Daniel Lock's blog

This is my notes from a fascinating Q&A session with Warren Buffett. There are many insight here about not just investing, but how live a good life, and be successful in general. You could apply these to your business operations as well as investing.

The main points to think about.

• Look for integrity in people. Not just energy and intellect. What you dont want is people with intellect and energy, but no integrity!
• Invest in getting to know a half dozen things really well, and don’t bother getting to know more, as it’s just too much to focus on.
• Don’t worry about what the market is doing. Focus on buying or building a great business you would love to have for the 20 years.

With out further ado, the notes….

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There is more to success than intellect and energy.

Look for integrity, intelligence, and energy.

If not integrity, then you don’t want them intelligent and energy.

Think of picking some one (class mate) to invest in 10% for the rest of your life.

Would you take just smart and energetic ones.

• Leadership, giving credit to others.

What about going short on someone,

• You would think of someone who turned you off for some reason. Eg egotistical, some one who would have ego.

It’s not ability being best looking, or run 100m in certain time.

Of good qualities, there isn’t any you cant adopt, and of the bad ones, there aren’t any you have to have.

Any person can adopt any behaviors you want.

I look at people I admire and behave like them, and get rid of qualities that you don’t.

Be someone who you would want to invest in.

Q. Thoughts about Japan:

Buffet says he is not a macro guy.

Japan can borrow at 1%, doesn’t seem hard to beat 1% for ten years, would have to invest in Japan dollars.

Japan have bunch of businesses who earn low roe.

Cigar but stocks. If you are in lousy business over time still have a poor return.

However, in wonderful business, even if you pay a lot going in, you can make a lot of money over time.

People doing stupid things:

The people, who are very smart, with their own capital in business. But still do dumb things.

Risking something they don’t have for something don’t need. Like Russian roulette.

People do it financially.

Book title: you only have to be rich once. (Walter Gutman)

If you got $100m what difference is $110m, or $120m with leverage, what difference does it make? Especially when you are managing other people’s money – you have got to face them.

People have an over reliance on leverage.

What about a 6 or 7 sigma event hitting you? Past history doesnt tell you about what could happen in the future.

We really have a blind spot.

Buffett would never borrow, even with $10k, or $1m.

Does same thing with a lot of money, just as he would have with a little money.

The only thing rich do differently to anybody else is travel. That’s it. So there is n need to be greedy.

Buffett works in jobs that he loves. He did that even when he didn’t have money. Dont take a job just for your resume.

Buffet went to work for Benjamin Graham for a few years.

Take the job you would do even if you were independently wealthy.

Having more money wont make you happier.

That will make you cut corners when you shouldn’t or cut corners you shouldn’t.

Q. Where to Invest

Buffet invests in businesses he understands. He doesn’t want an easy business.

Wants a mote around a business. And management with integrity.

People have to buy auto insurance. They have to buy one.

If you have a castle, people will want to try and take it off you.

Kodak has share of mind (not market share). They have lost some off that. They let that mote narrow.

Coke’s mote is wider than 30 years ago. He wants to throw sharks in mote.

Comes about from: service, cost, real estate location,

Gates is hell of a businessman. But he doesn’t know about technology.

I know about chewing gum business in ten years from now.

With $10 billion can I hurt coke? No.

What Buffett looks for in a business:

• Simple business, great mote around it.
• Good economics now,
• Honest and able management
• And he can see in a general way where they will be ten years from now. If he can’t see 10 years from now, he doesn’t want to buy it.

He doesn’t look at quotes each day, you are buying a part ownership of the business. The cash flow.

If you are buying farms, buy farms you understand.

You can understand some businesses, but not all businesses.

Q. how do you understand determine what is fair price

Tough business, if it is a good business, it isn’t likely to produce 40%per annum. Why should it. Berkshire doesn’t produce those sort of returns.

Do have in mind never losing anything.

Bought See’s candy in 1972.

Hasn’t hired in any consultants. See’s had share of mind in California.

Each year, he would raise the price. Bought it knowing he could increase prices.

Of $60m, it makes $55m the week before Christmas.

See’s candy is $11 pound, even if you could buy for $6/pound would you do it? No, its not price dependent.

Think like Disney – you have something in your mind on that business.

How would you try an create a brand that would replace Disney? Very hard, not going to happen.

Coke is associated with people being happy. Happiness and coke go together.

Key is service. Everything associated with selling is pleasant and great.

Almost very business he buys takes 5-10minutes. He bought Executive Jet, he hadn’t been there.

Staying in the circle of influence.

Buffet, got familiar with businesses in the early years. Interviewed customers, suppliers, and pieced it together. Ask CEO which competitor would you want to get out of the way.

Essentially creating a database about the businesses.

He knew the basics of a shoe businesses.

Establishing a price isn’t that difficult. It’s the background stuff you need to learn.

