Picking Warren Buffett's Brain: Notes from a Novice

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The richest man in the world — $62 billion and counting. (Photo: CBS/AP)

“Excuse me. Where is the most difficult to reach microphone?”

I was out of breath from running up the steps but had managed to find one of the microphone stands, manned by two headset-wearing volunteers.

More than 10,000 people had waited on the sidewalks overnight to be first in the doors of the Berkshire Hathaway annual shareholder meeting, and I had made a choice: I would go for the mics instead of the front row.

Given a choice of shaking Warren Buffett’s hand for a five-second photo op or asking him a question, I opted for the latter, and in ten seconds, I’d be sprinting to the corner of the top floor. After all, lunch with Buffett once auctioned off for $620,100, and I’d planned it all out.

These are my notes on what happened and what I learned…

“Can you please radio ahead to put my name on their list until I get there to confirm?” I pleaded, explaining that this was the main reason I had traveled from SF all the way to Omaha, Nebraska.

They smiled: “Sure thing.”

There were 13 mics total and time for approximately six questions from each, for a total of 78 people out of the 31,000 who now packed the Qwest Convention Center like a rock concert. I ended up, only 10 minutes after the doors had opened, number 5 at mic #6. When the spotlight swung over to blind me a few minutes before the lunch break, I was ready to consult the Oracle.

“Good afternoon, Mr. Buffett and Mr. Munger…” my voice boomed out through the sound system with a half-second delay, making it almost impossible to remember my lines, memorized word-for-word. I continued:

“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”

[Postscript: Be sure to see some of the great reader answers to this question in the comments after this post.]

An MBA in a Weekend

As several veterans put it to me before the pilgrimage, “it’s like an MBA in a weekend.” I thought this was hyperbole and hero worship, but I would now take it further: I think it’s one weekend that delivers more than most MBAs. Real-world strategies culled from experience? Check. Networking? Big-time check. The only thing the mecca of Buffett seemed to lack was the $100K+ price tag.

Here are my non-linear notes from my exchange with Buffett (B) and Munger (M), as well as the rest of my first Berkshire Hathaway (BH) experience, including conversations in the hallways with some incredible portfolio company managers. Treat each line as a separate observation except for the answers following bolded questions.

Their continued answer to my question:

“…Put it all in a low-cost index fund like a Vanguard 500.” M: “Professionals take croupier profits out of the system. No one will give you this advice [index funds] because no one gets paid for it.” M: “The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity.” B: “There are situations, for the full-time investor, where it’d be a mistake not to invest 50% of your net worth in one business.” If more aggressive: small stocks and specialized bonds, but no currencies.

Best books to read for investing and life?

(B) Chapters 8 and 20 in The Intelligent Investor. (M) Anything by Ben Franklin.

Use the market to serve you, not to instruct you.

What’s being taught in current MBA programs that shouldn’t be?

Option pricing, etc. There are only three courses you need: how to value a business, how to think about market fluctuations, and how to communicate well. There is a great desire of the priesthood [in this case, academics] to teach what they know vs. what you need. If you know the bible in four languages, your ego won’t allow you to teach the true essentials, which might be “follow the 10 commandments.”

From CFO of portfolio company on how to select a money manager. Ask: What is your process? How do you make decisions? Given what you’re holding now vs. 3 years ago, can you share an example along those lines? Are you registered with the SEC?

From same CFO: having a short-term focus (2-4 months) or long-term (7 years or so) is good, but intermediate-term is bad (1-2 years). Everyone is looking at information for 1-2 years due to capital gains treatment. Given that I’d be comfortable with a 10% loss in a given year but not 20%, a 55/45 stocks/bonds split with 7-year objectives would be one potential allocation.

Conventional dogma among economists: the stock market is 6 months ahead of the respective economy.

B: “Envy is the worst of the 7 sins. You feel worse and they feel no worse. Gluttony, at least, has some upside.” [said as he opens another box of See’s chocolates]


The letter and goodies waiting in my hotel room upon arriving in Omaha.

Select money market accounts with comparable returns to CD have advantage: can invest in crashed S&P same-day.

