How would you define your character? And what portion of your character do you believe contributed the most to your success?
The important qualities you need are intelligence, patience, and interest, but the biggest thing is to be rational. In ‘97-8, people weren’t rational. People got caught up with what other people were doing. Don’t get caught up with what other people are doing. Being a contrarian isn’t the key, but being a crowd follower isn’t either. You need to detach yourself emotionally. You need to think about what is going on around you. Being in Omaha helps me in that regard. When I was in NYC, I had 50 people whispering in my ear before noon. It’s hard sometimes, like when the Internet craze hit. Nobody likes to see their neighbor doing stupid things and getting rich. It was like Cinderella’s ball, I think I’ll just have one more dance, it’s not midnight yet. Sounds simple – but it is hard to leave the party. The problem with stocks is they don’t have clocks. You don’t know when it will be midnight so you can leave the party. My partner Charlie Munger and Tony Nicely at Geico are always rational. 160 IQs can say stupid things that sound good. People do silly things, whether they have 120 IQ or 160. You can always improve your rational thought. Rationality is the only thing that helps you. One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down “I am buying Microsoft @ $300B because…” Force yourself to write this down. It clarifies your mind and discipline. This exercise makes you more rational.
After all your accomplishments, what legacy do you want to leave behind?
I think an example is the best thing you can leave behind. Obviously, you want to leave the right example. I mean, Wilt Chamberlain's tombstone may say, "At last, I sleep alone," and that's probably not the example you want to leave. If what I've done with Berkshire Hathaway - running a unique and independent company in true pursuit of shareholder value - persists and people learn from it to improve the way they invest and run their companies, that would be a fine legacy to leave.
What led you to develop your values and goals at an early age?
I was lucky because I knew what I loved at an early age. I was wired in a certain way when I was born, and I was lucky enough to stumble upon some books at a library at a very early age. In 1930, I won the ovarian lottery. If I had been born 2000 years ago, I'd have been somebody's lunch. I couldn't run fast, etc.
I was lucky. I had a terrific set of parents. My father was an enormous inspiration for me. The job when you are a parent is to teach them. Be a natural hero. They are learning from you every moment you are around. There is no rewind button. If your parents do what they say and their values match what they teach you, you are lucky. What I observed in the world was consistent with what my parents taught me. That was important. If you are sarcastic, and use it as a teaching tool to kids, they'll never learn to get over it. Those first few years they are very impressionable.
Are you a goal oriented person? When you were in college did you set goals for yourself?
I have always liked business and wanted to be in business. This is my ledger from 1950, when I was at the University of Nebraska. It shows the investment in my golf ball business. I had $44 cash and half interest in a car. I also had a brokerage account, but had to buy stocks in my sister’s name because I was underage.
Your goals were financial then?
Business, I like the process of business. Money is a way to be in business, but the real fun is the activity itself.
Who are your heroes?
I have been extraordinarily lucky with my heroes, starting with my Dad. I have never been let down by one of my heroes. When I was about 13 or 14, we moved to Washington. I was all mixed up for a while, I ran away from home, stole things, but I got through it because I had the right heroes. If you have the wrong ones you have a real problem, because you are going to emulate your heroes. You will gravitate toward the people you admire. If you don’t choose those people carefully, you will very quickly develop situational ethics that can get you into trouble.
What goals do you set for yourself today; do you have goals you still want to accomplish?
Berkshire is my canvas. The goal I have is to have Berkshire be general- ly admired for what it is. I am also proud that we do things at Berkshire that are dif- ferent than other corporations. My partner, Charlie Munger, says that Berkshire is a didactic exercise, that it is a teaching platform. We do things differently at Berkshire than in other business which bring into question the generally accepted ways of doing business.
How do you spend your day?
What do you read?
Most of reading includes K’s, Q’s and 5 newspapers daily. I haven't found much worthwhile book reading outside of Graham and Fisher.
[For recommended books see http://futile.free.fr/wbbiblious.html]
How do you define happiness and what about your life makes you most happy?
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
I tell college students, when you get to be my age you will be successful if the people who you hope to have love you, do love you. Charlie and I know people who have buildings named after them, receive great honors, etc., and nobody loves them -- not even the people who give them honors. Charlie and I talk about wouldn't it be great if we could buy love for $1 million. But the only way to be loved is to be lovable. You always get back more than you give away. If you don't give any you won't get any. Everybody loves Don Keough [former senior executive and Board member of Coca Cola]. There's nobody I know who commands the love of others who doesn't feel like a success. And I can't imagine people who aren't loved feel very successful.
[Charlie Munger: You don't want to be like the motion picture exec who had so many people at his funeral, but they were there just make sure he was dead. Or how about the guy who, at his funeral, the priest said, "Won't anyone stand up and say anything nice for the deceased?" and finally someone said, "Well, his brother was worse."]
Most people in this room and most college students I talk to will have plenty of money, but some will have few friends.
[Re: Keys to Happiness and Success]
[Charlie Munger: Just avoid things like racing trains to the crossing, doing cocaine, etc. Develop good mental habits.]
