Warren Buffett's Timeless Investing Wisdom – 1988 Interview

To meet the wizard of Omaha, Warren Buffett, next on Adam Smith's Money World. He doesn't generally do interviews, but I called on him recently to get some of the wisdom and apherisms of Warren Buffett on the record. It is characteristic of Warren that he runs his financial empire not from Wall Street or the trading pits in Chicago, but from Omaha, Nebraska, in America's heartland.

Omaha is home to the Union Pacific Railroad and of course the Mutual of Omaha Insurance Company, but it is hardly a financial capital. In fact, Omaha is better known for its stock yards than its stock market. Buffett's headquarters are in this Omaha version of an office tower. He runs his empire with a staff of only seven people.

Interviewer: "Warren, if I had given you $10,000 when I first met you, and I devoutly wish I had, I would have millions today. If you joined the partnership when we started in 1956, and when we disbanded it in ' 69, reinvested the proceeds in Berkshire, which was somewhat of a continuation, I think you'd have a little over 15 million now. From $10,000 from $10,000 to 15 million, something like that."
Warren Buffett: "Yeah, that's a pretty good record."

Interviewer: "It's okay. But that doesn't tell you anything about tomorrow."
Warren Buffett: "Well, let's talk about tomorrow. Could anyone do the same thing you did starting today? They didn't try and do too much the first week."
Warren Buffett: "Yeah. Right. How did Warren Buffett turn $10,000 into $15 million? The old-fashioned way. He has no computer, no quotron screen, only common sense and a set of strict principles."

Interviewer: "We'll look at the Buffett formula for investing and we will hear his wisdom on everything from the stock market to the evils of inherited wealth in a moment. First, here is how the man known as the wizard of Omaha got his start. Buffett's interest in the stock market came early. His father, Howard, was a stock broker until he was elected to the United States Congress."

Howard Buffett was a frugal Republican. When Congress voted itself a raise from $10,000 to $12,500, Howard Buffett refused to accept the additional money. Warren, meanwhile, bought his first stock at age 11 and made a $5 profit. He eventually attended the University of Nebraska, then was rejected by the Harvard Business School.

So, Buffett went to New York and the Colombia Business School where he met Professor Benjamin Graham. Graham was not only the co-author of the classic security analysis, he also wrote the intelligent investor. Graham preached something called value investing. Find companies that are undervalued by the stock market, buy shares, and then hold on and wait.

Warren put those theories into practice. At age 25, he farmed his own investment partnership and began to buy stocks. An investor who put up $10,000 when Buffett began the partnership in 1956 had nearly $300,000 in 1969 when the partnership was dissolved. During that time, the Buffett partnership never had a down year.

Interviewer: "You know what the academics say? They say the market is efficient and no one can beat it, but you have. And and a number of other people that followed Dan Graham's principles have."
Warren Buffett: "Right. In fact, everyone that I personally know that has really stuck with the Ben Graham principles over 20 years or more has done appreciably better than the market."

Interviewer: "Well, what about all the learned business schools that say you can't beat the market? Well, then they aren't so learned. But you've seen some of these papers."
Warren Buffett: "I've seen the papers, but uh but uh I've seen some other people's tax returns."

One of the companies Buffett acquired during his partnership years was a small New England textile mill, Berkshire Hathaway. He later sold the mill but kept the name. Buffett began investing Berkshire funds in the stock market and in some cases he bought companies outright and made them part of Berkshire Hathaway. Bergkshire Hathaway is now a holding company with a net worth of more than $3 billion.

Last month, Bergkshire Hathaway held its annual meeting presided over by Buffett and Vice Chairman Charles Munger. Buffett believes it's very important to have patient, rational shareholders since it's one of his tenants that Wall Street's obsession with the short term and with frantic trading are counterproductive. So, Berkshire has never split its stock and Buffett never talks to analysts. But this is the happiest tribe of shareholders you'll meet anywhere in America.

Warren Buffett is certainly the greatest investor in the postworld war II period and maybe the greatest investor in history. I think he's has uh tremendous integrity and and a very very uh clear way of looking at the world. Uh the superlatives could go on and on and on and I'm not related. Berkshire Hathaway shareholders have every reason to be happy. One share of stock cost $12 in 1965. Today, a single share sells for more than $3,900. That's right, $3,900 a share in the over-the-counter market.

