Saturday, May 1, 2010

Week 18: Buffett's Gold Standard Reiterated in Omaha

At 7 AM this morning, I walked into a crowded indoor stadium in Omaha, Nebraska with 40,000 others. Our goal was the same: to listen to the musings of two 80 year-old men sitting at a very tiny table at the center of a very large stage. The two men are well known, particularly to the investment community: Warren Buffett, Chairman & CEO of Berkshire Hathaway and his partner Charlie Munger, Vice-Chairman of Berkshire Hathaway. For years, my Dad and I toyed with the idea of attending the annual shareholder's conference, and for my 25th birthday, we decided to finally make the hike to Omaha. Boy, am I glad we did.

The perspective, wisdom, and elegantly simplistic words and ideas I heard expressed today have inspired me. In some ways, the message is exactly what I - and perhaps we - need. We are at a crossroads. The economy is still in limbo, politics are divisive, and a widespread and legitimate uncertainty underscores our collective sentiment. Personally, I needed to believe again. I needed to hear that the principles of capitalism remain sound, and its byproducts virtuous. The cacophony of Wall Street and Washington has to some degree hijacked our discourse. Instead of focusing on what has to be the way out of our economic mess - the ingenuity, leadership, and integrity of our people - we have been focused on passing (and in some cases avoiding) the blame.

Which brings me to today's content. I will be focusing next week's post on a few of the meaningful topics discussed by Buffett and Munger. But today, I will give highlights and end with some of the incredible (and funny) quotes from the day. I'll start with this: these two guys should really have a television show. Not only did the two octogenarians (for accuracy's sake, Buffett isn't 80 until August 30) play off each other well, they showed incredible stamina. The two in good spirits answered roughly 40 questions over five hours, and had no inkling of the topics beforehand. However it was the first question on which they spent almost 30 minutes. The topic was Goldman Sachs.

For readers not coming from a finance background, Warren Buffett made a $5 Billion investment in Goldman Sachs during the height of the financial crisis. This both strengthened Goldman's capital reserves in a period of severe illiquidity and extended Buffett's venerable seal of approval to the bank at a time when market confidence was crucial to any financial institution's survival. As many of you know, Goldman Sachs and its executives spent a full day this week testifying before Congress. The bank was recently charged with fraud by the SEC. Rumors of criminal charges by federal prosecutors have been swirling as well. While I will save pontificating on this particular situation for another date, suffice it to say Goldman did not have a pleasant time in front of Congress this week.

Perhaps ironically, Warren Buffett had a similar situation to Lloyd Blankfein (the CEO of Goldman Sachs) almost 20 years ago. Buffett became the Chairman of Salomon Brothers in the midst of a trading scandal, and was called to testify to Congress as a result. His words resonate in a way that cannot be recreated - I urge you to follow this link to a two minute clip and hear what he has to say. The climactic quote underscores the seriousness with which Buffett approached the ethical issues of the firm: "Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless." Since giving this testimony in 1991, Buffett has played this clip at the beginning of each and every Berkshire Hathaway shareholder's meeting. But this year it resonated. His candid, unequivocal approach to challenging issues is what we need today.

In my judgment, unfortunately, the Goldman executives fell short. I say unfortunately because there is a very solid response for some of the issues facing Goldman. Most striking today was Buffett's strong support for the firm. When asked who he would want to replace Lloyd Blankfein, Buffett responded: "Lloyd's twin." Quite an endorsement from the Oracle from Omaha. Much of the problem with the Goldman situation, in Buffett's opinion, relates to the media and its inability (or unwillingness) to accurately represent the nature of the transaction in question. Without getting into the details, I will say that Buffett made a wonderful comparison between his own approach to the bond insurance business and that of some customers of Goldman's CDO underwriting and sales business. Importantly, he said that he stands by Goldman because nothing has been proven to be wrong and the facts as he sees them do not suggest any illegality. Equally important was his statement that if the facts did lead to a breach of law he would revoke his support. It is this kind of unbending critical but fair approach that we need more of.

It's easy to be negative about the future - capitalism needs a hero, we all need a hero. Warren Buffett and trusty sidekick Charlie Munger provided that today. Their unique but consistent approach is to be admired, their unparalleled investment track record lauded, and their honesty and transparency emulated. Below are some of the quotes that stuck out to me from today's session. It was a wonderful birthday gift (along with meeting Bill Gates, Peter Buffett, Ralph Nader, Andrew Ross Sorkin, and others), and I look forward to writing more about this next week.

Warren Buffett:

"If you want to give away 100% of your estate, it's a wonderful tax dodge."

"I want to hear about problems."

"We won't trade reputation for money."

"There's a point at which adding 100 pages... obfuscates, rather than illuminates, information."

"(Newspapers) were the only game in town. Now they're not the only game in town. And boy does that make a difference when you're trying to sell something."

"If the best reason you're doing something is 'the other person' is doing it, well that's not good enough."

"People will be living a lot better in India in 20 years, as in China, as in the US."

"In the end what counts is buying a good business at a reasonable price and forgetting about it for a very long time."

"I like the idea of being judged by my own words rather than others writing a few paragraphs."

"You don't have to be brilliant, you just have to avoid the dumb things."

Charlie Munger:

"We celebrate wealth only when it's fairly won and wisely used."

"I developed courage when I realized I could endure hardship. Maybe you should get your feet wet and try failure more often."

"Take the high road, it's far less crowded."

(Quoting Ben Franklin) "It's hard for an empty sack to stand up straight."

"(Ratings agencies) drifted with the stupidity of their times in a way that is regrettable... But I've also yet to hear a single apology from business academia for its significant contribution to the current problems."

"If a small group of people with lots of influence feel very strongly about something and everyone else is indifferent, that small group will get what they want."

"Warren never looks twice at anybody who isn't a little eccentric... all you have to do is look at me."


  1. Glad the trip went well bud.. I like those quotes a lot

  2. I eagerly await your exposition of CDO's.