Passion, The Greatest Asset - Warren Buffet

Passion lectures From the Tuck Investment Club Tour of Nebraska Furniture Mart:

Upon entering the enormous furniture superstore, Bob Batt, along with employees Jeff and Kristen, greeted us with a sign welcoming the "#1 Business School in America" fresh from the Wall Street Journal article earlier in the week. During the tour we picked up several pointers from Mr. Batt:
  • On being open on weekends/holidays: "gotta be there when the customers are there"
  • Sam Walton: "If you don't care about your customers someone else will"
  • Furniture retailing in Omaha is now a global business, events in China and India will affect the bottom line.
  • Continuous cleaning is very important; nobody buys from a dirty store.
  • Target customers are women, they make the purchasing decisions.
  • "How credible are you when you're selling?"
  • Learned crowd control from Disneyland, keep people in line entertained.
  • There is no consignment, all inventory is owned: "cash is king" - furniture manufacturers will give discounts to customers paying cash
  • In 1975 NFM lost all stores in a tornado, they made a Red Cross contribution the next day.
  • NFM does not have employment contracts, has never fired an employee in 61 years.
  • When asked what market segment NFM targets, Mr. Batt replied "we want it all".
  • Television sales are highly correlated to Nebraska's football schedule.
  • 'Adjacencies' are very important; having complementary items displayed near each other. For example, lamps and rugs near where chairs and couches sold.
The story of NFM's founding was referenced multiple times, and was a recurring theme during our meeting with Mr. Buffett as well. Rose Blumkin, aka 'Ms. B', started NFM in 1937 with $500 of friends and family money in her basement. She couldn't read or write and had never attended school at any level but built the largest furniture retailer in the region. NFM was sold to Mr. Buffett in 1983. After a difference of opinion with the current management team, Mrs. B started another furniture store at age 97. She sold this new furniture store to Berkshire a few years later, at which time Mr. Buffett wisely required her to sign a 10-year non-compete agreement. Her greatest asset was her passion, a pre-requisite for business success according to Mr. Buffett.

Some Q&A’s with Mr. Buffet

Q: What is your career advice?
A: If you want to make a lot of money go to Wall Street. More importantly though, do what you would do for free, having passion for what you do is the most important thing. I love what I do; I'm not even that busy. I got a total of five phone calls all day yesterday and one of them was a wrong number. Ms. B from NFM had passion, that's why she was successful. A few months ago I was talking to another MBA student, a very talented man, about 30 years old from a great school with a great resume. I asked him what he wanted to do for his career, and he replied that he wanted to go into a particular field, but thought he should work for McKinsey for a few years first to add to his resume. To me that's like saving s*x for your old age. It makes no sense.

Q: How does one become a successful general manager?
A: The first thing is that you have to know how you are wired. You have to pick the right environment. I can't imagine being responsible for hundreds of people and going to meetings all day, so I work with 17 other individuals. And, you have to have a passion for what you do.

Q: How do you identify extraordinary business ability?
A: Again, passion. When Ms. B's son was fighting in World War II, they exchanged letters every day…about the furniture business. When Berkshire acquired a 90% stake in NFM in the 80's, Ms. B and I shook hands and signed a two-page agreement. There was no audit of the books, no due diligence, I trusted her integrity. When Wal-Mart sold me one of their operating units, their CFO came to my office, I gave him a price, he called Bentonville [Arkansas - Wal-Mart headquarters], and that day the deal was done. I know how Wal-Mart conducts business [very well], and when we took over the division, it was exactly how they described it. So integrity is a requirement. One of Berkshire's businesses is FlightSafety, the founder is dedicated to preventing deaths, he's not motivated by the next quarter's numbers.

Q: When you consider an acquisition, what are the first things you look for in a management team?
A: Well, what do you look for in a girl? Seriously, you look for the logical things - passion, an interest in running the business, honesty. Such as, do they love the business, or do they love the money? This is the first filter. I mean real passion; Mrs. Blumkin ran Nebraska Furniture Mart until she died at the age of 103 - that's passion. If temperament is the most important personal asset in managing money, in business, it's passion. Secondarily, if you've been doing it a while, you get to know how to do it. But obviously no management team is perfect, so you're often stuck making a judgment call. You don't want to wait forever to find the perfect team. Incidentally, a friend of mine spent twenty years looking for the perfect woman; unfortunately, when he found her he discovered that she was looking for the perfect man.

