Part 6: SimoleonSense Interviews Warren Buffett's Biographer, Alice Schroeder.
Copyright 2010 Alice Schroeder & Miguel Barbosa
Please do not repost without asking for permission.
Miguel: How has Warren Buffett's intellect surprised you over the years?
Alice: For example, he recognizes square roots and sometimes cube roots of very large numbers; which is slightly unnerving, especially when he starts telling you the square and cube roots of license plate numbers.
It's something he does as a mild form of entertainment while driving.
More unnerving is that he remembers conversations that he has with you better than you do. I don't know if you've ever been in that situation –- where you realize the other person has asked you the same question some time ago. When Buffett does that, it's often a test. He will ask very probing and penetrating questions and then 2 months later he will ask again and you know he remembers the exact words you said. It can feel a little like getting deposed, and it's a bit spooky to have a human tape recorder sitting in front of you. He doesn't have a photographic memory, but sometimes it feels close enough. And of course, he's reading you emotionally at the same time, and you know it.
Please understand, this only happens occasionally. Most conversations with him are really enjoyable because they're full of witty repartee and a download of information from his unusual brain.
Other interesting situations: I have seen him make his famous 5-minute decisions on the phone. Five minutes is the outside amount of time it takes him to make a decision. If the person can be succinct and convey the salient points in 60 seconds he'll say, "Yes" or "No" in 60 seconds.
The time is determined by how long it takes the person to convey the salient points, not how long it takes him to think about it. It's virtually instant once he has grasped the 2 or 3 variables or points that are important to him.
Typically, and this is not well understood, his way of thinking is that there are disqualifying features to an investment. So he rifles through and as soon as you hit one of those it's done. Doesn't like the CEO, forget it. Too much tail risk, forget it. Low-margin business, forget it. Many people would try to see whether a balance of other factors made up for these things. He doesn't analyze from A to Z; it's a time-waster.
Lastly, the speed of thought is so startling. Remember the 60 questions I started with the first time I interviewed him, which he covered in 45 minutes or so.
He later took me to Nebraska Furniture Mart carpet warehouse and started quoting how many yards they sell of each type of carpet each week and at x price and it costs y amount a yard and we mark it up at z. He was sprinting through the carpet warehouse pointing at roles of carpet and telling me which ones sell at what price.
I jogged alongside him with my jaw dragging behind me on the floor in disbelief.
I used to spend 4.5 days a week in Omaha, and I would be so wrecked by the time I got home it was unbelievable.
I thought it was me; then, when I started interviewing other people who are his friends and colleagues, they would tell me that they also needed time to recuperate after seeing him. Or that they could only take him in doses of 2 hours at a time.
They all like him, but it's so intense to have someone racing ahead of you mentally and you are trying to keep up.
This is clearly one reason for his bond with Bill Gates. They don't have to wait for each other to catch up.
Miguel: Tell me more anecdotes, particularly about his processing skills.
Alice: I don't want to dispel any notion of his intuition. But he has internalized so much information over the years and uses so many mental models (to quote a Mungerism) that they have coalesced into an almost visceral reaction to an investing situation. And this is what you strive for. It's not mystical, even if you can't verbalize your analysis. Much of his decision-making has sunk to almost the unconscious realm, it is so refined.
Part of his skill and speed comes from a complete unwillingness to overpay for anything, which I think, is innate or formed in him by the time he very young. When he spots something it's like a siren goes off telling him its overpriced (either quantitatively or qualitatively).
We would kick around insurance pricing at different times. He would say, "How much would you pay to write terrorism risk on this building from now 2002 until 2012 for X events?" I would give some number and then he would say yea or nay.
Because I like probabilities and have enough experience with insurance, I usually did okay with this game. But his ability was remarkable. You could describe a situation with many contingencies, many derivatives, many puts and calls and swaps, and he would instinctively know whether it was priced well or not.
Those equity index puts that created issues with the rating agencies. I think the reason he had difficulty with those is that he knew immediately how to price them and that the odds were very high that they would make money for Berkshire, if looked at on their own as contracts.
The other elements that were subjective — the way they would create short-term volatility in the balance sheet; the way hedgers might respond; the regulating agencies — these didn't come into the equation because the trained, automatic part of his mind fastened on how much money could be made and the probability.
If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn't do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren't worth it.
Miguel: So what kinds of questions are not being asked about Warren Buffett? And on the flip side, what is overplayed with regards to his investment style (such as focusing on brands)?
