February 23, 2018 (Omaha, Nebraska) - If you had the opportunity to eat lunch with one of the most successful investors in the world, what would you ask? On February 23, 200 students from 10 universities (such as Stanford, UCLA, University of Toronto, etc.) across the world participated in a once in a lifetime opportunity- eating lunch with CEO of Berkshire Hathaway, Warren Buffett. Peking University, Guanghua School of Management was the only Asian business school to participate in the event; the school sent 20 students to Omaha, Nebraska, marking the second time Guanghua has been invited.
The day started off with a tour of the Nebraska Furniture Mart, a Berkshire Hathaway company and also the largest furniture store in the U.S. Afterwards, students ate lunch with Buffett and participated in an open Q&A session. Buffett shared his insights on finance and investment, career development and social responsibility.
Here is a round-up of the best questions from our participant students:
Q1: How would you change your approach to your career and business if you had to start from scratch in 2018?
Buffett: I would do what I do now and ask myself: what is the best entryway to my goals?
When I started out investing in securities in Omaha in 1920, I worked for my hero, Ben Graham, for nothing in return. While ideally I would like to have some money of my own to manage, obviously I didn’t have that kind of money when I was young. Thus, I needed to have people to join me. Another important aspect is to have a honorable record. Just as a player with good stats in the minor baseball leagues has a chance to join the majors, a young securities guy needs to have a decent record of making money, before people will hand you money in a big way. I wasn’t really managing money until May 8, 1956, when some people gave me 1,500 USD. At that point, I had no master plan for investing. My college roommate who knew that I had done well, with small amounts of money, trusted me to handle his money well.
We hired two to three people a year ago at Berkshire Hathaway. A whole load of people applied to join us and they all boasted about their good records of performance. What I then look for, beyond a good record, is how they achieved it and what kind of person they are.
If I had to start my career again today, I would only do the things I am passionate about. For me, I look forward to work everyday. I do a tap dance to work. I mean, I get social security checks rolling in now, so I don’t really need to work. But I still do, because I love my job.
So in summary, if I were to start again today, in 2018, it’ll just be doing over and over again what I did. If what you do what you love and you’re good at it, people will come to you.
Q2: What are the characteristics and financial figures you use when evaluating the growth of a company?
Buffett: I am looking to buy stocks that do something for the world. In valuating growth, there are many variables to consider, and the point is to know what variables to look for.
Current respective earnings are one criterion.
However, one must remember that if it is a fairly easy decision to make, then others can too. What is needed is insight that others do not have. It is also important to adhere to one’s circle of competence.
Mrs. B never went to school, but she knew everything.
Last quarter, I made a purchase of Apple. This was made upon an understanding about the ecosystems around smartphones.
There are many variables, but a large one is ‘how strong is the franchise,’ such as McDonald’s.
You perform a bunch of calculations regarding the choice of investments and then compare them.
The furniture mart has now reached its 4th generation of managers.
Over 10 years ago, I made a four billion USD investment on an Israeli company.
A factor in deciding whether to buy private companies is whether the person (manager) is going to be excited about managing the place – although the best businesses are businesses that are so good that you don’t need to think about managers.
Earning power and excess cash are important.
Changes occur, and sometimes, very rapidly.
Compare investment to baseball, when you are the batter. Investing in a company is like swinging when the ball comes along. Depending on where the ball is in the ‘strike zone’ the results will be different. But unlike in baseball, in investment, the investor has the choice not to ‘swing,’ because in stocks there is no clear ‘strike zone,’ unless you know enough about the company and the potential investment.
You should always maintain a ‘punch-card mentality.’
Q3: Mr. Buffett, you invested in the newspaper industry in the 1970s. These investments, such as your investment in the Washington Post, turned out to have significant returns. In 2018, what industries are you most interested in from an investment point of view?
Buffett: The newspaper industry started in the 1880s and, at that time, there were large numbers of such businesses. There was over 10 newspapers in every city, both in English and other foreign languages, such as Spanish, German, etc.
For a long time, the newspaper was an indispensable way for people to get a hold of information. In addition to its necessity, the industry was also a natural monopoly as there was no need for people to read two papers in one day. Consequently, by the 1970s, there were only 1,700 newspapers left in the country.