Complete Notes:

Nebraska Furniture Mart and Borsheim's Visits:
  • "Sell cheap and tell the truth." -Ruth Blumkin, "Mrs. B", NFM Founder
  • "Take care of your customer, and they'll take care of you." -Ruth Blumkin, "Mrs. B", NFM Founder
  •  "Successful business is about managing the moments of truth." -Bob Batt, EVP of NFM
  • "The key [in furniture retail] is not what you sell for, but what you buy for." -Bob Batt, EVP of NFM
  • "Most business people forget the importance of being friendly and building a rapport with customers." -Bob Batt, EVP of NFM
  • "Getting business advice from Warren Buffett is like getting physics lessons from Albert Einstein." -Bob Batt, EVP of NFM
  • "Stay within your circle of competence." -Warren Buffett
  • "Mr. Buffett likes businesses that are low-cost producers in industries where he believes there will be stable or growing demand into perpetuity. Nebraska Furniture Mart and Borsheim's are two prime examples." -Susan Jacques, President and CEO of Borsheim's 
Examples of Passion from Berkshire Hathaway's Annual Report 2008 –

GEICO possesses the widest moat of any of our insurers, one carefully protected and expanded by Tony Nicely, its CEO. Last year – again – GEICO had the best growth record among major auto insurers, increasing its market share to 7.2%. When Berkshire acquired control in 1995, that share was 2.5%. Not coincidentally, annual ad expenditures by GEICO have increased from $31 million to $751 million during the same period.

Tony, now 64, joined GEICO at 18. Every day since, he has been passionate about the company – proud of how it could both save money for its customers and provide growth opportunities for its associates. Even now, with sales at $12 billion, Tony feels GEICO is just getting started. So do I.

Here’s some evidence. In the last three years, GEICO has increased its share of the motorcycle market from 2.1% to 6%. We’ve also recently begun writing policies on ATVs and RVs. And in November we wrote our first commercial auto policy. GEICO and National Indemnity are working together in the commercial field, and early results are very encouraging.

At Borsheims, sales increased 15.1%, helped by a 27% gain during Shareholder Weekend. Two years ago, Susan Jacques suggested that we remodel and expand the store. I was skeptical, but Susan was right.

Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the business, and she loves her associates. That beats having an MBA degree any time.

(An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity. Another of our great managers is Cathy Baron Tamraz, who has significantly increased Business Wire’s earnings since we purchased it early in 2006. She is an owner’s dream. It is positively dangerous to stand between Cathy and a business prospect. Cathy, it should be noted, began her career as a cab driver.)

Examples of Passion from other sources –

CNBC Interview (Regarding Iscar Manufacturing)–

Warren: I got a letter in October of 2005 from a man I didn't know about a company I'd never heard of and it was a page and a quarter long and it just jumped off the page that these were the kind of people I'd want to be associated with and the kind of company.

Some Facts about Iscar factory in China - The factory floors here are all painted yellow. You can see this. It is a signature of Iscar. They make sure they paint the factory floors yellow so that dirt can't hide. That's one way they say everything stays clean. It's a very important point and they say it's one thing that distinguishes Iscar factories from other factories all over the world.

Another distinguishing factor: everything here is automated... From the processes you see, to even those you don't, like employee scheduling and logistics. The plant in China is a feat in itself. It went up in just six months - something Buffett says could only happen here.

Buffett: What I saw in South Korea and the new plant that is just developing in China and what I'd earlier seen in Israel I've never seen in 77 years of life, I have never seen a better factory operation than the Iscar people have put together in each of those places. They know as much about manufacturing as anybody I've ever seen.

I welcome your views on the above and urge you to share your experiences, thoughts, information about passionate businesses/people in the above context.

Trading & Investing Lessons

In the recent years, stock markets have become a centre of attraction for most us. Equities and related financial products are becoming a popular asset class. This can be clearly seen from the growth in the number of participants, volume of transactions and overall turnover, and the growing assets under management with the Asset Management and Investment Companies.

Someone has rightly said - “If history repeats itself, and the unexpected always happens, how incapable man must be of learning from experience.”

It is not wrong to say that most of these downfalls happened because of ignoring or not correctly understanding and implementing Financial Discipline. Even after knowing and having experienced the ignorance, the emotions still make an individual a slave and make him deviate from rationality and common sense.

In this era of growing booms and busts, it is important to learn lessons from every failure in order to survive and grow. A lot can be learnt from the cases of Enron, Barings Bank, LTCM, Lehman and many such episodes. The most common reason of losing money at an institutional or individual level has been Lack of Financial Discipline.

“Common sense is the heart of investing and business management. Yet the paradox of common sense is that it is so uncommon. For example, people often refer to a stock or the market level as either “overvalued” or “undervalued.” That is an empty statement. A share of stock or the aggregate of all shares in a market index have an intrinsic value, which is the sum of all future cash flows the share or the index will generate in the future, discounted to present value.

Estimating that amount of cash flows and its present value are difficult, but that defines value, and it is the same without regard to what people hope or guess it is. The result of the hoping and guessing game—sometimes the product of analysis, often not—is the share price or market level. Thus, it is more accurate to refer to a stock or a market index as overpriced or underpriced than as overvalued or undervalued.”

