertheimer. “Starting with the basics: respect people, ask real questions and know what you want. Over time the business grew and became more complex. We wanted family members to have an option to join rather than feeling an obligation, whilst also maintaining our commitment to employees and customers. We heard of Berkshire Hathaway, investigated the company and knew we had found a match. I told Mr Buffett that I would either sell to him or to no-one.”

Warren Buffett interview - Financial Post Exclusive

IMD Transcript - WEB Q&A

Official IMD Transcript:

I will open the floor to questions now.Question: What margin of safety do you apply when you buy a family business?

When investing in marketable securities you can change your mind tomorrow, and sell them if you feel that you made a mistake. When we buy a business, we buy that business to keep. Our margin of safety is not in the price we pay but being virtually certain that we are buying into a business that has competitive advantage, good economics, one that is run by people with passion, and one that we will run the same way next year the way the family ran it the year before. Our margin of safety gets more into qualitative characteristics than the quantitative aspects you are probably referring to. When you are buying a business you are buying to keep and you better make sure that it is a business you are going to like 20 years from now and a management that you are going to love.

Question: Mr Buffett, do you have any plan to buy any Brazilian companies?

We would certainly buy a Brazilian company. We would buy any business in any country in the world if we understood the country and company well enough. But it would have to be a large enough company to meet the criteria we set forward in the annual report. We are looking for things that are earning at least US$75 million pre-tax. Brazil is a large country, but the smaller the country the fewer the businesses that meet that criteria will be there. We would feel very comfortable however buying a Brazilian company. You may have noticed in our annual report that the Brazilian Real is the only currency we have held outright in the last year and at $1.65, I’m very glad we did so.

Question: You met yesterday with family-owned companies in Germany. Are you going to strike a deal? Are you going to make a deal before the end of the week?

I can guarantee that we will not make a deal before the end of the week.If I’m lucky I might buy one or two a year. We don’t buy when we are ready to buy. We buy when others are ready to sell. If you have a good private company, you are already rich. You do not need us to put a number on it to validate the value of the business. The best thing to do is not to sell. If you have a business it is probably worth a billion dollars, a billion dollars next year and three billion after that. All businesses will get sold eventually. And if they’ve got a reason to sell, I want them to call me.

Question: There has been bad feeling in Europe, especially in Germany about American investors. Why do you think family business should be looking to investors such as yourself for their future growth?

Whether it be businesses with no heirs, or businesses with siblings, or parents who can’t agree who should take over, if it is to simply get the best price they should simply auction it off. If they have been building up their business for decades and decades, if they care, and they want to make sure it doesn’t get sold a few years later based on the fashions of Wall St. they should invest with us.

Question: You have been so far investing in American companies. Now you are looking for good opportunities in Europe. Are you disappointed in US companies or the American way of doing business? What are your main criteria to invest in Swiss companies?

I’m not disappointed in US companies. I hope we buy an American company tomorrow or in the next couple of years. We are better known in the US, even after a trip like this to Europe. A great number of people in the US have sold us a business in the US and we are in the minds of business owners in the US more than here because we have been around so long there. I love buying businesses in the US and in Switzerland. You’ve got some fine businesses here. The criteria are exactly the same. There isn’t a column A for the US and column B for the rest of the world.

Question: We talk about Europe, but central and Eastern Europe is Europe too. Are you going to invest in this part of Europe?

We don’t rule out any country. There are certain countries where we may worry about the rule of law. But apart from that, most countries would qualify.The bigger the country the more likely we are to find a business. I accept phone calls from a lot of countries that I haven’t visited.

Question: Which sectors and companies do you like in Switzerland? Have you an investment target here?

We do not look for specific sectors. We do look for business that we understand. Meaning when I have confidence in my ability to know what they are going to look like 5-10-20 years from now. It is not that I don’t understand the software products. But I don’t know how that industry will develop over 10 or 20 years. I didn’t know that Google was going to come along. Anything that is rapidly developing, I don’t understand Google for example. We are looking for businesses that are quite understandable. For example, Nestlé, anyone can figure out where it will be in 5 to 10 years from now. Nestlé isn’t going to be on the list, but we are looking for businesses like that. I don’t go out looking for steel industry, or whatever, office equipment industry. I can understand that business. I understand the economics, the distribution system, their accomplishments, their competitors. So I will have a fix on their business.

Question: You have been fairly critical in the past about how the US currency is being devalued and how it has been handled by the US administration. How much of your trip is about diversifying away from the US dollar?

It is not really a factor, but it does mean that I’m not worried about buying in at currency rates. 80% of the earnings of this company which we have owned for a long time come from around the world, and it has benefited from the fact that other currencies have appreciated against the US dollar. But I’m not here for that. If the Euro was 180 or 110 I’d be here. I’m perfectly happy to earn money in Euros whether it is through US companies or whether it is through companies domiciled here and I’m not unhappy about buying in Swiss Francs or Euros and earning in Swiss Francs or Euros. It is not really a big factor.

