Warren Buffett Goes Back to School

“If you talk to 100 students and you say something that makes sense,” said Buffett, “a few of them may pay attention to it — and it may actually change their lives."

On October 27, 1993, Warren Buffett returned to Columbia University — where he once learned at the feet of the great Benjamin Graham — and spoke to 80 graduate students about business and leadership. After opening with a brief speech, the eager students peppered him with questions for the better part of two-and-a-half hours.

Buffett always relished these opportunities to connect with developing young minds, believing that his words could still make a transformative impact on their lives.

“If you talk to 100 students and you say something that makes sense,” he said, “a few of them may pay attention to it — and it may actually change their lives, as opposed to a bunch of 60-year-olds.”

The only known record of this particular conversation — at least that I’ve found — comes from the Omaha World-Herald, which dutifully transcribed lengthy excerpts from Buffett’s talk that day. I cleaned up the transcript and reproduced the entire thing down below for posterity and further study. Enjoy!

---

---

Columbia professor Bruce Greenwald introduced Buffett as the “Rose Blumkin of value investing” — a nod to the iconic Nebraska Furniture Mart founder. This prompted Buffett to kick off his remarks with a warm tribute to the one-of-a-kind Mrs. B.

Buffett: Rose Blumkin is going to be 100 years old in December. Incidentally, she still works seven days a week. [On] the nights the store is open until 9 o’clock, you’ll find her there at 9 o’clock. She rides around in a little golf cart and if the salesperson isn’t waiting on someone and gets a little disgusted, she goes up and rams him with her cart and makes her point. (Laughs)

We’ll do $200 million [in sales] in that store this year. A very remarkable woman. A remarkable family. She has done it by having a terrific mind and an incredible desire.

I would like to talk to you for a few minutes, give you a very short sermon, and then we’ll take your questions.

I had an experience a few years ago that may be of some value to you as you leave here and go out in the world. On August 16, 1991, I got a call at about quarter of seven in the morning. [It] woke me up. I hate to admit that. (Laughs) I stumbled over to the phone. Essentially, it was the top officers of Salomon. [They were] telling me that … they were going to offer their resignation.

It was a small problem because the company owed more money than any other enterprise in the United States at that time, except for Citicorp. Salomon had liabilities of about $150 billion — and it owed most of it in a manner that came due in a few weeks or less.

Anyway, what developed over that day was that I came in [and] I faced the immediate problem of deciding who was actually going to run Salomon Brothers, the institution, while essentially I had to deal with regulators and the public and politicians.

On Friday night and again on Saturday morning, I met with about twelve people. These twelve people were top-level managers at Salomon. And, essentially, I had to pick from that group of twelve someone to run a $150 billion institution who was going to be under great stress and who could lead 8,000 people under very trying conditions.

This was the most important hire of my life.

I interviewed those people Saturday morning over a couple hour period, knowing that I was going to pick one when I got all through. I didn’t have time to do a lot of psychological tests or anything. The good news is I did not ask them what their grades were in business school. (Laughs)

They all had the IQ — just like everybody in this room. It doesn’t make any difference whether your IQ is 140 or 160 if you’re running Salomon or doing most things in this world. They all had the energy and the desire.

The question was: Who would be the best leader? Who was going to go into a foxhole with me? Because whoever went into the foxhole with me could stick a gun to my head. If they wanted to come around and say they got an offer from Goldman Sachs or something, twice as much money as they were making, or wanted personal indemnification because of lawsuits… A million things could happen — and would happen with some people.

In the end, I picked someone (Deryck Maughan) and — fortunately — it was not only the most important decision of my life, but probably as good a business decision or hiring decision as I could make.

I devised this little system in getting you to think about how you might attack that problem yourself — or how you might be the person that would be chosen under those circumstances. Imagine that you have just won a lottery I conducted. And, by winning it, you had a very unusual prize. The prize you get is the right to pick within the next hour one of your classmates — and you get 10% of the earnings of that individual for the rest of your life.

