If anyone hasn’t heard their is a fantastic new resource for people who had an avid interest in Warren Buffett and his company, Berkshire Hathaway. The new site contains videos of the question and answer session of the Berkshire Hathaway Annual Meeting from 1994 until the most recent meeting. It also contains videos of many of his CNBC interviews along with snippets of other information. I recommend it wholeheartedly! The link is: https://buffett.cnbc.com/
One thing that really grabbed my attention while listening to the 1998 annual meeting was what Mr. Buffett and Mr. Munger had to say when asked by a shareholder how he would teach investing. I thought the answer was so interesting that I wanted to share it here.
WEB: “I was lucky, I had a sensational teacher in Ben Graham and he had a course there. Ben made it terrible interesting, we walked into that class and we valued companies. He had various games he would play with us. Sometimes he would have us evaluate company A and company B with a whole bunch of figures and we would find out that A & B were the same company at different points in there history. The were lots of little games we would play to get us to think about what were the key variables and how we could go off track.
If I was teaching a course on investing there would be simply one valuation study after another with the students trying to identify the key variables in that particular business and evaluating how predictable they were because that is the first step. If something is not very predictable forget it, you don’t have to be right about every company, you just have to make a few good decisions in your lifetime. The important thing is to know when you find that you really do know the key variables i.e. which ones are important and you think you have a fix on them. Where we have done well Charlie and I had known we were right going on. They just weren’t that complicated. We knew we were focusing on the right variables and they were dominant. We knew, even if we couldn’t take it out to five decimals places, we knew in a general way, we were right about them and that is what we look for, the fat pitch. I would not try to teach them to think they could do the impossible (this meeting was during the .com company valuations and I think he was referring to how it would be impossible to value companies like those with no predictable earnings).
CM: “If you’re planning to teach business valuation and what you hope to do is teach the way people teach real estate appraising so you can take any company and your students after taking your course will be able to give you an appraisal of that company which will indicate really future prospects compared to its market price I think you’re attempting the impossible.”
WEB: “Probably on the final exam I would take an internet company and ask how much is this worth? Anyone that gave me an answer I would flunk.”
I see this often when I talk with clients and/or students. They assume that any company that they name I should have an opinion on or in the case of students I should be able to provide a valuation of. In the real world that is just no how it works. When you look at a company and its now within your circle of competence how in the world are you supposed to make a determination on how its future cash flows will turn out? The answer is easy you can’t so you put it into the to hard bin and move on. I can’t count how many times I have tried to explain to last in the investment world it’s not about total activity, it’s waiting for the right investments!
Until next time! Rich