- Lawrence A. Cunningham, How to think like Benjamin Graham and Invest like Warren Buffet

One of the important aspects of stocks is value and price difference. Let us start the discussion by understanding the two terms. Consider a showroom offering a computer with certain configuration for a price of Rs. 30,000. One way to look at it is that the true value of this computer would be the aggregate the price of every single part of the computer (monitor, keyboard, multimedia, RAM, Hard disk etc). One would realise that if he gets every single part of the computer separately paying a few bucks to get it integrated, the same computer with same configuration would cost him say Rs. 25,000. This could explain its original value, to be more accurate, the intrinsic value of that computer as of today. Therefore, in the above case, we can say that the price of the computer is Rs. 30,000 whereas its value is Rs. 25,000.

Today, the global economic system is based on the concept of money and not barters. Thus, in stock markets, price and value both are to be expressed in terms of some currency. Nevertheless, price and value are different, and one has to look at them differently. In successful investing, value plays an important role. It ensures a margin of safety. Thus, understanding a business is essential. That would be the key to arriving at a fair value with reference to investing. Fundamental analysis is therefore an important aspect affecting investment decisions as it ensures a margin of safety for the investment. It involves the study of the business, its financials, management efficiency, growth potential etc.

Stock Market Investing is an arbitrage opportunity, which exists because of a mismatch between value/worth of a stock and its market price. If market would have always priced stocks at their fair value, then logically speaking, the scope for investing and making returns would have never exist. The scope for investment is there only when the price will be less than the value by a reasonable margin. The prices that the stock market ticker shows are just numbers; at any given point of time they may not necessarily reflect the worth or the true value of the company or an economy and its prosperity.

We have been studying in our theory, as well as all great Investors including Warren Buffet have mentioned that there are numerous opportunities in Stock Markets. These opportunities are there because of price-value difference. This difference exists most of the times.

“We start with the assumption that the stock market is always wrong," Soros told a Wall Street Journal reporter in 1975. He says –

“I contend that financial markets are always wrong in the sense that they operate with a prevailing bias, but in the normal course of events they tend to correct their own excesses. Occasionally the prevailing bias can actually validate itself by influencing not only market prices but also the so-called fundamentals that market prices are supposed to reflect; the crux of the theory of reflexivity is not so obvious; it asserts that market prices can influence the fundamentals. The illusion that markets manage to always be right Is caused by their ability to affect the fundamentals that they are supposed to reflect.

The prevailing wisdom is that markets are always right. I take the opposition position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis. It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend. This line of reasoning leads me to look for the flaw in every investment thesis.” 
- George Soros, from the book - Alchemy of Finance

We need to understand and accept the fact, that there is something called “Market” just because everyone has different views. There cannot be a market if at any given time, everyone wants to buy or everyone wants to sell. Market will come into existence only when some want to sell and some want to buy. So the point Mr. Soros is making is that the markets will be wrong most of the times i.e. they will price the stocks higher or lower than their intrinsic values thus giving opportunities for Investments. Very rarely they will price the stocks near about its true value.

Till now, we have studied the concept of “intrinsic value” and we know that this will depend on factors like company’s assets/liabilities, expected future profits, discounting rates and certain other assumptions. On the other hand, price is a function of demand and supply. This demand and supply comes from Market participants which includes all, right from retail investors (Accountants, MBAs, Engineers, Doctors, Shop-keepers etc) to Institutional Investors, Mutual Funds, Venture Capitalists, Private Equity players etc. Among all these classes of Investors, there will be differences of opinion/view on future expectations, intrinsic values (because every one of them will have different ways of arriving at one). All this will help give birth to the concept called “Market”. And the market is wrong just because they do this job of integrating the expectations of millions of investors/traders and factoring it at any given point of time.

“Markets can remain irrational, more than Investor can remain solvent” Keynes famously remarked. 

Another reason for market being wrong could be the fact that there are lots of people who have access to all valuable information before others have, and if they get a chance to make money due to it, they would certainly do so. These are people who have access to every piece of information much earlier than it comes to the public/media at large. Such big time gamblers and operators who have first hand information are one of the real causes for making the market irrational. The other causes for market wrong can be attributed to all the factors of behavioral finance as discussed earlier.

Thus, another lesson history teaches us is that the “Market is always wrong.” That is one of the reasons Mr. Buffet mentions that the right time to buy is when everyone is fearful and the right time to sell is when all are greedy. He quotes - Be "fearful when others are greedy; be greedy when others are fearful...". History has always revealed that the best time to buy is the time when most of the market players are bearish and it is the vice-versa. All bull markets have taken a pause when most of the participants by and large where invested and quite bullish, and it is the vice-versa for bear markets reversing. People tend to get very excited and become extremists often. Extreme points often are points of desperation. At one point of time, people become extremely desperate to sell stocks, they dump all of them at any price and walk away, whereas at other point you will also notice that people feel so left out that they get extremely desperate to put money into markets and buy stocks at any prices.

