It's Difficult to Teach a New Dog Old Tricks
A complete transcript of Warren Buffett's 1988 interview with Adam Smith
Happy Monday and welcome to our new subscribers!
Special thanks, too, to those who recently became paid supporters! ❤️
No one documented the feats and foibles of the investment world quite like George Goodman. His pseudonymous work — under the name of “Adam Smith” — perfectly captured the psychological depth (and madness) of markets.
Starting with The Money Game in 1968, Goodman’s many must-read books exhorted curious investors to examine their own personalities and temperaments before jumping into the market. As the author ably showed, the difference between investment gains and losses could often be traced back to ego and self-image.
Not surprisingly, Warren Buffett became a recurring character of sorts in Goodman’s work. He first profiled Buffett — then virtually unknown outside of Omaha — in his 1972 book, Supermoney.
Then, in 1985, Goodman spoke with Buffett again for his Adam Smith’s Money World television program that aired on PBS. This iconic interview is often heralded as Buffett’s first national television appearance. In it, the Berkshire Hathaway CEO advised the audience to focus on businesses that they can understand, ignore the noise from Wall Street, and invest with a long-term perspective.
Buffett’s second appearance on Money World, though, gets far less attention. In 1988, Goodman returned to Omaha for another sit-down with the Oracle — one timed to coincide with that year’s annual meeting. This episode, titled Warren Buffett: Reluctant Billionaire, aired in June 1988. And, after that, it disappeared into the television ether.
Happily, a recording of this rare Buffett interview popped up on YouTube a couple of weeks ago. Many thanks to jazz on the coast for uploading this video!
For the sake of posterity and further study, I’ve transcribed Buffett’s remarks below…
[Note: Warren Buffett’s discussion with “Adam Smith” forms the backbone of the episode. Clips of the Berkshire Hathaway annual meeting, comments from shareholders, and Smith’s own thoughts are interspersed around the larger interview. I limited this transcript to just the Buffett interview itself.]
Adam Smith: If I had given you $10,000 when I first met you — and I devoutly wish I had — I would have millions today.
Warren Buffett: If you joined the partnership when we started in 1956, and when we disbanded it in ‘69, reinvested the proceeds in Berkshire — which was somewhat of a continuation — I think you’d have a little over $15 million now.
AS: From $10,000 to $15 million.
WB: Something like that, yeah.
AS: That’s a pretty good record.
WB: It’s okay — but that doesn’t tell you anything about tomorrow. (Laughs)
AS: Well, let’s talk about tomorrow. Could anyone do the same thing you did, starting today?
WB: If they didn’t try and do too much the first week, yeah. (Laughs)
*******
AS: You know what the academics say. They say the market is efficient and no one can beat it — but you have.
WB: And a number of other people who followed Ben Graham’s principles have [beaten the market]. In fact, every one that I personally know that has really stuck with the Ben Graham principles over twenty years or more has done appreciably better than the market.
AS: What about all the learned business schools that say you can’t beat the market?
WB: Well, then they aren’t so learned. (Laughs)
AS: But you’ve seen some of the [academic] papers.
WB: I’ve seen the papers, but I’ve [also] seen some other people’s tax returns.
*******
AS: Warren, you say you like to buy businesses. How do you know what a company is worth?
WB: I look for a business where I think I know what, in a general way, is going to happen.
If you buy a bond, you know exactly what’s going to happen — assuming it’s a good bond, a U.S. government bond. If it says 9% coupons, you know what the 9% coupons are going to be for maybe thirty years, if it’s a thirty-year bond.
Now, when you buy a business, you’re buying something with coupons on it too — except the only problem is they don’t print in the amount. It’s my job to print in the amount on the coupon. Some companies I feel capable of doing that with and others I don’t have the faintest idea.
AS: You seem to stay away from high-tech companies.
WB: You name ten high-tech companies to me and ask me where they’re going to be in ten years — or ten months — and I don’t have the faintest idea. That would be exactly like buying cocoa beans or something. I just don’t know what’s going to happen.
AS: Do you ever really get a big, big hit just buying these predictable stocks?
WB: Yeah, you do.
AS: You do?
WB: But not very often. But, occasionally, sensational businesses are given away.
In the mid-’70s, the whole Washington Post Co. was selling for $80 million at a time when the properties were worth not less than $400 million. And no one would have argued with you about the properties being worth $400 million. The price was there for all to see, but people just didn’t feel very enthusiastic about the world then.