Alice: We touched on this earlier. He is great at distilling important concepts into memorable sayings. But these sayings are not a substitute for doing work and analysis and he doesn't use them that way in practice. For example, be greedy when others are fearful and fearful when others are greedy, which is a Gus Levy (former CEO of Goldman Sachs) quote that he uses a lot.
I've seen people rationalize buying a beaten-down stock because other people are fearful. That's not how Warren thinks. For the most part, he has a universe of stocks that he has analyzed. And when something hits his bid then he will buy it.
I think another thing people have gotten confused about is the sustainable competitive advantage and the moat. Durable competitive advantage and moats are not the same thing as brands. People sometimes use these terms interchangeably. I have also seen people ascribe competitive advantages to brands that don't have them. For example, retailers — retailers have brands. We all know what Macy's is, but retailing is fundamentally a bad business.
In essence, the merits of a brand are not the brand itself; they are the qualities of the product that create the consumer loyalty. What attracted him, ultimately, to Coca-Cola is that Coca-Cola's formula make you more, not less, thirsty, and supposedly has been tested to prove that it doesn't wear out the palate, no matter how much is consumed.
This implies infinite sales potential. The cute commercials and cheery red logo create an association in people's minds with those qualities. They aren't what makes it Coca-Cola.
While there are moats that include brands, a brand is not a moat. The moat is whatever qualities are innate to the business that make it difficult to compete with.
Lastly, investing is not a religion. It's not like you have to follow a creed. Warren will buy things that are simply cheap. He's pragmatic. There's no rule that he has to be absolutely consistent. If he sees something that he thinks is undervalued he'll occasionally buy it, even if it's a Korean dairy company. Then he'll sell it. Everything doesn't have to fit into a perfect framework.
Miguel: What are other things to avoid?
Alice: One of Warren's great strengths is that, despite his pragmatism, he is quite rigid when it comes to anything that could lead to emotional decision-making. This is the circle of competence. He never bought Intel, and if there is anyone who could have understood Intel it was him. I mean, he knows Andy Grove quite well and was around at the founding of the company and even knew Bob Noyce. There were times when it must have been obvious to him that Intel was a rocket.
This is another way of saying that he has managed to avoid style drift for the most part. There's nothing wrong with learning new things or adapting to changing circumstances. What's wrong with style drift is that emotions are forming the current that's drifts you along. Style drift is just endemic whenever the market is briskly valued and it's hard to find ways to put money to work. You could argue it's the most common reason highly regarded investors get blown up.
Lastly, I would say that people got confused that leverage is okay in financial institutions as if they are exempt from the laws of leverage because of the nature of their business. That's a mistake that people won't be making again anytime soon.
People were investing in companies leveraged 30x where they would never dream of considering a stock like that in a value portfolio in any other industry. What is very interesting is that Warren did not do this (by this I mean investing in these types of financial institutions).
When he did finally invest, in Goldman, he bought preferred stock with mandatory interest payments and various forms of downside protection. It was primarily a bet on Goldman's continued existence rather than its shorter or longer-term earnings trends. The $115 warrants were gravy.
Miguel: You mention that Warren occasionally buys something because it's cheap, that makes perfect sense to me. Sometimes you just have to buy something that's okay but at an attractive price.
Alice: What you're talking about is an instinctual attraction. Warren has an instinctual attraction for things that are worth more than they're selling for. He's tried over the years to articulate different criteria by which other people can find these opportunities. But the fact is that in he has a nose for things that are more valuable than their price and vice versa.
To some extent, when he describes investing or writes he is refining and explaining the rules by which his instinct told him to operate. If you put a dollar in front of him and say, "I will sell this to you for 50 cents" he's not going to say I don't do cigar butts anymore, and I don't see a moat there (laughter).
Miguel: Is this instinct is innate?
Alice: Some is temperamental but I also think people can figure it out. Clearly some of it is mathematical, and it's a question of being alert to it and having focus. There are times when nothing works. I use to say this about insurance stocks that once every decade you should buy all of them and once every decade you should sell all of them and the rest of the time you should do nothing.
That's probably true of a lot of industries, which means that doing nothing is the right answer most of the time. Much of the time you're either looking for what's cheap or waiting for that magic moment.
Miguel: One of my friend's likes to say, "People's decisions compound money."
Alice: And that's the other mistake, because the price you pay determines your return. For example, people will take an earnings yield, expressed in cash flow versus price paid, on a stock that they would never consider in a normal interest rate environment. Large caps are supposedly cheaper now than any time in decades based on dividend yields.
Yet investors who pay 18x earnings if rates are 1% on the theory that getting a very low earnings yield is acceptable versus treasuries might wake up disappointed. You may have to wait an awfully long time to earn your way out of a hole because of the price paid.
