November 25, 2015 12:38 ET

Warren Buffett: The Oracle of Nebraska Shares His Wit and Wisdom With Business Students

NEW YORK, NEW YORK--(Marketwired - Nov. 25, 2015) -

Editors Note: There is one photo associated with this press release.

The Nebraskan hospitality was in full force. On March 20, 2015, Warren Buffett greeted approximately fifteen students from the Wharton School of the University of Pennsylvania, together with approximately another one hundred students from organizations across the United States, including Marquette, Ohio State, Navy, Smart Women Securities, and Notre Dame. The students met Mr. Buffett on his home terrain in Omaha, Nebraska where he shared his wisdom with them, in typical Buffett-style. After his lecture, in a lighter moment during a photo session, Mr. Buffett joked liberally with the students. He singled out Wharton student, Griffin Rotman, putting him into a head lock.

Mr. Buffett regaled the students with a story about his partner, Charlie Munger, and himself that spoke 'volumes': I started to get worried about Charlie's hearing. I asked my doctor what I should do, because I didn't want to approach him and insult him. I tested it by standing across the room and saying something in a normal volume. He didn't respond. I got closer and tried again. He didn't respond. Finally, I walked up to him and repeated it again. He said, "For the third time, I agree." If you know us, you know that Charlie can hear and I can see.

The students asked Mr. Buffett what he would do differently, if he could turn the clock back to age 30. Without hesitation, he responded that he would act just as he had, but double down. He felt that he could have pushed harder and that he had made mistakes early in his career. He recounted that he had a disagreement with an executive that resulted in the firing of this executive and Mr. Buffett taking over Berkshire. Good luck is important and Mr. Buffett acknowledged his own. According to him, the odds of being born in the USA and being male in 1930 were probably 80:1 and that the ovarian lottery played out in his favor. At that time, he feels that the biggest mistake one could make is in the choice of one's spouse.

When questioned about his recent comment on market value in his shareholder letter for the first time, he shed some light on why now. In his view, for 90% of businesses, book value is irrelevant. However, for financial firms, it can be relevant and is generally a good tracking device. Berkshire owns more and more businesses that were purchased for market value. Mr. Buffett stated that Berkshire bought a business for $500M that had a book value of $10M and recognized that market value can be volatile in the short-run, but is a better measure in the long-run.

Next, the students asked Mr. Buffett what he would do with $36K today? He suggested that if you are borrowing at 0.75%, you could lend it to someone for 1.00% and collect a nice spread. In addition, he recommended investing in equities, in an index fund, as over time, that's a good bet.

In response to a query as to what was the riskiest investment Berkshire had ever made, he responded that he had never done anything where he felt like he was gambling or making a bet. He bought a gas station with a partner when he was in the National Guard, long ago in Omaha, and put 10% of his net worth into it. It was selling 15,000 gallons per month at the date of purchase and he thought he could take down a competitor moving 30,000 gallons per month. He was wrong and the opportunity cost of that 10% today would be $7B. But he was not upset. He firmly believes that he doesn't take risks, which doesn't mean he doesn't lose money. The best one can do, in his opinion, is to find a small group of names that you like. Leverage creates risk. Emotion creates risk. Lots of people get shaken out as fear is contagious. In September 2008, there was $3.5T in money markets and there was a 5% outflow in 3 days. With typical Buffett insightfulness, he stated that confidence comes into the room slowly, but fear gets people out of the room as fast as they can.

He also had some views on the future of healthcare in the United States. He advised the students that 17% of GDP in the United States is in healthcare vs. 11% or less in other nations. He believes that the eventual answer will be a single payer model. Lots of money in healthcare goes toward better solutions, but not toward more efficient solutions, according to Mr. Buffett.

He suggested the students read some of the books authored by Atul Gawande, who he believes to be very smart. He is convinced that America will figure out its financial future, given that the U.S. has 2% real GDP, which he regards as actually pretty good. With 1% population growth, that implies a 20% real GDP gain over a generation. As proof, he cites that GDP per capita has grown 6x since 1930 (when he was born).

What are the challenges and advantages you see for women today, Mr Buffett was asked. He stated that he is heavily dependent on women. His historical precis was simple: he felt it's funny that in 1776, we wrote that all men are created equal and, then, 13 years later, we wrote in the Constitution that African Americans are only 3/5 of a person and women basically don't exist. It takes time for change. It took a Civil War to challenge slavery. By 1920, women could vote. Mr. Buffett has an older sister and a younger sister and revealed that when he was growing up, people told him that his opportunities were unlimited but they told his sisters to marry well. From his vantage point, investing is a very good area for women to shine and he recognizes that other jobs are more subjective. Objective thresholds are better to ensure fair comparison. Although society has made improvements over time, more improvements will come.

Undoubtedly a question he has heard many times before, how do you raise children to be humble when you are so wealthy, it received a thoughtful response. He told the students that the most important job they'll ever have is to raise their children. There are no second chances, and their children will learn based on who they are. It's how you live. His kids were not treated differently because they were wealthy. If money is all that is important to the parents, it's going to be so for the kids as well, in his view. Kids are smart and they will see if you say one thing and do another, he told the students. What do I want this child to remember? What lessons are they going to get from what I am saying, but more importantly from what I am doing?

