May 23 2008
Warren Buffett on How to Grow Wealth in a Responsible and Sustainable Manner
A few days ago, 90 MBA students were at IMD Business School in Lausanne for an interview session anchored by Mr Paul Hunter, Director of IMB Corporate Learning Network with his guests Warren Buffett, Israeli family business ISCAR Chairman Eitan Wertheimer and Prof Joachim Schwass, Director of Family Business Center at IMD.
You can also watch the 42-minute video of the entire session here:
Warren Buffet in IMD Business School
It’s available online until 19th Jun 2008.
I have also compiled and rephrased most of the questions posed to Warren Buffett and his replies below.
Paul: To start off the discussion for today, what’s the linking thread? What is it that brings all you three gentlemen together here at IMD?
Prof Joachim: Well, it has to be family business. We are very happy about this, myself speaking from a position of the Professor of Family Business, very pleased that we have the opportunity to have both of you here, and what binds us here together is a family business, namely Eitan’s family business, which he decided to sell a while back. Eitan, why don’t you tell us a little bit about the reason for that.
Eitan: We are here because it took me a long time to find out that Warren Buffett and Berkshire Hathaway have a solution for maybe some of the families out of sometimes in their life. It took us a long time to find it out and therefore I thought it was a good idea to come here to Europe and just let more people be aware of more solutions for some family possible strategies.
We, the family, were very successful, the business was very successful. We worked with successful customers and everything was and is growing. We understood that family complexity of the next generation will get to be more and more complex and we also understood that we would have to secure long term (I talk about fifty and more years) our customers, our people who have worked together for so many years and of course our family.
And we looked for a solution. We were also afraid that too much success and high growth will have something big; that we will never be able to find a customer if we grow too fast. And we searched around the world for other possible situations and we knew that we wanted to keep our freedom to do our thing; we knew that we have a group of people that wanted to work for at least the next twenty or thirty years. We love what we do.
And we wanted to solve the ownership problem for the future. And then we found Warren Buffett. Then I wrote him a letter and the whole thing started from October 2005.
Paul: Warren, when you receive that letter (of offer to sell his Iscar business) from Mr Eitan, what was your reaction? What was in that letter?
It was a letter that was one and a quarter pages long but it leapt off the page to me that Eitan was talking about a company that I haven’t heard about before but it was a wonderful company. He gave me enough information that clearly this was an extraordinary company. And more importantly, I can’t tell you the exact words that did it, but the quality of the man came across, and I knew that this was someone that I would want to be associated with. And it looked to me that we would be associated with. So he said if you were interested, get in touch with him.
He was in Israel, I was in Omaha, and they were not neighbouring cities. He said he would come over, he came over and in person he proved to be everything that I expected from the letter and not long after, we put in $4 billion dollars for 80% of his business. And I did it without even going to his plant or sending in a team of lawyers or doing any of the customer due diligence. But I knew what I was buying and I knew who I was dealing with and I’ve been happy ever after.
Prof Joachim: This is really counter-intuitive. We are here in the studio of a business school and we teach our students to do due diligence and to be very careful. Here you are saying for me it doesn’t work.
In the end, the important thing is to buy the right business with the right people and at the right price. We don’t check on every lease and we don’t look at every labour contract. The important thing is to get a fix in my own mind is where the business is likely to be in five, ten and twenty years. And if there’s a little mistake here, and something causes one percent of the purchase price because we didn’t think of it, oh we could benefit sometimes because of the one percent of the purchase price that I didn’t anticipate, but that’s meaningless.
If you look at the businesses we bought twenty years ago, they were a huge successes and in a few cases there were failures.
And I don’t think you can send a team out. It’s not my job to send a team out anyway. The shareholders of Berkshire expect me to evaluate the business. They bet on me. They might be wrong in doing that, but they bet on me.
I got my own money on it. I got 99% of my networth in Berkshire so I’m going to try to size up those businesses and go to the ones where I’m getting something with long term very durable competitive advantage. With a terrific management that I trust. I’m handing people a lot of money and I want them to be as enthusiastic and passionate about the business the next day as they were the day before (I bought them). That’s the key decision. I don’t know anyone in the world who would turn that over to his team of lawyers to figure out.