Look at it this way. The economy will be struggling to eke out 2% growth for who knows how long. The average business cannot, on average, get 4 – 6% real growth in an environment like that, without some drastic change in relative currency values or some other unpleasant thing that resets the base. Yet all of the assumptions I see are based on 6 – 8% growth and everything else status quo.
It's safe to assume that at some point, multiples are going to decline from here to reflect the economy's real growth rate.
Berkshire has put 60% of its cash flow into equities so far this year. It's an increase from zero, which could easily be interpreted as a portfolio repositioning, but it is not. Warren is still building cash. He doesn't like bonds right now, but he likes cash. The feeling of needing to be fully invested obstructs a lot of money managers.
Miguel: I think a lot of this irrationality has to do with capital market theories and so called portfolio optimization. Or simply put – a lack of common sense.
Alice: When people are spending a lot of their time marketing themselves and their businesses and they're not a startup, it's problematic. The greatest investors resent the time they spend marketing even though they have to do it. When marketing becomes the highlight of your day (that is to give a speech or be on television) that is a sign to be careful (of that manager).
Miguel: It's like winning a Nobel Prize…there is a curse attached (laughter).
Alice: Sure…there is mean reversion and it's true in any business. People reach a certain level and then they are not as hungry and they start to plateau. It's more fun to be on television and be awarded honorary degrees and give speeches.
Miguel: How has Warren evolved in the past years. Also tell us about his moves during the financial crisis.
Alice: After the Internet bubble, there was a point where he was seriously worried that he wouldn't get another chance to make any big scores because of his age. Instead, he has had, since 2002, a run of unique opportunity that was interrupted briefly by the housing bubble.
I've heard some people say, "He's in his heyday." The market has certainly worked in his favor. But the gigantic anchor of capital that Berkshire has to invest means that no environment can be as good for him as the past. If people are following his investments, they should consider how limited his universe of possible ideas is compared to their own.
He is being forced to accept lower returns than smaller investors simply by virtue of his market cap limitation. He's given fair warning of this often enough, so it shouldn't surprise us now. He's often spoken nostalgically of how much better he could do running a smaller portfolio.
Therefore, let's invert the situation. If you are running a smaller portfolio, the stocks he owns are interesting to consider, but not necessarily the first place I would look for investment ideas.
On a slightly different aspect of his life, I posted by the way on my blog called Cirque du Berk 2012 which is a proposal to move the BRK meeting to Vegas in 2012. It's only partly, barely, tongue in cheek. Warren's desire to be in the spotlight has gotten a bit stronger in recent years. He used to really shun publicity. The shareholder meeting has grown in proportion to his appearances on CNBC. It's okay, he's entitled to have some fun. But why not move the meeting?
Miguel: So Omaha is Too large?
Alice: Yes, Omaha isn't a big enough town anymore to handle this event. It's classic price-gouging; even low tier hotels are jacking up rates and requiring 3 night minimums. Some people are spending $2,500 to go to Omaha to stay at a Holiday Inn. The airline fares are a disgrace and rental cars are just as bad. The past couple of years have seen a dramatic change and it's made the shareholder meeting unaffordable. I know that Warren isn't happy about this. People are staying home because it costs too much to attend. You can spend 4-5 nights in Paris or Bali, all in, for what it costs to go to Omaha. We're talking April in Paris vs. April in Omaha. With no disrespect to Omaha, I would rather go to Paris.
By the way, the people of Omaha aren't the ones doing this — it's the hotel chains based elsewhere. I think he should move the meeting.
Miguel: Tell us about your interests? How can people follow your latest endeavors? Where are things going for you?
Alice: I'm working on a Buffet investing book. This, I'm pretty excited about because there is so much interesting material that I think will help people apply in practice the ideas that they work with on a very high level now. I also write a column approximately once a month for Bloomberg on whatever business topic is of interest at the time. I've written about Greece, BP, Wall Street. I'm doing public speaking. I'm doing some feature writing. I'm investing. I'm doing some nonprofit work.
Miguel: What motivates you?
Alice: Curiosity. When something crosses my field of vision I will spend time to figure it out and if it's complicated and interesting enough I'll keep figuring it out – which is why Warren Buffett was fun to study. It was delightful to write about this amazing American business story. Warren was the perfect subject.
I'm motivated by my curiosity to uncover, analyze, and present important stories with interesting characters.
Miguel: Alice thank you for taking the time to answer my questions. It has been a privilege working with you. I wish you the best of health.
没有评论:
发表评论