What starts going through your mind? Are you going to give an IQ test or look up their grades and take the person with the highest grades? Are you going to try to measure desire or energy or something? I think you’ll decide that those factors tend to largely cancel. They would be important up to some threshold limit, but once you hit those levels — you’re okay.

I think you’ll probably start looking for the person that you can always depend on. The person whose ego does not get in their way. The person who’s perfectly willing to let someone else take credit for an idea as long as it worked. The person who essentially wouldn’t let you down, who thought straight as opposed to brilliantly.

And then, let’s say, there’s a catch attached. For the right to buy this 10% interest, you had to go short 10% of somebody else in the room. So, in effect, you get the 10% of the first person’s earnings, but you have to pay out 10% of the second person’s.

Now, again, do you look for the person with the lowest IQ or the person with the slowest walk or whatever it may be? I think you’ll look around for the person that’s a little slippery. The one that everything has to be his or her idea. The one that never quite does what’s expected of them — or pretends to do things that they don’t. You really get back to things that, interestingly enough, are things that you can control.

You have these what I would call voluntary items of character [or] behavior. Essentially, you can pick out those qualities of behavior and, if you want them, you can have them yourself.

Take that one person where you would go short and if you find a few of those qualities creeping into your own behavior, they are things you can get rid of. If you’re taking all the credit for things when other people do it, you can do something about that. You can make yourself into the person that you would buy the 10% of — and you can make very sure that you’re not the one that you would sell short 10%.

I would say that most of it is habit. It’s just as easy to have good ones as bad ones — and it makes an enormous difference. Deryck Maughan simply behaves well and he behaves in a high-grade manner. He doesn’t give up his ability to think independently or any of those qualities whatsoever.

I’ll give you an example. Deryck, two or three months after he took the job, had never asked me how much he got paid — let alone had a lawyer around negotiating for him or anything of that sort. Deryck, when he came in, had one thought in mind and that was keeping the place together and then building a business that fit his image of what he wanted it to be. He never asked me for a dime of indemnification — and he could have been targeted. He could have gone broke. There were dozens of suits. He was working 18-hour days. He could have been making way more money someplace else.

Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you. (Laughs) You think about it. It’s true. If you hire somebody without the first, you really want them dumb and lazy. (Laughs)

Pick the kind of person to work for you that you want to marry your son or daughter. You won’t go wrong.

So that’s it on the sermon.

Let’s talk about a few things that can make a few dollars, too.

Student: How do you evaluate investments and risk?

Buffett: As I referred to in the last annual report, valuing things is terribly easy as long as you plug in the right variables. There are only two variables you have to plug in to value any financial asset. That’s simply the stream of cash in and out between now and Judgment Day — and discounted at the proper rate of interest.

Essentially, when you look at Coca-Cola or Gillette or whatever, in many ways it’s mathematically equivalent to looking at a long-term U.S. government bond. The only difference is that the U.S. government bond has the coupons printed on it and the maturity date. Now you go to Coca-Cola [stock] and it’s the job of the investor to print the coupons. Your job is, for some long period of time in the future, to come up with your best estimate of the coupon or a range of coupons that you think is appropriate on that instrument. And I would say that if you don’t feel capable of doing that, you toss that one away and go on to the next one.

I feel competent to do that in a relatively few cases. I think that Bill Gates is one of the best managers in the world, but I don’t have the faintest idea of how to evaluate what the stream of coupons will look like on a bond called Microsoft. It may be a sensational stream of coupons, but I just don’t know enough about it to evaluate that.

If I can’t evaluate it … then I’m not investing. I’m betting on whether a stock will go up or down tomorrow or next week or next month — some little ticker symbol.

But once I come up with that [estimate of earnings] on any economic asset — a farm in Nebraska, an auto dealership, whatever it may be — that is its value. The first twenty years or so is quite important.

The trick is to look at businesses — I don’t call them stocks, I call them businesses — within what I call your circle of competence. And your circle of competence is a kind of business which you feel reasonably confident about predicting the [earnings] stream. It’s not important how big the circle is. What’s important is how well you define the parameter.