Prof Joachim: So you did not have a big team of lawyers and financial analysts doing any due diligence?
We don’t have them. I mean I don’t know where to find them. We have nineteen people in the whole office (of Berkshire). About ten or eleven are in accounting and a couple others are taking care of my mail and a few things. We don’t believe in that. We just don’t believe in that. I don’t believe in farming out the responsibility that comes with us making big capital allocation decisions.
Prof Joachim: How important is this trust issue and the relationship on any of the possible candidates you are looking?
It’s a 100%. Isreal is 10,000 miles away. I have been there once since I bought it a couple of years ago. We don’t have anybody on the premises checking on anything. But I’m trusting Eitan to do it and I couldn’t have put my trust in a better person.
And I’m trusting him to do is to run the businesses the same way the day after the cheque cleared as they did the day before. That’s the big decision. Most of the time I have been right but you are going to make mistakes occasionally. I sure didn’t make one with Eitan. That is the key decision.
Prof Joachim: How is the relationship? Has it changed for you? Has anything changed for you every since Berkshire took over?
Eitan: The only change is that I have more responsibility now. Because I now have a lot of shareholders of Berkshire Hathaway. Before I had them, just my family and some of the wonderful people I work for and with.
Now I have many more people that I have to make sure I keep them very happy. And I have to work on my future compliments. So that’s my major job.
Prof Joachin: You have a portfolio at Berkshire of 76 individual operating companies that you have a controlling or dominant interest in. How do you manage these companies?
I don’t. The key to management is getting things done through other people. I’m very good at handing off responsibility to other people. I pick very carefully who I work with.
But I don’t hand them half a ball. Once I make a decision, I hand them the whole football and it’s theirs to carry.
I can’t run those business, I don’t know a thing about running those business. I don’t know how to come up with new products, I don’t know the customers. I haven’t built throughout the years the trust with his employers. It’s his business. And fortunately, we buy in with success. That’s management at Berkshire.
Prof Joachim: You mention you buy companies forever?
Absolutely. We have LBO and private equity firms coming with what they call the exit strategy and it usually means leveraging the place up for every dollar they can borrow. And then doing what they can with the accounting, doing what they can with the business and selling (the business) when they think it’s a good time to sell.
We don’t have an exit strategy. We have an entrance strategy which is to own great businesses with great people but there is no end game at Berkshire. We just want to keep on adding more and more good businesses. And we love them. We are not going to sell them.
Prof Joachim: You once said that the CEO running those companies are bakers not butchers.
Well, that’s a good way of putting it.
I’m not the one that came up with it but they are people with a passion for what they do. They aren’t doing it for the money. 3/4 of them are at least independently rich. They can do anything they want tomorrow including telling me to go to hell but they don’t because they love their businesses. They want to keep running them.
I just consider myself lucky to have all these people.
Prof Joachim: Eitan, how have you communicated ever since the sale with Warren? Were there monthly management meetings or annual meetings?
Eitan: I see Warren as a teacher. I try to drop in Omaha every couple of months to have coffee and talk. Basically, we don’t talk about what we will be doing next year We don’t submit budgets. We send once a month those monthly reports we used to have before. And we make sure that next year, we get better compliments because we love to satisfy and make them happy. Customers, people and shareholders.
And we enjoy it. We know everything we are going to do for the long term is going to be the same.
Warren: I have managers I haven’t seen for three or four years. They run their own businesses. Some of them like to talk to me, some of them don’t like to talk to me but that’s fine either way. But what they do in common is they love their businesses.
There’s one manager I talk to every day but he’s the exception; there’s others I don’t talk to once a year. They never have to come to Omaha. We have no company meetings.
There’s a 2-page letter they get from me once every two years. It just reminds them of a couple of things.
Prof Joachim: I think you mentioned a few important points in this letter. You lay out your expectations in regards to what it is they definitely have to know.
It’s very simple.
I tell them, the first part I say is that we have all the money we need, we like to have more money but we don’t one ounce of reputation we can afford to lose. And Berkshire’s reputation and my reputation are in their hands.