Another version of the Transcript - was added to VIA earlier.
Warren Buffett IMD Q&A Transcript
(Note: This is all paraphrased by me. Do not take any of this as an exact quotation, but rather a general idea of what was said here . I made this because these videos are difficult to share and take a while to sit through, so hopefully you will find this to be helpful.) from Streetcapitalist.com

Q: How do you evaluate family business acquisitions? same as stocks?
A: When buying marketable securities use Benjamin Graham’s margin of safety
When buying businesses, you buy to keep. Margin of safety is in crossing the threshold of being virtually certain of buying a business with competitive advantage and a passion for the business. Margin of Safety is qualitative instead of quantitative when buying whole businesses. Ben Graham is very quant. focused, buying businesses is a much different look
Q: Any plan to buy stakes in Brazilian Cos because of its new status as investment grade?A: We would buy in any country as long as they understand risks well enough. Has to be a large enough criteria (75mm dollars pre-tax, etc) Would feel very comfortable owning a business in Brazil, owned the Brazilian Real.
Q: Anything you like in Germany? Strike a deal before the end of the week?
A: Guarantee not by end of the week. If lucky, run into two possible deals. We don’t buy when ready to buy — buy when the owner has a reason to sell. Advises owners not to sell their wonderful private businesses, don’t need a number put on it to validate it. Doesn’t call or pester owners to sell. I don’t go around delivering sales talks, wonderful businesses should be kept by owners until there is a reason to sell.
Q: Some bad feeling in Europe/Germany about American Investors. Why family businesses should look to investors like yourself?A: If they have a reason to sell, maybe no heirs, siblings don’t agree — this is a reason to sell. If it’s simply getting a best price, then they should auction it off. If they care about a business over decades and decades, and want it to be in a home where everything will continue as it has before, where they are dealing from great financial strength and never have to see Wall Street - Go to me. Berkshire Hathaway and its culture is what they’re buying into and it’s a very rare and hard to replicate culture. It’s large so a very big business can join. We’re a logical alternative.
Q: Known to invest in American Cos. Why Europe? Are you disappointed by American Cos / American way of businesses? Criteria to invest in Swiss companies?A: Not disappointed by US… will buy a US company probably in a couple years. We’re in the minds of more owners in the US than in Europe. Trip to Europe is a move towards correcting that. I love buying Businesses in the US, but I love businesses in Switzerland too. The criteria for buying in Switzerland is exactly the same as buying that is listed in the annual report. Wherever they can buy they will buy.
Q: You speak about Europe but — Are you ready to invest in Eastern Europe? Are you happy?A: Yes — I am happy. We don’t rule out any countries but smaller companies have less opportunities. Some companies we worry about the rule of law. I accept phone calls from a lot of companies I have not visited.
Q: Which sectors and companies do you like in Switzerland?A: We don’t look for specific sectors. We look for businesses that I can understand. Where I have a high degree of confidence where I can see where they will be 5-10-20 years from now. I didn’t know that Google would come along. Anything rapidly changing I would not understand. I look at businesses that are reasonably easy to evaluate their products - how they will fit in the economic picture - how the economics will look. We’re looking for understandable businesses (like Nestle). But I don’t go out saying I’m looking for the steel industry, etc.
Q: You’ve been fairly critical in the past about how the US currency has been devalued and Handled. How much of your trip to Europe is about diversifying away from the USD?A: Not really a factor but does not mean I ignore currency rates. I’m not here because of small differences in the euro. It’s not a big factor. I certainly feel that overtime — long period (10 years) I do not worry about them (Euro currencies) depreciating against the US dollar. If we don’t change the USD policies we will have weaker currency.
Q: Have you seen any challenges with EU Family businesses / Compared to US Businesses?A: Same challenges, many diverse reasons. Bought twice when there was a successor issue that could hurt the family — I can solve the problem in a way that their solution cannot. There are all kinds of situations that can come up. I would guess that the reasons are diverse in Europe/Asia as they are here, in the US.
If you go 100 years - there will come a time when certain hatreds develop. I had one call some years back from a large family business where they were all hating each other.
I had a call from a young woman, a thousand miles from Omaha, I never met her. She said, “Mr. Buffett the family has some split — we feel that you’re the only person who can come here and solve this.” Then I said to her, “Tell me one thing, do you want to win, or do you want your bother to lose?” She paused and said “Don’t bother to come down.” I was not going to make a solution that could cause anyone to suffer. You get into situations where things break up sometimes. You get great results for family businesses but sometimes it comes to an end.
Q: You’ve teased biz schools for teaching arcane subjects (Option Pricing). What would you teach?
A: It wouldn’t keep all the professors permanently employed. It would teach
1. How to value a business.2. How to think about the market.
As a general part of the curriculum, I would add two subjects not emphasized in business school. I think that the ability to communicate both orally and in writing is enormously important. All students I meet benefit immensely by working on those two skills. They would have a pay off that is enormously disproportionate that would pay off more than learning modern portfolio theory.
The way someone speaks or write can have an enormous impact. Those subjects are under-taught and can have an impact on all schools.
Q: You like real economy - real business. What do you think about what’s going on in the banks. What advice would you give to these bankers?
