Buffett's first major TV interview and 5,106 pages of wisdom you will never read
"I don’t have to make money in every game. There are all kinds of things I don’t know about. Too bad. The process is defining your area of competence and finding what sells cheapest in that area."
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Hello everyone,
Yesterday, for the first time in two years, Berkshire shareholders returned to their annual pilgrimage to Omaha. I’ve only attended once in 2009. Something about joining tens of thousands of others triggers a contrarian instinct in me (though arguably the alpha of attending is in the connections and serendipity emerging from the meetings leading up to the main event).
Instead, I re-watched one of my favorite Buffett interviews. It is only seven minutes long and was conducted in 1985 by George Goodman, who helped start Institutional Investor magazine and wrote one of my favorite books about Wall Street, The Money Game, under the pseudonym Adam Smith.
In his book Supermoney Goodman wrote about his first encounters with Ben Graham and Buffett. This was in 1970, shortly after the publication of The Money Game. Goodman received a letter from Ben Graham’s summer home in France.
While Goodman had much respect for Graham...
There is only one Dean of our profession, if security analysis can be said to be a profession. The reason that Benjamin Graham is undisputed Dean is that before him there was no profession and after him they began to call it that.
… he also pointed out that Graham’s value investing philosophy seemed to belong to a bygone era of ample bargains. Among Goodman’s social circle of professional investors, Graham’s ideas were “trading at a discount.”
To Graham, a stock had Intrinsic Value. In the Dark Ages of the Thirties, it was not so hard to find Intrinsic Value.
Benj. Graham was studied with respect by generations of analysts, but not with affection. What was one to do all day, if the market was to be ignored? That would not get you rich. How could anybody ignore IBM? How smart could somebody be if he had missed IBM—not because he didn’t know about it, but because he had considered it, measured it and turned it down?
Graham was well aware that he was himself selling at a discount. Through a number of editions of Security Analysis, the final sentence to the “Summary of the Valuation of Common Stocks” warned that “our judgment on these matters is not necessarily shared by the majority of experienced investors or practicing security analysts.”
Graham asked Goodman to work on a new edition of The Intelligent Investor:
“There are really only two people I would want to work on this,” Graham said. “You’re one, and the other is Warren Buffett.”
“Who’s Warren Buffett?” I asked.
By that time, Buffett had just dissolved his partnership and Berkshire Hathaway stock was still traded on the pink sheets.
While Goodman was well connected among money managers in New York and Boston, Buffett was an unknown quantity to him.
All through the sixties, Warren stayed away from the stocks that dominated the financial headlines and provided the excitement in the board rooms. The partners bought an old textile company called Berkshire Hathaway because its net working capital was $19 a share and their cost was about $14; they ended up owning most of the company, and Warren put new management in.
Buffett had eschewed the growth stock craze of the 1960s, a central theme in The Money Game.
What was remarkable was that Buffett was easily the outstanding money manager of the generation, and what was more remarkable was that he did it with the philosophy of another generation.
Just pure Benj. Graham, applied with absolute consistency—quiet, simple stocks, easy to understand, with a lot of time left over for the kids, for handball, for listening to the tall corn grow.
Goodman was wrong about there being much time left for Buffett’s children. But he was rightly captivated by Buffett’s success:
His partnership began in 1956, with $105,000, largely supplied by uncles, aunts and other assorted relatives. It ended in 1969 with $105,000,000, and a compounded growth rate of 31 percent. Ten thousand dollars invested in the partnership in 1957 would have grown to $260,000.
He did not have a committee to deal with, and he did not have a boss. He kept himself out of the public eye, though for most of his career the public eye would not have been on him anyway. If he bought so much of a company that he controlled it, he was willing to step into the business. All of these factors freed him from more typical restraints.
Buffett also shut down his investment partnership at the top of the market. This was incredible to Goodman because it went against the instinct to maximize fee income.
He quoted from Buffett’s letters during the late stages of the ‘68 bull market:
“I am out of step with present conditions. When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on . . .
On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean forgoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.”
“Philosophically, I am in the geriatric ward,” he wrote.
“We live in an investment world populated not by those who must be logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.”
After several lunches, Goodman visited Buffett in Omaha where they “went over the lessons of the Master to see what was still relevant, like two scholars over the Scripture.”
Goodman was fascinated by the fact that a money manager could succeed this far from Wall Street. He kept asking Buffett about his decision to live in Omaha. I highlighted a quote from this visit in The Reading Obsession:
“I can be anywhere in three hours,” Warren says, “New York or Los Angeles. Maybe a little longer, since they took the nonstop off. I get all the excitement I want on those visits.
I probably have more friends in New York and California than here, but this is a good place to bring up children and a good place to live. You can think here. You can think better about the market; you don’t hear so many stories, and you can just sit and look at the stock on the desk in front of you. You can think about a lot of things.”
During their tour, Buffett introduced Goodman to his philosophy. While Goodman was used to aggressive managers trading stocks, often at an aggressive pace, Buffett emphasized valuation and business analysis. And patience.
After a while, around Warren, you begin to get a feel for business, as opposed to stocks moving.
“Whether the New York Stock Exchange is open or not has nothing to do with whether The Washington Post is getting more valuable. The New York Stock Exchange is closed on weekends, and I don’t break out in hives. When I look at a company, the last thing I look at is the price. You don’t ask what your house is worth three times a day, do you? Every stock is a business. You have to ask, what is its value as a business?”
We are driving down a street in Omaha; and we pass a large furniture store. I have to use letters in the story because I can’t remember the numbers.
“See that store?” Warren says. “That’s a really good business. It has a square feet of floor space, does an annual volume of b, has an inventory of only c, and turns over its capital at d.” “Why don’t you buy it?” I said. “It’s privately held,” Warren said.
“Oh,” I said. “I might buy it anyway,” Warren said. “Someday.”
Berkshire acquired the Nebraska Furniture Mart more than a decade later in 1983.
Despite his track record, Buffett was still not widely followed among professional managers (though he was well known among fellow disciples of Graham). When he started buying shares in the undervalued Washington Post, Goodman paid attention. But the idea did not resonate among Goodman’s money manager friends.
I tried the Washington Post idea on my Wall Street friends. They couldn’t see it. “Big city newspapers are dead,” they said. “The trucks can’t get through the streets. Labor problems are terrible. People get their news from television.” And anyway, it wasn’t the next Xerox.
In the end, neither Goodman nor Buffett worked on a new edition of The Intelligent Investor. “We wrote a note to Ben,” Goodman wrote, “saying his book didn’t really need any improvements.”
But Goodman managed to interview Buffett more than a decade later, in 1985, for his show “Adam Smith’s Money World.”
“I don’t think Warren has ever been on television until this interview, and he is certainly never courted publicity, but recently he got a lot of it when he emerged as the key figure in the takeover of ABC by Capital Cities.”
(Goodman was wrong - Buffett had appeared on TV at least once before, in 1962.)
His lessons were short, simple, and timeless.
Remember the first rule: don’t lose money
It’s all about temperament
Think for yourself
Buy businesses, not stocks
Reduce the noise
Choose the game that’s right for you
Patience and discipline: simple, not easy
Data can be a distraction