Warren Buffet

INSIDE THE PROFESSION

INSIDE THE PROFESSION

His License Plate Says My quest to learn from America’s billionaire investment hero,

Warren Buffett hat do Fidel Castro and Warren Buffett, the worldʼs second richest man, have in common? Probably nothing, but if it were not for Fidel Castro I would have never have had the idea of setting up a trip for 33 students to meet with Warren Buffett, Chairman of Berkshire Hathaway Corporation. Prior to spring break one year, my cousin proposed the idea that we visit Cuba, one of the last remaining Communist countries in the Western Hemisphere. He asked something that piqued my interest: “Why donʼt we try to meet with Fidel Castro?” Meeting a dictator? Interesting, but I replied that I rather meet someone like, well, Warren E. Buffett. If you are passionate about music, you would probably want to meet Aerosmith. If your thing were motion pictures, you would probably want to meet Steven Spielberg. My interest is business and, in particular, investing. The process of researching a business and learning what makes it better than its competitors — and in the process, making a couple of dollars as the stock price increases — is something which is fascinating. After a few e-mails to Buffettʼs staff, I was amazed to nd myself standing in his lobby in Omaha, Nebraska, waiting for him to see us. I looked to my cousin and said, “What do we say?” Being helpful, he responded, “This is your thing.” But before I could react, Warren Buffett popped out and said, “Aww…the Aggie invasion.” We all laughed that Buffett knew Texas A&Mʼs students are known as the Aggies; but more importantly this took a little of the nervousness out of the air – on our part at least. After that initial meeting, who would have thought he would invite us back, along with 30 of our fellow students? That November, we headed to Omaha for a whirlwind 24-hour trip that opened my eyes to the world of a humble, thankful man whose license plate reads “THRIFTY” — the same man whose investment strategies have made him the second wealthiest man in the world. Integrity Not only did we meet with Buffett, we also met with people 36

from the Berkshire Hathaway companies, Nebraska Furniture Mart and Borsheimʼs (the largest single-store independent jeweler in the nation). One of the biggest themes we were inundated with was the critical essence of integrity and how important it is to the culture of Berkshire Hathaway. As Susan Jacques of Borsheimʼs told us, “It takes 37 years to build your reputation, and you can lose it in 37 seconds.” She said she thinks about this every time she is about to make an important decision. While we students were eating lunch with Buffett that day in his favorite steakhouse in Omaha, Goratʼs, he told us what he tells all of his managers: only make decisions that you wouldnʼt mind reading about in the newspaper the following day. He said to act as if an unbiased reporter stood next to you as you made your decisions. He guaranteed that we would avoid most of the problems that plagued todayʼs white-collar criminals if we thought like this. He sure does!

Q: What do you stay away from when valuing a company? Buffett: What I donʼt understand. Get a x on your own limitations of knowledge. Ted Williams [the only Major League Baseball player to hit .400, or a 40% success rate, over an entire season] divided the strike zone into 77 areas. You only swing at the pitches you can hit with an average of .400. Also, I donʼt want to know the price of a stock as I value it. Knowing the price anchors your thoughts. Q: What is the more valuable area of academic study, accounting or nance? Buffett: Accounting is the more valuable. It is the language of business… A number of CEOs donʼt understand accounting. Some people have an intuitive grasp, [but] some people will try to cheat you and lie to you. Q: Explain your business evaluation criteria.

Thankfulness Itʼs funny. Buffett, with his loads of wealth, was able to make a bunch of cash-strapped college students feel just as wealthy as him; albeit, in a different kind of way. As we were walking out of Goratʼs, Buffett said he really wanted to show us his car. Immediately, the students began thinking: What kind of car does Warren Buffett drive? The newest Hummer or a limo waiting to pick him up? Not exactly. Buffett drives a simple Lincoln Town Car. What he wanted to show us was his license plate, with the word “THRIFTY” emphasizing his philosophy. It is quite amazing that someone with his wealth and power realizes just how lucky we, as Americans, are. You might think that someone of his social stature is careless with his material possessions and nancial status. Not Buffett. As he said, “If I were born in Bangladesh 200 years ago, I would have been

Graphic: YiDing Yu for Harvard College Investment Magazine

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By George Giannukos, Texas A&M University

someoneʼs meal.” Buffett strongly believes that his ability to allocate capital and manage valuable businesses would be worthless in another country at a different time. As he likes to say, we won the “ovarian lottery.” According to Buffett, his odds of being born in the United States in 1930 were 50 to 1. Buffett explained that when we were born, we pulled quite a valuable lottery ticket: We live in a