I get letters every day from people in financial trouble. Often it’s health related, but it’s often debt. They’re decent people, but they’ve made a mistake. They’re not going to catch up, so I tell them to just file for bankruptcy and start fresh. In most cases, they should have done so a lot earlier.
[Charlie Munger: Avoid evil, particularly if they’re attractive members of the opposite sex.]
If you hang out with a bad bunch, it’s likely to rub off.
Look at the people you like to hang out with. What qualities do you like about them? Why don’t you copy them? And look at the people you don’t like. What don’t you like about them, and can you stop doing these things?
[Charlie Munger: If your new behavior earns you a little temporary unpopularity with your peer group, then the hell with them.]
This reminds me of the old lady who was asked what she liked about being 103 years old? She replied, “No peer pressure.”
If you could have lunch with one person you have never met, who would it be and why?
I would have to say Isaac Newton or Benjamin Franklin. I’ve met a lot of interesting people and some uninteresting ones, too. The two men had a bigger grasp of the world they lived in. But I don’t think I would pass up an opportunity with Sophia Loren.
How do you stay so down to earth and humble? Are there specific people or lessons you have learned throughout your life that enable you to maintain this outlook?
I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. One of your most important jobs in life will be raising your children. They will learn more from you than they will in graduate school. My father was a huge influence, and later on Graham came along. I was also never let down by my heroes.
I had nothing to do with my own success. My father was a securities broker and after the Great Crash, he had no one to call. Consequently, I was born in 1930 in the United States during the time of one of the greatest capital markets. I was born with the wiring for capital asset allocation. I had the right wiring at the right time. Temperament is a large part of my wiring. I was naturally good at it, and I used some feedback to develop it better. There is nothing to be arrogant about. Gates says if I had been born earlier, I would’ve been some animal’s lunch. I can’t run, I can’t climb. I’d be talking about allocating capital and the animal would think, “Those are the kind that taste the best.” You have all won the ovarian lottery. There is no reason to feel guilty about it.
I have never given away a dime that has any meaning on how I live. There are people that go to church and they put money in the offering plate that truly makes a difference in how they will live their lives, what they will eat, what presents they will buy for their children. There’s no reason to get puffed up over things you didn’t control.
What are some of your biggest mistakes or regrets?
We’ve made lots of mistakes, but they don’t bother me. We’ve had no regrets. We are in the business of making many decisions and there are bound to be mistakes. There are $10 billion mistakes of omission that no one knows about; they don’t show up in the accounting. In 1994 we paid $400 worth of Berkshire stock for a shoe company. The company is now worth 0, but the stock is worth $3.5 billion. So now, I’m happy to see Berkshire go down since it reduces the size of my mistake. In 1973 Tom Murphy offered us NBC for $35 million, but we turned it down. That was a huge mistake of omission.
In my personal life, there are always things I could’ve done differently. But so many good things have happened. It just doesn’t pay to dwell on the bad things. Finding the right spouse is 90% of it. If you are lucky on health and lucky on your spouse, you are a long way home. Getting turned down by HBS was one of the best things that could have happened to me, bad luck can turn out to be good.
[Charlie Munger: "The most extreme mistakes in Berkshire's history have been mistakes of omission. We saw it, but didn't act on it. They're huge mistakes -- we've lost billions. And we keep doing it. We're getting better at it. We never get over it."
"There are two types of mistakes: 1) doing nothing; what Warren calls "sucking my thumb" and 2) buying with an eyedropper things we should be buying a lot of."]
First off, follow Graham and you'll be fine.
My biggest mistakes were errors of omission vs. commission. Berkshire Hathaway was also a big mistake. Sometimes the opportunity costs of keeping money in something (like a lousy textile business) can be a drag on Berkshire's performance. We didn't learn from the previous mistake and bought another textile mill (Womback Mills) 6-7 years after buying Berkshire Hathaway. Meanwhile, I couldn't run the one in New Bedford.
Tom Murphy, my friend, bought the newspaper in Fort Worth. The previous ownership of these entities owned NBC as well, but he wanted to divest the NBC affiliate - $30 million to buy, doing $75 million in earnings. It was really a pretty good company, but he wanted to sell it anyway. There wouldn't be many more of it. Network television stations don't require excessive brains to run. They add a lot of money to our bottom lines.
We have never lost lots of money in things, except in insurance after 9/11. We don't do the kinds of things that lose you a lot of money. We just might not be finding the “best” opportunities.
Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too many mistakes.
Side note: Warren once asked Bill Gates, “If you could only hire from one place, where would it be?” Gate's reply was Indian Institute of Technology.
[Q - Sometimes we learn more from our failures than our successes. What do you consider your greatest mistake or failure?]
I have made lots of failures of omission more than failures of commission. Things that I understand, there have been a few, a couple that cost $10B. If a business was selling cheap and I did not buy, I consider that a failure. As Charlie would say, I was sucking my thumb on that one. I made a terrible deal buying Dexter Shoe. I did not learn much from it either. I bought it for $400M, but the biggest mistake is that I gave up stock that is now worth $3B.