*******
AS: You have been talking [about] this philosophy for years. It’s no secret.
WB: It’s no secret.
AS: Why doesn’t everybody do it?
WB: Well, it requires patience — which a lot of people don’t have. People would much rather be promised that they’re going to win [on] a lottery ticket next week than that they’re going to get rich slowly.
Gus Levy used to say that he was long-term greedy, not short-term greedy. If you’re short-term greedy, you probably won’t get a very good long-term result.
AS: You’ve said they could close the New York Stock Exchange for two years and you wouldn’t care. Can you explain that?
WB: We own parts of businesses when we own stocks. The New York Stock Exchange being open has nothing to do [with] whether the Washington Post is getting more valuable over a five or ten year period.
What we want to do is be right on the business. If we’re right on the business, the market will take care of itself. If the stock exchange closes on Saturday and Sunday and I don’t break out in hives, if it closes for a couple of years and the business does well, we’ll do very well.
*******
AS: I noticed in your annual report you say that if you’re in a poker game for thirty minutes and you don’t know who the patsy is, you’re the patsy.
WB: You’ve got it.
AS: How do you apply that to the market and to investing?
WB: If you think the market knows more about your business… In other words, if your stock goes down 10% and that upsets you, it obviously means you think the market knows more about the company than you do. And, in that case, you’re the patsy.
If it goes down 10% and you want to buy more because you know the business is worth just as much as when you bought it before — or perhaps a little bit more with the passage of time — so you buy more, [then] they’re the patsy.
AS: Where do you get these aphorisms that [you are] so well known for?
WB: Well, I don’t know. (Laughs) They’re about the limit of my intellectual capacity, so I have to work with one sentence.
*******
AS: Was October 19 an aberration or could it happen again?
WB: Oh, it can always [happen again]. Anything can happen in the stock market.
If you read financial history for a couple of hundred years and take the South Sea Bubble and the Tulip Boom and some of the panics we’ve had in this country. We closed the stock exchange for a few months back around 1914. Anything can happen.
You ought to conduct your affairs so that, if the most extraordinary events happened, you’re still around to play the next day.
*******
WB: Any time you offer a big prize for a small amount of money, you encourage stupid behavior on behalf of those you’re appealing to. And low margins, which you can get through the futures market, encourage that sort of activity.
AS: How much did the small investor look at stock index futures and index arbitrage and all the volatility that has come into the stock market?
WB: He should hope that they cause other people to behave very silly and then he should step in occasionally. He should ignore them himself, but to the extent that silly instruments occasionally cause silly prices, he can take advantage of them and the rest of the time he ignores them.
AS: Old basketball players lose their legs. Do old investors lose their legs?
WB: I don’t think so. They probably lose their legs, but they don’t need their legs that much. Being a sound investor really just requires a certain control of your temperament and the ability to know what you know and know what you don’t know and, occasionally, act. I don’t see any reason why that goes [away] with age.
I may give you an illustration in another few years, but so far it has no effect. In a sense, you keep accumulating a little more business knowledge as you go along — and that’s a plus.
*******
AS: There’s been a lot of talk about the Silicon Valley culture. Is there a Berkshire Hathaway culture?
WB: I guess there’s a Berkshire Hathaway culture, but it would be a long way from the Silicon Valley culture.
AS: What is the Berkshire Hathaway culture?
WB: We like managers who are in love with their businesses. We like ‘em when they feel like I do — I want to tap dance when I get to the office. That’s the sort of managers we have.
We have terrific luck when we buy businesses with managers that had been enormously successful over a period of time. They’re usually rich after we buy the business — and they keep on working afterwards.
We don’t have so much luck with business school grads. We find it’s difficult to teach a new dog old tricks. We like the people who have been around a while.
*******
AS: If you had to look over the next five or ten years, what do you think will be good businesses?
WB: The businesses that have some sort of a franchise to them. What makes a good business a good business is when if I go into a drug store and I want a Hershey bar, they can’t sell me an unmarked bar. If I’m going to pay 35 cents for a Hershey bar and they say, “Wouldn’t you love this wonderful unmarked chocolate bar for 30 cents?” I’d buy the Hershey bar. And if they don’t have it someplace, I’ll go across the street to buy it. That’s what makes a good business.
I don’t feel that way about the carton of milk I buy. I’ll take whatever carton of milk is in the grocery store’s cooler.
