Warren Buffett’s Talk with Students from University of Kansas : Q&A

Thanks to Professor Hirschey, University of Kansas ( May 6, 2005 )

Question: According to a business week report published in 1999, you
were quoted as saying “it’s a huge structural advantage not to have a
lot of money. I think I could make you 50% a year on $1 million. No,
I know I could. I guarantee that.” First, would you say the same
thing today? Second, since that statement infers that you would
invest in smaller companies, other than investing in small-caps, what
else would you do differently?

Yes, I would still say the same thing today. In fact, we are still
earning those types of returns on some of our smaller investments.
The best decade was the 1950s; I was earning 50% plus returns with
small amounts of capital. I could do the same thing today with
smaller amounts. It would perhaps even be easier to make that much
money in today’s environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies.
You have to find the companies that are off the map – way off the
map. You may find local companies that have nothing wrong with them
at all. A company that I found, Western Insurance Securities, was
trading for $3/share when it was earning $20/share!! I tried to buy
up as much of it as possible. No one will tell you about these
businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E
of 2, GEICO, Union Street Railway of New Bedford selling at $30 when
$100/share is sitting in cash, high yield position in 2002. No one
will tell you about these ideas, you have to find them.

The answer is still yes today that you can still earn extraordinary
returns on smaller amounts of capital. For example, I wouldn’t have
had to buy issue after issue of different high yield bonds. Having a
lot of money to invest forced Berkshire to buy those that were less
attractive. With less capital, I could have put all my money into the
most attractive issues and really creamed it.

I know more about business and investing today, but my returns have
continued to decline since the 50’s. Money gets to be an anchor on
performance. At Berkshire’s size, there would be no more than 200
common stocks in the world that we could invest in if we were running
a mutual fund or some other kind of investment business.

Q: Since Ben Graham isn’t around anymore, what money managers do you
respect today? Is there a Ben Graham today?

You don’t need another Ben Graham. You don’t need another Moses.
There were only Ten Commandments; we’re still waiting for the
eleventh (j/k). His investing philosophy is still alive and well.
There are disciples of him around, but all we are doing is parroting.
I did read Phil Fisher later on, which showed the more qualitative
aspects of businesses. Common stocks are part of a business. Markets
are there to serve you, not to instruct you. You can often find a
couple of companies that are out of line. Find one; get rich. Most
people think that what the stock does from day to day contains
information, but it doesn’t. It isn’t just something that wiggles
around. The stock market is the best game in the world. You can take
advantage of people who have no morals. High prices inside of a year
will typically be 100% of the low price. Businesses don’t change in
value that much. That is simply crazy. There are extreme degrees of
fluctuation, and Mr. Market will call out the prices. Wait until he
is nutty in one direction or the other. Put in a margin of safety.
Don’t find a bridge that says no more than 10,000 pounds when you
have a 9800 pound vehicle. It isn’t a function of IQ, but receptivity
of the mind.

When investing you don’t have to invest in all 10,000 companies
available, you just have to find the one that is out of line. Mr.
Market is your servant. Mr. Market is your partner and wants to sell
the business to you everyday. Some days he is very optimistic and
wants a high price, others he is pessimistic and will sell at a low
price. You have to use this to your advantage. The market is the
greatest game in the world. There is nothing else that can, at times,
get this far out of line with reality. For example, land usually only
fluctuates within a 15% band. Negotiated transactions are less
volatile. Some get this; others don’t. Just keep your wits about you
and you can make a lot of money in the market.

Q: Do you expect the stock market premium to continue to be 6.5% over

I don’t think that the stock market will return 6.5% over bonds in
the future. Stocks usually yield a little more, but that isn’t
ordained. Every once in a while, stocks will get very cheap, but it
isn’t ordained in scripture that this is so. Risk premiums are mostly
nonsense. The world isn’t calculating risk premiums.

Best book prior to Graham was written by Edgar Lawrence Smith in 1924
called Common Stocks as Long Term Investments. It was a study that
evaluated how bonds compared to stocks in various decades of the
past. There weren’t a whole lot of publicly traded companies back
then. He thought he knew what he was going to find. He thought that
he’d find that bonds outperformed stocks during periods of deflation,
and stocks outperformed during inflationary times. But what he found
was that stocks outperformed the bonds in nearly all cases. John M.
Keynes then enumerated the reasons that this was so. He said that
over time you have more capital working for you, and thus dividends
would grow higher. This was novel information back then and investors
then went crazy and started buying stocks for these higher returns.
But then they started to get crazy, and no longer really applied the
sound tactics that made the reasons given in the book true. Be
careful that when you buy something for a sound reason, make sure
that the reason stays sound.

If you buy GM, you need to write the price and the respective market
valuation. Then write down why you are buying the business. If you
can’t, then you have no business doing it.