You’re going to make mistakes. You can’t play in the game without making any mistakes. I don’t think about it, I just move on. Most business mistakes are irreversible setbacks, but you get another chance. There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children. Business, you just go on. It’s a mistake to dwell on mistakes, it’s unproductive. It’s like Mark Twain’s story about the cat that sat on a hot stove – he never sat on a hot stove again, but he never sat on a cold one again either.
How do you think differently today than you did twenty years ago? Where do you expect to see the greatest differences in 2030?
The fundamental things about investing that I learned when I was younger haven’t changed. I am lucky to have picked up a book at 19, The Intelligent Investor, that gave structure to investing and investment decisions. Over time, I learned different ways to apply it. I have learned what it is outside my circle of confidence. I bought See’s in 1972 and I think understanding the value of brand helped drive the decision to buy Coca-Cola in 1988. Through experience, I have gotten smarter on predicting and evaluating human behavior. My wife put me together in terms of human behavior. I really enjoy doing what I do and I get to do what I want. I enjoy talking to groups like these. Irv and Ron Blumkin are some of my best friends and I continue to add friends by buying businesses. I don’t want a boat or 12 houses. I’m almost fully depreciated, down to my residual value. Age doesn’t affect my ability to my job though, as opposed to Arnold Palmer, he can’t play his game.
Why are you frugal?
You can’t buy health and you can’t buy love. I’m a member of every golf club that I want to be a member of. I’m the highest handicap member of Augusta National. I’d rather play golf here with people I like than at the fanciest golf course in the world. I can do anything that I want, and I do. I buy everything I want to have. I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living. Bella Eidenberg was a Polish Jew who was at Auschwitz and some of her family didn’t make it. Twenty years ago she said she was slow to make friends, and that the real question in her mind was always, “Would they hide me?” If you have a lot of people that would hide you, you’ve had a very successful life. That can’t be bought. I know people that have billions of dollars and their children would say, “he’s in the attic.”
I estimate that I live on $100,000 per year, except for my plane which costs me about $1 to $1.5 million. I like the plane, it improves my life. My computer and my airplane changed my life in a big way and I’m not sure, if I had to choose, which one I’d give up. Anything beyond $50 Million doesn’t improve my life. If I took out $3 billion of Berkshire stock, I could have paid 30,000 people $100,000 per year to paint my portrait every day. I could have paid 50,000 people $60,000 per year to dress in loin cloths and haul rocks to create the Buffett tomb. That’s not me. I believe in giving my kids enough so they can do anything, but not so much that they can do nothing.
What would you do to live a happier life if you could live over again?
This will sound disgusting. The question is how would I live my life over again to live a happier life? The only thing would be to select a gene pool where people lived to 120 or something where I came from.
I have been extraordinarily lucky. I mean, I use this example and I will take a minute or two because I think it is worth thinking about a little bit. Let's just assume it was 24 hours before you were born and a genie came to you and he said, "Herb, you look very promising and I have a big problem. I got to design the world in which you are going to live in. I have decided it is too tough; you design it. So you have twenty-four hours, you figure out what the social rules should be, the economic rules and the governmental rules and you and your kids and their kids will live under those rules.
You say, "I can design anything? There must be a catch?" The genie says there is a catch. You don't know if you are going to be born black or white, rich or poor, male or female, infirm or able-bodied, bright or retarded. All you know is you are going to take one ball out of a barrel with 5.8 billion (balls). You are going to participate in the ovarian lottery. And that is going to be the most important thing in your life, because that is going to control whether you are born here or in Afghanistan or whether you are born with an IQ of 130 or an IQ of 70. It is going to determine a whole lot. What type of world are you going to design?
I think it is a good way to look at social questions, because not knowing which ball you are going to get, you are going to want to design a system that is going to provide lots of goods and services because you want people on balance to live well. And you want it to produce more and more so your kids live better than you do and your grandchildren live better than their parents. But you also want a system that does produce lots of goods and services that does not leave behind a person who accidentally got the wrong ball and is not well wired for this particular system. I am ideally wired for the system I fell into here. I came out and got into something that enables me to allocate capital. Nothing so wonderful about that. If all of us were stranded on a desert island somewhere and we were never going to get off of it, the most valuable person there would be the one who could raise the most rice over time. I can say, "I can allocate capital!" You wouldn't be very excited about that. So I have been born in the right place.
Gates says that if I had been born three million years ago, I would have been some animal's lunch. He says, "You can't run very fast, you can't climb trees, you can't do anything." You would just be chewed up the first day. You are lucky; you were born today. And I am. The question getting back, here is this barrel with 6.5 billion balls, everybody in the world, if you could put your ball back, and they took out at random a 100 balls and you had to pick one of those, would you put your ball back in?
