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Berkshire Hathaway
Notes from Columbia Business School Visit

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By bsmeal
March 29, 2006

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I visited Warren Buffett in Omaha with a group of Columbia Business School students on Friday, March 24.

My entire notes, including the Q&A, are at the following link:
http://investoblog.blogspot.com/

In terms of what Buffett said, there was nothing groundbreaking, but here are some quote highlights:

He never took a stake in Progressive because of "thumb sucking". Owning GEICO didn't preclude it. He could have and should have done it.

"It's terrifically important to understand history. The Long Term Capital Management blowup in 1998 was a repeat of Northern Pacific in 1903. These kinds of opportunities keep coming up not because humans are dumb, but because humans are human."

"You will see a half dozen fish-in-a-barrel opportunities in your investing lifetime, with the water drained and fish not flopping anymore. The key is to make sure you are ready to act quickly when they happen".

"You can argue that my decision not to sell businesses is not economically rational, and I would agree with you. It's just how I prefer to do it. But maybe it is economically rational. Craig Ponzio (Larson-Juhl) wouldn't have called if he knew I might sell his business. We bought five businesses last year, none at auction, (because of this policy)."


My general observations:

Eddie Lampert, the hedge fund manager and current chairman of Sears Holdings, is a long time Buffett admirer. In his recent letters to his shareholders, Lampert has used the adjective commercial numerous times to describe the type of employee he is looking for. It's a peculiar adjective, one that you don't hear very often, and it well signals Buffet's impact on Lampert.

The word "commercial" perfectly describes Warren Buffett and the soul of what he has built at Berkshire Hathaway. Buffett is shamelessly and unabashedly commercial. The man has spent most of the waking hours of his 75-year life obsessively reading about, learning about, and engaging in the game of business. During our visit, when he was not telling us about an off-the-wall deal from his past (like trying to buy a town in Ohio as a 21 year old in 1951) or some commercial genius he idolizes (Rose Blumkin), he was trying to sell us jewelry and mattresses, or mugging for the camera with his capitalist groupies. He clearly enjoyed every minute of it. Buffett is an exemplar and cheerleader of the capitalist ethic, and in this circle at least, he is virtually a rock star. He is both the dean and the Elvis of American Business.

Buffett's commercial spirit extends to the entire Berkshire Hathaway family. Bob Batt, one of three executive officers at Nebraska Furniture Mart, and Susan Jacques, CEO of Borsheim's, each took a few hours to show us around their respective stores. They both clearly knew their businesses cold, and they are obsessed with pleasing the boss. Bob Batt understands the furniture business better than almost anyone else on earth, from the design of the showroom floor to the export competitiveness of fifteen different developing countries. Susan Jacques could break down the competitive characteristics and financial details of her jewelry competitors to the nth degree. She chatted with me for fifteen minutes on the threat of the Internet distribution players in the jewelry business, and was keenly aware of the threats she faced ten years out. Buffett didn't find these people at Harvard Business School. When he made Jacques CEO of Borsheim's, she was a 34 year old immigrant with no college degree. But he saw that she had the ambition, the passion, and the integrity, and he was smart enough to realize that is what matters.

This deeply rooted commercial DNA is an enormous competitive advantage for Berkshire Hathaway in each of its businesses. I would guarantee that those businesses outperform their competitors financially by a large margin. As Buffett has mentioned before, asking his managers about making money or controlling costs is like asking them about breathing; it's not something for which they come up with a strategic plan, it's a completely reflexive act. Nebraska Furniture Mart has 3 executives, 15 vice presidents, and 3,000 employees. Bureaucracy is non-existent. When asked about how they charge buyers for capital employed, Batt replied, "We know the business, so we don't need to employ cost accounting systems. Plus, that would mean hiring cost accountants, and we don't have the time or energy for that."

It is Buffett's peculiar genius that he is able to make the game sound so straightforward. Want to make money investing in businesses? Remember three things: Mr. Market, Margin of Safety, and make sure the business has a moat. The moat either comes from a low-cost position or from pricing power, the latter of which usually results from a strong brand. If you're going in with a partner, make sure that they are a passionate and ambitious fanatic who has devoted their life to the business, and that they don't lie, cheat, or steal. That's about it. As Buffett puts it, you don't need an eleventh commandment; it's all spelled out in the first ten.

At the end of our lunch, I witnessed Joel Greenblatt meet Buffett for the first time. Greenblatt is in many ways the heir to Ben Graham's legacy at Columbia, and it was fascinating seeing these two great investors, a generation apart, meet for the first time. Buffett told the surrounding students how lucky they were to have professors like Greenblatt and Greenwald at Columbia. Then he congratulated Greenblatt on his best-selling recent book, The Little Book That Beats The Market. Buffett said: "Terrific book, buying great businesses at cheap prices. Doesn't it seem so simple?"

Ben


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