“Investing is just about assigning yourself the right story.”
David Rubenstein Talks to Warren Buffett
When I got home from work today I found this new episode of the David Rubenstein Show available, this time a talk between David Rubenstein and Warren Buffett.
The interview is about 25 minutes and I spent the time on my back in my bad watching and listening, just having a good time. A spoiler here… There was no talking about Wells Fargo. The subject wasn’t even brought up. I don’t know at what date the interview was recorded, but it’s not unreasonable to believe that the interview was taped before the Wells-Fargo scandal hit the headlines.
Topics discussed range from pinball machines, Harvard Business School, Benjamin Graham, Columbia Business School, Washington Post, Bill Gates, smartphones, computers, and philanthropy, bridge, search among others.
When watching and listening to an interview that I find especially interesting, I’d like to put down in writing the things I enjoyed the most. I do this to share with the readers of this blog, but also to archive it in a place I know I can go back to later on.
Below you’ll find the parts transcribed by me. Hope you enjoy it.
The Best Business: The Pinball Machine [01:59-02:39]
David Rubenstein: You grew up in Omaha, but then you moved to Washington when your father became a congress man. How did you start you business career in Washington, with various pinball machines or golf businesses?
Warren Buffett: Yeah, I was like that with a couple of businesses going. The best business we had was the pinball machine business, which was the Wilson Coin and operated a machine company, and it was named after the high school me and my partner went to. But, we had our machines in barber shops, and the barbers always wanted to put in the machines with flippers which were just coming in. But those machines cost 350 bucks, whereas an old obsolete machines cost 20 bucks. So, we always told them we’d take it up with Mr. Wilson, this mystical Mr. Wilson. He was one tough guy, I gotta tell you.
Going to College as a Way to Please Dad [02:40-03:05]
David Rubenstein: So, when you graduated from high school you weren’t as interested in the academics, I assume, at that time?
Warren Buffett: I was not interested.
David Rubenstein: And your high school yearbook said he’s likely to be a stock-broker, but he’s very good in math. Why didn’t you go to Wharton? And why didn’t you wanna stay two years there?
Warren Buffett: I didn’t wanna go to college, and… But my dad wanted me to go to college. And we didn’t have SATs then, but he practically would have done the SATs for me. So he… and the truth… I always wanted to please my dad. He was a hero to me and still is.
Working for Benjamin Graham: The Hero [04:55-05:40]
David Rubenstein: You worked for Mr. Graham and his partnership, and how did that work?
Warren Buffett: Well, it was terrific in the sense a was working for my hero. But Ben was going to retire in a couple of years. And, so I was only back there a year and a half. But, every day I was excited about being able to work for him.
David Rubenstein: So, what you were good at where picking stocks according to his formula, which is to look for stocks that were undervalued, now call value investing. Did you realise that he had some principles that were very unique, and is that why you followed his guidance?
Warren Buffett: Well, by the time I went to work for him I probably could have recited the words in his book better than he could. I’d read his books multiple times, and so it was more a question of being inspired by him than it was learning something new from him.
The Reason For the Success [08:12-08:42]
David Rubenstein: What would you say is the reason for your ability to do this? Is it that you study the companies more than anybody else? You’ve stuck to your principles? You were smarter than other people? Or people were just caught up with fads, and you didn’t get caught up with fads? What would you say is the reason for the success?
Warren Buffett: Well, the first two to quite an extent. We bought businesses that we thought were decent businesses at sensible prices and we had good people to run them. But we also bought marketable securities in Berkshire. Over time the emphasis shifted from marketable securities over to buying businesses.
The Railroad [08:42–08:52]
David Rubenstein: What was the theory behind buying a railroad? Cause people thought they were kind of fossils, these businesses.
Warren Buffett: The railroad business had a bad century, the kind of like Chicago Cubs. Everybody has a bad century now and then.
The Washington Post: A Bargain Price [09:01–11:29]
David Rubenstein: Over the years you’ve bought a number of companies and had stakes in companies, one of the ones I know very well is Washington Post. How did that come about?
