Tuesday, October 24, 2006
Lessons from American's best business leader
Warren Buffett, the legendary Chairman of Berkshire Hathaway, stunned the world this summer when he announced to contribute roughly US$40 billion of his fortune back to society. For years, he was not known to be a philanthropist. However, his intention is cleared right from the start - even before he was known as the Oracle of Omaha. In a biography of him, The Making of an American Capitalist, Roger Lowenstein noted how he was worried about his future fortune in the way of distributing back to society. Warren once commented on Andrew Carnegie's grace: "Huge fortune that flows in large part of society should be in large part be returned to society." Being a spendid investor that he is, he is not so much a spendid allocator in the distribution of charity funds. However, as what he always practices - being great in staying in spots or his "circle of competency" - he found the best person in his view to manage his fortune which he donated back to society - Bill Gates and Foundation. Just like he acquires businesses, he is never good in operating or managing a business - though he did once during his long career when Saloman Brothers was on the brink of bankrupcy - he is second to none in spotting a fantastic manager operating a great business. And this is the basic strength of him in building from nothing to something since he started out in investing.
Such bold moves are typical of Buffett. He rarely invests for the short term or changes his mind. When he invests, he will hardly sells the business away. He will keeps the business forever. He once quiped "Our favourie holding period is forever." What he values besides the value of the business is he must treats the employees in a fair way. By buying and selling businesses, employees will suffer. As is so evident in so many take-over deals, jobs are cut in the name of rationalizing and so on. In the field of investing, PATIENCE is the key to success. And in this, it could means holding a business forever without taking a single cent out or selling out a great business. Think for the moment, if you own the picture "Mona Lisa" and today it is worth $10M, and you sell it today, the cash you receive today will be only $10M assumming you do not reinvest or do anything. But if you hold on to the picture, knowing this is the only piece of art in the universe, the value can only increase with time. Thus, it makes no sense for the owner to sell away the art today or in the future unless someone is paying him a great premium. Everyday that he holds on to the art, his net worth will be increasing. So in the case of holding a great business, if you sell today, you are throwing away all the future value that it may be worth. Then think of this case, if you spend a dollar today, you are not only throwing away the dollar worth of face value, you are also throwing away the potential value of what it can earns in the future. These cases are truly nothing but a lose-lose situation.
What he says is what he does. These wisdoms are all-so-evident in his current holdings. To name a few, See Candies (since 1970s), Coca Cola (since 1988), American Express (Since 70s), Geico (Since 70s). If you had put a dollar in Berkshire at the start, the dollar is worth more than $7000 today. If one does not have the patience, he will have regreted his action tremendously.
Notably, Buffett goes beyond his mentor (the late Benjamin Graham) in many times, particularly in two. He focuses on companies with a sustainable competitive advantage and believes the quality of its leadership is integral to its value. To understand the quality needed for leadership, it is way beyond the capability of the manager, there are so many managers who are very smart people but yet they fail the owners because of walking the "low road". I would suggest to read "The Warren Buffett CEO" to get an understanding the making of a great manager.
Unlike the vast majority of acquirers, Buffett retains its management. Being a master evaluator of people, he asks "Do you love the business, or do you love the money?" This is such a logical and basic question that many people fail if they will answer truthfully. In this question, I'm pretty sure many would chose money over what they love to do. However, there is nothing wrong with loving money but it should not be the driving factor taken to be your motivator. If you do what you love, you will have a better chance of succeeding, and when you succeed, you get rewarded. However, if you do it the other way, by doing something which you do not love but maybe you think it can makes lots of money, you may stand a lesser chance to succeed. Because when you do something you do not like, chances are you will not be able to do it to your maximum capability because you will not be motivated. So logically, your returns will be less. And if you are able to link it all up, by doing what you love, you will get your reward. So if you do what you love, you do not have to worry about rewards because it will comes to you naturally. Then if it comes naturally, why do a person needs to even think about loving money? That is so secondary.
Another Buffett wisdom is to live life simply while doing what he has a passion for. When you have a passion, you learn everyday. That's how greatness is acheived. Greatness can never be achieved if learning is ceased. However great a person can be in his field, mistakes will always be lying in wait, but that is not a terrible matter, in fact, it is a great thing to set the ground for improvement.
What is less familiar to the public on Buffett is his generousity of spirits to others, from students comtemplating their careers to CEOs facing difficult challenges. Consider this example, Vitaliy Pereverzev of Kazakhstan was part of an investment club that recently traveled to Omaha to meet Buffett and have lunch at Gorat's, his favorite restaurant. When his classmates started having pictures taken with Buffett after lunch, Pereverzev realized he had left his camera back in the Berkshire Hathaway boardroom. Rather than sending a staff person, Buffett offered to drive Pereverzev himself. And he took the opportunity to provide the young Kazakh with some counsel. "Vitaliy, you have to do what you love. I do not want to live like a king. I just love to invest," Buffett said. "Money aside, there is very little difference between you and me in terms of lifestyle. I eat simple meals. I drive a regular car. I make decisions, and, yes, I, too, make mistakes." Then Buffett offered the young student advice he won't forget: "Be a nice person, Vitaliy. It's so simple that it's almost too obvious to notice. Look around at the people you like. Isn't it a logical assumption that if you like traits in other people, then other people would like you if you developed those same traits?"
Another example was Anne Mulcahy of Xerox told me about her encounter with Buffett shortly after becoming CEO in 2001. Facing a liquidity crisis with $18 billion in debt, Mulcahy was under intense pressure to declare bankruptcy. Determined to save the company she loved, she made a "cold call" to Buffett, who invited her to Omaha for a chat. Mulcahy later confessed that she had hoped Buffett would put money into Xerox, in spite of his well-known aversion to investing in technology companies. But the advice she got proved more valuable. After listening patiently to her problems for two hours, Buffett told her, "You're thinking that the investors, bankers, and regulators are the people you need to survive. Put them all aside, and give priority to talking to your people and your customers about what is wrong and what you have to do." For the next six months, Mulcahy did just that as she toured the country, rallying support for changes required to restore the company. Xerox stock continued to decline, but she was unfazed. Ultimately, Buffett's advice proved fortuitous as Mulcahy warded off bankruptcy, paid back $10 billion in debt, and continued to invest for the long term. Xerox stock tripled in value.
All these lessons are extremely deceptively simple but yet neglected. These pieces of leadership advice reflect Buffett's wisdom and generousity : His lessons are often the simplest and the most empowering. Like his business partner, Munger quoted: "Simple ideas carry the most freight."
What Buffett does is like an artist. As he quoted: ""Berkshire is my painting....so it should look the way I want it to when it's done." If one has a passion, it is just like having an artwork that can be painted and altered for the better with every passing day. That is the amazment of how one can live their lives to the fullest and most fulfilling live. When he started out, it was all about his personal growth mostly, now with where he is, it is more about growing others and giving back to society. In Buffett, he is the Michael Jordan for many facets of life. He teaches the basic way to the better half of life, the principles in staying in the middle of the field and not taking corners, the joy of seeing others grow along while maintaining personal growth, having a passion in what you do, growing a little smarter compared to where you were the night before and most importantly giving back what society has given to him.