A further interesting inquiry was in regard to Mr. Buffett's thoughts on the role of activist investing. He said it is hard to make a blanket conclusion about activists as there are some terrible managers and, in such cases, activists have a role to play. But sometimes activists are just looking for quick returns. He was an activist at Berkshire, then he ended up owning it. He believes that it is most important to be aware of incentives. He doesn't like incentives that align with a short-term view. If an activist has a target to get his returns within two years, he may not be a good partner. He also doesn't think a favorable argument for an activist is that a company carries $20-25B cash. A CEO should be focused on other things instead of appeasing a shareholder with a $5B repurchase program (referencing GM).

Mr. Buffett was asked to discuss wealth inequality in the U.S. According to Forbes, several years ago, the first top 400 wealthiest people in the USA had $81B in total net worth. Today, they have $2.5T. The top 400 also pay 19% income taxes on average. Mr. Buffett acknowledged that personal wealth has tilted toward the super rich. Money making money is taxed less than labor making money. It's also very tough when money moves politics. Eventually society will fix this issue through the ballot box. To get a true read on a politician, he asks, "tell me what you are for that a majority of your constituents are against, and that's how I'll know what you really believe." He believes in huge disparities of outcome, but not disparities of opportunities. To illustrate the issue, he recounted that he sometimes calls potential contributors to The Giving Pledge. It's mind-boggling to him that someone can tell him they can't live off of $500M. He offered this interesting exercise--the ovarian lottery. Imagine a genie comes to you 24 hours before you are born, so you are still in the womb. The genie asks you to design the system you want to be born into. You can choose political, economic, social, and other systems. What's the catch? The genie says there is a barrel with 7B names in it. Who you will be when you are born is determined by a random draw. Thus, you would want to create a system in which you have freedom from fear, including access to fair health treatment. What if you have health problems from birth? What if you aren't that smart? What if you are born into poverty? He pointed out that most of the students in the room would not want to trade the ticket they have today for a draw of 100 tickets from that lottery. Out of the 100 you draw, 4-5 would be born in the USA of either gender. If you had an IQ of 85, you could do most jobs in this country 200 years ago. Today, even a great education won't fix an 85 IQ.

In 50 years, he was asked, what legacy do you want to have left? He told the room "Ah, the tombstone question". He had a newspaper mail him recently stating that they were writing his obituary and they needed him to fill out a form. A month later, they mailed it again and it said, "URGENT." He thought that was funny. In the end, he wants to be remembered for being a teacher. Everyone in this world is a teacher. You are setting a tone for the people you interact with. If The Giving Pledge works out, it will be even more impactful. He received a handwritten letter from a woman, who sent him neckties and said, "you have changed how we think about our own immortality." This was a woman who, with her husband, was worth $10B. She wrote, "we have thought it through, and we are changing things." He has done some work with The Giving Pledge, primarily in dialing for dollars. Bill Gates has done more. People do like to copy the United States and, although different countries have different cultures of giving, hopefully The Giving Pledge will serve as a role model.

What are the behavioral lessons Mr. Buffet has learned over the years? Imagine that, in one hour, you have to decide, among the people you know, how you would allocate 10% of your portfolio long and 10% of your portfolio short. How do you get the most out of people's talents? Talents are good, but not necessarily what matters in this exercise. You don't necessarily just need the person that can run the fastest, jump the highest, or lift the most. You want to pick people who can lead and that others want to follow. These are not ordained qualities. These people have elected to become these things. He suggested making a list of the things you admire in people (leads to a long view), and the things you dislike (lead to a short view). Then, figure out what qualities you want to have and work toward them. In the end, you'd want to be the person you'd buy a 10% interest in. Mr. Buffett further explained that it's about habits. He has a saying: "The chains of habit are too light to be felt until they are too heavy to be broken." There are wonderful individuals out there who are well-loved and as good a human being as you can find in life. This has to do with developing habits that make people respond favorably.

Is there anything you regret not doing--the bucket list question was inevitable. There's really nothing left on it, Mr Buffett told the students. Maybe that's for lack of imagination, he quickly stated. One only has so many hours and so many days and free time is enormously important. Mr. Buffett wanted to do what he liked doing and he wanted to make money. When he was turned down at Harvard, he thought it was terrible but, as he said, "things work out."

His views on financial regulation were also canvassed. Don't ever say that you did it because someone else did it, Mr. Buffett stated, as that is unacceptable. HSR actually strips the Fed of the ability to act in a panic in the future. To end a panic, you need someone who will say, "I'll do whatever it takes." Hank Paulson guaranteed money market funds in September 2008. Panics will make you rich if you have resources and you can stomach it, stated Mr. Buffett. He doesn't agree with many things that George W. Bush did, but Mr. Buffett feels Bush said it best in 2008: "If money doesn't loosen up, this sucker could go down." Mr. Buffett said that If he was Chairman of the Fed and was told he couldn't do something that he thought he needed to do, he would just do it anyway.