A: There are more banks than bankers. I think that the head of any bank or financial inst. needs to be the Chief Risk Officer. You have no biz in running a financial institution if you’re not looking at risks. Unless willing to take on CRO job, you shouldn’t be a CEO. We’re seeing the consequences of people not understanding the vehicles they’re sitting up and the risks they’re facing.
CDOs squared can be 750,000 pages just to understand one instrument. Designed to make money for the seller. Huge mistakes have been made by these institutions and they will make similar mistakes in the future. I’d buy a bank bank depending on banker.
Q:Some criticism towards SWFs. Is it fair? Have you ever looked at a Norwegian co.?A: I’ve looked at one or two Norwegian cos. Not a lot I could put 500 mm in (minimum investment for marketable security). SWFs interesting. We’ll have them as we continue to force-feed dollars to the rest of the world. Not the best policy to blame these people when it’s us who push the dollars onto them.
Q: What will solve the food crisis? Will you invest in food cos like Nestle?A: Some talk of speculators — does not look like a speculator situation. Prices of corn are largely dependent on supply/demand. If producing 86 million bb a day of oil and using 86 million — that is how supply and demand intersect. There has been a case to some degree of corn — part of the corn supply being used on fuel is spilling over, farmers may plant more corn because he sees the the affect on corn, affecting other crops. We’re likely to see higher prices over time if we follow the same policies. We don’t own any commodities, we use them in our businesses. All these factors (price increases) has a real affect on the consumer.
Q: How does it feel to be the richest man in the world? You still friends with Bill Gates?A: Bill and I are extremely good friends. Nothing has changed. I’m giving away the stock as I go along so I wont stay there.
Q: Over the last few years, a number of energy industries have come to Switzerland. Would you own an energy company?
A: Sure. We can understand energy companies. I understand the energy business, we’ve bought stocks and natural gas pipelines. Frequently they’re large so I would not be reluctant.
Q: Why and how do you support Barack Obama? What do you do for the people from Burma and China who have been affected by natural disasters?A: Before both Hillary and Barack were running I told I would support both of them. I told them that I’d hold more fundraisers for them. They are outstanding candidates. In terms of the philanthropic efforts, I’ve outsourced that to 5 foundations. Largest portion goes to Bill & Melinda Gates Foundation. Biggest so far has been health. A portion in there goes towards emergency type relief. In various crises in the past they’ve always contributed something. They handle that. My funds will end up being half what they dispense annually. They handle that. I support them.
Q: You bought a 3% stake in SwissRe. A 20% share in their PnC Business. Do you understand Cat Bonds, Longevity Bonds? What do you think of insurance securities?A: I would prefer to write them for our own account. I’d rather take the risk myself and get paid the premium. There are plenty of people in that business who are good at it. Investment banks have been making cat bonds which is competition against Berkshire.
Q: We’re in Switzerland, the country of Luxury Goods. Would you be interested in buying something here?A: Our Ben Bridge subsidiary is the largest seller of Rolex (I believe). We have 80-90 stores, Rolex is a significant portion of our business. Those are great companies (companies like Rolex). They know my phone no. but haven’t called.
Q: You keep telling us that you want the family owned businesses and want the family owners to call you. What phone number should they use?A: 402-346-1400. I was a little bothered the other day, a letter came in that said Supreme Idiot - Berkshire Hathaway. I see all of my mail. Every phone call that comes in, people are asked what they are calling about. If people are calling about a serious idea, they have no trouble getting through to me or sending a fax. I bought half a dozen companies just starting with a fax. It’s easy to get through. You can call collect if you have a good deal.
Q: One of the most difficult tasks for you must be to find a guy who can get in and follow you?A: There are three people we’ve identified. It’s all we (the board) talk about. The board knows. People on the board have almost 1/2 their net worth in berkshire stock. They care about it. My successor will be a lot better in certain things than I am. They will walk into a very well-defined culture. There will be a little bit of a problem in that people don’t know him yet. That will get overcome.
Sam Walton died 15 years ago, Walmart was Sam Walton, but Walmart isn’t Sam Walton. Walmart was institutionalized. Berkshire’s culture is institutionalized.
Q: A question about your charity activities and corporate activities. Suppose you have corporations that you invest in, that might not be impeccable in corporate governance. Can charity be a balance for a corporate governance flaw?
A: We on stock in companies where I don’t agree with everything, but my children don’t either. We can’t expect 100% adherence. We don’t feel a responsibility about that. If we have control over a company, we want it run in a way that you could describe it on the front of the paper and not feel embarrassed.
For businesses we own, I say keep following your own charitable policies, don’t check in with us. In my own case every share I own will go to charity. But it’s no sacrifice, but it’s what I believe should happen. I don’t believe it is my job to take the shareholder’s money to be allocated to whatever charity I believe in. They should allocate their own funds.
Q: Any calls from finance ministers that you didn’t show up to their countries?A: No. No complaints either! I would be delighted to find the right business in any country. Europeans should feel comfortable about the US. US should feel comfortable about Europe. All of these countries believe in the right things. Wonderful businesses are built all over, no reason to rule one country off the list. I’d be equally to get a call from any company even one I haven’t visited. Call at 402-346-1400.