AS: So it’s the power of the franchise?
WB: It’s the power of the franchise.
AS: When Ben Graham talked about these things, he talked about tangible assets. Iron and steel above the ground, bricks and mortar. But you’ve expanded Ben Graham’s idea to this idea of the franchise, haven’t you?
WB: I learned [the value of franchise power] subsequent to Ben. The principles of buying value and the margin of safety and the detachment from the market, I learned from Ben. You might say that I learned the proper temperamental set from Ben. The stocks I buy are entirely different from what Ben would buy if he were alive today.
*******
AS: Do you still do your own tax returns?
WB: Yeah, it’s a pretty simple return.
AS: Really?
WB: Yeah, it’s a very simple return.
AS: Warren, you have spoken for years against corporate perks, but you finally bought a corporate jet.
WB: I can’t explain it. It’s a total blank in my mind. I’ve given speeches against them for years and — I gotta tell you — I love it. (Laughs)
AS: But you have the cheapest corporate jet of anybody in America.
WB: Well, no, I don’t know whether it’s the cheapest corporate jet. It works perfectly for me. I’ve got to tell you that I have an untapped potential for that type of life, apparently, because it’s made life a lot easier the last couple years.
*******
AS: Warren, you created a stir with your remarks about money and children. You have three children and grandchildren. You love your children [and] they love you, but you’ve said you’re not going to give them any money because that would be a bad thing to do.
WB: I hear children of the rich — or the rich themselves — talk about the debilitating effect of food stamps on welfare mothers. They say it’s terrible [that] you hand them all these food stamps and it causes the cycle to perpetuate itself, but of course when a very rich child or one who’s going to inherit a lot of money is born, when they leave the womb they’re handed this lifetime supply of food stamps. They have a welfare officer — he’s called a trust department officer — and the food stamps are little stocks and bonds. Nobody seems to notice the debilitating effects of that particular form of a lifetime supply of food stamps.
I think, by and large, that if I’m going to be a sprinter, I will become a better sprinter in life if I sprint against everybody else leaving the starting box at the same time than if they say [that], because I’m Jesse Owens’s child, I get to start on the 50-yard line.
AS: How have your children felt about that?
WB: I think they feel pretty good. I’m not quite as draconian as I sound, but I’m quite close to it. (Laughs)
*******
AS: Do you do this for the money? What does money mean to you?
WB: Money is a byproduct of doing something I like to do extremely well. I think if you found an athlete who was doing well, my guess is — and I’m not comparing myself — but a Ted Williams or an Arnold Palmer or something, after they have enough [money] to eat, they’re not doing it for the money.
My guess is that if Ted Williams was getting the highest salary in baseball but was batting .220, he would be unhappy. And if he was getting the lowest salary in baseball and batting .400, he’d be very happy. That’s the way I feel about this job.
AS: What do you feel like when you look at this piece of paper that gives you your net worth and says that you’re worth over $1 billion?
WB: It’s a byproduct of doing things that I like to do well. If I bat .400 long enough in this business, you get a very big sum [of money].
AS: That is a big sum. What are you going to do with it?
WB: Eventually, it’s all going to go back to society. 99+% of it is going to go to society. It should.
Become a paid supporter today and receive immediate access to three annotated transcripts full of wit and wisdom from the top names at Berkshire Hathaway.
Paid subscribers will also continue to receive a new annotated transcript each month.
Another can’t-miss highlight from this episode of Adam Smith’s Money World…
In 1988, Warren Buffett and Tom Murphy (CEO of Capital Cities/ABC) made a cameo appearance on the soap opera Loving. In their scene, Buffett the bartender and Murphy the waiter were called upon to escort an unruly customer out of the bar. Neither man had any lines, though.
Money World actually included this brief scene — which I had never seen before — in the Buffett episode.
“They were wise,” Buffett told the Omaha World-Herald about his soap opera cameo. “They didn’t trust us with any dialogue.”
“For a town that produced Henry Fonda, Marlon Brando, and Fred Astaire, I’m a sad commentary, let me tell you.”
“If they ever have a worst performance of the season award, I’m a cinch [to win].”
Note how casually Warren tosses out a 30 year treasury yielding 9% as his bond example. I bet most readers on Substack have never seen a 9% Treasury. I’m not predicting their return, but nothing says the Fed has to stop at 5.5% or cut the discount rate next year either.
I like the sporting performance metaphor