Q. Asian crisis, and affecting a business likes coke.

Coke wont be effected in long term.

Cola has no taste memory, people don’t sick of them. It doesn’t accumulate on you like chocolate. So you get an incredible consumption.

Will be hurt in short term.

When listed, Coke went from $40 to $19. Sure there were lots reasons, but if you bought one share it would be worth $5m.

Buffet doesn’t worry about temporary issues, if it is great business.

If your right about ‘what’ (what to invest in). You don’t have to worry about “when” (timing so much).

Q: About mistakes

Biggest mistakes were mistakes of omission. Things, he understood but didn’t make the decisions.

Multi billion dollar mistakes, that accounting standards don’t pick up.

Bought airline, did something dumb. Almost lost all of the money invested. It was an attractive security, that wasn’t an attractive business.

The bigger mistakes were the omission.

Other people’s mistakes are best to learn from.

Never look back. Always look forward, as there is so much to look forward to.

A generic mistakes, being outside competence.

Say, I am buying 100 shares in GM because…. Not good enough to say I heard at a dinner party, or a chart. There has got to be a reason to buy a business.

Q. About interest rates.

Buffet doesn’t worry about macro stuff.

Need to focus on what is important & knowable.

Interest rates, are important, but un-knowable.

Buffet has never bought a business due to a macro issue.

Doesn’t read or listen to issues about macro stuff…
Buffet says macro stuff is useless. Greenspan would make no difference to what her would pay for a business.

Q. About being away from Wall Street

No being over stimulated, and thinking you have to do something. It is about getting one good idea a year.

Wall street (brokers) makes it money on activity, whereas an investor makes money in-activity.

If you buy a bunch of average businesses and hold for another 50 years you will be rich.

You want to stay away from any business that stimulates activity.

Goes there about every 6 months, and go a home and think about it.

Q. About Paying Dividends.

No berkshire div’s. As long as he can turn a dollar into dollar plus something ore at a good rate.

The only way they judge the business is the ROE, the performance of the business.

Is a lot harder than it use t be because of the size of the capital he is investing in.

Q. Philosphy

Think about buying a business that you want to hold forever.

Buffet wants to attract people where they want to hold forever.

Buffet used to have more ideas than money in the beginning and had to sell the least attractive stock. He no longer has that problem (nice problem not to have).

Never buy something with a price target in mind, ie if it ever goes to $x dollars in mind then sell.

Q. About long term capital

Buffet has done arbitrage over the years… Requires being near the phone.

Focuses on “games” he can understand. Things he learns over time.

Q. About diversification:

If you are not about managing, or professional investor, to get a better return. So he believes that 99% that should extreme diversification, eg index funds.

Unless you are going to have an extra intensity to the game, in which diversification is an extreme mistake.

You only need to know 6 businesses, really well. Knowing a 7th may bring you down. Lot of people have got rich on there best idea.

Probably have half it in his best.

Every one who has done well hasn’t diversified.

Q. Proctor and Gamble

Good distribution, and good brands. Doesn’t have the same as Coke, but is still a good business.

Would I put all my money in proctor or coke for 20 years.

That’s how he thinks about it. Coke is better to buffet.

Q. About McDonalds and going away for 20 years.

Is a tougher business, than Coke. People don’t want to eat it every day.

If you had to pick one fast food business you would pick McDonalds. McDonalds has got into price structure

Gillette is better as people want a mach 3 rather than….

[Buffet keeps talking about the "game" and understanding it]

Q. About large cap and small cap and having $100k.

Buffet says to not worry about investing in either small cap or large cap having only $100k. The idea is what presents a better roe.

It’s the certainty of it that counts.

Q. Talks about Real Estate and securitization

REITs: have high operating expenses.

Can you buy simple REIT on 8% yields? If you have $1m or $10m you are better owning direct property yourself.

Buffet says he sees very little in that field to get him excited.

Moving large quantities of properties is difficult.

Q About which way the market is going.

Buffet doesn’t care about ‘market’. It doesnt worry about your feelings.

Buffet would prefer it to go down. As he is ‘net’ buyer.

Has a cold shoulder (Mr market).

Are you a net buyer of seller, then you would prefer the market to go down.

Stock exchange is a big super market of companies.

Ben graham’s book about investing. The two best essays on investing:
o Chapter 8 – about direction of market.
o Chapter 20 – on margin of safety.

Buffet has no idea where it’s going…

Q. About doing it all over and having a better life

Buffet says he has been extraordinary lucky.

Example if you had 24 hrs to design the world… One catch you don’t how you will be born.

Buffet is well wired for the system.

Question to ask yourself, if you could put your ball back, and they took out 100 other balls would you bring.

I am in the luckiest 1% of the whole world. Just by where I was born. Where it pays off like crazy in a market economy.

Only works with people he likes.

Marrying for money is crazy, especially if you have money.

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Daniel Lock
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