Warren Buffett Univ. of Florida MBA Talk - Part 1

10 part video of interactive session with WEB

News - A Collection

May 19 (Bloomberg) -- Billionaire Warren Buffett said there are ``far more'' potential takeover targets for his $200 billion Berkshire Hathaway Inc. in Europe than in emerging markets, as he looks outside the U.S. for acquisitions to spur profit growth.
The world's wealthiest person started a four-city European tour in Frankfurt today, seeking to form relationships that may lead to purchases by his Omaha, Nebraska-based investment and holding company.
``There's far more companies that would make sense for us to buy, and for them to sell to us, in Europe,'' Buffett said at a news conference, declining to identify possible targets. ``In emerging markets, there are going to be very, very few businesses that would be earning $75 million pretax. You want to fish in a pond where the fish are and Europe is a much better pond.''
Berkshire has $35 billion in cash and Buffett, 77, has been looking for places to put it. He's invested in China, Israel and the U.K., complaining that there's a dearth of U.S. investment opportunities for a company as large as Berkshire. Berkshire may get more than half its revenue outside the U.S. in 30 to 40 years, Buffett said.
He also said the U.S. economy is less than halfway through a credit crisis that sent home foreclosures to a record and sparked the collapse of Bear Stearns Cos., Wall Street's fifth- largest securities firm.
`Silliest Things'
``I don't necessarily think we're halfway through or necessarily a quarter of the way through the effects throughout the general economy,'' Buffett said. ``The initial effects are felt by the people who really did the silliest things, but you can have a whole bunch of domino-type effects that eventually can get to people who are doing fairly sound things.''
The worst U.S. housing slump in a quarter century sank the mortgage securities market causing banks and securities firms worldwide to amass at least $379 billion of writedowns and credit losses, regulatory filings show. Economic conditions wouldn't stop him from making a new U.S. acquisition if the right company presented itself, he said.
Buffett's trip includes meetings in Lausanne tomorrow and Madrid on May 21, finishing in Milan on May 22. The visit was arranged by Eitan Wertheimer, president of Israel's Iscar Metalworking Cos. -- acquired by Berkshire in 2006 in Buffett's first non-U.S. purchase -- and Angelo Moratti of the family-run Italian energy company Saras SpA.
Buffett owns about a third of Berkshire, which he built over four decades from a failing maker of men's suit linings into a company with businesses that range from candy-making to insurance and a $72.6 billion stock portfolio.
Not a Meddler
He's known for buying well-run, privately held companies with high barriers to would-be rivals, cutting deals on a handshake and not meddling in management. In exchange, he typically pays less than companies could receive in an auction.
Germany is fertile ground for Buffett's investment style because about three-quarters of companies there are family-run. Many were founded as the nation rebuilt after World War II and are now grappling with succession issues as their founders age.
``I want us to be on the radar screen of private companies,'' Buffett said today. ``I hope that when the time comes they recognize that in Berkshire Hathaway they can find things that they can't find anywhere else.''
Buffett, who described his visit to Europe as a ``deferred shopping tour,'' said he's looking for businesses he understands where the management is already in place.
``The bigger the better,'' he said. ``In order to have a meaningful impact on Berkshire we need to make large deals.''
Something `Unique'
Germany's privately-owned companies include Robert Bosch GmbH, the world's largest auto-parts maker, Aldi Group, Germany's biggest discount retailer, and Boehringer Ingelheim GmbH, the world's largest family-owned drugmaker.
``Many families go through certain stages of strategic decision-making and they need to know their options,'' said Iscar's Wertheimer, 56, whose company was founded in 1951 by his father. ``From Warren you get much more than money. You're part of something that's unique.''
Expectations for a weak U.S. currency add to the allure of earnings in other denominations. Since at least 2002, Buffett has made investments with the assumption the dollar will decline, first with direct bets against the currency, and then with the Iscar purchase.
The euro fetched less than a dollar when Buffett first enlisted Moratti in 2001 to advise him on potential European purchases. It traded at $1.5509 at 3:17 p.m. New York time today.
Weak Dollar
``The U.S. is going to continue to follow policies that make the dollar weaker,'' Buffett told reporters at the Berkshire annual meeting in Omaha earlier this month. Americans' preference for foreign goods causes the country to send about $2 billion in ``IOUs'' and assets abroad every day, pressuring the dollar, he said.
Buffett said today the strength of the euro wouldn't deter him from making purchases in Europe.
After paying $4 billion for 80 percent of Iscar, which makes cutting tools for manufacturers in plants around the world, Buffett said he hoped the deal would raise Berkshire's international profile and help him find new candidates in ``the bigger economies.''
An investor who says he buys companies ``for life,'' Buffett looks at businesses he understands and in which he can project performance during the next one or two decades. To familiarize himself with Europe's business culture and issues, Buffett has met Moratti, the Italian energy executive, in Omaha at least four times a year since 2001, Moratti said in an interview last month.
Devoted Following
Buffett has a devoted following, particularly in the U.S. About 31,000 shareholders and groupies from every continent except Antarctica filled Omaha's Qwest arena to overflowing earlier this month to hear Buffett answer questions for hours on topics ranging from the economy to his businesses and philosophy of life and marriage.
During the meeting, Buffett said a subsidiary was ``probably close'' to a ``mid-size'' U.K. acquisition.

Candies and airplanes

See's Candies is a role model

If you want to know how to recognize a great business, you could do worse than look at See's Candies. More than half of its profits have been paid to its owners, with the remaining amount being retained (some people will spin this by saying it was reinvested).

Compare its net profits in the 1970s against its profits in the 1990s and ask how much capital was required to generate all these profits.

It is even more relevant to note that the candy industry is not unlike the airline industry in that almost half of the businesses in this industry are unprofitable. So this is not a case of a high tide lifting all boats. The tide has been out for some time with no promise of returning.

Some trivia that you might not already know

Recently, we came across different kinds of trivia worth sharing with all of you. Not sure which ones you may have already heard before, but we think some of this stuff is pretty new.

TRIVIA

Did you know that Warren Buffett's dad wanted him to apply to Harvard Business School. It was a 10 hour train ride to Chicago where he met with the person who was to interview him, and was told to come back another time when he was older. He was still 19 at the time. So he rode 10 hours back.

Did you know that when Warren Buffett showed up at National Indemnity, there was only one person at work apart from the security guard? Everyone else was home.

When Warren Buffett was 13 or 14, upon moving to Washington, he ran away from home and engaged in some theft.

When Charles Munger was asked how he felt about being old, he remarked "I'm not going to complain about my age because without it, I'd be dead".