Back then, the newspaper had classified for jobs and real estate, baseball scores, financials, and so on. Today, there are lots of resources for finding out stuff. Every piece of “news” is now scattered. Additionally, newspapers also cost line by line. But the internet is free no matter how much you publish.
Overall, the rise of TV stations and, more recently, the Internet, has replaced the newspaper as the primary source of information. Therefore, the newspaper industry has gradually lost its user base and its monopolistic power.
The Washington Post was started in the 1930s and, in the 1970s, it had become the best paper in D.C. It was bankrupt and auctioned. At the time of our investment, it also owned four TV stations, Newsweek, and other assets. The whole company was selling at 18 million USD, while the assets alone was easily worth 400-500 million USD. It was a no-brainer and the investment made an over 100x return.
As for what is the best business today, he said jokingly, “I wish I knew, but even if I did, I wouldn’t tell you. If you know, please tell me quietly; don’t shout it out to the others.”
The best industries are castles with a wide moat. There will always be other people looking to attack your castle, but the question is whether your moat is wide enough. Some great businesses are dispersed in lots of communities. People don’t notice them and competitors don’t target them. That is getting rarer with the ubiquity of information. Also, there were some industries and companies that used to enjoy wide moats that gradually disappeared.
Newspaper was such an industry with a local, natural monopolistic power, but that was gradually eroded by the appearance of the Internet. Another example was AOL, which was a great business twenty years ago. At that time, everyone hated them, but they kept growing. That is a good indication of a great business. Google is another example of a great business where the channel is “invaluable to its users,” as a result GEICO has to pay 10 dollars for each click-through from Google for car insurance. The moat in this case is so wide that the attacker Bing is teased by users as standing for “But It’s Not Google.”
Q4: How much does your personal life impact your business strategies over the years?
Buffett: Happiness in your personal life will certainly help your business career. Maintaing a good relationship with people that you associate with is very important. I have been working with Charlie Munger since 1959 and we never had a single argument over all these years.
The most important partnership is with your spouse. Overall, a good personal life has a positive association with successful business life.
On the business side, we don’t look to buy businesses to change the management. We look for managers who have a passion for their business and can take their business seriously, as if they own the company.
Overall, to succeed in business you have to find your true passion. For me, investment is like painting on a canvas without borders and that is what I enjoy most. Furthermore, I enjoy applauses when I make the right decision. It just happens that an investment career can fulfill both of my criteria and I love what I am doing.
Q5: You have always stressed the importance of keeping an inner scorecard for a successful career and a satisfying life. What I am curious about is if have you ever made changes to this inner scorecard? What have you prioritized at different stages of life?
Buffett: It is important to keep an inner scorecard. People often judge you from the outside. If you are influenced by them, that is the outer scorecard. Essentially, my inner scorecard has not changed much. I learned it from my father when I was 13 years old. When I was unhappy of what others thought of me, he used this method to calm me down. It matures as time goes by and counts towards your character. If you are not satisfied with yourself, then set a high standard. Whatever you call it, checklist or scorecard, you should use it to aim to the person you want to be. Let us imagine that on your way back, I give you an opportunity to pick someone amongst the 20 people around you and you will receive 10% of his/her income from now on. This person does not have to be the smartest one, or the most athletic. You might effectively pick someone that is the most generous, honest and give credit to that person. What is more interesting is that if you could sell short of someone, you could say this is the kind of people that you least want to be. Put the traits from the people you admire on the checklist, and you can be that person. In the end, good things will always flow back to you. A bell is not a bell until you ring it. A song is not a song until you sing it. Love in your heart wasn't put there to stay; love isn't love until you give it away!
Q6：Berkshire made a 400 million USD investment in Canada. Do you think there are any other opportunities to invest in Canada?
Buffett: It was opportunistic. There was a run on this savings bank in Canada. In the USA, the FDIC stops this. Berkshire made an offer to provide a line of credit to help stop the run. The bank had other offers, but with tougher terms. Berkshire offered better terms plus an investment and an association with Berkshire, which would help end the long run.
Canada is a good place to put money. In 1977-78, I offered to buy a bridge in Canada for 20 million USD. It was a publicly traded company and owned one of the main bridges. I get excited when the phone rings…This is how things happen. I can often tell in two minutes if I’m going to do the deal.
Q7: Berkshire paid 400 million USD for a REIT. How do you get comfortable with low interest rates and how do you make investment decisions under changing monetary policies?
