Dan Sweet

This is the fifth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

How do you decide on an appropriate premium over book?

We don’t use book at all.  It is future cash flows and our certainty of them.

See’s Candies – enduring competitive advantage.  Mirror, Mirror, on the wall, how much should I raise the price of candy this fall?  We’re hiring girls to slap guys who buy them Russell Stovers.  We’ve grown $4 million pretax profits to $80 million pretax profits.  The business is going nowhere on volume.

Coke – loses money at Olympics and Disneyworld but people all have a favorable image of Coke in their mind.  You can’t get that share of mind through advertising.

Ask what is it going to produce over time in terms of cash?

If a business depends on capital it’s a bad business.

Real investment equation from 600 B.C.  Aesop – a bird in the hand is worth two in the bush.  Got to be sure they really are in the bush.

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This is the fourth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

How do you perform due diligence?

Just look for durable competitive advantage.
Iscar – they sent me a letter – guy came to visit – we bought it.
The real key is how much cash are you going to get over the years.
Dexter shoe was a disaster.  It wasn’t the leases or clauses, I was just wrong about the shoe business.  (gave them 2% of Berkshire)

What do you look for in management?

We look for management that loves to work and has passion.
I like doing what I’m doing.
I get to paint my painting on the ceiling – it’ll never be finished, but I do it my way.
I’m looking for people who love the business, not the money.  Employment contracts mean nothing.
My job is to judge whether or not they have the passion in them.
I set all the compensation in ten minutes a year.

What questions do you find most useful when meeting with companies?

Always ask at the end—if you could only buy stock in one of your competitors before going to a desert island for ten years, who would it be?  Who would you short?
Andy Grove—Only the Paranoid Survive
Silver bullet to take out competition.  Who would you take out?  I want the answer to that from the top ten players in the industry

Is it true that Berkshire will never sell a good company?

True.
Not true for our marketable securities.
I have three kids and some days some look more promising than others but I’ve never thought of putting one in a foster home.
I want to own something I feel good about.

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This is the second in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Do you find any of the insurers in China attractive?

You can’t own more than 24.9% of anything—that’s a problem for us.

Distribution is still expensive there.

Do some business with reinsurers. Look at auto – didn’t exist 100 years ago.

Insurance was a cartel with bureau rates. Competed to get the best agent with the best insurance.

1921 – a farmer started State Farm. “The Farmer from Merna” took captive agents direct to consumers.

1936 – Leo Goodwin and his wife Lillian went more direct by mail and started Geico—lower customer acquisition cost than competitors

Look for a big business where you can offer the consumer a better deal.

Geico got in trouble in 1976—bought half. 1995 – bought the rest.

Gates called and asked Munger and I to come up to give the orangutan perspective on the internet. Gates said “Here is the internet—tell me how to make money with it. I had just bought Geico but I never thought of it. No one in the room thought of disruptive technology, direct selling, search, etc.

Subscribe to the RSS feed to make sure you don’t miss any of Warren Buffett’s insights from this 12 post series.

This is the first in a series of twelve posts.  The introduction to the series is here.
By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

What are your thoughts on investing in China?

If you don’t have a high degree of confidence, just leave it alone. Not buying stocks in China at this time.

The 1790 population of China = the US population now.

I only want things I am certain of.

Know when you are in your circle of competence and when you are outside of it.

Ted Williams – it’s all about waiting for the right pitch.

PetroChina at 33% of book – swing. At 80% of book – wait.

H-shares vs. A-shares – mainland Chinese paying 2.5x as much for PetroChina as HK and US investors.

How he got into the PetroChina investment:
reading Annual Reports in 2003, saw a firm that promised to pay out 45% of earnings as dividends (earnings looked to be worth at least 80-100 billion) then looked up price—found it was 35 billion. Sold investment at 275 billion, it later went to 400 billion.

Yukos was similarly huge, but I’d rather be in China than Russia. Ate breakfast with the Yukos CEO 4 months before he went to prison.

Comparing yourself to your idiot neighbor who is getting rich drives momentum and bubbles.

I would never buy based on momentum.

Buy based on how businesses behave, not how people behave.

It’s like Cinderella. The ball is fun, you know it ends at midnight, but there are no clocks on the wall.

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I took a trip down to Omaha in October of 2007 to meet Warren Buffett with a few of my Notre Dame MBA classmates.  We joined a group of Stanford MBAs and spend the morning in conversation with Warren Buffett.  He is a class act as these pictures illustrate.

He pulled out his Notre Dame “INVEST LIKE A CHAMPION TODAY” sign to welcome us:

He took us out to eat at one of his favorite restaurants:

He posed for pictures with us:

And he signed my copy of The Intelligent Investor (Wow, I’m a nerd):

Anyways, it was an amazing experience and I want to share some of the content from the trip so I’ll be typing up a series of posts here to archive the notes I took in my notebook.  I’ll write his responses to our questions in his voice; however, some responses will be paraphrases and some will be direct quotes.  I don’t know which are which so I won’t be differentiating.

Theses are the questions that I’ll be sharing Buffett’s response to:

1 – What are your thoughts on investing in China?

2 – Do you find any of the insurers in China attractive?

3 – Can you comment on the challenge presented by Berkshire’s size?

4 – How do you perform due diligence? What do you look for in management?  What question do you find most useful when meeting with companies?  Is it true that Berkshire will never sell a good company?

5 – How do you decide on an appropriate premium over book?

6 – You’ve been critical of hedge funds in the past.  Didn’t you run a fund with a similar structure before?

7 – What are your personal goals for the next 5-10 years?

8 – Do taxes in the U.S. favor the rich?

9 – Is the Fed doing a good job? (October 2007)

10 – Which railroads do you like and why?

11 – How do you feel about derivatives?

12 – What do you see as the best investments for young investors now?

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