Cheap Steaks — and Other Lessons from Warren Buffett
"I can’t dance in and out and skip the terrible years."
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On March 13, 2007, Warren Buffett participated in a panel discussion at Georgetown University — hosted by Treasury Secretary Hank Paulson — about the regulatory burden then facing American businesses.
Afterwards, he hopped on CNBC’s “Morning Call” for a one-on-one interview with Liz Claman — which allowed him the time and space to better explain his thoughts on regulation (and answer other questions outside the purview of the conference).
I’ve always been fascinated by those few Buffett media appearances that, for whatever reason, slip through the cracks and escape mainstream attention. In this case, it’s particularly interesting to look back and study his comments from this pre-GFC moment when regulatory reform seemed to be our most pressing economic challenge.
Here are fifteen of the highlights from Warren Buffett’s appearance that day on CNBC’s “Morning Call”…
🇺🇸 Business Regulation: Too Much or Too Little?
(1) “The American public got quite disillusioned with Corporate America after the late 1990s. I think there was a question of restoring trust [by increasing regulation]. Some of it may be almost cosmetic — but cosmetics have their value in terms of millions of people making decisions to invest. So I think the fact that the American investor thinks things have been tightened up is a good thing.”
The Sarbanes-Oxley Act, passed in 2002 after several high-profile scandals at Enron and Worldcom, was a hot topic at the panel discussion.
“Most of my friends are not overly happy [with the imposed regulatory burden], but to some degree they’ve brought it on themselves,” Buffett told the Georgetown audience.
For the bookworm investor, though, the flurry of reports and filings mandated by the act has its perks. “I have an enthusiasm for reading [financial] reports,” Buffett laughed. “It’s like a teenager reading Playboy. At 76, you have to get excited about something.”
To Claman, though, he acknowledged that Sarbanes-Oxley came at a financial cost. “It cost us a good many millions of dollars last year. Our audit was $24 million … There are real dollars involved.”
(2) “Mikhail Khodorkovsky talked to me at a conference three years ago. He said, ‘Is it too dangerous to list [a company] in the United States?’ Three or four months later, he was in a prison in Russia. There are other dangers besides securities regulation in this world.”
A myopic focus on dollars and cents — and handwringing over regulation — can blind you to more serious problems that exist elsewhere. Buffett hammers that point home with the example of Khodorkovsky, the founder of the reform-minded Open Russia organization who languished in prison for ten years on (seemingly) politically-motivated fraud charges. Say what you will about our regulatory state in America, but a Khodorkovsky-like situation is unlikely to happen here.
(3) “I don’t think [regulation is slowing innovation]. Not in any important way. Corporate profits are virtually at an all-time high as a percentage of GDP. Return on tangible equity is virtually at an all-time high. American business is doing very, very well.”
With corporate profits at over 8% of GDP, said Buffett, “American shareholders and American CEOs do not have a lot to complain about. It doesn’t mean the system can’t get better, but we are not an endangered species.”
Playing the Money Game
(4) “I have no idea what the market will do next week [or] next year. Zero. I don’t think about it. If I thought about it, it wouldn’t do any good. The main thing an investor needs is the proper temperament. He doesn’t have to have a 150 IQ. He doesn’t have to be an expert on accounting. But he does have to keep his balance when untoward things happen in the market. The reason investors do poorly is that they beat themselves.”
(5) “The Dow went from 66 to 11,400 in the last century. You’d think it would be pretty hard not to do well if you go from 66 to 11,400. The people who didn’t do well are the people who panicked at the wrong time — [who] came in because stocks were popular and left when they were unpopular. You have to have emotional stability. If you have emotional stability and you stick with American businesses, you’re going to do fine.”
(6) “I like to eat steaks. If I go to my steak house and I pay $10 for a steak and the next night it’s $9, I don’t break out in tears.”