Now those 100 balls you are going to get out, roughly 5 of them will be American, 95/5. So if you want to be in this country, you will only have 5 balls, half of them will be women and half men--I will let you decide how you will vote on that one. Half of them will below average in intelligence and half above average in intelligence. Do you want to put your ball in there? Most of you will not want to put your ball back to get 100. So what you are saying is: I am in the luckiest one percent of the world right now sitting in this room--the top one percent of the world. Well, that is the way I feel. I am lucky to be born where I was because it was 50 to 1 in the United States when I was born. I have been lucky with parents, lucky with all kinds of things and lucky to be wired in a way that in a market economy, pays off like crazy for me. It doesn't pay off as well for someone who is absolutely as good a citizen as I am (by) leading Boy Scout troops, teaching Sunday School or whatever, raising fine families, but just doesn't happen to be wired in the same way that I am. So I have been extremely lucky so I would like to be lucky again.
Then the way to do it is to play out the game and do something you enjoy all your life and be associated with people you like. I only work with people I like. If I could make $100 million dollars with a guy who causes my stomach to churn, I would say no because in way that is very much like marrying for money which is probably not a very good idea in any circumstances, but if you are already rich, it is crazy. I am not going to marry for money. I would really do almost exactly what I have done except I wouldn't have bought the US Air.
What keeps you up at night?
I try to live my life so nothing keeps me up at night. I don't like to sound, you know, like a mortician during an epidemic or anything, but last fall was really quite exciting for me. I don't wish it on anybody, but there were things being offered. There are opportunities for us to do things that didn't exist a year or two earlier. So I really don't -- I don't want to be in a position where I am leveraged or something of the sort that does keep me up at night. I did not worry about the ultimate survival of our economic system. We were messed up. Wasn't any question about that. But the plants haven't gone away. The cornfields haven't gone away. The talent of the American people hasn't gone away. The innovativeness of the next Bill Gates hasn't gone away. This country was going to do fine. I knew that. We just had to get things straightened out. And we're well on the way to having that happen.
The most dramatic way we protect ourselves is we don’t use leverage. We believe almost anything can happen in financial markets. The only way smart people can get clobbered is [if they use] leverage. If you can hold them [the positions you own during a crisis], then you’re OK. But even smart people can get clobbered with leverage – it’s the one thing that can prevent you from playing out your hand.
Absent leverage or just going crazy on valuation, the financial cataclysms won’t do you in. And if you have any more money, you buy.
Berkshire is in an extraordinary position to weather any financial cataclysm. While we don’t go around like an undertaker, hoping for a plague, we would benefit [in such a situation] and have done so in the past. We’ve never gotten hurt in the past 30-40 years by what’s going on in the world around us.
What do you think were the major qualities that you have that distinguish you from the majority?
It's always interesting when Bill and I appear together, they don't figure they can do what Bill does, but they know they can do what I do. We did both have a passion. We were doing what we did because we loved it. We weren't doing it to get rich. We probably felt if we did it well, we would get rich. But we'd have done it, you know, if somebody was slipping bread in under the door, you know, to keep us going. And so I think that passion for it is enormously important. I was lucky enough to have a couple of great teachers, particularly one great teacher. I had a great teacher in life in my father. But I had another great teacher in terms of profession in terms of Ben Graham. I was lucky enough to get the right foundation very early on. And then basically I didn't listen to anybody else. I just look in the mirror every morning and the mirror always agrees with me. And I go out and do what I believe I should be doing. And I'm not influenced by what other people think.
What was your reasoning behind your huge contribution to the Bill and Melinda Gates foundation?
Well, I wouldn't have given it to them unless I was 100% in sync with their objective, which is do the most good for the most people, wherever they may be, male or female, whatever their color, whatever their religion or so on. They believe every human life is equal to every other one. I am very good at making money. If you read what Adam Smith wrote in 1776 about specialization of labor, you know, he said if you need to deliver a baby, don't try to learn to do it yourself. Get an obstetrician. So Bill and Melinda will be better and my children who will also have foundations will be better at doing it than I would be. And that's fine. I'll work at what I'm good at and I'll let them do it. And they are doing it 100% in accord with my wishes.
[Q - which part of this incredible act was most important or most concerning to you and why?]
I actually gave the stock away 15 years ago in my mind, created a trust mentally. When my wife died, I was forced to do something. Soon after I discussed my plans with Bill and Melinda they gave me an original copy of Adam Smith’s Wealth of Nations. In the first chapter Adam Smith talks about “Specialization of Labor”, which talks about markets and allowing countries to specialize and work on what they are good at. Mike Tyson doesn’t try to run Berkshire, and I don’t try to get in the ring with Mike Tyson. This is how I look at philanthropy. I started looking for people that were younger, smarter, more experienced, and doing it with their own money. I looked for people that had similar goals, who would do the best with the money. In effect, I outsourced the handling of my philanthropy. It was a no brainer.