B and M have never discussed timing the market, and if they could, they would focus exclusively on S&P 500 futures.

Look for attractively priced businesses, not stocks. Could you remain confident in your choice, in their durable competitive advantage, even if the market were to close for a few years? Imagine that you have a card with room for 20 hole punches, and you can only invest in 20 companies your entire life.

Worry about getting ahead, not galloping ahead.

Purchasing businesses that earn revenue in British Pound Sterling, Euros, or Francs is OK, as those currencies are unlikely to decline vs. $ USD. $ USD will continue to weaken vs. others.

B and M’s job is to retain — not recruit — good managers once they choose an attractive business to purchase. Good management is part of the evaluation of intrinsic value. Chief characteristics: passion, excellent communication skills, and the tendency to always do more than fair share.

If you want to buy or sell a stock, buy or sell it instead of speculating on futures. If you make a call for a cheaper price, the movement will come earlier 4 out of 5 times.

M on charities/nonprofits: if you donate to a group with strong political leanings, you tend to make lots of dumb charitable gifts.

B: Most things I want do not come from the expenditure of money. I have what I need. We do virtually nothing we don’t want to do. Associating with wonderful people is about as good as it gets. Never trade reputation for money.

Berkshire Hathaway (BH) is now targeting companies with a 50B+ market capitalization (market cap) — there are fewer options, the companies are less profitable, and more is required to move the % needle [% growth in BH stock] for shareholders.

M on CEO compensation: If you’re in a job you’d pay to have and are an exemplar for the rest of the organization, there is a lot to be said for paying yourself little. B: “If you rise high enough in American business, you have a moral obligation to take less pay.

“Pair trading” — long and short two stocks in the same industry to hedge losses (BP + Chevron, etc.). Useful in 60’s; less useful now.

Press and media are larger factors in changing bad corp/exec behavior than regulators. Boards respond to bad press.

###

How would you answer my question?

“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

For those interested, here is how I prepared for my “meeting” with Buffett.

Posted on: June 11, 2008.

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188 comments on “Picking Warren Buffett's Brain: Notes from a Novice

  1. How long have you been investing Tim? I didn’t know you were remotely interested in doing so. Do you see yourself ever starting up again or do you have enough momentum (from BodyQuick and book sales) and familiarity with investment to forgo the process? Thank you in advance for being as specific as possible:)

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  2. Excellent stuff Tim! Warren is a smart dude for sure. I’m totally sold out on his index fund investing advice. Another excellent book on investing in low cost index funds is Hebner’s Index Fund book.

    After reading this, I’m making my plans to go next year.

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  3. Based on your assumptions and including an average life expectancy of 85 years, you’re talking about a 55 year investment horizon.

    If you can stomach the ups and downs, I would go with an all equity portfolio, but instead of going simply with the S&P 500, I would go with a globally diversified basket of low cost, tax efficient index and/or asset class funds.

    I would include the entire US stock market (all capitalizations), the entire International developed market (all capitalizations), and the entire International emerging market (again, all capitalizations). I would also add some income producing real estate in the form of a well diversified, low cost REIT index fund.

    This can be accomplished with Vanguard funds, ETFs or other flavors of investment.

    You can further increase your expected returns over time by tilting your exposures more heavily to small cap and value companies.

    Check out http://www.dfaus.com for further data on this approach. They advocate taking the risks that you’re compensated for, and I incorporate this approach in my work with clients.

    Once your target allocation among the chosen funds had been determined, I would rebalance back to your target allocation when any single asset class deviated 20% from it’s target. There is meaningful data supporting this rebalancing trigger. You could also rebalance with additional savings which is a much more tax efficient approach and will reduce your capital gains realization. Rebalancing forces you to buy more of the relatively less expensive asset class in a classic “buy low” discipline.

    That’s about it. Buy when you have money and only sell when you need the money, but not before.

    Cheers

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  4. Jesus, dude.

    This is the third post of yours in a row I’ve shared in Google Reader. And I’m not exactly known as a link slut.

    I would never have thought this possible, but I’m actually considering making the trip next year.