Warren Buffett formed his 1st investment partnership at the age of 25.

The CFA Program was first proposed by Benjamin Graham in 1942 as a member of the New York Society of Securities Analysts (NYSSA, founded 1937)

Quotes from Charles Munger

"The ethics of Wall Street will always average out to mediocre at best.... This doesn't mean there aren't some wonderful, intelligent people on Wall Street -- there are, like those in this room -- but everyone I know has to fight their own firm [to do the right thing]."

"Berkshire’s whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form." - Oct. 2003

"if regulators had banned the phrase, 'this is a financial innovation that diversifies risk,' the financial markets would have been a lot better off."

"the policy of turning American corn into automobile fuel is an incredibly stupid idea."

"A stock option is both an expense AND dilution. To argue anything else is insane."

"People tend to forget how well the system worked when we had rules that prevented this complexity and aggression"

Munger's Commencement Speech

These are quotes taken from Munger's Commencement Speech at USC School of Law on 13 May 2007. Instead of copying the entire speech, it seemed more productive to pick out the best pearls of wisdom for your ease of reference. What do you guys think of these?

• The safest way to get what you want is to deserve what you want.
  
  
• Deliver to the world what you would buy if you were on the other end.

• There is huge pleasure in life to be obtained from getting deserved trust. And the way to get it is to deliver what you would want to buy if the circumstances were reversed.

• There’s no love that’s so right as admiration based love and that love should include the instructive dead.
  
  
• Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here.
  

• I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.
  
  
• ...so if civilization can progress only with an advanced method of invention, you can progress only when you learn the method of learning.
  
  
• Nothing has served me better in my long life than continuous learning.

Quotes from Warren Buffett

"Don't try to catch a falling knife until you have a handle on the risk"

"Cash combined with courage in a crisis is priceless"

"The role that Charlie and I play in the success of our operating units can be illustrated by a story about George Mira, the one-time quarterback of the University of Miami, and his coach, Andy Gustafson. Playing Florida and near its goal line, Mira dropped back to pass. He spotted an open receiver but found his right shoulder in the unshakable grasp of a Florida linebacker. The right-handed Mira thereupon switched the ball to his other hand and threw the only left-handed pass of his life - for a touchdown. As the crowd erupted, Gustafson calmly turned to a reporter and declared: "Now that's what I call coaching."" - Chairman's Letter 1991

“My most surprising discovery: the overwhelming importance in business of an unseen force that we might call ‘the institutional imperative." WEB elaborated “for example: (1) as if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) just as work expands to fill available time, corporate projects or acquisitions will materialise to soak up available funds; (3) any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.”- 1989 Letter to Shareholders

"What the DeBeers did with diamonds, the Arabs are doing with oil; the trouble is we need oil more than diamonds." And there is the population explosion, resource scarcity, nuclear proliferation. But, he went o­n, you can't invest in the anticipation of calamity; gold coins and art collections can't protect you against Doomsday. - WEB 1974, Forbes

"I call investing the greatest business in the world," he says, "because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike o­n you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."
But pity the pros at the investment institutions. They're the victims of impossible "performance" measurements. Says Buffett, continuing his baseball imagery, "It's like Babe Ruth at bat with 50,000 fans and the club owner yelling, 'Swing, you bum!' and some guy is trying to pitch him an intentional walk. They know if they don't take a swing at the next pitch, the guy will say, 'Turn in your uniform.'" Buffett claims he set up his partnership to avoid these pressures.
Stay dispassionate and be patient, is Buffett's message. "You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K." First the crowd is boozy o­n optimism and buying every new issue in sight. The next moment, it is boozy o­n pessimism, buying gold bars and predicting another Great Depression.

Derivatives:

“Derivatives are dangerous because they can be so mispriced. You have interconnectedness in financial markets like you’ve never had before. Trillions are held by people which, if they get a trigger, they’d all behave the same way.” It’s a crowded trade with out people knowing it’s crowded.“It’s like the portfolio insurance doomsday machine on October 19, 1987- failure should’ve been predicted. It was less than 1% of the market but took 23% off the market and the market was almost closed. It’s now the electronic herd all over the world, waiting to act on a stimulus and it’s accentuated by derivatives.”Additionally, total return swaps “are financial weapons of mass destruction” because they create chaos in the markets. “It’s amazing the trouble people can get into with leverage.”

The Gift to the Bill and Melinda Gates Foundation:

“It was an absolute no brainer for me. They’ll keep running it decades after I’m dead.” “There are plenty of people who want to put their name on a building for $10 million and that’s great but it doesn’t do anything for me.”

---

“The point is to engineer backwards from where you want to be and do what you must to get there. It’s like a country song, you should sing it backwards so you get your home back, your car back, your dog back……….”

Q: Aside from winning the “ovarian lottery” as you’ve called it, what was the most important year in your life and why?

“When I proposed to my wife.” It also happens that that year was when I was taking the Carnegie public speaking course. They would give pencils every week to theperson who had improved the most and the week that I proposed, they asked me, ‘Did she say yes?” And that was the week I got the pencil.

Miscellaneous Questions and some other thoughts and asides from Mr. Buffett:Municipal insurance:

“Municipal insurance might be more risky in the future than it’s been in the past.” If municipal bonds get insured, then often cities will default more frequently just because they are insured.
“Be very careful using historical information in business”, like looking at historical default rates on municipal bonds. The default rate is very different, for a reason, during a period when a project or a city is insured vs. when it’s not.