In the Fortune article, I stated that business is a game that I love because I get to hit the easy pitches. Ted Williams had written a book about hitting and he said to succeed in baseball, you had to wait for the best pitch. See’s Candies to me was an easy pitch. It is not like Olympic diving, where one could do a simple dive perfectly, but score lower than someone who might have made a big splash attempting a more difficult dive. In diving you are judged on the degree of difficulty. Philanthropy is the opposite of investing with degree of difficulty. Philanthropy deals with trying to solve the toughest problems in society, so you expect to fail very often. I personally don’t like failing, so I’d rather let someone else do it. I wouldn’t personally enjoy working on something where I couldn’t get any feedback on how I was doing and in fact, expected the project to fail. My lifespan is 12 years now and I should be able to add tens of billions of dollars to my “donation” in that time. I am going to stick with what I love doing and I am glad others will work on giving the money away.
I’m just lucky to have been in the right place at the right time. Another place, another time, I wouldn’t have been as successful. Society enabled me to make my money and my money should go to society.
If you could come back again, would you want to be Warren Buffett?
I’d want to be Mrs. B - she made it to 104! (An allusion to the longtime manager of the Nebraska Furniture Mart, Mrs. Rose Blumkin, who died in 1998.)
I have fun every day. I had fun at twenty-five, I have it now. I work with people I like; what would I do differently? I don’t understand people who’d like to change skins with others.
What's your view on inheritances?
I’m a big believer in meritocracy. I don’t believe that people should get a big head start in life because of what womb they came from. I believe that society doesn’t benefit from that, but it does benefit when people are rewarded based on what they do.
[Charlie Munger: Throughout history, lots of people have had much handed to them - and they haven’t always done well with it afterwards.]
[Q - Could you discuss your views on estate planning and how you will allocate your wealth to your children?]
It really reflects my views on how a rich society should behave. If it weren't for this society, I wouldn't be rich. It wasn't all me. Imagine if you were one of a pair of identical twins and a genie came along and allowed you to bid on where you could be born. The money that you bid is how much you had to agree to give back to society, and the one who bids the most gets to be born in the US and the other in Bangladesh. You would bid a lot. It is a huge advantage to be born here.
There should be no divine right of the womb. My kids wouldn't go off and do nothing if I give them a lot of money, but if they did, that would be a tragedy. $30 billion will be generated from estate taxes, which will go to help pay for the war in Iraq and other things. If you take away the estate tax, that money will have to come from somewhere else. If not from estate taxes then you inherently get it from poorer citizens. Less than 2% of estates will pay the estate tax. They would still have $50 million left over on average. I think those that get the lucky tickets should pay the most to the common causes of society. I believe in a big redistribution. Wealth is a bunch of claim checks that I can turn in for houses, etc. To pass those claim checks down to the next generation is the wrong approach. But for those that think I am perpetuating the welfare state, consider if you are born to a rich parent. You get a whole bunch of stocks right at the beginning of your life, and thus you are sort of on a welfare state of support from your rich parents from the beginning. What's the difference?
At $100,000 a year, I can find 10 people to paint my portraits to find the perfect one. I have that kind of money. But that is a waste, as those people could be doing something useful. I feel the same way about my kids and other heirs. They should be doing things that help to contribute to society.
What feedback mechanisms do you have in place?
It is part of human nature to interpret all new information such that prior conclusions remain intact.
Having a good partner is key. Charlie will not accept anything I say because I say it. It's great to have a partner who will tell you when you're thinking is wrong.
The typical corporate organization is structured so that a CEOs beliefs and biases are reinforced. Staffs won't give you any contrary recommendations -- they'll just come back with whatever the CEO wants. And the Board of Directors won't act as a check, so the CEO pretty much gets what he wants.
Having good feedback mechanisms is terribly important. We have a very good system."
Your friendship with Charlie?
The people who introduced Charlie and me thought we'd either really hit it off or quickly dislike each other, as we both had very strong personalities…Over the years, we've had disagreements, but never an argument.
You should think about what you like in other people and admire about them. Then ask yourself which of these traits you ones you physically or mentally can't have. The answer is: NONE! The reverse is also true. Habits are critical and hard to change. Ben Franklin had a list of qualities and set out to acquire them.
[Charlie Munger: I think there's some mythology in this idea that I've been this great enlightener of Warren. He hasn't needed much enlightenment. But we know more now than five years ago.]
Charlie and I have been partners in some way since 1959. We worked together in a grocery store and both came to the conclusion that we don't like hard work.
We have never had an argument. You just have to learn how to calibrate his answers. If you ask Charlie something and he says "no," then we put all of our money in it. If he says "that's the stupidest thing I've ever heard," then we make a more moderate investment. If you calibrate his answers and then you'll get a lot of wisdom.
[BRK2007 - “Charlie can hear quite well and I can see, so we work well together.”]back to the questions.
Why don't you charge a percentage management fee to Berkshire, given that you earned 25% of the profits above 6% each year when he ran the Buffett Partnership. Is it because you believes, as you've said before, that "it's better to give them to receive"?
I would pay a lot of money for the job I have. If I can work with people I like, why do I need to make a further override when I already have a lot of money? I was changing my life at the time [when I ran the Buffett Partnership] and I needed money then. I got no management fee at all.
Berkshire was originally owned by the [Buffett] partnership and I would be double dipping [to also take a fee from Berkshire]. By that time I had all of the money I needed. It [taking a percentage of Berkshire's profits] would make a difference in the size of my foundation, but I like the way that I live.