Never trade reputation for money. So, never trade reputation for money. Never do anything that you do not want to appear on the front page of the newspaper tomorrow. If there’s anything close to the line, I told them to call me. And if it’s close enough to the line to call me, you can forget about it.
There’s a lot of money to be made in the center of the court, my eyes are bad and I don’t want anything close to the lines.
I tell them that they are running their businesses. Two items that they need to change - post retirement benefits and if they are going to have anything unusual in terms of capital expenditure that is really large, they get in touch with me. Otherwise, just keep running their businesses.
And then I ask them if something happens to them tonight, what should I do the next morning in terms of successor. And that letter goes out to them every two years. And I get replies about their successor every year. And then we reinforce that message in our annual reports and annual meetings. Communications from Berkshire I think is consistent. We want them to reflect the culture, embed the culture, and everybody picks up pretty well.
Prof Joachim: You got the best of both worlds. You got the money and you got the freedom to continue building the business that you like and you love.
Eitan: I got the perfect solution for my family, for the future, for the people I work with, for the customers, and it’s heaven. I got on top of it a wonderful group to work with. I got a wonderful teacher. We love coming to Omaha to the shareholder meeting because that is one of the most exciting day. We are part of a very interesting club and we are very appreciated and respected if we do something wonderful.
Before this we were living in a vacuum, nobody knows exactly what we were doing. It’s a real wonderful situation, and I’m committed to continuing this for many, many years because we just love it.
Warren: These kind of people are heroes to shareholders. I love to have them come. The family comes with them and everybody wants to be invited to the party that we are having. It’s sort of a badge of honour if you can have Eitan’s family come to your particular party in Omaha this year and the shareholder’s weekend.
We have 31,000 people come to the meetings this year and these are real owners. These are people who have put their money in for a lifetime. And they love the fact that somebody like Eitan will bring this to the family and it enhances the value of Berkshire.
Prof Joachim: What is it that holds Berkshire Hathaday together? Is it you?
No. It’s the culture. Something to do with developing in the culture. The culture is what I believe in. It does get reinforced but after a while, it creates its own momemtum. People self select in joining the culture. The directors self select in becoming directors. We pay our directors $900 a year. Show me another company that can get 100% of its directors. Everybody that we ask to become a director becomes one for $900 a year. I don’t think that applies anywhere else.
People buy into the culture. They want to be part of it. And they want to see it continue.
Prof Joachim: Are you a family business? You are very long term, you don’t want to sell. Do you consider yourself a family business?
Yes, we consider Berkshire a family business. And if you look at our annual reports, we have our economic principles laid out for over twenty five years and we don’t change them. We believe in telling people what we are about. We want people to learn what they are joining when they come into Berkshire.
The very first principle there is - Our form is corporate, our attitude is partnership. And we look at the owners as partners, we look at the managers as partners. And it’s a family business.
Prof Joachim: When you talk about family business, you have to talk about generations. And you have to talk succession. What is your succession plan for yourself?
Well, I like to succeed myself but I can’t pull that off. We have three people identified by the board and me. Anyone of the three can model me very very well. Many of the things I do, they do much better. The board agrees on which one of the three it would be if it was tomorrow morning. Five years from now, that might change.
I do believe the person who succeeds me should be relatively young. It helps to have a long run at the job, particularly in our kind of culture. I do not want to turn it over to somebody who will only be here for three or five years. It will be much better if they can be here for fifteen years. That doesn’t mean they leave at sixty-five.
As the years pass, there might be new candidates, there might be some who pass the age range, but our board is unamiously in terms of not only all three being able candidates but also in terms of the one that they would pick tomorrow.
Prof Joachim: But you also have a family member?
I hope that my son Howard is the non-executive, non-paid chairman, just the sort of guardian of the culture but not in anyway to dominate policy or anything of that sort.
How important is money to you?
Well, it’s nice to have all you need.
I have all that I need ever since I was in my mid twenties. I got everything in life that someone would want. I have a job I love, I work around people I love and they like me, I get to do what I want to do every day. I got my own canvass to paint on.
That makes me rich.