"There is a woman in Omaha in her 80s, she's Polish Jew, she's a wonderful person, she's a friend of mine, when she was a young teen, she was in Aushwitz, with other members of her family, not all of whom came out, and she says, Warren, when I look at someone I am slow to make friends because at the back of my mind, the question always is "Would they hide me?" Now I would say this, if you get to be 60 or 70 or my own age, 77, and you and you have a lot of people that would hide you, you are a success and if you don't have anyone that who would hide you, no matter how rich you are, no matter how many honorary degrees you have been given, no matter what hospitals are named after you, you're a failure. And its another way of saying how many people love you, basically. And I have not seen anyone who has the love of dozens of people as they get older, who is not a success or who doesn't feel that he's a success." - IMD, May 2008

"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." - Nebraska Business 2001

"Only buy businesses that are so good that someone with Alzheimer's can manage them!"

"We see change as the enemy of investments, if it wasn't the richest people would be librarians"

"Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems." - FORTUNE, March 3, 2003

"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."

"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." - Nebraska Business 2001

"How long does the management have to think before they decide to raise prices?"

"I would suggest that the big successes I’ve met had a fair amount of Ben Franklin in them. And Donald Trump did not." - Notre Dame Faculty, 1991

"Every business student you have has the requisite intelligence and requisite energy. Integrity is not hard wired into your DNA. A student at that age can pretty much decide what kind a person they are going to be at sixty. If they don’t have integrity, they never will. The chains of habit are sometimes too heavy to be broken." - Nebraska Business 2001

"The two biggest weak links in my experience: I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. Donald Trump failed because of leverage. He simply got infatuated with how much money he could borrow, and he did not give enough thought to how much money he could pay back." - Notre Dame Faculty, 1991

"I would say, 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," - Nebraska Business 2001

"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." - Nebraska Business 2001

“I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” - Vanderbilt, Jan. 2005

"Capitalism without failure is like Christianity without hell."

“There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.” - Vanderbilt , Jan. 2005

"I think everybody in business school should really know accounting; it is the language of business. If you are not comfortable with the language, you can’ t be comfortable in the country. You just have to get it into your spinal cord. It is so valuable in business." - Nebraska Business 2001

"The advice doesn’t promise enough…it’s not a “get rich quick” scheme, which is what a lot
of other philosophies promise" - Vanderbilt, Jan. 2005 (On why more people don't follow his advice)

"I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult." - 1984

"Rule No.1 is never lose money. Rule No.2 is never forget rule number one."

"Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner."

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."

"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."

"We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do."

From the Tuck Investment Club site:
Q: In one of your letters to shareholders you reference Byron Trott grudgingly as "an investment banker who earns his fee". What do you feel Wall St. does well and doesn't do well?

A: Wall St. makes money well. Per incremental unit of energy and IQ, you will make more money on Wall St. than anywhere else. Wall St. is very good at selling things and at auctions, they're good if you're selling a business. On the other hand, there are so many products that Wall St. has created and not all of them are good. There's a pervasive sense of 'if you don't do it someone else will'. There's an HBO movie coming out in October called Last Best Chance, it's about a nuclear crisis precipitated by a Russian soldier who is bribed by terrorists stealing a weapon. He almost didn't go through with it but they told him 'if you don't do it someone else will, so you may as well be the one to get the money'. This type of thinking has gotten people into trouble, like CEOs managing earnings. In 1985 a Cleveland firm, Scott & Fetzer [a conglomerate that included World Book encyclopedias] was selling their business, First Boston was their advisor and they sent pitches to twenty buyers without anyone biting. Berkshire didn't get a pitch, but I sent the seller, Mr. [Ralph] Schey, a letter saying we were interested and did the deal. Since First Boston was due a fee from any transaction, at a closing dinner they offered Charlie [Munger] their pitch book with pages of analysis, Charlie replied 'no thanks'. We only buy companies where the seller cares about where the business goes.

Q: How will the expensing of stock options affect entrepreneurship and small business?

A: Not much at all. Berkshire has never used options as compensation in our companies. At The Pampered Chef [a Berkshire acquired cooking utensil company], our employees value travel awards as a kind of extra compensation. Often the recipients of stock options don't place the same value on them as the giver does, or should. In the 90's when we were involved with Salomon Brothers instead of granting stock options to employees I offered to sell them options at 80% of their present value. They turned it down.

From 1998 CNBC interview:
As part of his coverage of the 1998 Berkshire annual meeting, Scott asked Buffett about the then high-flying U.S. stock market.

Buffett: Things that go up, and stocks, don't necessarily have to come down. I mean, businesses get worth more over time and they should sell for more over time as they become worth more. But the real question is, if returns on equity would return to 13 or 14 percent for American business or if interest rates went up substantially, then we would look back and say this was a time of overvaluation. But, I don't know the answer on that today and I've never said I knew the answer.

Scott Cohn: You're putting your bets on things like commodities, silver, oil, bonds ..

Buffett: Those are minor positions. No, our big money is in businesses. We own, at present market, 15 billion dollars worth of Coca-Cola and we own a number of operating businesses. So we love to own great businesses run by people we admire and trust. So that's, the other stuff is around the edges.

Scott: I guess what I'm wondering though is, the money that you have parked there, you've made a decision to do that. Is that something that people should follow your lead. Can they be as successful as you seem to have been in those areas?

Buffett: No, I think people should follow their own lead. They should decide what they know and understand and what they have competence in. And then they should do that, whatever that may be.