[Charlie Munger: Carnegie was always proud that he took very little salary. Rockefeller, Vanderbilt were the same. It was a common culture in a different era. All of these people thought of themselves as the founder. I was delighted to get rid of the pressure of getting fees based on performance. If you are highly conscientious and you hate to disappoint, you will feel the pressure to live up to your incentive fee. There was an enormous advantage [to switching away from taking a percentage of the profits to managing Berkshire, in which their interests as shareholders are exactly aligned with other shareholders].]
Bill Gates takes a small salary -- the only reason he takes a salary at all is so that he can reduce it if they have a bad year. He wants to be able to take a 90% cut. He's also never taken a stock option. I think this is true of Steve Ballmer as well. They got rich with their shareholders, not off of their shareholders.
[A shareholder pointed out that Buffett’s salary is only about 10 cents/year/A share and suggested shareholders would happily pay him 25 cents/share/year. Buffett replied:]
I would pay to have this job. It doesn’t get any better than this. I’m getting SS now. My family would go crazy if I were getting any more money.
Who are your current role models?
I have a number of them – I’m not sure I want to name them. I’ve been very lucky – the ones I’ve had have never let me down. It would be a terrible experience and hard to get over. People have had it in marriage or business. The worst is with your parents. The reverse happened with me.
Choosing your heroes is very important. Associate well, marry up and hope you find someone who doesn’t mind marrying down. It was a huge help to me – I can tell you that. [Laughter]
Munger: You’re not restricted to living people when choosing your mentors. Some of the best people are dead. [Laughter]
What's the motivation behind giving your fortune away? your philanthropy?
Buffett: I always felt I would compound money at a rate higher than average and it would have been foolish to give away a significant portion of my capital, which would have been spent within months. I thought my wife would be doing it [giving my fortune away], but that didn’t work out.
When my wife and I had a baby, we hired an obstetrician – I didn’t try to do it myself. When my tooth hurts, I don’t turn to Charlie. Similarly, when it comes to giving money away sensibly, I let people who are smart, energetic and passionate do it. I want to give the claim checks to someone who can follow generally what I would do myself if I were to do it myself.
Munger: I think it’s perfectly great for shareholders that you’re letting someone else give away the money.
Buffett: For the smaller grant requests, I send them to my sister Doris, who likes to handle them.
As far as I’m concerned, I haven’t given up anything. Someone who gives up an evening out or a lot of time or a trip to Disneyland because they donated to a church or whatever, they have given away something. I haven’t changed my life. I can’t eat any better or sleep any better, so I haven’t really given up anything.
[Q - What are the joys of giving or the pitfalls of donating money?]
Warren Buffett: I’ve never given up anything that made a difference to me. There are people that drop in the collection plate an amount that makes a difference in their lives. I’ve never given a penny that way. I’ve lived a long time, which gives you a huge advantage in accumulating money. I’m giving away excess, not necessity. What I am doing is useful, but it isn’t on a par with people who give real money. Doris [Doris Buffett, Warren’s older sister] gives away money and time which is a real cost—she gives help beyond the money. She is retail; I am wholesale. You should give to things that you personally have interest in. I won’t prioritize your giving.
Charlie Munger: Regarding pitfalls, I would predict that if you have an extreme political ideology, you are very likely to make a lot of dumb charitable gifts.
Warren Buffett: If you hang around Charlie enough, you get the sunny side of life. [laughter]
Would you rather have dinner with John Adams or Ben Franklin?
Munger: John and Abigail Adams were wonderful people.
Buffett: Did you know them personally, Charlie? [Laughter]
Munger: But if you wanted a lovely evening, you’d like Franklin. I think I have too much Adams and not enough Franklin.
Why do you support Planned Parenthood?
[The questioner attacked Buffett’s charitable support of Planned Parenthood and was roundly booed.]
I think Planned Parenthood is a terrific organization. I really think it’s too bad that for millennia women, not only in the U.S. but over the world, have involuntarily had forced upon them the bearing of babies, generally by governments run by men. [Applause]
I think it’s an important issue that doesn’t have a natural funding constituency – it’s not like putting your name on a hospital. I think if we’d had a Supreme Court with nine women on it from the beginning, I don’t think a question like yours would even be asked. I think it’s wonderful that women can make reproductive choices. I hope you’ll respect my opinion as I do yours. [More applause]
What is the best question you've ever been asked?
I guess the best question I've ever asked is my wife to marry me. Her answer might have been her worst! [Buffett paused for a moment] Why don't you tell me the best question you've ever been asked and I'll answer it? The best questions ask what I've learned about life over the years. You can't know those answers when you're young. For both men and women, the most important decision you'll ever make is your choice of spouse. The most important job is raising children. The first five years are very important in a child's life. The Gateses do a good job raising their children and have thought about it a lot.
Has there been any question that you haven’t been able to get a comfortable answer to that also can’t go in the “too difficult” pile?
Buffett: You may have just asked one.
