“You have to understand the business. You can understand some businesses but not all businesses.” —Warren Buffett
Warren E. Buffett Lecture at the University of Florida School of Business October 15, 1998
A Few Notes and Quotes
Go here for full transcript of the above talk.
Below are a few great parts from the Buffett video that I like. There are many more, just watch the video and read the transcript to find them. I watched it yesterday night, and I have seen it a couple of times before. It’s really a great talk from Buffett with a lot of useable and important (and knowable) stuff to take away and remember.
Isn’t it wonderful, being able to read so much and look at great videos like this one. Too bad we didn’t learn this in school. But anyway, good to catch up now, having your own little Value Investing University. All you have to do is open up the Internet browser and start searching and learning. Awesome. Okay, so back to the quotes.
“See’s Candy was a $25 million business when we bought it. If I can find one now, as big as we are, I would love to buy it. It is the certainty of it that counts.”
“It is a tough thing to decide but I don‘t want to buy into any business I am not terribly sure of. So if I am terribly sure of it, it probably won‘t offer incredible returns. Why should something that is essentially a cinch to do well, offer you 40% a year? We don‘t have huge returns in mind, but we do have in mind not losing anything. We bought See’s Candy in 1972, See’s Candy was then selling 16 m. pounds of candy at a $1.95 a pound and it was making 2 bits a pound or $4 million pre-tax. We paid $25 million for it—6.25 x pretax or about 10x after tax. It took no capital to speak of. When we looked at that business—basically, my partner, Charlie, and I—we needed to decide if there was some untapped pricing power there. Where that $1.95 box of candy could sell for $2 to $2.25. If it could sell for $2.25 or another $0.30 per pound that was $4.8 on 16 million pounds. Which on a $25 million purchase price was fine. We never hired a consultant in our lives; our idea of consulting was to go out and buy a box of candy and eat it.”
“What we did know was that they had share of mind in California. There was something special. Every person in California has something in mind about See’s Candy and overwhelmingly it was favorable. They had taken a box on Valentine‘s Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See’s Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything–$60 million bucks and it still doesn‘t take any capital. And we make more money 10 years from now. But of that $60 million, we make $55 million in the three weeks before Christmas. And our company song is: ―What a friend we have in Jesus. (Laughter). It is a good business? Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts—somebody‘s birthday or more likely it is a holiday. Valentine‘s Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three week period. Men buy on Valentine‘s Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt—guys are veering off the highway right and left. They won‘t dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine‘s Day is the biggest day. Can you imagine going home on Valentine‘s Day—our See’s Candy is now $11 a pound thanks to my brilliance. And let‘s say there is candy available at $6 a pound. Do you really want to walk in on Valentine‘s Day and hand—she has all these positive images of See’s Candy over the years—and say, ―Honey, this year I took the low bid.‖ And hand her a box of candy. It just isn‘t going to work. So in a sense, there is untapped pricing power—it is not price dependent.”
Why Smart People Do Dumb Things
“But to make money they didn’t have and didn’t need, they risked what they did have and what they did need.”
Circle of Competence
“Everybody has got a different circle of competence. The important thing is not how big the circle is, the important thing is the size of the circle; the important thing is staying inside the circle. And if that circle only has 30 companies in it out of 1000s on the big board, as long as you know which 30 they are, you will be OK. And you should know those businesses well enough so you don‘t need to read lots of work.”
Understand the Business
“You have to understand the business. You can understand some businesses but not all businesses.”
“I like businesses that I can understand. Let‘s start with that. That narrows it down by 90%. There are all types of things I don‘t understand, but fortunately, there is enough I do understand.”
“I don‘t think about the macro stuff. What you really want to in investments is figure out what is important and knowable. If it is unimportant and unknowable, you forget about it.”
The Business to Buy
“So I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they will be ten years from now.”
Buying a Business
“You really want your decision making to be by looking in the mirror. Saying to yourself, ―I am buying 100 shares of General Motors at $55 because…… It is your responsibility if you are buying it. There‘s gotta be a reason and if you can‘t state the reason, you shouldn‘t buy it. If it is because someone told you about it at a cocktail party, not good enough. It can‘t be because of the volume or a reason like the chart looks good. It has to be a reason to buy the business. That we stick to pretty carefully. That is one of the things Ben Graham taught me.”
Beta and Risk
“They thought that the Beta of the stock told you something about the risk of the stock. It doesn‘t tell you a damn thing about the risk of the stock in my view.”