Q: What do you stay away from when valuing a company?
A: What I don't understand…. Get a fix on your own limitations of knowledge. Ted Williams [the only Major League Baseball player to hit .400, or a 40 percent success rate, over an entire season] divided the strike zone into 77 areas. You only swing at the pitches you can hit with an average of .400.
Also, I don't want to know the price of a stock as I value it. Knowing the price anchors your thoughts.
Q: What is the more valuable area of academic study, accounting or finance?
A: Accounting is the more valuable. It is the language of business… A number of CEOs don't understand accounting. Some people have an intuitive grasp, [but] some people will try to cheat you and lie to you.
Q: Explain your business evaluation criteria.
A: Where is this business going to be in five to 10 years? What is the moat? What protects it?
With Coca-Cola, the moat is the brand name in the mind. See's Candies [a Berkshire Hathaway company] owns the boxed chocolates business in California and has been there since 1921. A boy buys a box of chocolates, and she kisses him: We own him. Other examples of moats: Microsoft operating system[s]; [and] Meg Whitman [CEO of pioneering online auction company eBay Inc., who] has all of the buyers and sellers.
Businesses with moats are easy to value. How do you knock off Wrigley? — the Internet doesn't change the way people chew gum.
Q: What biography would you recommend?
A: The question is, who are your heroes when you are 15? This is a strong indicator of future success. Katharine Graham's autobiography is very honest and very interesting. She ran The Washington Post. She had a strong will…and felt it was important to succeed.
Q: What other books do you recommend?
A: "The Intelligent Investor," chapters 8 and 20 provide the framework. Also, read about a lot of businesses. Philip Fisher is another good author [ "Common Stocks and Uncommon Profits and Other Writings"].
You need to like reading annual reports and related information. Look for businesses you understand. You need to know enough about the business to be a good scorekeeper.
Q: What is your definition of a capitalist?
A: A capitalist lives off of profits, not labor. If I was born in Bangladesh or 200 years ago, I wouldn't have been successful.
Imagine yourself 24 hours before your birth. A genie comes to you and says, "John or Joan, you will be bright and fair-minded. I will let you design the world into which you will be born — the economic and social conditions for you and your descendents."
John or Joan replies, "So, what's the catch?"
The genie then states, "From the jar pick a ticket. There are 6 billion possible tickets." The tickets have information on them such as male or female, U.S. or Bangladesh, physically fit or crippled, nurturing parents or abusive parents.
Your lottery ticket matters.
Take the example of the sport of boxing. In the 1930s, Madison Square Garden held 30,000 seats. Now, due to cable TV, 190 million people can watch the boxing match. The boxers benefit due to the size of the audience — i.e. [the lottery of] when they were born.
We won the ovarian lottery. In 1930 [when Buffett was born] the odds were 50 to 1 against being born in the U.S. I was also born to parents who cared about me, given good health and [given] a good mind.
Q: What is your view on social responsibility?
A: In 1790, there were 3.9 million people in the U.S., 100 million in Europe and 190 million in China. We succeeded because we had a better system, not because we have better morals or are smarter.
The talent profile of the population does not fit the job requirement profile. People in the right place should take care of people who can't succeed.
Q: Explain your take on tax fairness.
A: I spend $2.2 trillion on the federal government [annually]. What should tax policy be? The "haves" should pay the lion's share.
I have the same tax rate as my receptionist when you include social security. I am wired a certain way and I get benefits. I do not agree with [President] Bush at all. We [the wealthy] don't need any more favors. Bill Gates also agrees with me.
I prefer liquor store robbers with hungry kids to companies that locate offshore to avoid U.S. taxes.
Q: Who should have stock options?
A: Charlie Munger [vice chairman of Berkshire Hathaway and close associate of Buffett's since the 1970s] and I are the only employees who should work for stock options. No one else has control over the company strategy.
Q: How does someone become a good leader?
A: Leaders should have a passion for their business; they need to be able to energize people to march with you because they believe in you. [I like] Arnold Schwarzenegger as a leader. Berkshire Hathaway has a strong and unusual culture… That people are willing to follow a leader implies that the leader is competent.
One way to lead is to work harder than anyone else. A good rule is that the officers eat last, and the enlisted eat first. Air Force General Curtis LeMay said, "I will fly the lead plane, and I will court martial anyone who won't fly." The leader takes the biggest risk but demands compliance.
Q: How will business fare in the stock market over the long term?
A: Four to 6 percent is the typical range for corporate profits as a percentage of GDP. This is unlikely to change. Over the last four or five years, the market has returned 6 or 7 percent. Over the last 35 years, it has returned 10 percent annually. Seven to 13 percent is pretty much the expected range. The market returned between 7 and 13 percent exactly one year over the last 35 years. [I] conclude that investors are much more volatile than businesses.
Q: What qualities do you look for in business partners and co-workers?
A: I misjudged them sometimes, but rarely. It is easy to recognize the extremes; I can tell the outright crooks.
You want to develop the qualities you like in other people. Consider which of your classmates would you choose to go long on [buy] 10 percent of their earnings? The one with the best grades? — Probably not. You will probably pick the person who is the most generous and the most honest. Conversely, think of who you choose to go short [sell] 10 percent of their earnings.
Q: What's your view on the capital asset pricing model (CAPM)?
A: CAPM is still taught in schools. The weakness is that it assumes efficient markets. The popularity is fading, but it still persists — priesthoods are like this. It was very acceptable in the 1960s: Allocate capital, what is the most attractive thing to put our money in?
If the smartest thing isn't that smart, then we don't play. We don't want to give up cash flexibility. Good businesses offer offensive decisions; bad businesses offer defensive decisions. Switch to offensive businesses for a significant edge.
Q: Any advice for students entering the workforce?
A: What train are you getting on: U.S. Steel or Microsoft? Don't work for somebody who's crummy.
Q: Who are the right heroes?
A: My heroes are: My dad — parents are everything in the formative years; Melinda and Bill Gates; In raising three kids, my wife; Tom Murphy, who ran Capital Cities ABC [Murphy purchased ABC in 1985 with Buffett's backing]; Ben Graham [co-author, "The Intelligent Investor"]; somebody who makes you behave better.