Munger: If you have a child dying of a terrible disease, you can’t just put it in the “too difficult” box. There are a lot of things you can’t just put aside. But in investing, you can do this.
Buffett: With WMDs, you can’t just put it in the “too hard” box. You have to wrestle with it because if you even reduce the probability a tiny bit, it is good. You hope you don’t have too many like that.
How do you maintain your good mental and physical health?
Warren Buffett: [Holding up a piece of See’s candy] You start with a balanced diet — See’s, Mars, and Coke. [laughter] If Charlie and I can’t have a decent attitude, who can? We get to do what we like every day, and we work with people who love to do what they do. We are not forced to do what we don’t want. I get to do what I like every day. We are very blessed in so many ways. How could you be sour? Charlie is 84 and I am 77. We have slowed down, but we pretend we haven’t. There is no reason to look at the minuses in life. It would be crazy. We count our blessings. Not much more to it than that.
Charlie Munger: I wish we were poster boys for the benefits of running marathons with slim bodies, but as much as you can tell, we don’t pay attention to health advocates and dietary rules. I for one don’t plan to change.
Warren Buffett: From the moment we get up, until we go to sleep, we are associating with wonderful people. We are biased. We live in the best country in world. We could have stayed in my grandfather’s store and it would have been terrible.
Charlie Munger: If you are in a job you would pay to have, and you are supposed to be an exemplar — there is a lot to be said for not paying yourself very well.
Warren Buffett: On corporate compensation, the idea that you have to pay someone $10 million in pensions just to keep him around... there’s something wrong in that.
Charlie Munger: Executives should volunteer to get paid less, as they would stay in their jobs at a quarter or half of their pay and would not be able to get better jobs elsewhere.
Your comments on Phil Fisher?
Phil Fisher was a great man. He died a month ago, well into his 90s. His first book was Common Stocks and Uncommon Profits in 1958. He wrote a second book, and they were great books.
You could get what you wanted from the books (I only met him once). Like Ben Graham, it was in the books – the writing was so clear, you didn’t need to meet them.
I thoroughly enjoyed meeting him. I met Phil in 1962. I just went there. I’d go to New York and just drop in on people. They thought that because I was from Omaha, they’d only have to see me once and be rid of me. [Laughter.] Phil was nice to me. I met Charlie in ’59; he was preaching a similar doctrine, so I got it from both sides.
[Charlie Munger: I always like it when someone attractive to me agrees with me, so I have fond memories of Phil Fisher. The idea that it was hard to find good investments, so concentrate in a few, seems to me to be an obviously good idea. But 98% of the investment world doesn’t think this way. It’s been good for us – and you – that we’ve done this.]
What do you think and know about Carlos Slim?
Warren Buffett: We had lunch 15 years ago, and it was pleasant. Outside of that visit and what I read in the newspaper, I don’t know much about him.
Charlie Munger: You speak to the total knowledge of both of us about Carlos Slim.
Do you believe in Jesus Christ?
Warren Buffett: I am an agnostic.
Charlie Munger: I don’t want to talk about my religion.
Warren Buffett: Being an agnostic, I don’t have to have an opinion.
Is it fun inventing something that inspires young kids?
This question reminds me of Thomas Edison who was a great inventor. He invented many things including the electric light bulb. Edison said, “I never did a days work in my life. It was all fun.” I feel the same way, so I guess my answer is “yes, with a big exclamation point!”
I know you like baseball. My favorite team is the Chicago Cubs. Would you like to buy the Chicago Cubs from Sam Zell? Is it a good investment?
Warren Buffett: It’s been a good investment. Earnings haven’t gone up so much, though cable [television] expanded the stadium. There were 40,000 seats in 1939, and cable multiplied seats in a huge way, and a lot of it went to the players, but some stuck to the owners. When I was your age, I thought I would buy a team. If the Cubs sell for $700 million, I don’t think I would buy at that price—but there is a psychological income to some owners. It is a way to instant celebrity. A certain percentage of people want the route to that life. Many people have loads of money. I’ve had calls from others about the Cubs. I think I will leave that to you.
Warren Buffett: Charlie is a harder sell. I might do something like that.
Charlie Munger: [Referring to Buffett’s minority stake in the Omaha Royals—the Triple-A affiliate of the Kansas City Royals baseball team] You have already done it once.
Warren Buffett: Touché. [laughter]
Will you share what or who had the biggest influences on you?
Warren Buffett: My biggest educator was my father. It is important who you marry. Those are great teachers. Ben Graham, Dave Dodd. I devour books. Charlie likes Ben Franklin. My grandfather at the family grocery store. The most important job you have is to be the teacher to your children. You are the big, great thing to them. You don’t get a rewind button. You don’t get to do it twice. Teach by what you do, not what you say. By the time they get through formal school, they would have learned more from you than from school. Provide warmth and food and everything else. It won’t change when they get to graduate school — and you get no rewind button. You teach with what you do, not what you say.
Charlie Munger: Differing people learn in differing ways. I was put together to learn by reading. If someone is talking to me it doesn’t work as well. With a book, I can learn what I want at a speed that works. It works for my nature. For those people who are like me, welcome, it is a nice fraternity.
