What Warren Buffett Tells MBA Students

Elon Musk and Mark Zuckerberg might very well be the most admired business people by MBAs today, but no one has been more generous with his time than legendary investor Warren Buffett. For years, he has spent many hours meeting with MBA and undergraduate business students from a wide variety of schools, from Columbia Business School to the University of Kansas.

In these sessions, often with small groups of students, the chairman of Berkshire Hathaway reaffirms his reputation as the “Oracle of Omaha,” opining on a diverse range of topics and dispensing a healthy doses of homespun wisdom cultivated over his 86 years. Many students say their one-on-ones with one of the wealthiest men alive are often the highlight of their MBA experience. They leave those meetings with a sense of awe and inspiration at both his candor and his generosity.

Typically, few of his insights leave those rooms. But just four days ago, on Nov. 18th, Buffett spend two and one-half hours with some 20 MBA, MS and undergraduate students from eight universities, including Columbia, Yale, and Boston universities. David Kass, a finance professor at the Smith School of Business at the University of Maryland, took copious notes of the student session. With help from several others, he has reconstructed the meeting and the advice dispensed by Buffett in a fascinating blog post.

‘COME TO OUR NEXT ANNUAL MEETING AND FLY FIRST CLASS’

The discussion ranged from the qualities he looks for when hiring people (“intelligence, energy and integrity, but the most important quality in a manager is having a passion for the business”) to what he would invest in today if he started with $1 million (four undisclosed stocks). Asked what qualities he admires in others, Buffett advised, “Choose someone (among your friends and classmates) whom you would want 10% of their future earnings. Someone who is generous with a good sense of humor and you would want to be led by them.”

Clearly, Buffett was in a good mood, inviting the students to Berkshire’s next annual meeting in Omaha and noting that because his company is invested in airline stocks every student should fly first class. He also humorously referred to a recent conversation with Charles Munger, 92, his long-time friend and vice chairman of Berkshire Hathaway. “He said that recently he stood across the room from Charlie Munger and said, ‘Let’s buy General Motors at 33, do you agree?,'” wrote Kass. “Since there was no response, he moved closer and repeated the same statement. Again, no response. Then, he went very close to Munger and repeated his statement. Munger replied, ‘For the third time, yes!’”

Students were invited to ask him questions, and Buffett responded to all of them. Here are excerpts from the session, with WB obviously referring to Buffett:

What qualities do you look for in hiring people?

BUFFET: Berkshire has only 25 people at headquarters, but 360,000 employees. The managers of Berkshire’s 70 businesses choose their own people. The qualities he looks for are intelligence, energy, and integrity. But the most important quality in a manager is having a passion for the business. It is not IQ but passion for their businesses that make Berkshire’s 70 managers stand out. When WB was 23 years old, he was rejected by Ben Graham for a job. Years later he received a letter saying the “next time you come to NY stop by my office”. WB went the next day. He never asked about pay. You should take a job that you would take if you didn’t need a job.

What is the percentage of S&P 500 companies that are getting better?

BUFFET: WB has been on the board of directors of 19 public companies. 3G Capital has added discipline to Kraft Heinz and Anheuser Busch InBev. Jeff Bezos is the best business person he has ever seen. The quality of management has improved and they are paid better. The CEO’s main responsibility is capital allocation. Director fees are now about $300,000 – $400,000 per year and directors generally do little. Berkshire’s directors buy stock in Berkshire with cash (rather than stock options used by most companies).

Are you concerned by the size of the national debt?

BUFFET: The gross debt of the U.S. is 100% of GDP, but the net debt (subtracting trust funds) is less, at 70%+ of GDP. Our net debt was as high as 120% of GDP in World War II and as low as 35% -38% in the Reagan years. As long as our debt is in dollars, it cannot cause us any problems. (We can always print more dollars.) Taxes have accounted for 16% – 20% of GDP over time. Medical costs today represent 17% of GDP, up from 5% in 1970. The next highest country spends only 11% of GDP on health care. Corporate taxes equal 2% of GDP down from 4% in the past.

What is your opinion of active vs. passive management?

BUFFET: Passive management is active management in aggregate. The S&P 500 represents the aggregate result of America. Nine years ago WB made a $1 million bet (for charity) on the Vanguard S&P 500 (very low fees) against a fund of funds (hedge funds). The S&P 500 has substantially outperformed the hedge funds. One-half of the gross returns of the hedge funds has gone to the managers. They have underperformed by 40%. The portfolio managers are getting rich while failing their investors. Find well-managed companies that grow over long periods of time and leave them alone. That’s mostly a passive approach. Buy and hold. Successful investors need to have the right temperament. Those with high IQ’s frequently panic.

What is your opinion of Dodd-Frank?

BUFFET: We are less well equipped to handle a financial crisis today than we were in 2008. Dodd-Frank has taken away the Federal Reserve’s ability to act in a crisis. In 2008/9 Ben Bernanke said he will do whatever it takes and only he could have stopped it (financial crisis). Money market funds equaled $3 ½ trillion or 50% of the $7 trillion of deposits in U.S. banks. This could have been the ‘greatest run’ of all time. Ben Bernanke was able to draw from the Emergency Stabilization Fund set up in 1933 with respect to gold. In 2008, President George Bush said the 10 most important words ever in economics: “If money doesn’t loosen up, this sucker is going down.” But Dodd-Frank took this option away from the Fed. Fear is contagious. It paralyzes. Confidence comes back one at a time, not by a stampede. Both General Electric and Goldman Sachs were ‘in the domino line.’ We were lucky we had the right people.

Is there a fundamental (investment) wisdom that you disagree with?

BUFFET: Investing hasn’t changed much over time. There were 15 students in Ben Grahams’s class (where WB was a graduate student at Columbia). He focused on cash over 2- 3 years and certain returns. A stock is a bond with coupons on it. Berkshire Hathaway is a stock with coupons attached. Several years ago WB invested in 15 South Korean companies selling at two times earnings. He didn’t know much about the companies except for their low valuations. He purchased a diversified portfolio. It worked out very well. If you invest in good companies, you do not need to diversify. Anyone with an IQ above 130 should sell off the excess above that level.

If you started with $1 million today, how would you invest it?

BUFFET: If I had only $1 million today, then something has gone terribly wrong. Today, with $1 million, he and Charlie would probably invest in four stocks. When he graduated from Columbia (MBA), he had 75% of his net worth invested in Geico (then called Government Employees Insurance Company). He started his investment partnership in 1956 with $105,000 and it was worth $105 million when he closed the partnership in 1969/70.

Will technology replace human intelligence?

Buffett: Technology will not get rid of the human element of fear and greed. You cannot program a computer to produce a durable competitive advantage nor create passion for employees. Berkshire is not at a disadvantage now. WB prefers Ted (Weschler) and Todd (Combs) over computers.

What was your biggest mistake and what did you learn from it?

Buffett: His initial three businesses are now out of business – (1) Berkshire Hathaway – textiles, (2) Blue Chip Stamps, and (3) Retail division – department store in Baltimore. He has made some ‘people’ (hiring) mistakes. The worst part of his job is having to terminate an employee. He regrets ‘things I haven’t done even though I thoroughly investigated, but I didn’t do.’ (Errors of omission rather than errors of commission)

What is the most important skill in finance?

BUFFET: The most important skill in finance is salesmanship. That’s how you convince someone to marry you and that’s how you get a job. The most important quality to do well is temperament which would permit the control of fear and greed which have ruined many. Anyone who has become rich twice is dumb. Why would you risk what you need and have for what you don’t need? If you are already rich, there is no upside to taking on a lot more risk, but there is disgrace on the downside.