Wharton Journal

Issue date: 10/20/03 Section: News

Which of your classmates will be the most successful in life? Would you like to have 10% of the success of that classmate? What are the qualities about that classmate that made you select him or her? Make a list of those qualities on the left-hand side of a piece of paper. What kind of qualities would you place a premium on? Athletic ability? Richest father? Highest grades? Ability to recite pi to 16 digits? No, none of those. You'd pick the person with the highest character, someone who treats others properly and does things the right way. If that successful classmate is a "buy," now think about which classmate you would "sell short." List their qualities on the right-hand side of the same page. (You should actually try this exercise. Set aside an hour one day and do it. Benjamin Franklin, the founder of our university, did something similar.) What qualities would you list? Probably things like trying to take credit where it isn't deserved, cutting corners, cheating, not showing up on time, etc. If you consciously decide to make yourself a better person by accentuating the items in the left column and detracting from the items in the right column, you will become better over time. Cut off your bad habits and develop good ones. Actions turn into habits, and habits determine your destiny. As Samuel Johnson said, "the chains of habit are too light to be felt until they are too heavy to be broken."

These were the opening remarks of Warren Buffett, CEO of Berkshire Hathaway, on October 10, as he addressed an audience of 40 second-year MBA students who had traveled to Omaha to meet with him. Mr. Buffett spent the next two hours answering questions on a variety of topics, including investing, hedge funds, China, inflation, corporate giving, and life in general.

Asked by Simeon Wallis to talk about his worst investments, Mr. Buffett said that buying Berkshire Hathaway was a big mistake. He paid less than working capital for the company, but that working capital turned out to be a "mirage." Mr. Buffett explained how, in those days, he was looking for "cigar butt" investments. A cigar butt might not be the greatest smoke, but it's free. The problem with Berkshire was that it was a "soggy cigar butt." He also commented on Blue Chip Stamps. When he bought the company in the 60's, it was doing $120 million in sales; this year it did $50,000. In his usual manner he attributed this decline to "the old Buffett touch."

Regarding the hedge fund industry, Mr. Buffett said, "It's open to significant abuse." He explained how asset gathering can become more important than investment performance if there are wrong incentives in place. He then added that, for any investment portfolio manager, "It's unethical to have less than 100% of your money in [your fund]."

Continued...

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