Warren Buffett: "I am a better investor because I am a businessman and a better businessman because I am an investor.”
Back in 1993, the Oracle of Omaha lifted the lid on the secrets to his success...
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In October 1993, Warren Buffett topped the Forbes 400 list for the first time with a net worth of approximately $8.3 billion. He edged out close friend — and the previous year’s winner — Bill Gates for the #1 spot.
It took over two decades of compounding Berkshire Hathaway’s wealth at an average annual rate of 29% to scale this particular mountain, but Warren Buffett had made it.
And, while his rank as the richest American proved fleeting, the investment principles and business philosophies underpinning his (and Berkshire’s) rise have more than stood the test of time.
In honor of his 93rd birthday, I thought it might be an opportune time to revisit the lengthy profile of Buffett that accompanied the ‘93 Forbes list and celebrated his ascendancy to the top spot. After all, it provides one of the most comprehensive examinations of his life and career from that era.
[Great minds think alike: Last week,
mentioned this Forbes profile in Warren Buffett’s Canvas. A must-read on Buffett’s evolving masterpiece.]Let’s dive in and take a closer look at some of those aforementioned principles and philosophies that fueled his meteoric rise atop the Forbes 400…
WHAT MATTERS MOST
Investors should be on the lookout for wonderful companies run by honest and capable management teams. But, alas, we live in a fallen world where such opportunities are few and far between. So, when forced to choose between a good business and a good manager, Buffett leans towards the former.
“When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”
But, if you’re lucky enough to stumble upon that rare marriage of a wonderful business and wonderful management, Buffett recommends paying up for it. “When you find a really good business run by first-class people, chances are a price that looks high isn’t high,” he said. “The combination is rare enough [that] it’s worth a pretty good price.”
In the Forbes profile, Buffett lavished praise on Roberto Goizueta and Don Keough for spearheading Coca-Cola’s resurgence in the 1980s. Tom Murphy, too, received special mention for his outstanding work with Capital Cities/ABC. But, ultimately, Buffett conceded that even the best of the best could do frustratingly little to change the trajectory of a subpar business. “If you put those same guys to work in a buggy whip factory, it wouldn’t have made much difference,” he said.
Case in point: Berkshire Hathaway’s now-defunct textile operations. For two decades, Buffett and his textile managers tried everything under the sun to resuscitate this moribund piece of the Berkshire machine. He did not want to close the textile mills — and regularly praised both management and labor for their sincere efforts — but he finally admitted defeat in 1985 and exited the industry. Some things just cannot be saved.
OPEN TO NEW IDEAS
Warren Buffett invested in Berkshire Hathaway in the first place because its stock price was so cheap. A classic cigar butt investment right out of the Benjamin Graham playbook. This investing style had made Buffett — and his partners — a lot of money, but that didn’t mean it could go on forever. So, when Charlie Munger presented Buffett with a better path forward predicated on brand names and moats, he was smart (and humble) enough to take it.
“Charlie made me focus on the merits of a great business with tremendously growing earning power, but only when you can be sure of it,” said Buffett. “Charlie is rational, very rational. He doesn’t have his ego wrapped up in the business the way I do, but he understands it perfectly. Essentially, we have never had an argument — though occasional disagreements.”
Munger says that there are times when he has to prod Buffett away from his old Ben Graham attitudes about what constitutes a bargain. Munger: “Warren was a little slower to realize that a very great business can sell for less than it’s worth. After all, Warren worshipped Ben Graham, who wanted to buy companies at a fraction of the liquidation value, and it’s hard to go beyond your mentor. Sure, I convinced him we should pay up for good businesses.”
Buffett draws an important distinction between his new style and that of his mentor’s. “Ben Graham wanted everything to be a quantitative bargain [based on present conditions]. I want it to be a quantitative bargain in terms of future streams of cash.”
DIVERSIFICATION? WHAT DIVERSIFICATION?
“[John Maynard] Keynes essentially said don’t try and figure out what the market is doing,” Buffett told Forbes. “Figure out businesses you understand — and concentrate. Diversification is protection against ignorance, but if you don’t feel ignorant, the need for it goes down drastically.”