“Those quotations did not represent prices of stocks to me, so many dollars per share. They were numbers. Of course, they meant something. They were always changing.” 
- Jesse Lauriston Livermore, Reminiscences of a Stock Operator

Logically, the markets do a very good job of predicting events and trends. In short/medium term, the prices are generally higher or lower than their respective values. Under this period, the prices on the stock ticker can be referred to as numbers which are built up on expectations. These numbers (prices) change on expectations, news, rumours, speculation, and changes in government policy, economic numbers etc. All these events may not always materialize in the way they are expected to be. For example, the inverse relation between commodity prices and stock prices as it seems to be existing according to many theories was no where seen in the last decade. A particular news or event might be negative or positive for a company, but in the long term, it might not materialize that way.

“The reason for what a certain stock does to-day may not be known for two or three days, or weeks, or months. Your business with the tape is now not tomorrow. The reason can wait. But you must act instantly or be left. Time and again, I see this happen.”

- Jesse Lauriston Livermore, Reminiscences of a Stock Operator.

Yes, the next few lines may sound like a paradox to our conversation till now. However, I think this is a must and is the way it happens. The MARKET IS ALWAYS RIGHT AS WELL. I say this because no matter how much manipulation is done in the short or the medium term, the market and its participants always consolidate the stock PRICE near its true VALUE and the deviation between the two is minimized over a period. Thus, I say that the market is always right as well in the long term. We may not understand why the price of a particular security is moving (up or down) (may be its manipulation or price-rigging or just plain expectation by market participants) but the market knows exactly why it is moving and it is prepared to consolidate it when the right time comes. All the irrationality in the market is in the short term to medium term. The market is wrong in this period.

Nevertheless, in the long term, we have always seen the survival of the fittest. Good stocks have always traded at higher valuations and have performed well. We all know how the arbitrage opportunities cease to exist over a period of time, whether it’s the futures market case or it’s the case of the arbitrage opportunities in case of the mismatch of the value/worth of a stock and its market price. Long term investing has been always the most advisable and systematic approach as everything takes its own time.

Your feedback is welcome.

The "Buffet" Style of Doing Well...

I am sure all of us have had a royal buffet and I guess experiencing this must have also been a costly affair for most of us.

Before we go on talking about its contents, let us appreciate that such buffet’s are served properly with good plates, ambience. These buffets are also marketed well at least till the time they aren’t well known.

A royal buffet comprises of starters, few sweets, farsan, rote/chapatti/naan, a few vegetables, rice and dal, salads, desserts. Further, there are lots of restaurants offering buffet but not all of them are good.

Some buffet’s are good overall and they also have some specialty in it i.e. some of the items would be just outstanding.

Such a buffet which serves all such items, with some specialty would manage to get a good price from customers.

Imagine, a buffet with only rice, or only dal, or only chapatti, or only sweets….!!! I am sure there would be very few (or no) takers for it and the price paid for it would be pretty low.

I am sure you will be wondering what has the above descripttion of buffet go to do with getting a good offer. Apply the same logic….You will get the answer yourself.

Can you get a good offer with only rank? Or only references? Or only knowledge? Or only soft skills? No sir, that’s highly imporbable.

The buffet that gets a very high price has everything as discussed above. Similarly, you need to have mostly everything; Note that a rank or a reference maybe just like that one particular item which gets an excellent rating or it improves the overall rating of that buffet. Ranks have to be there, so do references, knowledge, soft skills, presentation skills and more important all this put together should be marketed well at the first place; it should be visible in front of the right person at the right time.

Also note that when you think about yourself and your roadmap to achieve your destiny, it is very likely that one or the other thing is missing (for example not everyone has ranks, nor everyone has influential references). There is still nothing to worry in that case. A buffet may skip on one or two items but may still get the highest price. In that case, it has to ensure that it makes the remaining other things attractive enough to cover up well for those missing. I am sure you must have experienced that not all items in a buffet are that good. There maybe one or two items which aren’t so well. However, that buffet still manages to get a high price. This is because it covers up for these jokers in the pack i.e. the items which aren't so good. That’s exactly what you need to do by covering up in other things and ensure you make it to the top... There are so many options where you can leverage upon!

In reality, no one expects all items in buffet to be outstanding. Ideally, a few are outstanding, and the remaining one's are atleast decent/good. Similarly, one is not expected to be outstanding in every area (its great if thats the case). Accordingly, you are expected to have some selling points, these could be the areas you are outstanding at, however, at the same time, you should be decent/good at other things as well.

So find out your specialties (unique selling points) and market yourself accordingly.

Wishing you good luck.