Quote from Ben Graham: “You can get in more trouble with a sound
premise than an unsound premise because you’ll just throw out the
unsound premise”.

Q: What was your biggest mistake?

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

Q: Could you comment on your currency position?

We have about $21 billion in about 11 foreign currencies. We have $60-
70 billion in things that are denominated in US Dollars. We still
have a huge US bias. If Martians came down with currency certificates
and could choose any currency on earth, I doubt it would be 80% in US

We are following policies that make me doubt that our currency will
not follow a downward spin. We lost $307 million this quarter. The
net gain since we started holding foreign currencies in 2002 is $2.1
billion. We have to mark these future contracts to market daily. If
we owned bonds instead of sterling forward contracts, it wouldn’t
fluctuate around so much.

Identifying bubbles is fairly easy. You don’t know how big they will
get and you don’t know when they will pop. You don’t know when
midnight will hit, but when it does, it turns carriages to pumpkins
and mice. What markets will do is pretty easy. When they will do it
is more difficult. Some people want to stick around for the last
dance, and they thought that a bigger fool would be just around the
corner tomorrow.

When we bought those junk bonds, I didn’t know we would make $4
billion in such a short time. It would have been better if it
wouldn’t have happened so quickly, as we would have gotten a bigger

Q: When did you know you were rich?

I really knew I was rich when I had $10,000. I knew along time ago
that I was going to be doing something I loved doing with people that
I loved doing it with. In 1958, I had my dad take me out of the will,
as I knew I would be rich anyway. I let my two sisters have all the

I bet we all in this room live about the same. We eat about the same
and sleep about the same. We pretty much drive a car for 10 years.
All this stuff doesn’t make it any different. I will watch the Super
Bowl on a big screen television just like you. We are living the same
life. I have two luxuries: I get to do what I want to do every day
and I get to travel a lot faster than you.

You should do the job you love whether or not you are getting paid
for it. Do the job you love. Know that the money you will follow. I
travel distances better than you do. The plane is nicer. But that is
about the only thing that I do a whole lot different.

I didn’t know my salary when I went to work for Graham until I got
his first paycheck. Do what you love and don’t even think about the
money. I will take a trip on Paul Allen’s Octopus ($400M yacht), but
wouldn’t want one for myself. A 60 man crew is needed. They could be
stealing, sleeping with each other, etc. Professional sports teams
are a hassle, especially when you have as much money as him. Fans
would complain that you aren’t spending enough when the team loses.

If there is a place that is warm in the winter and cool in the
summer, and you do what you love doing, you will do fine. You’re rich
if you are working around people you like. You will make money if you
are energetic and intelligent. This society lets smart people with
drive earn a very good living. You will be no exception.

Q: What is your opinion of the prospects for the Kmart/Sears merger?
How will Eddie Lambert do at bringing Kmart and Sears together?

Nobody knows. Eddie is a very smart guy but putting Kmart and Sears
together is a tough hand. Turning around a retailer that has been
slipping for a long time would be very difficult. Can you think of an
example of a retailer that was successfully turned around?
Broadcasting is easy; retailing is the other extreme. If you had a
network television station 50 years ago, you didn’t really have to
invent or being a good salesman. The network paid you; car dealers
paid you, and you made money.

But in retail you have to be smarter than Wal-Mart. Every day
retailers are constantly thinking about ways to get ahead of what
they were doing the previous day.

Retailing is like shooting at a moving target. In the past, people
didn’t like to go excessive distances from the street cars to buy
things. People would flock to those retailers that were near by. In
1996 we bought the Hochschild Kohn department store in Baltimore. We
learned quickly that it wasn’t going to be a winner, long-term, in a
very short period of time. We had an antiquated distribution system.
We did everything else right. We put in escalators. We gave people
more credit. We had a great guy running it, and we still couldn’t
win. So we sold it around 1970. That store isn’t there anymore. It
isn’t good enough that there were smart people running it.

It will be interesting to see how Kmart and Sears play out. They
already have a lot of real estate, and have let go of a bunch of
Sears’ management (500 people). They’ve captured some savings already.

We would rather look for easier things to do. The Buffett grocery
stores started in Omaha in 1869 and lasted for 100 years. There were
two competitors. In 1950, one competitor went out of business. In
1960 the other closed. We had the whole town to ourselves and still
didn’t make any money.

How many retailers have really sunk, and then come back? Not many. I
can’t think of any. Don’t bet against the best. Costco is working on
a 10-11% gross margin that is better than the Wal-Mart’s and Sams’.
In comparison, department stores have 35% gross margins. It’s tough
to compete against the best deal for customers. Department stores
will keep their old customers that have a habit of shopping there,
but they won’t pick up new ones. Wal-Mart is also a tough competitor
because others can’t compete at their margins. It’s very efficient.

