Warren Buffett & “The Punch Card Mentality”
Learnings from an afternoon in Omaha, a conversation with Warren Buffett, and a glimpse into the mind of an American investing legend.
“Imagine you are on a bus with 20 of your closest friends and colleagues. You can pick one person and receive 10% of their future earnings forever. What would you think about? You’re likely not going to pick the person with the highest IQ, but the person who is the most effective leader and makes those around him or her better.” -Warren Buffett
On a brisk winter day in Omaha, Nebraska, I had the opportunity to learn more in one afternoon than most learn in a lifetime.
“We’re still not quite over that Big 12 Championship Game,” quipped Mr. Buffett as I nervously handed him our question on equity markets. “That was a close one,” I responded before returning to my notebook as I anxiously awaited the response from the Oracle of Omaha.
The game Mr. Buffett was referring to was the 2008 Big 12 Championship, when a close call on Colt McCoy’s out-of-bounds pass allowed for a last second field goal and a Texas victory over Nebraska, launching Texas to a national championship appearance.
But NCAA Football nostalgia aside, the opportunity to join 19 of my Texas MBA peers for a facilities tour of three Berkshire Hathaway subsidiary companies, and two and a half hours of Q&A with Warren Buffett was most definitely a highlight of my business school experience.
In a surreal day that included a group photo with Mr. Buffett as he sang the words to “The Eyes of Texas” (and I mean to tell you he sang every.. single.. word..), I would be remiss if I did not pass along some of the wisdom that was conveyed to us.
… On Relationships & Attitude
(Un)surprisingly, the most common topic that Buffett referred to throughout the afternoon was not whether the Federal Reserve would raise rates next quarter or if equities were over-valued, but was the importance of healthy relationships and a positive attitude.
“You’re going to move in the direction of the people you associate with, so you should surround yourself with people better than you.”
He continued to revisit the idea that the most important thing in life is to treasure the people that bring out the best in you, so make sure you invest your time with quality people, and the profitable investments will follow.
“I try to be rational in business, and that’s not necessarily the best strategy in your personal life. But having good human personal relationships is vital in both.”
On spouses, he urged us to look for someone who brings out the best in us, and don’t expect them to change! Just as Berkshire Hathaway invests in solid businesses with exceptional management teams, and allows them to continue operations with minimal interference, so is Buffett’s approach on selecting a significant other. This business approach was evident in the 2012 acquisition of Oriental Trading Company, whose state-of-the-art fulfillment facility we toured later that afternoon. Buffett said in a statement:
“Oriental Trading is a leader in its industry, has a strong management team and delivers exceptional customer value and service. We are delighted to have them join the Berkshire Hathaway family and continue their quest to make the world more fun.”
What was true in 2012 remains true today. Without revealing too many proprietary details, it was astounding to hear how fast Buffett and Berkshire Hathaway closed the deal after they identified the investment opportunity and vetted the management team.
… On an Inner Scorecard
Buffett’s relationship with his father was instrumental in shaping his worldview, work ethic, and positive attitude. He asserted that the most important job in the world is raising a kid.
“You are your children’s entire world. Hold yourself to high but not impossible standards — you’re going to make mistakes, but never look back at those mistakes and have your stomach churn!”
His father emphasized the importance of having an inner scorecard based on personal values. As a young teenager, Buffett ran with a “tough” crowd, and would often cut-up around the neighborhood. After a string of incidents, his father told him that he was better than that, saying, “To thine ownself be true.” From then on Buffett, strove to hold himself accountable to his own inner scorecard, and surround himself with people that made him better.
… On Investing
“If you were given a punch card with 20 ticks on it when you graduated, and those were the only investment decisions you could make throughout your entire career, how would you use them? You would likely be very selective, and probably very rich. This type of mentality will force you to be patient.”
For Buffett, many of his investment decisions have been more or less “obvious”. He made his first investment in Western Insurance, for instance, when he noticed that they reported $29 in earnings-per-share, yet was trading at a price of $3. That exact scenario surely doesn’t exist today, but he said that “Things jump out at you occasionally — pay attention to those opportunities,” So, what should you look for?