Scott: Let me ask you about Berkshire Hathaway stock. It seems to keep going up and up and up. You've talked before about whether you'd buy it ... You've been silent on that this year. Would you buy it at this price?

Buffett: I haven't bought a share of Berkshire Hathaway in a long, long time, but I haven't sold a share either.

On May 3, 2008 (Morningstar):

Mr. Buffett said that the most important investment you can make is in yourself, because an individual's potential often exceeds realization. He further said that he asks high school students that if they could buy one car for their entire life, how would they treat it? He then drew an analogy to caring for an individual's mind and body. Mr. Buffett said that the reason people are effective in life is because other people want to be around them and work with them.


2006 Letter BRK/A:

"When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with the experience ends up with the money." - WB

WB May 4, '08:

"There's going to be more pain, sure," Buffett said. "The action of the Fed, in terms of Bear Stearns, prevented in my opinion the contagion where you're essentially going to have bank runs on the investment banks ... The idea of a financial panic ... has been pretty well taken care of. That was a watershed event."

OMAHA (Money Magazine) -- On Sunday, May 4, I attended the press conference where Berkshire Hathaway Chief Executive Warren Buffett and vice chairman Charlie Munger took questions from print reporters for two hours, then went off and did more interviews for TV.

Buffett, who composes his thoughts at blazing speed and speaks in long and complex paragraphs, spent the entire weekend talking. Munger, who is as laconic as Buffett is loquacious, saves his voice - speaking, as always, only a handful of words at a time.

Buffett and Munger, aged 77 and 84 respectively, have the mental energy and sharpness of someone half their age.

Here are some highlights.

Building a philosopy
In response to a question from Barbara Kiviat of Time on how he and Munger control their emotions, Buffett replied: "[It] comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from Benjamin Graham and The Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff."

"You have to have the right temperament. I tell the students who come visit me that if you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor. You need a philosophy and the ability to think independently...It doesn't make any difference what other people think of a stock. What matters is whether you know enough to evaluate the business," he opined.

"You should be able to write down on a yellow sheet of paper, 'I'm buying General Motors at $22, and GM has [566] million shares for a total market value of $13 billion, and GM is worth a lot more than $13 billion because _______________." And if you can't finish that sentence, then you don't buy the stock. [Note: Buffett mentioned GM for illustrative purposes only.] All this requires some temperamental detachment from other people's behavior. Both Charlie and I have a natural instinct in that direction. We value our opinions more than others' -- perhaps to an extreme!"

Kiviat followed up by asking whether they mind being regarded as "a bastion of calm" by others. Buffett simply stated, "I think they're probably right," while Munger was more loquacious: "Not only are they right, but it's a huge advantage to us to get the reputation of being wiser and stronger than other places. Would any of you object to being considered wiser and stronger when you're trying to get anything in life? The key is not to be seduced by crazy ideas, but instead just stick to the fundamentals year after year. Academia doesn't get too interested in us -- we're too simple. What would the professors do? A great many of the formulas [they use to analyze securities and markets] are dead wrong. They exist purely to give the intellectual class something to do. We don't do anything just exercise our intellectual proclivity for mathematical formulas."

Then Buffet said one of the most remarkable things I've ever heard him say: "There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month."

Look at that sentence again. What Buffett is actually saying is that most people's emotions work backwards: They get greedy when stock prices go up and fearful when they go down. Instead, if you are a true investor, you should shop for stocks the same way you shop for anything else: Look for sale prices, and never regard falling prices as inherently bad news. Instead, falling prices create the opportunity to buy even more of something that was already worth owning.

In that single sentence Buffett captured the difference between investing and speculating: An investor, like Buffett, wants the price of a stock to fall below the value of its underlying business so he can buy even more and hold for as long as possible. A speculator (like Jim Cramer) only wants the price of a stock to go up, with no regard for the value of the underlying business at all, so he can sell as fast as possible. To the investor, the market's opinions do not matter. To the speculator, they are the only thing that matters.


Bond insurers beware

In what may spell trouble for bond insurers MBIA and AMBAC, Buffett said, "We see every day that people are coming to us and paying more than they paid the original bond insurer to see that they have an insurer." Berkshire wrote $400 million in municipal-bond insurance in the first quarter of 2008 and is already licensed to operate in 49 states. "This is entirely a secondary-market business," said Buffett, "where people are telling us, 'We'll pay you just to back them up.' "

Note carefully what is going on here: People who already have insurance on a very low-risk investment (municipal bonds) are coming to Buffett and asking him to ensure that their existing insurance will be adequate. It is like a man who is already wearing a belt paying you to put a pair of suspenders on him. This is the kind of business that Buffett loves. Without naming names, he criticized MBIA and AMBAC for ravaging their own capital by insuring too much dicey mortgage debt: "If they keep writing the business at any price, eventually the secondary market is likely to reflect that in the price [of bonds that carry their insurance]. And if you're writing business to pay for yesterday's losses, you'll be sorry."

Then Buffett marveled at the fact that "You have one bond insurer whose stock went from $96 to $4 [AMBAC (ABK)] and they're still rated AAA. The other one issued 14% paper with Treasuries at 4% [MBIA (MBI)] and they're still rated AAA." At that point, Munger elicited laughter from the room by intoning, "The rating agencies, with 20-20 hindsight, could have done better."