Of course, Buffett is right — but this can be a risky play for us mere mortals who lack his prodigious intelligence and financial acumen. The ignorant are a surprisingly self-confident bunch and often overestimate their own abilities, so this maxim obviously has its limits.
As always, the key is to know thyself. Only after a brutally honest self-assessment — which lays bare your shortcomings and irrationalities — should one follow Buffett’s lead and eschew the relative safety of diversification. Tread carefully.
CIRCLE OF COMPETENCE
Forbes asked Buffett about two recent decisions — selling Fannie Mae and a portion of Affiliated Publications (owner of the Boston Globe) — that appeared ill-timed. Buffett took full blame for one, but brushed off the other. And it all boiled down to his own circle of competence.
“[Buffett] readily concedes he left $2 billion on the table by getting out of Fannie Mae too early. He didn’t buy as much as he set out to and sold too early. Why? He shakes his head. ‘It was easy to analyze. It was within my circle of competence. And, for one reason or another, I quit. I wish I could give you a good answer.’”
Buffett pared back Berkshire’s position in Affiliated Publications because “he did not fully grasp the value of [its] big position in McCaw Cellular”. And he’s perfectly okay with that. “I missed the play in cellular because cellular is outside my circle of competence.”
SOME MORE QUICK HITS
Back in the 1990s, long before The Giving Pledge, Buffett often faced accusations over his perceived lack of charitable giving. My, how times change. “I wouldn’t want to transfer Berkshire Hathaway shares to anyone while I’m alive,” he told Forbes. “If I owned a wide portfolio of securities, I could give them away. But I don’t want to give up control of Berkshire Hathaway.”
This, too, has changed. At the time of the Forbes profile, Buffett held 42% of Berkshire’s voting power. That has since fallen to under 32% after many years of charitable contributions.
Buffett railed against corporate cronyism. “If you have [managerial] mediocrity and you have a bunch of friends on the board, it’s certainly not the kind of test you put a football team through,” he said. “If the coach of a football team puts eleven lousy guys out on the field, he loses his job. The board never loses their job because they’ve [hired] a mediocre CEO. So you’ve got none of that self-cleansing type of operation that works with all the other jobs.”
“I am a better investor because I am a businessman,” said Buffett, “and a better businessman because I am an investor.”
Warren Buffett’s Forbes 400 triumph in 1993 made big waves back in Omaha.
Several members of Buffett’s inner circle spoke to the Omaha World-Herald about what this honor meant — and didn’t mean — to the Oracle.
Buffett’s daughter, Susie, insisted that her father was not driven by money. “He goes to the office and loves what he’s doing. He’d be perfectly happy making $40,000 a year if he could go to work and do something he loved.”
This echoes what Warren Buffett told Forbes: “I have in life all I want right here. I love every day. I mean, I tap dance in here and work with nothing but people I like. I don’t have to work with people I don’t like.”
His son, Howard, said that fame and fortune hadn’t changed his father one bit. “He’s doing great. There just really are no things I could put my finger on to say he’s any different than he was fifteen years ago.”
More from Howard: “We have a great relationship. He has been a great instructor, a great teacher. I never look at my dad as the Warren Buffett that you see on Forbes magazine. All I see him as is my dad. But, at the same time, I realize he has so much experience and knowledge to offer.”
Okay, this next line comes from the Forbes profile, but it sums up Buffett’s personality so well. “One of the reasons Warren is so cheerful is that he doesn’t have to remember his lines,” said Charlie Munger, indicating that Buffett remains the same person whether in public or private.
Warren Buffett, himself, told the World-Herald that topping the Forbes 400 came with some unexpected drawbacks. Namely, a flood of media inquiries, autograph seekers, and strangers with outstretched hands. “One guy wrote this long letter asking for $10,000,” he said. “And, then, at the end, he said, ‘Well, while you’re at it, why not make it $1 million?”
But, other than that, Buffett was largely unfazed by the accolades and attention. “I like Berkshire to do well, but Microsoft can do better and that doesn’t bother me. If Berkshire does well, I’m happy. If Berkshire was doing so-so and I was at the top of [this] list, I would not feel good about it.”
Above all, Buffett promised not to rest on his laurels. “I’m interested in what happens tomorrow,” he said.