Mrs. Blumkin has one of the best-defined circles of competence I’ve ever seen. She trusts furniture, carpet, cash, and real estate. Anything else is not in her circle of competence. If you want to talk to her about 8,000 end tables, she will name you a price at which she’ll buy because she knows what she can do with 8,000 end tables. And she’ll do the same thing with carpet and she can do the same thing with real estate. But if I [had] tried to buy Nebraska Furniture Mart with Berkshire Hathaway stock, I could have given her a million shares and she wouldn’t have taken it — because she doesn’t know what the hell Berkshire stock is all about.

I put a heavy weight on certainty. And, incidentally, if you do that, the whole idea of a risk factor doesn’t make any sense to me. You don’t do it where you take a significant risk. But it’s not risky to buy securities at a fraction of what they’re worth.

I’ve used the case before, but the Washington Post Co. in 1973 was selling in the market for $80 million, debt-free. If you asked anyone in the business what their properties were worth, they’d have said $400 million or something like that. You could have an auction in the middle of the Atlantic Ocean at two in the morning and you would have had people show up and bid that much for them. And it was being run by honest and able people who all had a significant part of their net worth in the business. It was ungodly safe. It wouldn’t have bothered me to put my whole net worth in it. Not in the least.

Risk comes from not knowing what you’re doing.

Student: What were you thinking when Berkshire invested in USAir? What is your opinion of that investment now?

Buffett: This is my psychiatrist asking. Actually, I have an 800 number now which I call if I ever get an urge to buy an airline stock. I say, “My name is Warren and I’m an air-aholic,” and then they talk me down. (Laughs)

It’s a terrible business. There is no worse business of size that I can think of than the airline business. You’re selling a commodity product with no variable costs and huge fixed costs. It’s a terrible business.

As you know, since Kitty Hawk, the commercial airline business in the United States has shown a net loss. Actually, there should have been some capitalist down there shooting Orville. (Laughs)

There’s really no answer. Capitalism is brutal when it gets to be a commodity product.

There was a class here at Columbia [and] the guy said, “Remember one thing. It’s harder to be smarter than your dumbest competitor.” And for those of us who think all competitors are dumb, that means we should be looking for a business where there’s no competition. That really is what we try to do. We try to find businesses that we think are insulated in some material way from competition.

Student: All the other value investors have pretty clearly defined exits as opposed to you in their investments, particularly in a business where the economics are changing. How do you think about that in relation to value investing?

Buffett: Well, part of it is the way I want to live, frankly. When I got out of school, I was immersed in buying stocks that were very cheap statistically. I called it the “used cigar butt” approach to investing. When you’re buying cigar butts, you’ve got to get rid of them. There aren’t a lot of puffs in it.

Over time, I evolved more into trying to find the wonderful business. And, if you find one, the best thing to do probably is not to sell it. It will go on and on usually — even if it looks a little overpriced.

But, beyond that, I ran a partnership until the end of 1969 and I felt obligated to the partnership to make as much money as I could for my partners … so I bought and sold things and did all kinds of things. I didn’t find that as satisfying as getting in with some people I really liked and working with them over time on something that was quite good.

I think when you’ve got all the money you can possible use in 100 lifetimes, you’ve got promises to people to do reasonably well — but you don’t have a promise that you’re going to get the last ounce out of everything. I wouldn’t enjoy going into business with somebody I really liked and then selling them out a year or two later.

We’re just buying something called Dexter Shoe, which is a big shoe company. It’s a little like a romance for a while. You spend some time with them and, you know, you have the first date. And then, finally, the big moment comes. (Laughs) The next day, do you want to start thinking about if somebody offers me 2x for this or 3x for this, would I sell it?

I think that’s kind of a crazy way to live. It’s a little like marrying for money. It’s probably a bad idea under any circumstances, but absolutely nuts if you’re already rich.

I don’t want to do lousy. I would not be able to handle that well. I want an approach that works — but I’m not necessarily looking for an approach that works to the last tenth of a percent.