Buffett: Berkshire never makes a decision based on macroeconomic considerations. I don’t believe that interest could make any difference, but is a fascinating game to watch. I believe investment decisions should be made according to the nature and feature of the business itself, rather than the interest rate.
I valued and appreciated the long growth of the U.S. economy. “I’ve lived under fifteen presidents, one third of all of them…American business is doing great over time.” All the American assets you see came from nothing in a couple of lifetimes. “It’s a winner’s game and you want to be in it.” I would never let political belief influence my overwhelming belief.
In 1942, I bought my first stock at the price of 14.75 USD. At that time, the US was losing the war in the Pacific and the people were in great desperation. If you had invested about 114 USD, then it would be worth 400,000 USD today. There is a huge tailwind, so short-term gusts just don’t matter. You could also see the edge during the great recession.
Buffet said, “Look at where we are versus in 1776. If you don’t see a trend line, you need glasses. Don’t dance in and out of a game with a big tailwind. You care about what the asset is going to produce over time. In this way, you are in a winning game over time. You don’t need a newspaper subscription. You just need Moody’s manuals.”
Q8：In your speech in Sun Valley in 1999, you spoke of an overvalued market. Are we facing a similar situation today?
Buffett: There are similarities between 1999 and today – in both cases the stock market has seen an extended period of upward trend. However, the current situation is not comparable to 1999, bonds were over 3% and equity was less attractive in those days. In 1999, Paine Webber did a survey on what people expected to earn on an equity investment over ten years. The answer was over 15% annually for 10 years - that was very optimistic! The real trick is to find the obvious opportunities – the ones that shout out to you. For instance, there was a corporate bond with 5 years maturity with less than 1% return (YTM). Looking at a macro level of asset allocation, why would anyone hold an asset that will give you less than 1% return when you can easily achieve a much higher return by holding equities or other instruments. The real question is to find companies that have the potential to do exceedingly well, it is about finding these companies from the thousands that are out there and correctly valuing them. All you need is just to find 1-2 of these obvious mispriced opportunities to get very rich. On the other hand, the great thing about investment is that if you can’t find anything, you have the choice of just holding.
I used to read the Moody’s and S&P compendiums. These books are under industrial, transportation, and other sectors. He went through them page by page. Overall, the message is to find the obvious opportunities and seize them in a big way. This doesn’t require any advanced knowledge of financial formulas or mathematical equations. Furthermore, a lot of people view volatility as a risk, but in fact it is good for you because what you really want is vastly different prices for the same underlying assets to which you know the true value.
Q9: How will you build social responsibility in portfolio management?
Buffett: You do have a responsibility as citizen to concentrate your political and philanthropic efforts into social efforts. However, trying to rank the S&P by that is a lost cause. Don't make investment decisions based on social responsibility.
Once Charlie and I had the opportunity of buying a chewing tobacco company in Texas. We looked at it and had never seen a business with better economics. But we declined the business in the end. Buying the business would have made us participant and we didn't want that. We’ve never bought businesses that were not good for the society.
Charlie’s favorite investment Costco also sells cigarettes, but that doesn’t bother me. It is just like Coca Cola and eating junk food. It is a personal choice, even if it is not the most healthiest. I am willing to give up a year of my life for that. It is the price I am willing to pay. And that is my decision. You need to do what you believe in and do your part as citizen. For the cigarette issue, I think levying heavy taxes will do their part.
Q10: What are the major challenges that businesses face in the future and how should they deal with them?
Buffett: There is always going to be challenges in any industry, like driverless cars to the automobile industry. However, capitalism will do extremely well in this country. Gas stations are going to thrive whether cars are driverless or not, and that proves that some things don’t change overtime.
One of my friends, Jack Taylor, for example, he wasn’t exactly the best student in class, and he dropped out of high school in 1941. He joined the air force, flew around in World War II, and started to sell cars from St. Louis to Washington after he came back from the army. He had an idea when he saw that most people couldn’t afford a car: lease them. He started with just five cars and then expanded to 17 and ultimately became the largest leasing company in the U.S. His secret sauce: he hired more college graduates than any of his competitors. It’s an industry for the young, that’s what he loved to say. Everyone here is more extraordinary than Jack Taylor, and there’s never been a better time to be alive, as medical technology advances and social benefits improve.
