Dan Sweet

Warren Buffett recommends going all-in. (3 of 12)

This is the third 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.

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

Can’t compound like we used to.

Before, I went through all of Moody’s ten thousand pages.

Page 1433, Western Insurance Securities, earnings of $20-$30/share, low/high stock price $3-$13.

Can change net worth by 3-4x in 1-2 years by going all in on something good.

Atled Corp – delta spelled backwards – found it in the Oil & Gas Journal at the public library.

$20,000 in treasuries per share

Total A/P $189

Furniture and Fixtures $41 (I knew this was my kind of business.)

$10,000 per share in royalties

Bought 1 share for $29,000

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Warren Buffett on Chinese insurers (2 of 12)

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.

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Warren Buffett on investing in China (1 of 12)

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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“So I was down in Omaha talking with Warren Buffett…” introducing a series of 12 posts.

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:

Warren Buffett - Invest like a champion today!

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

Lunch with Warren Buffett at Piccolo's

He posed for pictures with us:

Warren Buffett

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

My signed copy of The Intelligent Investor - thanks Warren!

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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Chuck D of Public Enemy on branding…a book review

Buying In: The Secret Dialogue Between What We Buy and Who We Are

Rob Walker’s book, Buying In, attempts to understand the interplay between our personal identity and our consumer culture. Walker’s background as a columnist for the New York Times Magazine and Slate has allowed him to get close to the consumer and many of the most popular brands of our times. He leverages his experiences as a journalist to take the reader to places as far ranging as behind the scenes at Apple HQ for a chat with an annoyed Steve Jobs, a bicycle messenger polo match sponsored by Pabst Blue Ribbon in a field outside of Portland, and to a Miami beach for a Red Bull-fueled kite-boarding trip to Cuba. Walker effectively debunks many of the popular stories that are used to explain consumer behavior and dives deeper. He challenges the reader to understand their own behavior and the forces that create our attitudes and actions. Walker concludes his book by contrasting mainstream “terminal materialism” with his vision for a consumption that flows from an individual’s true identity. I didn’t expect that a book about marketing could delve so deep into the individual’s psyche and still be so fascinating—but Walker pulls it off.

The first third of Buying In addresses what Walker calls the Desire Code. This code is the “complex of factors, rational and otherwise, that spark us to make particular purchase decisions.” Walker describes what he calls the “Pretty Good Problem” that exists when consumers face a plethora of pretty good solutions to any given problem. Referencing Seth Godin’s Purple Cow concept, he touches on the challenge of being remarkable. Walker says that the goal of branding is to create a “different kind of value” that transcends the material. Interesting back-stories of the founders of Ecko and Ralph Lauren debunk the idea that authenticity is all important to consumers. Hello Kitty is then used to counter the suggestion that a brand must “stand for something.” Walker argues that Hello Kitty has become so successful precisely because she lacks any meaning. Consumers can instead project whatever they want onto Hello Kitty and make her stand for anything.

Once the author’s street cred has been established by talking hip hop and Hello Kitty has been trotted out as the ultimate blank canvas, Walker gets down to what he calls “the fundamental tension of modern life.” Essentially, people want to feel unique, but also want to feel a part of something bigger. Our attempts to resolve the tension between these two diametrically opposed states play out visibly in our purchase behavior and hold the key to understanding the Desire Code. Walker uses the archetype of the skater as outlaw to illustrate how the desire to be unique plays itself out for some. In an ironic twist, the skater is also the example that disproves the argument that young people are opposed to “joining.” Walker uses the explosion of the skateboarding category as evidenced by skyrocketing revenues for skateboarding apparel and shoes, relative to the more modest growth of actual skateboarding equipment, to demonstrate that people who don’t skate still want to associate themselves with skateboarding and that by extension, youth have nothing at all against joining. In fact, in many cases, people are longing to join and belong.

Walker takes his examination of the individual’s psyche one step further when he introduces the concept of “the interpreter.” Citing Keech’s seminal work on cognitive dissonance, he argues that consumers are actually attempting to tell themselves a consistent story of who they are. Consumers don’t buy to keep up with the Joneses as has previously been thought. Instead we buy things in an attempt to construct ourselves a consistent story about who we are. The “interpreter” is an important concept to keep in mind and adds a new layer to our thinking about basic branding concepts like salience and relevance. The interpreter is a mechanism that consumers use to create a rationale as to why a particular brand or product has relevance for their personal identity. Previously it was considered the responsibility of brander to communicate the relevance of a product or service offering to consumers. Walker uses the examples of the yellow Livestrong bracelets and the iPod as illustrations of the power of a diverse group of consumers’ “interpreters” to determine personal relevance without regard for an officially sanctioned value proposition. Walker doesn’t buy “badge theory” and argues that Method, a household cleaner our neighbors will never know we own, demonstrates that we are consuming as we are in an attempt to tell a story to ourselves—not to others.

The majority of the book explores the emerging world of “murketing.” Walker invented this term as a joke to attempt to explain an emerging form of marketing that oversteps our traditional construct of marketing. He argues against the idea that the “click culture” created by Tivo has hurt the industry and provides numerous fascinating examples of ways that companies are transcending traditional advertising and are becoming a part of pop culture itself. He uses the stories of Timberland boots and Chuck Taylor sneakers to poke fun at brand managers who offer consumers the opportunity to co-create meaning for a brand. Walker argues that, in many cases, consumers have owned brand meaning for decades.

In an unexpected twist, Walker next brings up the topic of religion. Walker cites Rick Warren’s popular book The Purpose-Driven Life and argues that its thesis, “its not about you,” is a direct and compelling attack on our commercial culture. While academics, university professors, European philosophers, simple-living fanatics and fringe culture jammers have essentially been saying that our commercial culture can’t satisfy the soul for years, they have traditionally been dismissed as “out-of-touch elites.” Warren believes that life is about “serving God and serving others” and not “about having more and getting more.” In Christianity, Walker sees the “fundamental tension of modern life” resolved for believers. This was not a conclusion I was expecting to see drawn in a book about marketing and consumption.

Walker concludes by discussing the psychological study of “adaptation” and proposing a new way to view our role as consumers. He sees that the choices that “spark that anticipation of pleasure” are constantly unfolding in front of us. However, “we’re not good at judging the ‘intensity and duration’ of our feelings of events that haven’t happened yet.” “’Thus when we find the pleasure derived from a thing diminishing, we move onto the next thing or event, almost certainly making another error of prediction, and then another, ad infinitum.’” This is the definition of “terminal materialism” and something I expect many of us can relate to.

Walker closes with a quote by Chuck D of Public Enemy and his vision for meaningful consumption:

Chuck D: “It wasn’t like a brand defined you, you defined the brand.”

Rob Walker: “Maybe then, the secret dialogue between what we buy and who we are should go like this. You are only what you surround yourself with? No. You surround yourself only with who you are.” Imagine that.

All in all, a fascinating read that I would highly recommend to all.