Let’s say I inherited $10 million and I had to invest it all tomorrow — and I had to do it in terms of buying part interests in five businesses in Omaha. All of them had a price on them, so I could pick any [of them] and I had to hold onto them. What would I think about in the next 24 hours? I know the businesses pretty well — most of them — and I know the people. What would be going through my mind?

Well, that’s what I’m doing when I’m investing. Only the universe is America and they’re bigger companies.

I would think very hard about getting into a business with fundamentally very good economics. I would think of buying from people I can trust. I’d also think about the price I’d pay — but I wouldn’t think about the price to the exclusion of the first two.

That, essentially, is what we’re trying to do at Berkshire. And, if I did that, would I think about whether I could buy it cheaper on Monday rather than Friday or would I think about the January effect or other nonsense?

All I care about is that it’s a good business.

Student: What do you look for in annual reports?

Buffett: I look for a business that I feel I can understand. I’m just trying to get my mind around the company. I always picture myself as owning the whole place. And if a management is following the same policy that I would follow if I owned the whole place, that’s a management I like. But if it reads like a public relations document and all of that, it tends to turn me off.

You do pick up on the personality of the business in many cases. I’m looking for businesses that, as I read them, I understand what’s going on — or I think I understand what’s going to happen in the next 5-10 years.

But actions speak louder than words. Coca-Cola in the ‘70s really wasn’t being managed [well] at all. The business didn’t do that well, but it didn’t do that poorly, either. I like a business that, when it’s not managed at all, still makes lots of money. That’s my kind of business. Then, in the late ‘80s, it became apparent that they were getting extremely focused on their main business and were going to get out of [some] other businesses.

When you get some smart, energetic people focused on a business as wonderful as Coca-Cola, you are going to make a lot of money. Around the world, there are about 700 million eight-ounce servings of Coca-Cola products consumed every day. Now, if you add one penny to the price, it’s $2.5 billion pre-tax. It beats the airline business.

If you find a management that just thinks straight and they’re a wonderful business, gobble it up. Sometimes, the annual report will give you some clue.

Student: Can you talk about the relationships you have with your managers?

Buffett: [If] you go in to change people, it’s like marrying somebody to change them. You’d better just accept it the way it is. That’s why I’m looking for people that I identify with prior to their chance to give me a sales pitch.

Our own feeling is that, generally, we don’t want to have any say in the businesses — and that’s even true, to some extent, when we own 100% of them. I don’t even know whether some of our companies have budgets. I don’t want to change anything they’re doing. I don’t want to be involved in the company, except to allocate major capital. The big money I want them to mail to Omaha. That’s true of all our businesses.

I allocate the capital — and we’ve got an enormous advantage in that respect. If they are allocating the capital there at See’s Candies or the Buffalo News, they would be thinking only of allocating within that industry. When we do it … we have the whole $4 trillion U.S. market — and then some — to work with.

The second thing I do is, if something happens to a manager, I have to make a decision on succession. Other than that, I am an institutional investor of the companies we own. If they want to talk over certain strategic things, we do.

I set the price on See’s Candies every year. I set the circulation prices at the Buffalo News. There are certain things — with certain managers who want me to do it — in which it’s better to have it centralized. Because a person who is too close to a business probably would not tend to price as aggressively as they can.

Student: Why did you sell Fannie Mae?

Buffett: We started buying five or six years ago with the idea of buying 10 million shares of the old stock. We could have bought it for $300-400 million. We started buying at about $33 per share. If we could have bought it all at that price, that $330 million in stock would now be worth about $2.4 billion or something like that. Other than that, it was a good year.

We got a couple million shares and it moved up a little and I was irritated because I wasn’t getting as much as I wanted. Who knows what was going through my mind? I sold it and instead of making $2 billion, we probably made about $10 million.

I’ve been trying to find out why [ever] since. It’s my decision. We have no committees. I entered the buy orders and the sell orders.

Student: Can you explain your research process for evaluating investments?

Buffett: When I got out of Columbia, the first place I went to work was a five-person brokerage with operations in Omaha. It subscribed to Moody’s industrial manual, transportation manual, banks and finance manual, and public utility manual. I went through all of those page by page.