Of course there is the challenge of immigration as well, but remember that two immigrants built America. Cyber-attack situations need attention, as they have the potential of mass destruction. Weapon issues persist as well.
If we look at opportunities, it is a better time to be in business in U.S., Canada or Asia, and in particular China; some ideal industries would be healthcare and education. Everyone in the room has the ability to do something.
Q11: What do you think is needed to maintain a healthy economy in the U.S. today?
Buffett: The United States has a GDP per capita of $39,000, an improvement of 6x’s that of the 1960s. All we have to do is keep the institutions and frameworks that have brought this about. One of the drivers of growth is that our market system gets more and more specialized as the days go by. This unleashes the potential of people who have specialized abilities. Our aim is for each person to have a sense of participation and well being in this world. Let’s say our world was dependent on football activity. But there are some people who have no such skills. With the kind of wealth generated in this country, we can give them and their families a decent life. If they are willing and able, we can find them some kind of job. And then we have social security, because we want people to be able to be themselves after a lifetime of working. Above all, we want to keep the atmosphere that has driven our progress to date. This is the type of atmosphere that drives a dying Steve Jobs to still want to make new things that change people’s lives. We need to unearth the potential of those who fit well in the system to create things that benefit us all and take care of those who are not capable of competing at all.
The United States has the secret sauce: a system that unleashes human potential. Think about it, back when the U.S. had a population of 4 million people, China had 60 million. We were able to progress so much faster because China had a government that restricted human potential, while we unleashed it. But today, China has transformed itself dramatically and it just shows how much potential there is in society. More talents can be utilized when society is not all just farming. Can you imagine – there might just have been a Steve Jobs among your farmers, but he never amounted to anything. But when you unleash that potential, as the market system gets more and more specialized.
That is why I am very optimistic about society. There have been many improvements in the quality of living and this will continue to be the case in the future.
Q12：Other than the 10K reports, what reading materials are essential in successful investments?
Buffett：If you learn more, then you will gain a reasonable understanding.
10K is not the most important reading document. There is nothing like actually going out there and getting personal experience, but it is very hard in terms of time and cost.
Because you can’t learn enough, what I’m trying to do is assess – for example, Coca-Cola. Consider the cultural change, the taste change. Pretend that you are the owner of the company at hand and imagine the challenges faced by the company, as well as the insulation, the competition, the weaknesses, etc.
In considering the purchase of a candy shop, one factor was the price sensitiveness of a box of chocolates. It is not. Imagine what the company is going to look like in 5 or 10 years, on the basis of where the world is going, the culture, etc.
Q13: Artificial intelligence (AI) is very popular nowadays. How will this technology affect hedge funds and other fund managers, as machines surpass humans in both quality and quantity analysis. Will AI become better investors than humans?
Buffett: I don’t think so. Machines, on average, might surpass humans in investment decision-making, but the best humans will beat the machines. AI might do better than S&P 500, but no machine can beat Charlie Munger. Computers are good at doing things fast, so in fast-trading situations, such as momentum trading, algorism trading machines have an advantage.
It is very dangerous to let machines make decisions in investment and fund allocations. Fund protection orders and other types of automatic orders played a big part in the crash of 1997 and, to some extent, in 2008. It will continue to contribute to flash crashes and, if the trend of letting machines make investment decisions continues, we may well see some disastrous events in the decades to come. Overall, people who have the right investment philosophy will continue to perform regardless of influence from the machines.
Q14: What is the hardest lesson you learnt in life and what advice would you give us?
Buffett: Except for illness, anything that happened to me, which seemed bad at the time, eventually worked out well over time. The most important advice is to treasure those people around you and bring out the best qualities in yourself. You should associate yourself with friends who are optimistic and can encourage you. Keep away from people who are full of negative energy, as this tends to spread and affect your own mindset. You will find that success is more correlated to optimism and being friendly, rather than to IQ or the ability to solve equations, etc.
Every student in this room has unlimited potential, you all have the energy, education and other qualities in you to succeed in life. Just choose wisely with wo you associate with. I wish the best for all of you.
Peking University feels honoured to have had the opportunity to sit down with one of the most brilliant minds in the financial industry. Mr. Buffett’s perspectives and insights challenged our students to think about investment and finance from the long-term perspective. We are humbled for his wisdom and learnings, which our students seek to take into their future career.