Warren Buffett | Lecture | University Of Florida | 1998

TL;DR

Success beyond intellect and energy comes down to integrity and the qualities of character you deliberately make habitual, because habits formed young are far easier to change than later in life. In investing, time is the friend of the wonderful business and the enemy of the lousy one, so even a cheap low-return business tends to give a lousy long-term result.

Transcript

it's my honor as well as my privilege to welcome our lifetime's best long-term investor Mr Warren Buffett 1 million 2 million 3 million seems to be working uh I'd like to just say a few words uh preliminarily and then uh uh the Highlight for me will be getting your questions in in in a few minutes because uh that's I want to talk about what's on yo... Read More

Key Insights

• Integrity, intelligence, and energy are the three hiring criteria, but integrity comes first because a smart, energetic person without it is dangerous. As Buffett puts it, if someone lacks integrity you would rather they be dumb and lazy than smart and energetic.
• The qualities that make you want to own 10% of a person are behavioral, not physical: leadership, generosity, honesty, and giving others credit even for your own ideas. None require athletic ability, looks, or the highest IQ.
• The traits you would short in a person are egotism, greed, and dishonesty like cutting corners. These repel others and, unlike talent, are qualities anyone can choose to shed rather than being born with.
• Habits, not intellect, determine long-term character. Buffett cites the line that the chains of habit are too light to be felt until they are too heavy to be broken, meaning self-destructive patterns become nearly impossible to escape with age.
• Deliberately adopting admired qualities works. Ben Graham in his low teens, like Ben Franklin before him, simply observed people he admired, decided nothing stopped him from behaving like them, and copied their good traits while shedding the bad.
• Time is the friend of the wonderful business and the enemy of the lousy business. Staying in a poor business long-term yields a poor result even if bought cheaply, while a wonderful business rewards you even if you slightly overpaid going in.
• The cigar butt approach means buying very cheap, quantitative stocks selling below working capital for one free puff of value, as Walter Schloss did. It works for a free puff but produces low-return businesses you must keep replacing.
• Japanese companies historically earned low returns on equity of around four to six percent, even during the booming economy. Buffett notes Japan had an incredible market without incredible companies, since business volume did not translate into strong equity returns.

Questions & Answers

Q: What three qualities does Warren Buffett look for when hiring people?

Buffett cites a colleague, Pete Kiewit, who looked for integrity, intelligence, and energy. Integrity is the most important because without it the other two become dangerous. As Buffett explains, if a person lacks integrity, you actually want them to be dumb and lazy rather than smart and energetic, since a dishonest person with brains and drive can do far more damage. He emphasizes integrity because he assumes his MBA audience already has the intelligence and energy.

Q: What is the point of Buffett's exercise of buying 10% of a classmate?

Buffett asks students to imagine owning 10% of a classmate's lifetime earnings, then choosing who to short 10% of. He argues you would not pick by IQ or grades but by qualities like leadership, generosity, honesty, and giving others credit. The lesson is that the traits determining success are behavioral and achievable by anyone, not physical gifts, and since you already own 100% of yourself, you might as well cultivate those admired qualities.

Q: Why does Buffett say habits are so important at a young age?

Buffett stresses that most behavior is habitual and quotes the saying that the chains of habit are too light to be felt until they are too heavy to be broken. He observes that people with self-destructive patterns become trapped by them with age and can hardly change. At a student's age, however, you can adopt any patterns of behavior you wish, so it is far easier to choose good habits and discard destructive ones now.

Q: How did Ben Graham develop his good character according to Buffett?

Buffett says Ben Graham, in his low teens, did what Ben Franklin had done before him. Graham looked around at the people he admired and reasoned that since he wanted to be admired, he should simply behave like them. He found nothing impossible about copying their qualities. He also worked on the reverse side, deliberately getting rid of the traits he found off-putting in others, treating character as something to be consciously constructed.

Q: What does Buffett mean when he says time is the friend of a wonderful business?

Buffett explains that time is the friend of the wonderful business and the enemy of the lousy business. If you stay in a poor business for a long time, you will get a lousy result even if you bought it cheaply. But if you are in a wonderful business for a long time, you will get a wonderful result even if you paid a little too much going in. Business quality compounds over time and outweighs the entry price.