Now, I also want to eat well and sleep in a house that is warm in winter and cool in summer, go to some football games and things like that. But I don’t have any great desire to build a tomb that rivals that of the pharaohs either when I’m dead or I’m alive.
To me, the standard of living does not equate with the cost of living. Up to a point it does, and then when you leave that point. I don’t want to own a baseball team so that my name is in the papers every day. I’m not interested in that. I don’t want to have the world’s greatest art collection like rich people frequently do.
I want to be around my friends; I want to be what I love to do. Fortunately, I get to do it.
Prof Joachim: And you are planning to give everything away to charity.
All my Berkshire shares will go to charity, but that doesn’t involve one bit of sacrifice on my part. They are just a branch of certificates sitting in a safe deposit box. I got everything that I need in the one percent that is outside of Berkshire. They can take care of me in any way that a normal human being can ever hope for. And the rest can go back to society because society has enabled me to do what I do.
Prof Joachim: What will you pass on to your children? You got three children?
I got three children. After seeing how they handled themselves in life, I have contributed to a foundation that each one runs individually. So they are able to participate in the society in their own way. Not only with the money but with their own energy and time. That’s a big part of it too.
What I told my kids is exactly what my dad told me. “Anything you do (as long as it’s legal), I’m behind you. I’ll back you. You don’t have to be me. You have to be you.”
And my dad gave me unconditional love in that aspect. And both my wife and me have said the same thing to our three children.
What they do is absolutely as important as what I do and maybe more important. They have to follow their own compass – they have to follow their own passion.
And if they turn out to be whatever aspect of society that they elect to join, if they do it well, we are going to admire them every bit as much as if they were the world’s greatest golfer or if they were the world’s richest person. They are all of equal value.
Joachim: What is your own personal definition of success?
I would say success… I’ll tell a story first.
There’s a woman in Omaha. She’s in her eighties. She’s a polish-jew, she’s a wonderful person. She’s a friend of mine. And when she was in her young teen I guess, she’s was in ___, with other members of her family. And all of them came out.
And she told me, “Warren, when I look at someone, I am slow to make friends, because at the back of my mind, the question always exist, would they hire me?”
Now I would say this, if you get to be sixty or seventy, my own age, and if you have a lot of people who would hire you, you are a success.
And if you don’t have anyone who’ll hire you, no matter how rich you are; no matter how many honourate degrees you’ve been given; no matter what hospitals you are being named after you – you are a failure.
And it’s another way of saying that many people love you. I have never seen anyone who has loved dozens of people, who is not a success when they get older.
I have seen a number of people who have all the ‘trappings of success’ by the world’s measurement. They are rich and have their names on the newspaper and they aren’t have a person on earth who love them. They can’t be a success.
If you have a lot of people who love you when you are sixty or seventy, then you are a very successful person.
Paul: That’s a very touching definition of success and clearly you’ve been successful by your own standards and by many other people’s standards as well. When you look back, you have been playing this game for the best part of sixty-six years now. You traded your first stock when you were eleven. Where does that passion and energy come from?
I was lucky in terms of the parents I have. I was lucky to be born in the United States.
I had all kinds of opportunities. I had a good education, I was wired in a way that allowed me to profit far beyond what I expected by just being able to allocate capital. I was very lucky that I found what I liked to do when I was very young. And that was probably by accident.
I was able to play in the game that I wanted to play virtually my entire life. I never had to compromise in terms of doing something that I really didn’t want to do because my kids were hungry. So I’ve been lucky in so many ways.
The most important thing actually (besides your parents) is picking the right spouse. If you have the right spouse, a lot of good things are going to happen. I was very, very lucky in that aspect.
Paul: Warren Buffett is the perfect balance between heart, pocket and mind. Eitan, what were your first impression of Warren Buffett when you met him in the first five minutes?
Eitan: First time I met Warren physically is on the 25th October 2005 in Omaha. It was nine o’clock. I saw a very modest man. I was shocked. No guard. No chauffeur. Nothing. And my first impression was that this was a man I want to work with. I knew it from the first second. And I also had a little hint from Warren before I left.