SUMMER 2006 • HARVARD COLLEGE INVESTMENT MAGAZINE

Buffett: Where is this business going to be in 5 to 10 years? What is the moat? What protects it? With Coca-Cola, the moat is the brand name in the mind. Seeʼs Candies [a Berkshire Hathaway company] owns the boxed chocolates business in California and has been there since 1921. A boy buys a box of chocolates, and she kisses him: We own him. Other examples of moats: Microsoft operating systems; and Meg Whitman [CEO of pioneering online auction company eBay Inc., who] has all of the buyers and sellers. Businesses with moats are easy to value. How do you knock off Wrigley? — the Internet doesnʼt change the way people chew gum. Q: What biography would you recommend? HARVARD COLLEGE INVESTMENT MAGAZINE • SUMMER 2006

society where we have equal human rights, educational opportunities, and the invaluable chance to make it big. Business Advice What would our visit with the worldʼs best businessman be without business advice? He did not offer us any stock picks, but I we left with great great advice. Buffett told us to invest “within our circle of competence.” The idea is simple, but makes a lot of sense. Many entrepreneurs and investors will invest in unfamiliar industries. Warren believes that the inherent risk in investing comes from not knowing what you are doing, not the volatility of the stock price. Buffet tries to reduce this risk by staying within his circle of competence. As Buffett says, “Itʼs not important how big your circle is or how many industries you are familiar with but that you dene and know where the perimeter is.”

Buffett: The question is, who are your heroes when you are 15? This is a strong indicator of future success. Katharine Grahamʼs autobiography is very honest and very interesting. She ran The Washington Post. She had a strong will…and felt it was important to succeed. Q: What other books do you recommend? Buffett: “The Intelligent Investor,” chapters 8 and 20 provide the framework. Also, read about a lot of businesses. Philip Fisher is another good author [ “Common Stocks and Uncommon Prots and Other Writings”]. You need to like reading annual reports and related information. Look for businesses you understand. You need to know enough about the business to be a good scorekeeper. Q: What is your denition of a capitalist? Buffett: A capitalist lives off of prots, not labor. If I was born in Bangladesh or 200 years ago, I wouldnʼt have been successful. Imagine yourself 24 hours before your birth. A genie comes to you and says, “John or Joan, you will be bright and fair-minded. I will let you design the world into which you will be born — the economic and social conditions for you and your descendents.” John or Joan replies, “So, whatʼs the catch?” The genie then states, “From the jar pick a ticket. There are six billion possible tickets.” The tickets have information on them such as male or female, U.S. or Bangladesh, physically t or crippled, nurturing parents or abusive parents. Your lottery ticket matters. Take the example of the sport of boxing. In the 1930ʼs, Madison Square Garden held 30,000 seats. Now, due to cable TV, 190 million people can watch the boxing match. The boxers benet due to the size of the audience — i.e. [the lottery of] when they were born. 37

INSIDE THE PROFESSION

INSIDE THE PROFESSION

We won the ovarian lottery. In 1930, the odds were 50 to 1 against being born in the U.S. I was also born to parents who cared about me, given good health and a good mind. Q: What is your view on social responsibility? Buffett: In 1790, there were 3.9 million people in the United States, 100 million in Europe and 190 million in China. We succeeded because we had a better system, not because we have better morals or are smarter. The talent prole of the population does not t the job requirement prole. People in the right place should take care of people who canʼt succeed. Q: Explain your take on tax fairness. Buffett: I spend $2.2 billion on the federal government [annually]. What should tax policy be? The “haves” should pay the lionʼs share. I have the same tax rate as my receptionist when you include social security. I am wired a certain way and I get benets. I do not agree with [President] Bush at all. We [the wealthy] donʼt need any more favors. Bill Gates also agrees with me. I prefer liquor store robbers with hungry kids to companies that locate offshore to avoid U.S. taxes.

One way to lead is to work harder than anyone else. A good rule is that the ofcers eat last, and the enlisted eat rst. Air Force General Curtis LeMay said, “I will y the lead plane, and I will court martial anyone who wonʼt y.” The leader takes the biggest risk but demands compliance. Q: How will business fare in the stock market over the long term?

Buffett: Four to six percent is the typical range for corporate profits as a percentage of GDP. This is unlikely to change. Over the last four or ve years, the market has returned six or seven percent. Over the last 35 years, it has returned ten percent annually. Seven to thirteen percent is pretty much the expected range. The market returned between seven and thirteen percent exLeaders should actly one year over the last 35 years. [I] have a passion conclude that investors are much more volatile than businesses.

for their

business... That people are

Q: Whatʼs your view on the capital asset pricing model (CAPM)?

Buffett: CAPM is still taught in schools. The weakness is that it assumes efcient markets. The popularity is fading, but it a leader implies still persists — priesthoods are like this. that the leader is It was very acceptable in the 1960ʼs: Allocate capital, what is the most atcompetent. Q: Who should have stock options? tractive thing to put our money in? If the smartest thing isnʼt that smart, then Buffett: Charlie Munger [vice chairman of we donʼt play. We donʼt want to give up Berkshire Hathaway and close associate of Buffettʼs since the cash exibility. Good businesses offer offensive decisions; bad 1970s] and I are the only employees who should work for stock businesses offer defensive decisions. Switch to offensive busioptions. No one else has control over the company strategy. nesses for a signicant edge.