I found a little company called Genesee Valley Gas near Rochester, [New York]. It had 22,000 shares out. It was a public utility that was earning about $5 per share and the nice thing about it was you could buy it at $5 per share.

I found Western Insurance in Fort Scott, Kansas. In Moody’s financial manual, the price range that year was $12-20. Earnings [were] $16 a share. I ran an ad in the Fort Scott paper to buy that stock.

I found the Union Street Railway in New Bedford, Massachusetts — a bus company. At that time, [it was] selling at about $45 and, as I remember, had $120 a share in cash and no liabilities.

Nobody’s going to tell you about the Union Street Railway Co. or Genesee Valley Gas. Sometimes, the management’s buying it themselves. You can’t do this for big money, but it’s somewhat the same principle. You find something that shouts at you.

Student: What would you do if you decided to buy a company and somebody wanted to buy it at the same time and started a bidding war with you?

Buffett: What would I do? I’d lose. I don’t think we ever won an auction. I can’t remember ever being in an auction. The auction process just doesn’t appeal to me.

Student: If I looked at a manual and saw a company that was selling at 4x earnings, I’d think I was doing something wrong. At what point in your career were you convinced that everyone else was doing something wrong?

Buffett: That’s a very good question. When I got out of Columbia, I started selling securities. It seemed so easy. GEICO happened to be the thing I was most interested in at the time, but there were always things. I kept finding them as I’d go through the manuals. And I really thought to myself, “This is kind of crazy. There must be somebody in Fort Scott, Kansas, too, who knows what’s going on.”

It was an evolutionary process. I had enough confidence to do it. And I really got that from [Ben] Graham. In the end, I always believe my eyes rather than anything else.

When I first got interested in GEICO, Graham was the chairman of Government Employees Insurance Co. at the time. I took his class here at Columbia. I went to the library and looked up Government Employees Insurance Co. and it said it was located in Washington, D.C. — so I went down there on a Saturday in January from Columbia.

I got down there fairly early, 11 or so o’clock, and the door was locked. I banged on the door for a while and, finally, a janitor came. I said, “Is there anybody here I could talk to except you?” Well, there was a guy up on the fifth floor and [the janitor said], “If you like, go up and see him.”

So I went up and met him. He’s 90 or 91 years old now. His name is Lorimer Davidson. At the time, he was the investment officer there. He later became CEO. He spent about five hours with me that day. He explained the whole insurance business to me, how it worked and how GEICO worked, and I became totally enamored with it.

Then I came back to New York, back at school, and I went downtown to talk to big insurance specialists. Every one of them told me that Government Employees Insurance [stock] was way overpriced compared to these other companies — for all kinds of reasons. It didn’t make any sense to me, but it was daunting.

I had to get over that hump — but that can be somewhat intimidating. It probably cost me a lot of money. I probably didn’t hit some things as hard as I should have.

Student: Can you tell us about how you purchased Nebraska Furniture Mart in 1983?

Buffett: [Rose Blumkin] wanted to sell it to me. She owned 20% of it and four members of the family each owned 20% — and she decided to sell. I heard about that and I went out to see her one day in August. I went to see Louie, actually, her son, first. Mrs. Blumkin can be hard to understand because she still talks with this Russian accent, having only been over here about 72 years. (Laughs) In fact, in the past, we’ve run ads [in which she speaks] and we run English subtitles.

So I went to her son and I said, “Louie, I don’t want any misunderstandings with your mother. If I miss anything, be sure I get it straight.”

But she wanted to do a deal. She wanted to do it for cash. She knew what she wanted for the business. She knows, mentally, probably better than anybody in this room, about depreciation and accruals — but she doesn’t know them in accounting terms. She knows she doesn’t owe any money and she knows what her receivables are and she knows that the inventories are all clear.

We drew up a one-page agreement. The line she signed — she made a mark, basically — said “Mrs. B, on behalf of herself and her family”. And, at that time, we had a deal.

Student: How did you go about evaluating how much NFM was worth?