Q: Why was Buffett interested in but cautious about investing in Japan?

Buffett noted that money could be borrowed in Japan for 10 years at just 1%, and he figured he could beat a 1% cost of capital. To avoid currency risk, any investment would have to be Yen-denominated, meaning Japanese real estate or businesses. However, Japanese companies earned very low returns on equity, around four to six percent, and he found very few wonderful businesses there, so he had done nothing but kept looking while money stayed cheap.

Q: What is the cigar butt approach to investing?

The cigar butt approach means buying very cheap, quantitative stocks selling well below working capital. Buffett compares it to finding a soggy, repulsive cigar butt on the street with one puff left, which is free. It was the first way he approached stocks, and his friend Walter Schloss, who also worked with Graham, used it. Buffett notes it works for a free puff but involves low-return businesses that you must keep discarding and replacing.

Q: What did Buffett say about the long-term capital situation?

Buffett referenced a story in the current Fortune Magazine, the issue with Rupert Murdoch's picture on the cover, that told the whole story of his involvement. He recalled getting the really serious call about long-term capital about four weeks earlier on a Friday, in the mid-afternoon. That same evening his granddaughter was having her birthday party, and he was flying that night to Seattle. The transcript cuts off before he details the rest of the play.

Summary

Warren Buffett, the legendary investor, offers insights and answers questions about various topics including personal integrity, the qualities of a successful leader, opportunities in Japan, his involvement in the rescue of Long-Term Capital, and his investment strategy.

Questions & Answers

Q: Can you talk about the importance of personal integrity in achieving success?

Personal integrity is essential for success because without it, intelligence and energy can be detrimental rather than beneficial. Integrity ensures that individuals act honestly and ethically, which builds trust and allows for long-term relationships and success. Warren Buffett believes that integrity is one of the most important qualities to look for when hiring someone because it sets the foundation for their behavior and actions.

Q: How does Warren Buffett determine which businesses to invest in?

Warren Buffett looks for businesses that he can understand and that have a clear competitive advantage or "moat" around them. He prefers businesses with simple products or services and strong brand recognition. He wants to invest in businesses that have a sustainable competitive advantage, whether it's through low cost, patent protection, or customer loyalty. Buffett believes that by investing in these types of businesses, he can reduce the risk of losing money and potentially earn solid returns over the long term.

Q: Can you provide an example of a business with a strong competitive advantage?

One example of a business with a strong competitive advantage is The Coca-Cola Company. Buffett explains that Coca-Cola has a valuable brand that is recognized and respected around the world. People have a positive image and association with Coca-Cola, which gives the company pricing power. Even if there are other cheaper options available, consumers are more likely to choose Coca-Cola due to the emotional connection and familiarity they have with the brand. This strong brand creates a wide moat for Coca-Cola, making it difficult for competitors to replicate its success.

Q: How does Warren Buffett determine the fair price to pay for a business?

Warren Buffett doesn't have a specific formula for determining the fair price to pay for a business. He focuses on understanding the business and its potential, and then considers the intrinsic value of the business based on its future cash flows. Buffett looks for businesses that are undervalued relative to their intrinsic value. He aims to buy businesses at a reasonable price that offers a margin of safety, meaning he can still make a profit even if his estimates are slightly off. Buffett's approach is to buy businesses he understands and believes will generate long-term value.

Q: Can you provide an example of a successful investment based on your investment strategy?

Warren Buffett shares an example of his investment in See's Candy. He bought See's Candy in 1972 for $25 million, and the company was selling 16 million pounds of candy at $1.95 per pound, making $4 million pre-tax profit. Buffett saw the potential for See's Candy to have untapped pricing power due to its strong brand and share of mind in California. He believed that people would be willing to pay a slightly higher price for See's Candy due to the emotional connection and positive association with the brand. Buffett raised the price of the candy and has continued to do so over the years, while maintaining high-quality products and service. Despite the increased price, customers continue to choose See's Candy because of the brand recognition and trust they have. This investment has been successful due to the combination of a strong brand and a sound business strategy.