Warren Buffett: [Speaking to Charlie] Did you learn more from your father? Your father probably had more impact on you before your readings?
Charlie Munger: My father did have an impact. He always took more than his share of work and risk—that was helpful. The conceptual stuff—I learned from books. Those authors are fathers in a different sense.
Warren Buffett: If you keep reading books, you’ll learn a lot. If you read 20 books, you can learn a hell of a lot. Having the right parents is very lucky. If you get the right spouse too, that’s just doubling down.
You have said that your assistant pays a higher tax rate than you does and that to be equitable the tax rate should be higher on you than on others. In reality, the bulk of estate will not be taxed due to your charitable donations. How do you change the system so people like you pay more tax?
Buffett: A wealth tax is an answer. If you want to give away all of your money it is a great tax dodge. People should give away all their money because the money could do a lot of good. In the US, if we spend 25% of GDP then we cannot keep taxation at 15% of GDP. Two classy people are heading up the deficit commission--Erskine Boles and Alan Simpson. They are going to have to recommend higher taxes and lower expenditures and after that they won’t be popular. We won’t be able to increase taxes on lower income people so it’s going to be a tough equation to solve.
Take BRK shares for example: I will not ever sell a share. I have everything I needs in my life and because BRK does well I can give shares away. Some people might suggest that I should give money away to the federal government instead. But in reality we would not want to give that money to the federal government [implying that it would not be used efficiently].
Munger: Those who worry about Warren’s taxes are wasting their time. Warren will have left it all when he dies.
Could you please share your views on why legislators should not change the inheritance tax law?
Well it’s not a death tax. 2.2 million people die in the US and out of that only 4,000 estates will be taxed. The federal government collects $30 billion in tax revenue per year from estate taxes and a high percentage of the heirs of these estates will receive $50 million or more.
We have to ask ourselves what is the proper tax policy for our society. Let me illustrate with a game. Imagine 24 hours before your birth a genie comes to you and lets you design the world into which you will come. You define all of the political, economic, and societal facets of the world. But there is one catch. You have to draw a ticket from a pool of 6 billion. On this ticket will be your characteristics in this world, i.e. if you are born in the US or Bangladesh, if you are male or female, black or white, retarded or normal, etc. What would you do? You would design a world with rules that would initially foster abundance. A world that produces lots of output where everyone is productive. You would create an abundant society. Secondly, you would want justice. You would want the output to be spread out. You would design a world where there was freedom from fear, freedom from fear of old age. You would want equality of opportunity, a market system, and that the best people were in the right places. You would want a world that would take care of the people who got the bad tickets. This has nothing to do with religion, I’m agnostic. At the time that I was born, the odds were about 50 to 1 that I was born in the United States. I won the ovarian lottery.
You would make sure all of the lucky tickets are incentivized to keep working. Also you would want others to have equality of opportunity, not equality of outcome though. One bigger thing would be a good system of the rule of law. You would also want to make sure you have people in the right places according to their talents. You would also want to help others that have no opportunity. I could set it up so that my descendants would not have to work for ten generations. So I would end up effectively taking my descendants out of the pool of proactive people. The descendants of wealthy people could potentially become welfare recipients. Lots of families (I won’t name names) create dynasties where society contributes to them just because they are part of the “lucky sperm club”. Instead of using food stamps, they would have stocks and bonds. The estate tax modifies the ability to create a family dynasty that takes the descendants out of the work pool, the group of productive citizens.
We all participated in the ovarian lottery, it’s probably the most important thing we have ever done. In fact, you all are in business school, you are pretty smart and you have a bright future ahead of you; if you had the chance to trade in your lottery ticket for the chance to pick 100 tickets of which you would have to take one. Would you do it? I would argue you should not. Out of the 100, only 4 or 5 would be born in the US. Out of that only not many would be headed on the path you are headed down. So we are part of the top 1% in society, we are pretty lucky. My descendants are part of the top 1 tenth of one percent of society. This means that you are in the luckiest 1% of the world.
Is all your media exposure the best use of your time?
Warren Buffett: Probably not. But there are a lot of things I do that aren’t. I play 12 hrs of bridge a week, and that isn’t good for shareholders either! If you want a record of things, I would much rather have a record on Charlie Rose where people can go back to it. I like the idea of being judged by my own words, rather than someone trying to write a few words and summarizing me. That versus a one hour interview where reporter is shopping for a few quotes to fit – I prefer TV. I like the accuracy of the reporting. Best use of time? It works fine. One story however, because TV isn’t perfect – you have to be careful on a broadcast. Charlie Rose did interview and taped me on Friday morning. During tape they were showing great railroad scenes, including a montage of railroad movies with Marilyn Monroe in Some Like It Hot and Grace Kelly. Then he asked me some question – and I said I would have paid more [for BNSF] if they included Marilyn Monroe and Grace Kelly. But the recording ran 106 minutes and they took out the montage of Grace Kelly and Marilyn – but left in my response -- it looked like I had come up with this out of the blue!
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