Korea and China vs. U.S. regional banks

When a Korean journalist asked whether Berkshire would buy any other Korean companies in addition to its existing holding in steelmaker Posco, Buffett revealed that he had bought "a number of" Korean stocks for his personal portfolio "a few years ago," when "that stock market got about as cheap as any market I've seen in my lifetime."

But most Korean stocks are too small to have a significant impact on Berkshire's portfolio, so Buffett and Munger don't expect to put much money there. Nevertheless, "Korea represents sound value," said Munger, and Buffett added: "It's one of the better stock markets in the world."

Later, in answering a question about whether the credit crisis has turned regional bank stocks into good values, Buffett said: "It's hard to get much conviction on how [the management] will behave and whether they tell the truth. There's a lot of leeway [in the accounting procedures and the reported financial statements]. Talking to the CEOs isn't very useful. When they're lying, they believe it themselves a lot of the time. I want to see how people behave in different situations."

In short, Buffett is not bullish on regional banks. Munger, however, was more upbeat: "For somebody who's very diligent, you've identified a prospecting territory that has some promise. It wouldn't necessarily work for us [because BRK needs to buy very large blocks of stock], but it might work for others."

Buffett wasn't done criticizing the impervious financial statements of US banks: "If you had $1 million," he retorted to Munger, "it would be easier to go through a manual of Korean stocks than to select a few good American banks." This time Munger agreed: "I'd take the Korean stock market so much faster than the American banks that it'd make your head spin."

I don't think, by the way, that Buffett and Munger were trying to say that the Korean stock market is a steal. They were, instead, merely pointing out that investors need to think for themselves and to cast a wide net. If you run out today and buy a bunch of Korean stocks without researching them first, you're not following Buffett and Munger's advice, you're violating it.

A Chinese reporter asked whether Berkshire will be buying more stocks in China now that its market has fallen by almost half, and what the next year will hold for Chinese investors. Buffett's answer held a lesson for investors based anywhere. "We're not in the business of forecasting what the market will do in the next year," said Buffett. "But if a market goes down, we like that. There's no way Charlie and I get upset when stocks go down. We like it, because falling prices give us the opportunity to buy more good businesses at better prices."

"We don't predict stock prices," he went on to day. "All we know is, the lower they go, the more interesting they get. I think it was Agatha Christie, who was married to an archeologist, who said: 'I don't mind getting older, because the older I get, the more interested my husband becomes in me.' Well, the lower stock prices go, the more interested we get in them...We are not looking at any stocks in China now, but China will always be on our radar screen."


Valuing stocks

Asked how he evaluates financial stocks when so many have balance sheets complicated by derivatives, Buffett said: "There are some that I can't value. I probably couldn't value them even if I worked there, even if I were in charge, and even if I had a year to do it. It's just too complicated [with such large positions in complex derivatives]....Most of them, I'm agnostic. I guess that means I don't trust them. When you're buying stock in a financial institution, you should have a reason to be quite comfortable with the risk-assessment capabilities of the people in charge...to have a real fix on the people running the institution. We can't do that with a lot of [banks]. We just can't figure out what they're doing most of the time.... [the accounting doesn't] really spell out where the institution stands. So you'd better know more about the people running it than any set of figures can give you."

Buffett added that not long ago, he read the 270-page 10-K annual report of a bank he was curious about. "After a couple of hours," he said, "I had about 25 pages marked with big question marks that I couldn't answer." (This raises the obvious question: If Warren Buffett can't understand the financial statements of big banks with derivatives, who can?)

Munger summed up the complexity of derivatives this way: "Wall Street is always going to go where the money is and not worry about the consequences. First they invent things they shouldn't sell to anybody, then they end up selling them to their grandmothers."

Munger commented later, "Many of the present troubles were richly deserved. A lot of financial institutions behaved with a combination of stupidity and over-reaching, and that's not a good combination. I think the world is right to exact a large penalty. Capitalism wouldn't exist without failure."

Added Buffett: "Capitalism without failure is like Christianity without hell. These institutions not only brewed the Kool-Aid but drank it. [Some of the banks and mortgage companies] were like an arsonist who got caught in the house after he set it on fire."

Munger's final word on the subject: "In some of these institutions, the main product is not banking, it's testosterone."

Recommended Reading

In no particular order, these are books that have been recommended either by Munger or Buffett.

1. Benjamin Franklin by Carl Van Doren

2. The Warren Buffett CEO: Secrets From the Berkshire Hathaway Managers, by Robert Miles

3. The Selfish Gene by Richard Dawkins

4. Genome by Matt Ridley

5. The Origin of Species by Charles Darwin

6. The Essays of Warren Buffett:
   Lessons for Corporate America,
   edited by Lawrence Cunningham

7. Foods You Will Enjoy -- The Story
   of Buffett's Store, by Bill Buffett

Tips on How To Invest

Equities/Stocks:
1. Know the the number of shares outstanding. Multiply the number of shares by the price of the shares. The product is the price you are paying for the whole company. Write a paragraph explaining why you want the buy the company at this price.

2.That is what Ben Graham meant by having a margin of safety. You don't try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.

3. Earnings should have doubled in the most recent 10 years.

4. No more than 2 declines in earnings of 5% or more in the past 10 years.

5. Total debt is less than tangible book value.

Bonds:

Top Value Investors

Best Value Investors around the world

Benjamin Graham
Warren Edward Buffett
Charles Thomas Munger
Charles Brandes
Philip Arthur Fisher
Joel Greenblatt
Irving Kahn
Michael Larson
Mohnish Pabrai
William Ruane
Walter J. Schloss
Whitney Tilson