Buffett: The price was about $60 million on the 100% basis. We didn’t buy 100%. The business, at the time, was doing something over $100 million [in annual sales] and probably had $40 million or so in tangible assets, which were more than enough to do the business. [It] probably was making about $10 million pre-tax on a very conservative basis. And you knew the competitive strength of the business — and you knew the people. It was a no-brainer. I wish I could find 50 more like it.

Most of the businesses we’ve bought, we’ve bought on the first visit. See’s Candies, I went out one time to see the grandson of Mary See. His name is Harry See … We had a deal. We understood the kind of position they held in consumers’ minds and pricing flexibility and so on. Did I think they could charge 20 cents a pound more for candy? Sure. And, sure enough, they could.

There’s one thing you want to think about in terms of evaluating a business — and that’s pricing flexibility. If you own See’s Candies and you look in the mirror and say, “Mirror, mirror, on the wall, how much do I charge for candy this fall?” and it says, “More!” — that’s a good business.

Student: You got your MBA and worked for Graham-Newman before going out on your own. Put yourself in our position now. What would you do?

Buffett: It depends on personal circumstance to some extent. Assuming you have no capital of your own and assuming you’re interested in managing money, I’d pick something you like to do whether it’s money management or whatever it might be.

I’d pick an occupation where I woke up tap dancing on the way to work. And I believe in going to work for businesses you admire and people you admire. Anytime you’re around somebody that you’re getting something out of and you feel good about the organization, you just have to get a good result.

I advise you never to do anything because you think it’s miserable now but it’s going to be great ten years from now — or because you think, “I’ve got x dollars now, but I’ll have 10x.” If you’re not enjoying it today, you’re probably not going to enjoy it ten years from now.

Student: Would you ever sell something short?

Buffett: No. Going short is betting on [when] something will happen. If you go short for meaningful amounts, you can go broke. If something is selling for twice what it’s worth, what’s to stop it from selling for 10x what it’s worth? You’ll be right eventually — but you may be explaining it to somebody in the poorhouse. (Laughs)

Student: What investment companies do you most admire?

Buffett: I certainly admire Bob Kirby at Capital Guardian. I admire Bill Ruane and his partners at Sequoia. If I were going away for ten years and I knew that Kirby was going to manage [my money] or that Bill Ruane was going to manage it, I would feel very comfortable.

Professor Bruce Greenwald: How do investors develop their circle of competence? How do you get to that state of understanding?

Buffett: Well, the insurance business, I understood nothing about when I was at Columbia. I took a course in it and I still didn’t understand insurance. But I decided that anything that Ben Graham was chairman of the board of, I was automatically interested in understanding.

I read a lot. I was over at that library … I started with Best’s, looking at a lot of companies, reading some books about it, reading annual reports, talking to [insurance investment specialists], talking to managements when I could. I would go over to the state insurance department. I went over to Harrisburg one time when I was working at Graham-Newman. I went down there and found some material on a company called Home Protective Co. This was one that, again, was selling at 1x earnings. You had to dig a little to find that out — but it was all there. It wasn’t that hard to understand. There’s more Mickey Mouse in insurance accounting now than there used to be.

I would take one industry at a time and develop some expertise on half a dozen. I would not take the conventional wisdom now about any industries as meaning a damn thing. I would try to think it through.

If I were looking at an insurance company or a paper company, I would just put myself in the frame of mind that I had just inherited that company and it was the only asset my company was ever going to own. What would I do with it? What am I thinking about? What am I worried about? Who are my competitors? Who are my customers? Go talk to them. Find out the strengths and weaknesses of this particular company versus other ones. If you’ve done that, you may understand the business better than the management. If you just do that yourself — don’t read any analysts’ reports or anything — I think you’ll come away with something.

A great business always has some sort of moat around it. What you’re looking for is a big castle and a wide moat — and you’re looking for a moat that widens over time. If you’ve got a business earning 200% on capital, there’s [going to be] someone trying to see what you’re doing. It better be awful difficult for them to do it.

Student: Do you see any good investment opportunities in communications?