Ah, the good ol’ days of a $10 steak… Anyways, Buffett’s unspoken point here is an important one. When the stock market “goes on sale”, investors tend to panic and run for the exits. Why is that?!? We instinctively grasp the benefits of (temporarily) cheaper prices in every other aspect of our lives — but then sell out of an investment position at the first bump in the road. Make it make sense.
(7) “I don’t think about [the economy]. I’m going to buy a business and be with it forever. I’ve never in my life not bought something because I thought the economy was going to get poor — and I’ve never bought something I didn’t like because I thought things were going to be great for a while.”
(8) “We’re going to play the game as long as I’m alive. There will be mostly good years, a few sensational years, and a few terrible years. I can’t dance in and out and skip the terrible years.”
(9) “There is some evidence that [investors] have come to favor more index funds over time. They have learned that they can’t try to beat the market by picking stocks themselves and they’ve learned the disadvantage of having high costs. By going with low-cost index funds, they’ve probably got the best solution for themselves — and more and more have gone in that direction. I would say at least that group has gotten smarter about [investing].”
Buffett has long recommended an S&P 500 index fund for the average investor. “In a sense, you own a cross-section of America at a very low cost,” he told Claman. “You’ll get a good result with that unless you panic at the wrong time. If you just stick with it for decades, you’ll do fine.”
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Succession: Berkshire-Style
(10) “We will have two people in [my] job. We’ll have a CEO run the business. We have a person identified. We have three candidates [within Berkshire] — all of whom are good. All three, in many respects, will be better than I am.”
At that particular moment, Buffett is probably referring to David Sokol as the next CEO of Berkshire Hathaway. Sokol remained the reported frontrunner to succeed Buffett until his ignominious exit in 2011 amid the Lubrizol scandal. Obviously, much has changed since then — with Sokol out of the picture and Greg Abel ready to ascend to the top spot whenever Buffett rides off into the sunset.
(11) “We will need an investment officer. If something happened to me today, Lou Simpson would do a great job. Charlie [Munger] would do a great job. One is a little older, one is a little younger. We need somebody for the longer term. We don’t need somebody for tomorrow, but we need somebody for the longer term … They’ll do it their way, but with the same aversion to risk and the same general [investing] principles.”
(12) “My job, as I like to say, is so easy that a caveman could do it … I had one four-year-old apply for the job. He must know me and figured a four-year-old can do my job.”
Buffett, the consummate company man, references the popular GEICO commercial slogan (“So easy, a caveman could do it…”) here. For our younger readers who might not remember this particular ad campaign, here’s a refresher from Wikipedia: “The premise of the commercials is that using GEICO’s website is ‘so easy, a caveman could do it’ — and that this slogan offends several cavemen, who not only still exist in modern society, but live as intelligent, urbane bachelors.” It even spawned a short-lived ABC sitcom. 👀
Money Talks
(13) “I set the compensation for 41 managers at Berkshire. I am the compensation committee for 41 businesses — and it’s very easy. We’ve never lost a manager in 42 years to somebody else. It is not rocket science. The consultants want to make it rocket science and the CEO naturally wants to compare himself to the highest [paid] person out there.”
(14) “I think big shareholders should be the ones to scream [about excessive CEO compensation]. If you had a few of the larger shareholders just come out and say, ‘We’re not going to vote for this management — as we think the guy is able, but we also think he’s over-reaching.’ I think that would cure things a lot faster than rules.”
Back in 1990, Buffett explained that he’s perfectly happy to write big bonus checks to any manager who has earned it. “But,” he adds, “what bothers me is paying $2 million to [an executive] who hasn’t done anything.”
“Executive compensation is too homogeneous. We’re paying the .200 hitters too close to the .350 hitters.”
(15) “It’s a terrible situation when the tax rate on me — what I pay to the federal government as a percentage, counting payroll taxes — is a lower percentage of my income than my receptionist. I think that is probably true for a majority of the Forbes 400. We’ve had a wonderful tax planner — he’s right here in Washington, D.C. — and, in my view … I just don’t think it’s right.”
Do you have a link for this video of Buffett and Claman?