    Thank you, sweet messenger of financial nerdery. Thank you…

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  5. Great notes. Irrelevant as it may be, couldn’t help noticing even the richest man in the world uses Times New Roman in corporate letters. Maybe he got so rich not from investing, but by never hiring designers and other “non-essential” services? ;)

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  6. Wow! I’m speechless. Great notes!

    @Joel Falconer: After Tim’s podcast on “The Art of Speed” at SXSW, I purchased “The making of an American Capitalist”

    It is a great read! Buffett is certainly a different type of animal compared to other investors.

    I would certainly invest with him, but there would be little chance I’d work for him…

    Rock on!

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  7. I would invest it all in a startup biodiesel company that had a brilliant idea to turn the sludge from wastewater treatment plants into renewable fuel. A million is about enough to build a plant and secure the contracts, then sell out to a larger company for a huge profit.

    Brown Is The New Yellow – you heard it here first!

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  8. For further elaboration on Buffett’s index fund strategy, which is to broadly diversify while keeping expenses as low as possible, I highly suggest checking out http://www.bogleheads.com.

    You’ll learn more about real life investing than in any B-school and it’s free!

    Enjoy!

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  9. Also, I just recently did a post about the flaw in investing in index funds. It’s actually quite simple and easy to understand.

    http://jeffnabers.com/2008/05/02/how-come-ive-been-losing-4-per-year-over-the-long-run-in-a-stock-market-that-returns-10-per-year/

    Btw, as much kudos is obviously due to Warren, it’s very hard for me to value advice from a person who doesn’t follow it themselves. Aside from the simple minded “invest in index funds and get back to work” (for 4 hours per week?), he has many great messages if you read deeper into his philosophy. I’ve read several Buffett interviews that were priceless.

    On productive alternative side of things, what do you guys think about investing directly into hard assets and private financial instruments where there aren’t all kinds of hands in the cookie jar to dilute your returns?

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  10. The commenter Russ Thornton has it mostly right. The missing component is asset allocation because its specific to your risk tolerance. Overall, equity and equity like instruments are what you want. David Swenson has a pretty good book on this.

    One further point though. A basic tenet of professional investing is to manage your liabilities by managing your assets. i.e. if you are a professional money manager it makes little sense to invest only in the S&P due to the very high correlation of performance/wages. Ditto for company share options. Taking it further one should analyse one’s costs in terms of exposure to various asset classes and then find a way to hedge if possible. i.e. if you commute a lot and drive a hummer then oil futures may not be a bad idea to remove the risk of price increases. This idea can be applied usefully in some instances depending on your personal circumstances.

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  11. As a new multi-millionaire with an engineer mind, after lengthy research I chose ifa.com for their low-fee access to DFA funds, which are essentially index funds with some academic magic at the edges to maximize returns. Instead of bullshit “how much risk can you handle?” quesitons, they boil it down to the number of years your liquidity horizon is. Check out their site, check out their charts – if you chose them, you’ll sleep well at night.

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  12. Excellent post Tim – I have to go there.

    I will be interested in learning if you ended up following the Vanguard 500 advise – I assume they also suggested not investing it all the same day or?

    Although there is no real focus on timing – it does seem to be very resonably priced at the moment.

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  13. Lazy Portfolios. Google that, else the concept is similar to that described in David Swensen’s “Unconventional Success.” The engine is the S&P (and foreign equiv.), but the bonds and rebalancing give you an edge over pure equities.

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  14. Question: How would you invest your first million dollars?

    Answer: Man… I guess that would TOTALLY depend on what you wanted your next 55 years to look like… Wouldn’t it?

    Seems like some people could move to the Philippines and live off of some low risk interest somewhere. Others would just be getting started on their quest for 1 billion dollars and their next move would look totally different.

    I would probably be looking for a business to buy or… I guess do what WB said. Throw it in my S&P500 index fund and get back to work…

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  15. Great Notes, thanks for sharing. I have only about 100k to invest into stocks at the moment, its stuck in USD and Im not keen to move it to Euro or AUD at the moment as im hoping for a USD Rally,

    WB saying that USD will continue to devalue doesn’t sound promising and maybe I should be moving it now rather then investing in the US market.

    I Plan on buying Stocks in China companies as their economy is growing rapidly

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