willing to follow

Q: What qualities do you look for in business partners and coworkers? Buffett: I misjudge them sometimes, but rarely. It is easy to recognize the extremes; I can tell the outright crooks. You want to develop the qualities you like in other people. Consider which of your classmates would you choose to go long on [buy] ten percent of their earnings? The one with the best grades? — Probably not. You will probably pick the person who is the most generous and the most honest. Conversely, think of who you choose to go short [sell] ten percent of their earnings. Q: How does someone become a good leader? Buffett: Leaders should have a passion for their business; they need to be able to energize people to march with you because they believe in you. I like Arnold Schwarzenegger as a leader. Berkshire Hathaway has a strong and unusual culture… That people are willing to follow a leader implies that the leader is competent. 38

Q: Any advice for students entering the workforce? Buffett: What train are you getting on: U.S. Steel or Microsoft? Donʼt work for somebody whoʼs crummy. Q: Who are the right heroes? Buffett: My heroes are: My dad — parents are everything in the formative years; Melinda and Bill Gates; in raising three kids, my wife; Tom Murphy, who ran Capital Cities ABC [Murphy purchased ABC in 1985 with Buffettʼs backing]; Ben Graham [co-author, “The Intelligent Investor”]; somebody who makes you behave better. George Giannukos ʻ06 is an Accounting major at Texas A&M University. He started investing at the age of sixteen. He aspires to build an empire and told Warren Buffett that he hopes to have a mini-Berkshire Hathaway some day. With a greater interest in making beans (than counting them), he hopes to break into the nance industry after he graduates. SUMMER 2006 • HARVARD COLLEGE INVESTMENT MAGAZINE

Bilimoria: The Entrepreneurial Einstein The story of Cobra Beer as told at the Said Business School, Oxford.

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he link between academia and successful entrepreneurship has notoriously been an insubstantial one. Indeed, most of the worldʼs most thriving businessmen have come from the lower echelons of society attaining very mediocre school grades. Yet, these men have ended up commanding international billion dollar enterprises. We only have to look at the case of Sir Alan Sugar who left school at the age of sixteen and started out selling products such as cigarette lighters, intercoms, and TV aerials. Now Sugar is the owner of Amstrad, one of the biggest providers of consumer electronics which at its peak achieved a stock market valuation of £1.2 billion and is now the famous face of the hit-UK show version of ʻThe Apprentice.ʼ Yes, the case for non-academic aspirations grows stronger, yet fear not my fellow soon-to-be poor college grad pseudo-Einsteins. There does exist a man who has managed to get the best of both worlds… Recently, Oxford Uni- Bilimoria’s Tempranillo wine the Silver Medal versityʼs Oxford Entrepre- isat awarded the prestigious Monde neurs (OE) brought one Selection 2005, Brussels of their founding patrons, Karan Bilimoria, the Founder & CEO of Cobra Beer to the Said Business School to talk about his journey as an entrepreneur. On that fateful day, upon entering the Said Business School, a large, intimidating building, there was a large crowd of smartlydressed students and smatterings of conversation which mainly consisted of ʻDo you think weʼll get free beer afterwards?ʼ We all entered the lecture theatre where Bilimoria was to give a talk on the inspiring and life-changing work he was doing with beer. After the President of Oxford Entrepreneurs, Rajeeb Dey, made an introductory speech and welcomed Mr. Bilimoria to take the oor, we got our rst glimpse of Mr. Bilimoria. When you rst catch sight of Karan Bilimoria, you may not immediately conclude that he is a man who has achieved the apparently impossible feat of conquering both the academic and business worlds, but rest assured, he has. Mr. Bilimoria was born in Hyderabad, India in 1961 as the son of a Lieutenant in the Indian Army. He attained his rst degree in business before the age of nineteen and then immigrated to the United Kingdom to try his luck and improve his fortunes. He obtained a diploma in accounting from London Metropolitan University and then joined Ernst & Young as a trainee chartered accountant in 1986. Not surprisingly, the tax and audit ofce HARVARD COLLEGE INVESTMENT MAGAZINE • SUMMER 2006

By Devina Shah, Oxford University could not contain him and his desire for learning propelled him to return to full time education and to read law at Cambridge. After graduating as a lawyer, Bilimoria decided that despite his intelligence and highly-regarded qualications which all seemed to be pointing to a professional career in law or banking, he was going pursue his longtime ambition of running his own business. He returned to India to spend some time with his family, and after some unsuccessful attempts at importing and exporting random non-beer-related items, Karan founded Cobra Beer Ltd in 1990. To this day, Bilimoria stresses the importance of passion in a successful business but then again, it does not really seem that difcult to be passionate about any kind of alcohol. What fueled Bilimoriaʼs desire to produce a new kind of beer was his recognition of an increase in a new kind of food: curry. Curry houses and Indian restaurants alike (although they really are not alike), were fast becoming the most frequented places to eat out in England. Bilimoria possessed the ingenuity to recognize that there was an opening in the market of a country where people loved both beer and curry but did not digest them together. The result was a vision of an Indian lager that would not only complement Indian cuisine but also due to its unique chemistry, appeal to ale drinkers. When Karanʼs parents discovered that their son was going to quit the profession of law before he had even started, they were inevitably shocked. Yet, he pursued his vision. Bilimoria described the strenuous rst few years of his business as involving him physically transporting crates of Cobra Beer and attempting to sell it to various Indian restaurants in Birmingham and London where Asian communities were particularly populous. 39