Buffett: I don’t like businesses where the technology is changing fast. Basically, I don’t think I’m a great one for seeing the future when the future looks way different than the present. Generally, anything that is subject to a lot of change — [or] technology — I tend to be critical of rather than excited by.

Student: You’ve been quoted as saying your philosophy is 85% Benjamin Graham and 15% Phil Fisher. Can you explain the 15% Fisher?

Buffett: Well, I read Phil Fisher’s books in the late ‘50s. There were two of them: Common Stocks and Uncommon Profits and the second one [Paths to Wealth through Common Stocks]. Very, very good books. I actually went out to see him in San Francisco. He emphasized more what he called the scuttlebutt approach. Essentially, it meant going out and talking to competitors and customers and all of that sort of thing — and trying to find outstanding businesses.

You can ask any company in the paper business, “If you had to invest in one other company in paper besides your own, who would it be?” And you just keep going around and developing an opinion about what the castle is like and what the moat is like through this process. That had an effect on me.

I use it to evaluate businesses. I have to — because I already know the things like the Furniture Mart in Omaha. I know what the position is. But if I had never heard of it coming from out of town, I could have gotten a picture of that business in 8-10 hours just by talking to half a dozen of their competitors and some of the customers.

You can find out a lot just by asking. As Yogi Berra said, “You can observe a lot just by watching.”

Student: What’s your assessment of the cigarette business?

Buffett: I think that — next to New Coke, which was reversible — the Philip Morris decision of early April [to cut prices on cigarettes], I simply don’t understand. Now, they faced terrible choices. The market share was eroding all the time, [but] I do not think I would have made that decision.

The cigarette business, for a lot of years, was in this incredible position where the returns on capital were just enormous. And you had a business which nobody wanted to enter. The same companies that were in it in 1960 were in it in 1990. And in lock step — led either by RJR or Philip Morris — they could raise prices. It got to be ungodly profitable.

You had Liggett and Myers decide to come in with low-price cigarettes. They take 1% of the market and 2% of the market … It was very tough.

You cut the price and you start all over again with a different price level. It would be one thing if you got rid of [low-priced competition], but you don’t get rid of them. It is tough to put that particular egg back together again once you crush prices.

Student: What do you think about the compensation for Coke executives?

Buffett: I would say, if we’d owned the whole Coca-Cola Co. in 1982 or whenever it was that Roberto Goizueta and Don Keough came in, I would have made a compensation deal with them at that time that probably would have paid them more than they’ve received subsequently. They added $50 billion in value.

Now, they had the kind of product they could do it with — but it hadn’t been done before. Somebody in the same position, a mediocre management, might have added $15 billion or something like that. So I would have made a deal with certain standards, but that deal wasn’t made and they paid them in other ways. I don’t have any quarrel with the amount of money they’ve made.

Student: What do the top money managers do that others don’t?

Buffett: Well, they know what they’re doing. They’ve thought through the investment process and they focus on things they understand. They know why they’re buying things. They are buying businesses. They’re not thinking about next quarter’s earnings and they’re not thinking about what the stock did over the last three months.

I ask myself, every time I buy a security, “Do I care whether the stock market is open next year?” The answer is — I don’t. I’m happy owning the business. The stock market isn’t open on Saturday and Sunday — [and] I manage to get through that. I don’t get a quote on See’s Candies or Dexter Shoe every day or every week or every month or every year. I look to the business to perform.

Student: How will Berkshire Hathaway move on after Warren Buffett?

Buffett: I have publicly announced I plan to run Berkshire until 5-10 years after I die. (Laughs) But Berkshire would be pretty easy to run. It’s in marvelous financial shape and has a great set of managers in the operating businesses.

The person that ran it would have to do two things. They would have to basically keep the present managers motivated and happy doing what they’re doing. And that basically means leaving them alone and judging them by the right standards.

And, then, they would have to allocate capital. They could partially solve the capital allocation by simply establishing a significant dividend policy for one thing. They’d have to get one good idea a year on capital allocation — and the managing would be very simple.

Well, on that happy note…

The Q&A session ended with a 40-second ovation from the students.