He gave me an annual report of Berkshire Hathaway and I asked me whether he was willing to sign and write something. And he wrote in, “To Eitan, with whom I would share a long journey.”
So I got the signal also very clear. And it was love at first sight. I knew it from the first minute it was what I’ve been looking for. And today, I have like basically two fathers, my own father and new father.
Paul: Mr Buffett, that was a two way process. You have the feeling straight away. Do you always have that feeling when you are making a deal with an organisation? Does that feeling have to be there?
It’s usually there. I love the people that we associate with. I’ve passed on deals where I thought the person in charge would cause my stomach to churn. I don’t need my stomach to churn.
So, we have a group of managers and I’ve good friends with a great many of them. Not all, some of them I don’t have much contact with. But the ones I have. I have really added enormously to the value of my life.
Paul: Is there a key management or leadership style that you are looking for or is every company managed in a different way?
They have very different styles. A good many of them have MBAs. A couple of them did not go beyond high school. They have very different styles. They are leaders in their own way. People like to follow them. I’m often amazed just at the different shapes and forms they come in. If I bought them all here today, you would have a very different looking group.
They all have passion for the business. They all would have qualities that would cause other people to want to follow them over the next mountain. They have people who believe in them. The people can’t see beyond the next mountain but they people that the person they are following can. They do love the businesses. Passion is the key.
Paul: Another question is on philantrophy. You are donating about 85% of your fortune to the Bill and Melinda Gates Foundation. How do you strike that balance? How do you move from purely being a business owner to a philantrophist and what advice would you give to people looking for that balance?
I think that’s very much the situation of the individual. Some people are in a position where they participate actively in philantrophy and others aren’t. They shouldn’t feel shameful of the fact that they can’t. Maybe they have money problems, feeding their family and that sort of thing.
But I have a very enormous surplus, which comes about in a very large part because I was born at the right place, at the right time, with the right parents, with the talent for something that pays off enormously in the market system. If I was in a different economy with an ability to allocate capital, I would have been nothing.
But in the end, I think you want to figure out once you have taken care of your own needs and your family’s needs, I think one way or another, you should go back to society.
I planned originally, with my first wife, both of us agreed that there would be a foundation that would basically get all my money. We should leave our kids enough so that they can do anything, but not enough so that they can do nothing.
She died when I was alive, I did not expect it, she was younger. So then, I had to make a decision on what’s the best decision for Berkshire shares. I looked at the various options. I left significant foundations for each of my three children.
But I’ve watched the Gates foundation operate for a number of years. I’ve seen two very, very bright and extraordinary talented people who had a common objective with me.
They do believe that every single person’s life is as important as anyone else, regardless of gender, geography, colour. And they were going about a process of trying to effect as many people’s lives as could be done.
And the chance of joining them and carrying out a program I had already seen in action made my job enormously easier.
I get to do what I love, and I hand over a brunch of certificates and they get to do something important with it. That’s the best solution I can come up with.
Paul: One thing you mentioned is that Berkshire is nowhere near as prominent as it should be in Europe. Why there and why now? With the weak dollar, this might not be a good time. What’s your reasoning of thinking behind this?
Let me answer you. I should have done it earlier. But I haven’t and I’m correcting the mistake now. We should be on the radar screen not only in Europe but also in Asia and in larger countries because we need larger companies.
We do have something to offer to certain businesses, not all businesses. It might not be important to them today. If you have a great family business, keep it. The best thing you can do is to own it. But there might come a time when a change may be necessary. I want to be on that radar screen so that when the time came, people will think of calling us.
I think we have been particularly weak outside of the United States and that’s why now we are trying to correct that.
Paul: And then you mention that Berkshire Hathaway has a lot to offer companies. What does Berkshire Hathaway bring to the table that other companies might not be doing?
Eitan: Freedom to work. Freedom to sing your song. That’s what we wanted and that’s what we got. To be part of something much bigger and to prepare for the future. What more can I ask for?
Warren: They hand us the stock certificates and the next day they are still the owner in very much the same way. They can get rid of any need for any bankers or any presentations to wallstreet that they need to please. What they get is a chance to do something even better than they were doing before.
