Warren Buffet: what can we learn from him?
03 February 2016
You can also listen to these podcasts directly from the Old Mutual app, which is available here.
Hello and welcome to the latest edition of Old Mutual Live Business, my name is Chris Gibbons. Say the words ‘great investor’ and they will almost immediately be followed by the name Warren Buffett, the so-called Sage of Omaha.
A man who has built an investment empire that ranks either the second or third wealthiest man in the world, a multi-billionaire, in other words. Yes, he does live in the city of Omaha in the US State of Nebraska, which is a little like living in a slightly obscure corner of the Free State.
So what makes Buffett so great, what does he do that the rest of us can learn from? Once a year thousands of investors make what could be called a pilgrimage to Omaha to the Annual General Meeting of Buffett’s company, Berkshire Hathaway to hear directly from the great man himself.
Someone who has done that trip a couple of times, well known financial commentator, David Shapiro, Deputy Chairman of Sasfin. David, thank you for joining us on Old Mutual Live Business. When did Warren Buffett first come to your attention?
David Shapiro: Oh, it’s 20 odd years ago. We used to read his letter, in fact Chris, I must tell you something, I did a course, before there was anything called the CFA. I did a course through the New York Institute of Finance and our textbook in those old days was Graham Dodd, Benjamin Graham. It’s through reading that textbook that I learnt about Benjamin Graham and of course, Benjamin Graham was the mentor and teacher of Warren Buffett.
It’s through that that I became aware of Warren Buffett and used to read his newsletters, which we always looked forward to. In fact, it should be out very shortly as well, and from that, one built a philosophy around his business practices. He’s changed them, he’s had to change with the times, simply because of communication, but still, many, many of those strategies still apply today.
How does Buffett get it right?
CG: What makes Buffett then such an astute picker of companies?
DS: You know what, common sense! I can’t think of anything else because when you read how he approaches business. He’s always got a wonderful way of putting things. I think that’s why anybody who has never been to Omaha, should go there.
I’ve done a lot of presentations on his philosophies, from the meetings, not from reading books. Just from stuff that I’ve picked up there and it’s just the way that he phrases it. He’s never phased out by what’s happening in the market.
He always looks for what he calls good businesses and how you do that, I think you’ll only, only in time can you actually choose your own good businesses. It’s common sense, he never looks for high flyers, he always looks for sustainability. Companies that are going to be there three, four, five years down the line.
It’s very difficult to put all his philosophies into a very short podcast and that, but I think it’s just the way that he approaches the market, is just what makes him so unique. We’re not going to get another Warren Buffett and when he goes, it’s going to be such sadness for the investment community. Between him and his partner, old Charlie Munger. You know, Charlie Munger is 92, Warren will be, I think 86 this year, so they’re still going.
You can always learn from others
CG: The role played by Charlie Munger, he seems to have played quite an important one?
DS: Very much so, he’s a stabilising force, very sensible man. But he’s also changed Buffett’s philosophy. Buffett was a value investor and I think that he’s changed it today from being a value, he’s really changed from looking for deep value.
In other words, the last puff of the cigar, trying to extract value out of companies maybe that aren’t doing that well. To businesses that have got enduring kind of competitive advantages and that’s what’s called a mote. Businesses with motes around them, so he rather looks for those today, rather than say quantitative bargains. I think that’s where Charlie has been a very big influence.
Motor companies, Visa would be a mote, for example, why Visa or Mastercard, simply, that you can’t recreate the infrastructure that they have around the world. Therefore they have a monopoly or a brand that commands loyalty.
If I gave you a Shapiro credit card, you know, you might be able to use it at one shop or something like that, but Visa/Master, you can use all over the place. There are businesses like that which he calls, have big motes around them. I’m trying to think of others that have motes, but that’s where they built it on. Companies with strong brand names, strong, almost dynamic in their industries and also with strong look brand loyalty.
