Thanks to Anix Vyas, MBA 2010
Below are my notes from the day in Omaha. I apologize for any misquotes / misrepresentations
in advance. This transcript is merely a compilation of my notes from the day, and may be
incomplete.
Tour with Bob Batt, Executive VP – Nebraska Furniture Mart (“NFM”)
Insights about NFM:
-Sits on 77 acres of land and has experienced 75 years of profit
-Has an employee with a tenure of 53 years, aged 88 years
-Views competition as anything that involves use of discretionary income
-Constantly working to improve operational efficiency by benchmarking with world class
organizations such as GE and Disney
-Globalization
o 95% of NFM furniture is in made in South East Asia, so globalization is very relevant
o When asked about the issue of being socially responsible versus making profits, Mr.
Batt responded, “social responsibility is not mutually exclusive from profits.” In fact,
NFM inspects all factories they buy from, and does not work with any factories that
utilize child labor.
-Key to Success: “Sell Cheap and tell the Truth” – Mrs. B (Founder of NFM)
Q&A with Warren Buffett – Cloud Room, Kiewit Plaza (Berkshire Hathaway HQ’s)
Question # 1: Comment on the Financial Crisis
The conversation began with a question about the financial crisis we are currently experiencing.
He started with a joke: “Did you hear they had to call off the Wall Street Christmas Pageant this
year? They had trouble finding three wise men.” He continued to reiterate comments on the
general economy that he made in a March 9, 2009 talk he did on CNBC (full transcript can be
found at http://www.businessinsider.com/buffett‐breakfast... so I
will not re copy those comments verbatim.
He did highlight that our economy will do well overall in the long term. He noted that in the
year 1790, the population in the United States was 4 million. Since then, the standard of living
has increased 7 to 1. No other country has experienced such success, which is a testament to
our system. While the “machine gets gummed up from time to time” it does work.
Question # 2: What is the First Question you ask in Interviews
Again, he began with a few jokes. He said to avoid this question all together, do not hire
anybody! More seriously, he continued, in business, it is important to “find people that have
passion.” He gave the example of his experience during the Salomon Brothers crisis. He said, in
1991 that he got a call from John Gutfreund and Tom Strauss telling him about the scandal they
uncovered. Amidst the frenzy, Buffett had to choose a replacement for Gutfreund, who
ultimately resigned. He had to select a person among a group of 12 very smart people, 3 of
which he knew personally. After meeting with each person for 15 minutes each, he asked
himself the question: “Who is going to go into a foxhole with me?”. The person he ultimately
chose was the one he thought was the highest quality person as a human being – not
necessarily the smartest person.
Continuing with this theme, Buffett mentioned a poignant definition of success that he learned
from Bella Eisenberg, a Nazi survivor who lived in Omaha. In a conversation with Buffett, she
mentioned that after going through the Nazi camp, she realized that it was very difficult for her
to make friends. The reason is that she would also ask herself whether or not [they] would hide
her. Buffett’s takeaway was that you should always be a person that would hide someone, and
the true definition of success is having people that would hide you.
Finally, Buffett used this topic to get in a joke about marriage. He said “to choose one that will
last, look for one quality: low expectations!”
Question # 3: Why did you choose to use an Open Call to fill the position of your replacement
Primarily to “cast a wide net.” Buffett knew people would like to do the job, but he was not
sure if people felt comfortable asking for the role. By taking the open call approach, he
removed any possible inhibitions interested people might have.
Question # 4: How do you value gold
Buffett commented: “Absent the total destruction of paper money, gold is a terrible
investment.” He mentioned that people think that gold is a good way to hedge, but he
challenged that belief and said that the best protection in an environment like today is to retain
enhancing purchasing power. Gold is an instrument that fails to really do this, has “zero utility”
and only “mystique.”
Question # 5: Main Challenges to Unites States Competitiveness
Buffett said that the United States will always face challenges, which is not necessarily a bad
thing. In order to stay competitive, the United States will need to continue to increase
productivity. Competition helps in this regard, and helps everyone, not just the United States.
He continued by noting that protectionism is not the way to go. He gave the example of
Berkshire Hathaway (the Mill business), and how over time, the business was simply less
competitive than overseas players – they were just far more effective in terms of cost. Things
like this are part of business cycles, so instead of using protectionism, the United States should
“build safety nets” for people that lose their jobs and have an inability to re‐train for other jobs
that are created.
Question # 6: How would you define freedom
He struggled to answer this question, but did mention that no one has 100% freedom. With
this caveat, however, he did note that he believes the Unites States is enormously free.
Question # 7: Should young entrepreneurs hold off in this environment or take the risk
Buffett equated holding off to “saving up sex for old age.” Clearly, it does not pay to put thing
on hold in his mind. He did caution, however, that young people should not use a great deal of
leverage to get ahead.
Question # 8: What are business schools failing to teach
Buffett believes that to be successful in investing, you only need two classes: one to teach
students how to value businesses, and another to teach students how to think about securities
and the markets. He said that business schools in general fail to give oral and written
communication enough emphasis, as this is typically “beneath schools.” Finally, Buffett thinks
that classes on effective persuasion, etc. would also be worthwhile.
Question # 9: How do you align the interests of your managers and reinforce the values you
have worked so hard to instill at Berkshire Hathaway
Every two years, Buffett writes a letter to each of his managers where he emphasizes that the
firm is extremely well capitalized and that they should never make a business decision that will
compromise the firm’s reputation because you can never trade that for anything. In three
words: “clarity, repetition, authentic.”