They have someone who very much appreciates them. I know that situation will continue for decades and decades. It’s not like Gin Rummy where you pick up one card and discards another. We don’t do that at Berkshire. We keep getting more cards and we keep them all in our hand.
We don’t have many competitors.
Paul: Is Asia of any interest to you? Are you looking for bargains there?
We are always interested in business as long as they meet our size requirements. Certainly there are some in Asia. Many in Asia perhaps. In terms of stocks, moving to marketable securities, I look all the time every place. We had a big investment in PetroChina a few years back. We have interests in various European countries and we have a big interest is Posco, the Korean steel company.
I’ll look all over the world for marketable securities and I will hope people all over the world will think of Berkshire in terms of getting in touch with us on their businesses.
Paul: Are you interested in investing in education? Why not buy a business school like IMD?
In the philantrophic area, about a third of the money in the Gates Foundation is directed towards education and starting next year, the Gates Foundation might give kids in school their full spending.
In terms of educational business, there aren’t many (bigger than 75 million category) and we had not have any offers to us that meets our criteria.
Paul: Thanks for your definition of success. What’s your definition of luck?
Luck? Something that I had a lot of.
Well, I was born in the right place, at the right time and with the right parents. How much did I have to do with that? I call that the ovarian lottery. I won the ovarian lottery. And that’s a pretty important lottery to win.
The ticket you get in life. I was born in 1930. If I had been born female, I would not have the many chances that I had. If I was born black, I would not have the same chances that I had. If I was born in many parts of the world, I would not have the same chances that I had. So, I won the ovarian lottery and I didn’t have anything to do with that obviously.
And that’s a huge part of our life.
Paul: So, a lot of luck. A lot of success. You have a remarkable return of about 21%pa since you started investing in 1965. Is there a particular secret in how you choose your stocks and the companies you invest in?
I try to stick with things that I understand. I look at the stock market as a way to buy businesses, not at a place where the prices move up and down. I have a very fundamental approach which I was lucky enough to learn when I was nineteen years of age by reading the right book called “
The Intelligent Investor
That was luck. Picking up that book changed my life in a very big way. I don’t do anything extraordinary. I don’t have any great insights of the world in ten or twenty years. I really just look for things that are obvious. I have been doing that a long time.
I learn a few things over the years but I had the right framework from Benjamin Graham.
Paul: How often do you find yourself being asked to come into political issues and is that something you feel comfortable with?
I got some views on certain political issues like tax policies and all that but it is true I work for both Obama and Clinton. I believe both of them make wonderful presidents.
The main thing when you volunteer to work in politics is that you get another call asking you to volunteer again.
It is enormously important who leads the country – we have a country that survives quite well even when we don’t get the best but it is better to have the best by a significant margin.
So I think people should be involved in politics. You should care about who your leaders are. You should work for them if you get a chance and I’m in a position to raise more money.
No matter how you look at it, I do believe in people being involved in politics.
Paul: Do you feel that US policies in place today are still weakening the strength of the US dollar?
We are doing pretty much what we have been doing in recent years. When you do what you have been doing over and over and you expect to get a different result, that’s insanity.
Paul: What do you believe makes the relationship between Berkshire and Iscar remarkable and what do you think family businesses can learn from that?
Prof Joachim: I think what a lot of other family business can learn from your particular case is the efforts you took to educate yourself about family business - how they function and learning from others. Looking at family business from a very structured view and asking the question, “Will we as the family still be the best owners for the business?” And obviously, you went through the analysis and you found the solution.
Selling a family business does not really mean a loss. It’s a value added and win-win situation for many parties involved and it creates a future for the business.
So this is really the key lesson we want family businesses to take away from this.
Paul: Are there any last words? You mentioned that you considered your life as an unfinished painting. What do you see are the brush strokes that you will be applying in the next few years?
I don’t know what the brush strokes will be tomorrow. I know in general what they will be. I think I know is that I love having that paint brush in my hand. I get to keep painting and that’s a lot of fun.
End of compilation
Warren Buffett comes across as a very humble person (he certainly is) and is well liked by many people. He’s a great success we all have much to learn from.