Q: How do you incorporate personal values and ethics into your investment decisions?

Warren Buffett emphasizes the importance of personal values and ethics in decision-making. He believes that investing in companies with good moral character and ethical corporate practices leads to long-term success. Buffett does not invest in businesses that he feels are dishonest, unethical, or have questionable practices. He advises others to align their investments with their personal values, as it not only contributes to overall happiness and fulfillment but also reduces the risk of investing in companies that may face legal or ethical challenges in the future.

Q: Can you talk about your involvement in the rescue of Long-Term Capital Management?

Warren Buffett explains that he was approached to potentially participate in the rescue of Long-Term Capital Management, a hedge fund that was on the verge of collapse. He received a call about the seriousness of the situation and took an active role in the negotiations. Buffett's involvement included submitting a bid to acquire the assets of Long-Term Capital, but the bankers ultimately made the deal without federal money. Buffett reflects on the situation, highlighting the intelligence and experience of the people involved in Long-Term Capital but also the risks associated with borrowing and overreliance on mathematical models. He believes that investing should be based on a thorough understanding of the business and not solely on historical data or mathematical formulas.

Q: How do you determine which countries or markets to invest in?

Warren Buffett emphasizes that he is not a macro investor, meaning he does not base his investment decisions on macroeconomic factors or economic trends. He looks at investments on a case-by-case basis rather than focusing on specific countries or markets. Buffett mentions the potential opportunities in Japan, where Berkshire Hathaway can borrow money at low interest rates. However, he cautions that it is challenging to find businesses in Japan with high returns on equity. Buffett's approach is to invest in businesses he can understand and that have a competitive advantage, regardless of the country or market.

Q: What qualities do you look for when hiring people for your company?

Warren Buffett looks for three main qualities when hiring people: integrity, intelligence, and energy. He believes that integrity is the most important quality because without it, intelligence and energy can be detrimental rather than beneficial. Buffett looks for individuals who are honest, hardworking, and have a strong moral compass. He values people who exhibit leadership qualities, are able to motivate and inspire others, and are generous in sharing credit and recognition. Buffett emphasizes the importance of surrounding oneself with people of high character and values and how their qualities can contribute to the success of a company.

Q: How do you balance risk and return in your investment decisions?

Warren Buffett focuses on reducing risk by investing in businesses he understands and believes will generate long-term value. He aims to buy businesses at attractive prices that offer a margin of safety. Buffett advises against taking on excessive risks, such as borrowing money to invest or investing in businesses with uncertain prospects. He believes in investing in a few high-quality businesses rather than diversifying extensively. By focusing on the fundamentals of the businesses and their competitive advantages, Buffett aims to minimize risk and achieve consistent returns over the long term.

Takeaways

Warren Buffett emphasizes the importance of personal integrity, understanding the businesses one invests in, and investing in businesses with a competitive advantage or moat. He looks for businesses he can understand and that have a strong brand or market position. Buffett believes in investing for the long term and aims to reduce risk by only investing in businesses that he feels are undervalued and have a potential for solid returns. He also emphasizes the need to align investments with one's personal values and ethics and to surround oneself with individuals of high character and values. Buffett cautions against excessive risk-taking and encourages investors to focus on the fundamentals of the businesses they invest in.

Summary & Key Takeaways

• Buffett opens by telling MBA students that intelligence and energy alone do not determine success. Using a fictional exercise of buying 10% of a classmate for life, he shows that the qualities people actually value, such as honesty, generosity, and leadership, are achievable behaviors rather than fixed talents.

• He argues that character is built through habit, warning that self-destructive patterns become entrenched with age. Because habits are far easier to change when young, students can choose admired qualities and discard repellent ones now, following the example of Ben Graham and Ben Franklin who deliberately emulated people they respected.

• Turning to investing, Buffett explains that time favors wonderful businesses and punishes lousy ones, so business quality matters more than a cheap price. He discusses low money costs in Japan, weak Japanese returns on equity, the cigar butt approach, and his involvement in the long-term capital situation.