“Run the business like it is the only asset your family can run for 100 years.”
“Talent is too scarce to be discarded while useful.”
Question # 10: How do you think about Emerging Markets
Investments in most emerging markets are too small to have a meaningful impact on Berkshire
Hathaway (minimum is $1 billion market cap). Ultimately, however, Buffett invests where the
odds are different from expectations.
Question # 11: Moody’s is a sizeable investment, can you comment on them given their
recent relevance to the financial turmoil
They were “dead wrong on mortgages.” Buffett continued to say that despite this fact, you
cannot fault them for being human, as everyone else in the US during the real estate boom,
was suffering from mass delusions. “Wall Street does / will not buck conventional wisdom.”
“Lesson: If you depend on other people’s views, you will do stupid things. Take responsibility
for your decisions”
Question # 12: What is the biggest issue facing Non‐profits / anything not government funded
in current environment
Buffett recommended reading Bill Gates recent letter about the Gates Foundation (link:
http://www.gatesfoundation.org/annual‐letter/Pag...
He said non‐profits will basically have to work much harder with less money, which will be
difficult in the short term. The American spirit is to give, however, and that will not go away.
Question # 13: What is important now, that you did not think was important when you were
younger
Understanding human behavior. Buffett spent the last 50 years watching people, including
people in corporations, on boards, in politics, etc. Understanding how people are motivated,
how they rationalize, etc. is very important.
He continued to discuss an exercise to find the most effective human being. The exercise
includes looking for someone in your class that you buy 10% of their future earnings, and at the
same time, short 10% of the lowest earner. Buffett is sure that if you were to make two lists,
the type of people that would fall under the short list would be people that turn you off. The
people on the buy list, however, would be people that don’t necessarily keep score.
He mentioned that Tom Murphy doesn’t keep score, and that all of these concepts combined
are “more important than beta.”
Question # 14: How would you improve the tax code
Society has contributed massively to the successful, and people that are rich should recognize
this, pay back to society, and be thankful.
Buffett thinks that the tax code should definitely be more progressive. He also thinks that we should
remove social security tax and instead be more progressive on payroll taxes. He does not think that education should be more expensive if you have
children. And finally, Buffett believes that lobby power should be removed, as the bottom 20% (that does not have a lobby) has no chance if this is not enacted.
Buffett took this opportunity to talk about his views on social philosophy, or how the world
should be. He asked us to imagine that 24 hours before we were born we were asked to design
the work as we wanted it. The only catch was that you don’t know what your race, gender, etc.
is prior to birth, but you had to live in the world with whatever ticket you got. Buffett thinks
this exercise, would force you to construct a truly fair world. It would force you to see a world where lots of goods and services were needed, and a world that would need to find a
mechanism to take care of the people that didn’t get the lucky tickets. To continue with this
exercise, and hit home another point, Buffett continued by asking if anyone in the room was
willing to give back their current ticket for the chance at pulling 100 tickets from a barrel (i.e.
playing the game again with a 1‐100 chance of getting a lucky ticket). No one raised their hand,
as Buffett assumed. His takeaway from that was that each of us had won the lottery, and that
because of this fortune, we also had a responsibility to give back.
Question # 15: Would you still make the Goldman investment, knowing how things turned
out
“Yes.” Buffett received preferred shares with a 10% coupon, primarily because the financial
system was on the brink of failure. This investment opportunity is a once in 50 year
phenomenon.
Buffett commented that he feels that top executives are generally less fearful now than they
were in September, however, the general public is more fearful now.
Question # 16: What is the biggest risk all generations face
The biggest risk is weapons of mass destruction. In 1945 the Atomic Bomb was created and
Einstein quoted: “This has changed everything in the world except how men think.”
The reason why WMD’s and biological warfare type of concerns are the biggest risk is because
they defy money and intellect. Buffett himself, will all his money, cannot single handily
Question # 15: Would you still make the Goldman investment, knowing how things turned
out
“Yes.” Buffett received preferred shares with a 10% coupon, primarily because the financial
system was on the brink of failure. This investment opportunity is a once in 50 year
phenomenon.
Buffett commented that he feels that top executives are generally less fearful now than they
were in September, however, the general public is more fearful now.
Question # 16: What is the biggest risk all generations face
The biggest risk is weapons of mass destruction. In 1945 the Atomic Bomb was created and
Einstein quoted: “This has changed everything in the world except how men think.”
The reason why WMD’s and biological warfare type of concerns are the biggest risk is because
they defy money and intellect. Buffett himself, will all his money, cannot single handilyeliminate this threat. He is,
however, working on reducing the probabilities of this threat.
Question # 17: We currently have an effective fed funds rate of 0% ‐ won’t this cause more
bubbles
Buffett indicated that the Fed was ready and willing to pump this rate up, at the first sign of
sharp inflation / economic stability. He also mentioned that given this phenomenon, banks
seem like a great investment as they have an opportunity to exploit terrific spreads.
The consequences of 0% rates, however, are much like those in physics. If M1 / M2 increase,
this could very well lead to much higher inflation, which is Buffett’s biggest concern.
The 0% rates have also let to a possible bubble in T‐Bonds.
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Fund Letters