Look for businesses that you understand. What do you think about the partner, the brand, the opportunity? Look at an investment as if you were investing in your friend’s McDonald’s franchise — do you trust them, do they know what they are doing?
Look for untapped pricing power and insulation from competition. For example, See’s Candies sold at $0.39 per chocolate while their main competitor, Russell Stover, sold for $0.46 per chocolate. “When she kisses you after receiving those chocolates, your pricing power becomes infinite… I think we can stand to increase price by $0.04.”
Look for economic castles that are surrounded by moats large enough to have some sharks and piranhas, and that are continuously getting wider. Buffett cited a few historical examples:
- Newspapers, in the 70's: they tended to capture the local market, and you didn’t want to read two newspapers everyday — you could get your news and high school sports scores from a single read. It was a natural monopoly.
- Microsoft, in the 80's: by creating an operating system that was shipped with virtually every PC, you had automatic consumer buy-in and significant market share.
- Google, now: their search is useful and invaluable. GEICO pays $10 for every paid search lead, but it’s worth it! If you are searching for “auto insurance,” you’re clearly a good potential target customer.
Look for times when everyone is panicking, because that is when you should act, if you have the ability to act. Volatility equates to risk —but volatility also equates to opportunity.
Buffett’s approach of finding businesses he understands, insulated from competition, and with good management teams has remained steadfast throughout Berkshire Hathaway’s history.
“Charlie Munger is 94 years old, and is just now finishing his internship.”
… On the Future of the Economy
Buffett asserts that there has never been a better time or place for business, health, or education than the United States, and said that, “America is an entrepreneur’s dream. We are all extremely lucky and have nothing but opportunity.” Two stories that he mentioned specifically included the founding of Enterprise Rent A Car by Jack Taylor, and Pilot Flying J, one of Berkshire’s most recent investments.
What about macro? Macroeconomic conditions and monetary policy does not affect Berkshire’s decision-making. Buffett has lived under 15 US Presidents, and has been a net buyer of US Equities under 14 of them!
This is evident in Buffet’s most recent Letter to Shareholders and “The Bet”. Ten years ago, Buffett invested $318k in a fund-of-funds that would eventually be granted to the Girl Scout’s of Omaha. He also invested that same amount in an S&P Index Fund.
The results are staggering. Although the fund-of-funds beat the index in 2008, in every one of the nine years that followed, the index fund beat the fund-of-funds despite over 20,000 collective investment decisions from hedge funds equipped with highly educated analysts, expensive database access, and management fee revenue vs. just one investment decision for the index fund in that period of time.
What is the biggest threat to the future of the American Economy? Cyber-attacks, nuclear weapons, and other weapons of mass destruction. Buffett cited Albert Einstein’s 1939 letter to FDR that would instigate the Manhattan Project and later the atomic bomb. He argued that the world was forever changed with the introduction of these massive weapons, and that this presents the biggest cloud over the future.
If he were to start his career over today, he would choose a similar career path that involved managing money. In order to manage money, you need to attract capital. And in order to attract capital, you need to have an audited track record to stand on. Investors will be interested not only in what the returns were, but how those returns were achieved.
Buffett urged us to take the job you’d want even if you didn’t get paid — have passion and have fun. He said that “I tap dance to work every day.” His positive outlook on life and career is contagious. As he wrapped up the session, Buffett joked about his Coca-Cola habit:
“A quarter of my caloric intake is Coca-Cola. My body is essentially one-fourth Coke, I just don’t know which part!”
I am thankful to have spent an afternoon with such an impressive and thoughtful human being. He left our group feeling confident, energetic, and inspired.
“A bell’s not a bell ’til you ring it
A song’s not a song ’til you sing it
Love in your heart wasn’t put there to stay
Love isn’t love ’til you give it away!”
- Warren Buffet, quoting a poem by Oscar Hammerstein II
Full version of the 2017 Berkshire Hathaway Annual Report here, comprehensive database of Warren Buffett FAQs here. Find me on LinkedIn here.
