Meeting the Oracle of Omaha

Price vs Value, Margin of Safety, Mr. Market are terms brought to life by Benjamin Graham in his books, teaching career at Columbia University, and twenty years at Graham-Newman Corporation. These simple ideas have been used along with patience as armories by many intelligent investors, most notably, Warren Buffett, to create investing legends for aspiring value investors. As one can imagine, an opportunity to meet the legend and ask him questions sounds remote to reality and makes it difficult for rookies like me to hide my own delectation.

Intelligent Investor synopsis:

Since the three terms predicate Buffett's investing philosophy, I would like to define them quickly. Graham exposed that any discrepancy between the intrinsic value of the business and its price created an opportunity for investment, if the investment offers sufficient margin of safety. Margin of safety concept can be easily understood when looking at undervalued stocks as a favorable difference between the price and the appraised value, in other words, a cushion to absorb unfavorable movements in the price. Who would be willing to sell securities cheap though? Graham introduces Mr. Market, an obliging partner who tells you everyday what he thinks your interests are worth and also offers to buy you out or sell additional interests to you. Often, Mr. Market lets his enthusiasm or his fears run away with him and the value he proposes seems to you a little short of silly. Most importantly, he does not feel bad at being ignored constantly.

Warren Buffett (वॉरेन बफेट), the legendary investor:

Warren Buffett graduated from Columbia Business School in 1951 and worked at Graham-Newman corporation from 1954-56. In 1956, he started Buffett partnerships and subsequently acquired Berkshire Hathaway in 1962 diverting most of his attention to its dying textile business, which he ultimately shutdown in 1985. The experience probably led Buffett to observe: When a good management meets a bad business, it is the reputation of the business that generally prevails.

I would like to throw some terms often used by Buffett to jump into discussing the little that I understand of his investing philosophy: Circle of Competence, Moat, Investor emotions, Capital Allocation, Great Management, Cash Flows, Earning Power, Franchise Value, Simple Business. While these concepts warrant lengthy dissertation, I would try to capture them briefly. Charlie Munger, Buffett's partner, the only person other than Graham whose investment recommendations Buffett listens to, greatly influenced him to invest in businesses with moat around them - In other words, a sustainable competitive advantage and franchise value enjoyed by a business that is hard to break for other competitors, examples include Coca-cola and American Express. By such definition, such companies may also enjoy superior earning power and cash flow. Even these businesses can stand to loose their edge from poor management and lack of responsiveness to changes around them.

Buffett believes that he is good at capital allocation, an art much easier to possess when deploying a thousand dollars to work as opposed to putting a billion dollars to work. Capital allocation can be simply understood as the ability to identify both how much and where to allocate capital such that every extra dollar of investment brings home more than a dollar. Now for the small investor, Buffet emphasizes on two important aspects of investing: Investing in one's circle of competence or businesses one can understand, and overcoming individual emotions of fear and greed in making investment decisions. As we stand before Mr. Market to engage in a trade, we should buy or sell his securities but not his emotions. Buffett's thoughts on investing find their best mouthpiece in his letters to Berkshire's investors each year and the letters can be best characterized as gems of investing.

What makes Mr. Buffett my hero? His riches, maybe, but more importantly his simplicity reflected in his thought process, clearly articulating complex ideas such as derivatives, and his simple lifestyle. He really turned into my hero when he pledged to donate his 10 mm Berkshire Class-B shares (majority of his holdings) to Gates Foundation. In many ways, he resembles a couple of my other heroes, Gandhi and Rajendra Prasad, who possessed the simplicity in thoughts, action, and lifestyle. I would like you to imagine a man with $54 billion net worth driving in a 70s buick, living in his grandfather's home all his life, not owning the building where he works, and not burning 24x7 of his life working manically like a banker, and you are right: That is Warren Buffett. While I can understand a perfectionist arguing that Buffett may not be the best example to follow in personal life, I would also ask him to muse over the question "Does perfect man or woman really exist?"

Omaha trip

My flights with the Columbia buddies to Omaha and back were terribly delayed due to bad weather allowing for only two hours of sleep before we went to meet Mr. Buffett in Omaha. As Mr. Buffett remarked on Omaha that if you pick up a book on the best things to do in Omaha, the first page would probably read "You are already doing it". My Omaha trip sounds much like a pilgrimage and I think I have laid down a fair case on why any serious investor should at least be cognizant of Buffett's investing philosophies if not Buffett himself.