Understanding who you invest in
CG: He speaks of companies that he can understand.
DS: Yes, it might have acted against him because of that, he might have lost out in the tech boom. But he understands an ice cream company or he understands Coco-Cola or Wriggley’s chewing gum. He always says, these companies will still be around five, ten, fifteen odd years, people will still read newspapers.
To be honest Chris, he hasn’t done well on this portfolio. Companies like American Express, IBM, Wells Fargo and that have come under a bit of pressure. Coca-Cola, for example, there’s a shift away from sugar, so some of these big companies haven’t done well.
But where he’s done brilliantly is on his, almost call it private equity portfolio. He bought Burlington Northern Sante Fe, which is a transport business, a railway business. He bought into Heinz, in joint venture with the man from Brazil, Leeman, I can’t remember him. But those are where he’s in the insurance, insurance businesses are the ones that give him what he calls his ‘float’ in which to do the big deals.
I think that’s where his genius has been exposed, in finding these brilliant companies. I think they’re undervalued, the full value doesn’t come out if you look at the balance sheet of Berkshire Hathaway. I think it understates these businesses to a large extent.
What is a Berkshire Hathaway AGM like?
CG: David, you’ve been to a Berkshire Hathaway AGM, you’ve been to a couple, tell me about them.
DS: You know, fortunately I never went last year, which was the 50th and I can’t go this year, for family reasons. Last year grandson and we’re expecting a baby, and this year it’s my daughter’s 40th in New York. So I’ve got to go earlier, but it’s always an education.
There are 40 000 people that attend in Omaha and it’s just a wonderful day. What happens, you wake up very early in the morning, you’ve got to queue up to get into the centre there, which is a big arena, they call it the Woodstock for investors.
One chap described it, he says it’s like church. I met a fellow there, he says: you know what, it’s like church. You know what the message is but you want to keep hearing it again and again. It’s that kind of place. What happens is, you go in there very early, it’s always got a kind of a carnival atmosphere.
They always start off the day with a show about an hour, which reflects what happened over the last year and also has a lot of adverts for companies in which he’s invested. I’ve seen Paul Aka there, I’ve seen Buffett, the musician Buffett –
CG: Jimmy Buffett.
DS: Jimmy Buffett, that’s right. There’s always some personality that makes an appearance with him. Of course their board includes Bill Gates and that. Then after that for six hours they take questions and it’s through those questions that their wisdom comes out.
It’s a big shopping spree as well because attached to the convention centre is an exhibition hall in which all the businesses in which he owns have outlets there. From the jewellery company to cowboy boots to See’s Candies which are sweets, etc; and boy, can the Americans spend, but it’s packed.
40 000 people, they have screens all over the place. He used to, Chris, he used to meet everybody, but it’s too much now. They’re very old and he used to meet all the foreign visitors that came. You’d queue up for about half an hour, shake his hand, but he can’t do that anymore, there are just too many people that do come.
Where he has changed it, sorry for going on, where he has changed it, it used to be only the public that would ask questions, now he has three journalists and now he also has three analysts who cover the company, that ask questions as well.
He has remained humble
CG: David, final question, one word about Warren Buffett which crops up again and again is, humble, is he really?
DS: Very much so. He’s very down to earth and that’s, you know, on the way, whenever we’re in Omaha we drive past his house. He’s been there for fifty odd years, he still lives very humbly. He still loves hamburgers and Coke. He always says: I buy expensive suits, but they look cheap on me. That’s his kind of humour.
He’s got a wonderful, wonderful humour. Look, it’s very hard to be that humble when you’re worth, I don’t know, $45 billion. But he’s approachable and I think even when he walks around, you don’t find heavy men around him. There’s no heavies or bodyguards or anything. You can actually reach out and touch him.
CG: David Shapiro, Deputy Chairman of Sasfin, sharing some insights about the man many call the world’s greatest investor, Warren Buffett. David, thank you for being with me on Old Mutual Live Business.