Mr. Buffett was asked what the next bubble would be. A bubble, by definition, is an economic phenomenon that cannot persist. According to Mr. Buffett, you have that in the bond market (particularly in Europe). Herb Stein (father of Ben Stein) once said, "If something cannot go on forever, it will stop." It's a simple saying but it is significant. In Europe, Mr. Buffett stated, Berkshire is paying 12.5M EUR of negative interest to hold 5.0B EUR in cash. He was asked to change his policy on liquidity given the negative interest, but he wouldn't change it - the situation in Europe will be fixed. After Hiroshima, Mr. Buffett pointed out that Einstein had said, "This changes everything in the world except how men think." [The full quote from Einstein is: "The release of atom power has changed everything except our way of thinking, and thus we are being driven unarmed towards a catastrophe."] He feels that the luckiest baby in the world today is still being born in America. We have created weapons of mass destruction and we have avoided catastrophic outcomes from their use.

Mr. Buffett addressed diversification at Berkshire and whether it is difficult to manage it. He told the students that he just opened Nebraska Furniture Mart in Dallas 10 days ago. He believes that the businesses in his portfolio have managers who feel they own their businesses. Berkshire has 130,000 employees worldwide and only one floor in Omaha. Mr. Buffett sees his job as not a player, but someone who must pick the right players. He feels that he has great managers and, in 50 years, he hasn't had a single manager leave to work in the same industry/job somewhere else. He recounted that Mrs. B worked until she was 103 years old, died at 104 years old. Thus, he tells his managers, "Look what happens when you stop working" (joking, of course). He told the students that he had dinner at Mrs. B's house once and she had tags on all her furniture so that she could make work and home feel the same. That shows how much she loved to work and that's the kind of person Mr. Buffett wants managing NFM. He provided an example of a fellow contributing $4B in revenue to the Berkshire portfolio, with whom he had only had two phone calls. He loved his business and he wanted to cash out when he sold it to Mr. Buffett for family reasons. Mr. Buffett advised the group that he jumps out of bed every day at the age of 84 years old, as he gets to paint his own painting. He gets to do it his way. And it works.

Mr. Buffett stays intellectually honest, as he ages, because he can. There are very few people about whom he cares what they might think: his father, Munger, Graham, and his wives. People approach him differently because he's wealthy, but it doesn't mess up his life. He would rather deliver presentations/papers and continue to think what he wishes to think.

His thoughts about changes in home ownership trends were discussed. In Mr. Buffett's opinion, if you are going to be settled, it's a great idea to buy a home. If you know you are going to be there for 10 years, you should buy. His daughter is 61 years old and loves coming home as it represents continuity in life. He feels that this is a good time to buy a home, but he can't imagine owning 10-12 homes. The only difference between the super-rich and everyone else is how you travel, offered Mr. Buffett. Money is overrated, but it does give you freedom, he feels. It is much more fun to be in the game you love and to take a job you would take even if money didn't mean anything to you.

His most successful investment was GEICO, which changed his life. When he was at Columbia, at age 20, Graham was the Chairman of the Government Employment Insurance Company (GEICO). In January 1951, Mr. Buffett got on a train and went to their office on a Saturday. There was no one there. The janitor said the Investment Chief of GEICO (Lorimer Davidson or "Davy") was on the sixth floor. He went to see him and learned the insurance business for the next 4 hours of their conversation. Shortly after, he put 75% of his net worth into GEICO. He also began selling GEICO stock to others in Omaha. GEICO faced trouble in the mid-1970s, so Berkshire bought 50% of the business. Berkshire bought control in 1995. Davy made a video when he was 96-97 years old. He said he always wanted GEICO to be owned by Buffett. Davy passed away shortly thereafter. Mr. Buffett regards GEICO as a wonderful financial arrangement and, emotionally, it was great to build the business.

The students discussed what books Mr. Buffett recommended. They learned that Charlie Munger reads biographies and Katharine Graham wrote a book, Personal History, that Mr. Buffett thinks highly of. He told them that they will learn a great deal about life from it, as it's a totally honest book - the standard we should all live up to. The story is about how she took over the Washington Post. David Axelrod's book about Obama was very good too, in Mr. Buffett's view. In general, he recommends biographies. You learn a lot when you learn about other people's lives. He spends 5-6 hours per day reading. When Charlie was a lawyer, he would spend 5-8 hours for reading and projects. Mr. Buffett advised that most or all of the students could make themselves 50% more valuable by learning how to write and speak better. How you express your ideas is critical. Maximizing one's communication abilities will allow all of one's other skills to thrive and meet with success. Mr. Buffett took Dale Carnegie's course to gain public speaking skills. He had just won the weekly award when he proposed to his wife, and she said yes. However, winning her was much more important than the weekly award!

It was a memorable day for all of the students and the messages delivered by Mr. Buffet will, undoubtedly, resonate throughout their lives.

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