Warren Buffett: Well, in 1973… the Washington Post Company had gone public in 1971, right about the Pentagon Papers time. But in ’73 the Nixon administration was through Bebe Rebozo who was a pale of Nixon, they were challenging the licenses of two of the four television stations the Post owned. So the stock went from 47 down to 16. Now at 16 there were about five million shares outstanding. So the whole Washington Post company was selling for 80 million dollars, and that included the newspaper, four big TV stations, Newsweek, and some other assets, and no debt to speak of. So, the Washington Post Company which was intrinsically worth four or five hundred million dollars was selling for about eighty million in the market. We bought most of our stock at an equivalent of 100 million in the market. And it was ridiculous, I mean, you had a business that unquestionable worth four or five times what it was selling for. And Nixon wasn’t going to put them out of business.
David Rubenstein: When you’re doing these analyses, then and now. Do you have computers that help you? How do you actually read all materials? And how did you in those days get the materials to read about the Washington Post? How do you do it today?
Warren Buffett: Well, I… pretty much the same way except there’s a few more opportunities now. But I met Bob Woodward back, and he’d just come up with all the presidents men, and all of a sudden at thirty years of age he was becoming quite wealthy, and we had breakfast or lunch over at the Madison Hotel. And he’d say: “What do I do with all this money?” And I said: “Investing is just about assigning yourself the right story.” I said imagine Ben Bradley this morning said to you: “What is this Washington Post Company worth?” What would you do? You’d have to write the story in a month. You’d go out and interview TV and brokers and newspaper brokers, and owners and just try to value each asset. I’d said: “That’s what I do. I’d assign myself the right story.” And it’s nothing more than that. Some stories I can’t write. If you ask me to write a story on whether some glamorous but non-profit business is worth, I don’t know how to write that story. But if you had asked me to write this story about Potoma Electric Power or something like that, I can write a story. And that’s what I’m doing every day. I’m assigning myself a story and then I go out and…
David Rubenstein: So you get the annual reports, and you read them. Just like other people read novels, you read annual reports?
Warren Buffett: That’s right.
David Rubenstein: And then, do you do the calculations in… what things are worth, in your head?
Warren Buffett: Sure.
Computers, Bridge and Search [11:30–11:42]
David Rubenstein: Do you use a computers to help you?
Warren Buffett: No. If you need to carry something out to four decimal places, forget it.
David Rubenstein: Today, do you use a computer today, even?
Warren Buffett: I use it to play bridge, and I use it to go to search… a lot.
The Highlight of Deals [15:25–16:31]
David Rubenstein: What would you say are some of the highlights, the deals that you’re most proud of? Let’s take one that you did recently. The biggest deal you’ve ever done was Precision Castparts, about 47 billion dollars.
Warren Buffett: Yeah, it was between 42 and 43 billion of cash, and then we assumed about four billion of debt.
David Rubenstein: Okay, so how much… for to spend 47 billion, you spent a year studying the company?
Warren Buffett: No.
David Rubenstein: How much time did you spend with the CEO?
Warren Buffett: I met the CEO, I think on July 1, last year. And he happened to be calling on certain shareholders, and one of the fellows in our office had had a position for some time. It was an accident I met him. If I’d been out playing golf or something it never would have happened. When then I liked him. I heard him talk for thirty minutes I then said to the fellow in our office: “Call him tomorrow and say if he would like to receive a cash bid from Berkshire Hathaway. We would supply one, and if he didn’t like to receive one; forget we ever called.”
David Rubenstein: That was it? Did you hire any investment bankers to help with the analysis?
Warren Buffett: No. No.
David Rubenstein: Do you ever hire any investment bankers to help analyse a company?
Warren Buffett: No. Not to help analyse a company.
Acquisitions and Mental Filters [17:41–18:05]
David Rubenstein: Now, people must call you every day and say: “I have a deal for you. It’s perfect.” And how often do any of these deals pan out?
Warren Buffett: They don’t call every day, and we’ve made our criteria fairly clear. So there’s relatively few that call. And when somebody calls I can usually tell within two or three minutes whether a deal is likely to happen or not. There’s just some half a dozen filters, and it either makes it through the filters, or it doesn’t.
Click here to see the whole interview.