Robert W. Bruce Lectures 2004-2007 to Bruce Greenwald's Columbia ClassVW Staff
core business that is a monopoly with a very high wall around it and they work very hard to protect what they have, but MSFT has nowhere to grow or reinvest their cash.
The reality is that the kind of businesses that combine these traits to be superior businesses are rare, and I will mention a few names here–we are not talking about multiple names–Liz Claiborne, an apparel manufacturer. There is Superior Industries, which makes wheels for the automobile industry, Rayco that makes paint sprayers. There are probably 50 to 100 in this category.
Buffett on researching a company: Buffett told Bob Woodward, the investigative reporter who uncovered Watergate, that, “Investing is reporting.” ….”A sensible story to assign yourself would be, ‘What is The Washington Post Company worth? Now, if (Editor) Bradlee gave you that story to work on what would you do for the next week or two? You would go around and talk to people in the television business. You would try to figure out what are the key variables in valuing a television station and you would look at the four that the Post has and apply those standards to that. You would do the same thing to newspapers. You would try to figure out how the competitive battle between the Star and the Post is going to come out and how much different the world would be if the Post won that war. All of these things are a lot easier than the problems Woodward would be working on. Usually people would want to talk to him but on this subject they would be glad to talk to him, and then I said when you get all through with that, add it up and divide by the number of shares outstanding. All he had to do was assign himself the right story and I assign myself stories from time to time.”
If you want a really easy way to identify some of these businesses, go to the 13-D or 13-F filings of Berkshire Hathaway and look at some of the companies owned by a great investment manager, Lou Simpson. Then wait for the prices to fall from time to time. These are businesses, which generate cash, they generate more cash than they need. Companies, which have little or no debt, which buy-back stock, and pay dividends. This is the preferred type of investment, the preferred option in my opinion–a good business that appears to have a wall around it.
LOU SIMPSON: The Oracle of Rancho Sante Fe ( Of Permanent Value, 2004 Ed.)
|Geico in 2000 Held Shares in||Other Stock Picks:
|Dun & Bradstreet||Manpower|
|First Data||Burlington Northern Sante Fe|
|GATX||International Dispensing Corp|
|Great Lakes Chemical||Apache Medical Systems|
|Jones Apparel||CollaGenex Pharmaceuticals|
Buffett on Lou Simpson: He has the ideal temperament for investing. He derives no particular pleasure from operating with or against the crowd. He is comfortable following his own reason.
Simpson was picked for three qualities: intellect, character and temperament. Temperament is what causes smart people not to function well. Like Buffett, Simpson is a voracious reader of annual reports, newspapers and magazines. Plowing through 15 corporate reports in a row is his idea of a satisfying day.
V. Research Management
If you find an investment and the value makes sense, then the next thing is to find out whom you will entrust your money to. Look hard at management. Find out how much stock the management owns, how management acquired stock in the company, how much each Director owns of company stock and find out about the relationships between the Directors and the management. Is management incentivized to build value for the shareholders?
On the one hand, we are talking about financial analysis and looking at the numbers but on the other hand in an investment in a company, you are becoming a silent partner or junior partner in that company. So before you make an investment in the company, you should do the best you can to ensure that the people running the company are people you can trust. If you look at the people in the companies involved in the front-page scandals in the business press, like Enron, Computer Associates and Imclone, the principals were involved with shady dealings long before those scandals erupted. Remember that you are entrusting a lot of responsibility to management when you invest your money.
If you are not a professional money manager and can’t talk to management, then read the proxy carefully and read the last 4 or 5 annual reports–read them sequentially to ascertain their candor and if they are self-critical and you have some comfort that you know what they are trying to do. All too many times, if you read the annual reports, there is no connection at all. The goals, tone and message change year to year–without explanation. It is very much an ad hoc kind of thing. Sometimes it is just a matter of what is popular at the time.
Example of ROAC annual reports
What I like to see is a company that sets forth its goals and objectives. The company says what it is trying to do, it says, this is what we are good at; this is what we are not good at. This is where we are trying to improve. Then at the next opportunity the same manager gives himself a report card. This is what we tried to do, this is what we accomplished this is what we have to do. It is honesty, candor, and admission of failure–a constancy of goals.
We have talked about the financial characteristics of the companies to look for. We talked about making an effort to identify the kind of people who are running those businesses. Whom we are partners with.
One of my pet peeves is the Imperial CEO. The idea that we have corporate CEOs as national heroes. Some of the publicity is unavoidable and some of it, quite honestly, is sought after whether it is Jeff Immel, Sandy Weil or Carly Fiorina–they may or not may not be good people, but that is not what I am talking about. The idea that CNBC or Bloomberg can say, “Jeff Immel, he is your friend. He is one of us.” I am talking about the CEO who may be a very rich man, a very successful man but no one outside his industry knows about him. So the idea those individuals are important–Bloomberg says, “Today, Sandy Weil went out and bought a bank.”–The news media personalize the CEO. Sandy Weil didn’t buy the bank, Citibank did. Citigroup is much bigger than Sandy Weil.
Buffett on choosing people. Buffett describing how he would choose a leader (to run Salomon Brothers). “They all had the IQ, just like everybody in this room (Columbia Business School students). It doesn’t make any difference whether your IQ is 140 or 160 if you’re running Salomon or doing most things in this world. They all had