Archive for January 14th, 2009

Some surprisingly profound words of wisdom & insights from… Warren Buffett

Wednesday, January 14th, 2009

I came across this interview with Buffett from 02/15/2008, and expected it to be an ode to capitalism and a defense of the (theoretical) free market system that we supposedly enjoy in the U.S.  As I read through it, though, I was struck by a number of things that Buffett said which I found fairly profound;  perhaps if they had come from an ordinary civilian they might have seemed less so, but, coming from him, they had (at least for me) a greater significance. 

Buffett is undoubtedly a very smart man, but also a wise one.  I was also struck by his perspective on how society should work. If you get a chance, you should read through the whole interview–I think you’ll find it worthwhile. 

Here are a few extracts that struck me as particularly meaningful:

Austin:

What industry will be the next growth driver in the 21st century and what do you see that supports that?

Buffett:

We don’t worry too much about that. If you’d look at the 1930s, nobody could have predicted how much the automobile and airplane would transform the world. There were 2000 car companies, but now only 3 left in the US and they are hanging on barely. It was tremendous for society, but horrible for investors. Investors would have had to not only identify the right companies, but also identify the right time. The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, would have done us a huge favor. Or look at TV manufacturers. There are hundreds of millions of TV’s, RCA & GE used to produce them, but now there are no American manufacturers left.

If you want a great business, take Coca-Cola. The product is unchanged, they sell 1.5 billion 8 ounce servings per day 122 years later. They have a moat; if you have a castle, someone’s going to come after you.

Gillette accounts for 70% of razor sales at 80% gross margins and it is the same over time. Men don’t change much. Shaving might be the only creative thing they do, like painting the Sistine Chapel.

Snickers has been the #1 candy bar for the past 40 years. If you gave me $1 billion to knock off Snickers, I can’t do it. That’s the test of a good business. You don’t knock off Coke or Gilette. Richard Branson is a marketing genius. He came in with Virgin Cola, we’re not sure what the name means, perhaps it turns you back into one, but he couldn’t knock off Coke. We look for wide moats around great economic castles. Growth is good too, but we prefer strong economics. In the upcoming annual report I have a section titled “The Great, the Good, and the Gruesome” where I talk about these.

Emory:

How do you define happiness and what about your life makes you most happy? When you make good on an investment, do you allow yourself to enjoy that success by getting excited – and on the flip-side, when an investment turns down, do you find yourself equally disappointed – or do you try to remove emotion from your work, as much as possible?

Buffett:

I enjoy what I do, I tap dance to work every day. I work with people I love, doing what I love. The only thing I would pay to get rid of is firing people. I spend my time thinking about the future, not the past. The future is exciting. As Bertrand Russell says, “Success is getting what you want, happiness is wanting what you get.” I won the ovarian lottery the day I was born and so did all of you. We’re all successful, intelligent, educated. To focus on what you don’t have is a terrible mistake. With the gifts all of us have, if you are unhappy, it’s your own fault.

I know a woman in her 80’s, a Polish Jew woman forced into a concentration camp with her family but not all of them came out. She says, “I am slow to make friends because when I look at people, I have one question in mind; would they hide me?” If you get to be my age, or younger for that matter, and have a lot of people that would hide you, then you can feel pretty good about how you’ve lived your life. I know people on the Forbes 400 list whose children would not hide them. “He’s in the attic, he’s in the attic.” Some of them keep compensating by joining board seats or getting honorary degrees, but it doesn’t change the fact that no one will give a damn when they are gone. The most powerful force in the world is unconditional love. To horde it is a terrible mistake in life. The more you try to give it away, the more you get it back. At an individual level, it’s important to make sure that for the people that count to you, you count to them.

What if you could buy 10% of one of your classmates and their future earnings? You wouldn’t buy the ones with the highest IQ, the best grades, etc, but the most effective. You like people who are generous, go out of their way, straight shooters. Now imagine that you could short 10% of one of your classmates. This part is usually more fun as you start looking around the room. You wouldn’t choose the ones with the poorest grades. Look for people nobody wants to be around, that are obnoxious or like to take all the credit. If you have a 500 HP engine and only get 50 HP out of it, you’ll be beat by someone else that has a 300 HP engine but gets 250 HP output. The difference between potential and output comes from human qualities. You can make a list of the qualities you admire and those you despise. To turn the tables, think if this is the way I react to the qualities on the list, which is the way the world will react to me. You can learn to turn on those qualities you want and turn off those qualities you wish to avoid. The chains of habit are too light to be felt until they are too heavy to be broken. You can’t change at 60; the time to look at that list is now.

 

Emory:

What do you think of aggregate infrastructure investment to stimulate the economy?

Buffett:

I think the best way to stimulate the economy is to give money to the poor. They will spend it. Don’t give it to guys like me. Infrastructure investment makes sense, but we haven’t done it in a while and it won’t do anything for the next 6-12 months. Infrastructure is not big relative to GDP. We are a consumer-driven society, spending 106% of production.

Emory:

It seems that the worldwide trend is towards lower corporate tax rates. Do you think that the US risks becoming less competitive if it maintains its current corporate tax rate?

Buffett:

Relative to GDP, government taxation is 18.5% and spending is 20%, so we borrow the balance. The national debt should not be a scary topic and the fact that it’s gone up is fine as long as it’s proportional to GDP. Where do we get that 18.5%? There’s 2.7 trillion in government revenues. 2.2 trillion comes from individuals, and less than 1% of that comes from the estate tax. 1.1 trillion comes from income taxes, with payroll taxes consisting of 900 billion, but it’s capped at the first $100,000 of salary. We want a tax system that encourages greater prosperity, but it needs to take care of the family.

We did an informal office survey by looking at the total tax footprint versus the total income. I earned 46 million and paid a tax rate of 17.5%. My rate was the lowest, the average was 33%, and my cleaning lady paid 40%. The system is tilted towards the rich. The Forbes 400 total net worth has gone from 220 billion to 1.54 trillion, an increase of 7-to-1. You see in legislature that there is lobbying carried on by the powerful over issues such as the estate tax and carried interest for private equity investments. We need to flatten income and payroll taxes, and those making under $30,000 shouldn’t be bothered.

Let’s imagine that 24 hours before you are born, a genie comes to you and tells you devise a social and economic system. The only catch is that after you designed the system, you would choose a paper from a barrel which would determine your demographics. What objectives would you want? You need to devise a system that creates prosperity. It needs to be a meritocracy, to put the right people in the right place. It needs to have a strong education system, and throw off lots of goods and services. It also needs to not discriminate against women or minorities. Even though the per capita GDP is $47,000, 20% of the population makes less than $20,000. We need to eliminate that fear of sickness or old age. A tax code is the codification of a country’s values. But you can’t kill the golden goose of prosperity.