If Eddie sees it as impossible, he won’t watch it evaporate. Maybe he
can combine certain things and increase efficiencies, but he won’t be
able to compete against Costco’s margins.

Q: 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.

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

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.

Q: What kind of impact will the demographic shift (i.e. baby boomers)
have on the United States?

We aren’t big on demographic trends. It’s difficult to translate that
information into profitable decisions. It is hard to figure out what
businesses will prosper in the future, based on macro trends. See’s
candy is for anyone and Fruit of the Loom is for people who need
underwear today. We want to be right on something that will work
right now, not something that might work in the future. I doubt that
Wal-Mart spends a lot of time on demographics. They instead focus on
where to put the store and what to put on the shelves. I’ve never
found those kinds of stats useful. People were all excited to go into
stocks 6 years ago, but it wasn’t because of demographic trends.

Warren then referred to a recent WSJ article written by Jeremy Siegel
that discussed funds flowing out of investments because baby boomers
will need to cash in their investments during retirement. He said he
respected Siegel, but he doesn’t find fund flows data useful.

Q: What would Berkshire be like if you hadn’t met Charlie Munger?

It would be very different, but I could say the same thing about a
lot of other people, too. I’ve had a lot (at least a dozen) of
heroes, including my parents. Charlie and I didn’t meet until 1959,
although he grew up a half a block from where I lived. Charlie was 35
and I was 29. We’ve been partners ever since. He is very strong-
minded, but we’ve never had an argument that whole time. I’ve never
been let down once. It must be a terrible feeling to be let down by a

Hang around people who are better than you all the time. You do pick
up the behavior of people who are around you. It will make you a
better person. Marry upward. That is the person who is going to have
the biggest effect on you. A relationship like that over the decades
will do nothing but good.

Q: Are investors more or less knowledgeable today compared to ten
years ago?

There is no doubt that there are far more “investment professionals”
and way more IQ in the field, as it didn’t use to look that
promising. Investment data are available more conveniently and faster
today. But the behavior of investors will not be more intelligent
than in the past, despite all this. How people react will not change –
their psychological makeup stays constant. You need to divorce your
mind from the crowd. The herd mentality causes all these IQ’s to
become paralyzed. I don’t think investors are now acting more
intelligently, despite the intelligence. Smart doesn’t always equal
rational. To be a successful investor you must divorce yourself from
the fears and greed of the people around you, although it is almost

Do you think Ponzi was crazy? The tech and telecom madness that
existed just 6 years ago is right up there with the craziest mania’s
that have ever happened. Huge training in capital management didn’t

Take Long Term Capital Management. They had 100’s of millions of
their own money, and had all of that experience. The list included
Nobel Prize winners. They probably had the highest IQ of any 100
people working together in the country, yet the place still blew up.
It went to zero in a matter of days. How can people who are rich and
no longer need more money do such foolish things?

Q: What effect does large institutional ownership have on stock price

Never has so much been managed by so few that care so much about what
happens tomorrow. So much of the world of investing is people who are
trying to beat indexes, and they have a willingness and eagerness to
make decisions in the next 24 hours. This condition didn’t exist
years ago. It has created a “hair trigger” effect. An example of this
hair trigger effect was Black Monday in ’87. The cause was program
trading and stop loss orders.

Q: What sectors are hurting? Is there a bear market coming?

Humans are still made up of the same psychological makeup, and
opportunities will always present themselves. All these people have
not gotten more rational. They are moved by fear and greed. But I’m
never afraid of what I am doing. What are directors thinking [by not
repurchasing shares] if the business is selling on a per share basis
for one-fourth of what the whole business would sell for? They don’t
always think rational. I simply don’t have that problem.

Berkshire owned the Washington Post, the ABC network and Newsweek. It
was selling for $100 million based on the stock price. No debt. You
could have held an auction, and sold off the companies individually
for $500M total, but $100M was the price. In other words they were
willing to sell us money that was worth $1 for $0.25. According to
efficient markets, the beta was higher when the stock was at $20 than
at $37. This is insanity. We bought what was then worth $9 million
that is now worth $1.7 billion.

Q: How do you feel about divisions of conglomerates trying to horde

Berkshire wants the capital in the most logical place. Berkshire is a
tax efficient way to move money from business to business, and we can
redeploy capital in places that need them. Most of the managers of
companies we own are already independently rich. They want to work,
but don’t have to. They don’t horde capital they don’t need.

Q: How do you feel about the current real estate environment?

If you are buying to own a home, that is fine. Otherwise, it seems to
be getting into bubble territory. We’re not excited about real estate
because generally there is not enough return at current prices.