Buffett has achieved all this by sticking to those fundamental principles and by keeping things simple.
Interviewer: "Warren, you say you like to buy businesses. How do you know what a company is worth?"
Warren Buffett: "I look for a business where I think I know what in a general way is going to happen. Is it—if you buy a bond, you know exactly what's going to happen. If it's assuming it's a good bond, a US government bond, if it says 9% coupons, you know what the 9% coupons are going to be for maybe 30 years if it's a 30-year bond."

Now, when you buy a business, you're buying something with coupons on it, too, except the only problem is they don't print in the amount. And it's my job to print in the amount on the coupon. And uh some companies I feel capable of doing that with, and others I don't have the finest idea. You seem to stay away from high- techch companies. You name 10 high-tech companies to me and ask me where they're going to be in 10 years or 10 months and I don't have the faintest idea. So that would be exactly like buying cocoa beans or something. I just don't know what's going to happen.

Interviewer: "Do you ever really get a big big hit just buying these predictable stocks?"
Warren Buffett: "Yeah, you do, but not very often. But occasionally sensational businesses are given away. In the mid70s, uh, the whole Washington Post company was selling for $80 million at a time when the properties were worth not less than $400 million. And no one would have argued with you about the properties being worth $400 million."

And uh, the price was there for all to see, but people just didn't feel very enthusiastic about the world. Then Buffett took full advantage of that undervaluation. In 1973, he bought 1.7 million shares of the Washington Post Company. As a boy, he delivered the Washington Post. Now he owns 13% of it. That investment cost Berkshire Hathaway $9.7 million. Today, it's worth $370 million, and Buffett says he'll never sell his shares.

Another of his permanent holdings is in Capital Cities. In 1985, Buffett bought 3 million shares of Capital Cities when it took over ABC. That investment cost $517 million and it's now worth $927 million. The chairman of Cap Cities is Tom Murphy, Warren Buffett's good friend. Recently, the two men were asked to play small roles in the ABC soap opera Loving. That's Tom Murphy on the left, Warren Buffett on the right.

Hi. "Can you get that through your thick head? Please do not make a scene."
"Well, that's up to you, Buster. I am not leaving until you set me right down next to Clay Alden. Wait a minute. You're making a big mistake. Clay's going to want to see me. He's got to be real ticked off."
Luckily, Buffett is a better investor than actor.

Another killing came in a troubled company, Geico, Government Employees Insurance Company. In the mid70s, Buffett bought 42% of Geico at a cost of $46 million. The value today $849 million. Last year, Buffett made just one major investment. He bought a convertible preferred worth $700 million of Solomon Brothers, the New York investment banking house.

It's far too early to tell whether this investment will be another Buffett coup. One thing all these deals have in common, the stocks were bought because Buffett thought they were undervalued by the market.
Interviewer: "You have been talking this philosophy for years. It's no secret. It's no secret. Why doesn't everybody do it?"
Warren Buffett: "Well, it requires patience, which a lot of people don't have. And people would much rather be promised that they're going to win a lottery ticket next week than that they're going to get rich slowly. It uh Gus Levy used to say that he was he was long-term greedy, not short-term greedy. And if you're short-term greedy, you probably won't get a very good long-term result."

Interviewer: "You've said they could close the New York Stock Exchange for 2 years and you wouldn't care. Can you explain that?"
Warren Buffett: "We own parts of businesses when we own stocks. And the New York Stock Exchange being open has nothing to do whether the Washington Post is getting more valuable over a 5 or 10 year period. And what we want to do is be right on the business. If we're right on the business, the market will take care of itself. And uh if the the stock exchange closes on Saturday and Sunday, you know, and I don't break out in hives. So if it if it closes for a couple of years uh and the business does well, we'll we'll do very well."

Buffett is known not only as a savvy investor but also as a kind of sage. His annual report has no photos and no fancy charts, but it's filled with Warren Buffett's prairie wisdom. These reports are in such demand that the company has put together a compilation of past reports. It's a kind of Warren Buffett's greatest hits.

Interviewer: "I've noticed in your annual report you say that uh if you're in a poker game for 30 minutes and you don't know who the psy is, you're the psy. You've got it. How do you apply that to the market?"
Warren Buffett: "Well, to investing in the market, if you think the market knows more about what your business—in other words, if your stock goes down 10% and that upsets you, it obviously means that you think the market knows more about the company than you do. And uh in that case, you're the psy. If it goes down 10% and you want to buy more because you know the business is worth just as much as when you bought it before perhaps a little bit more with the passage of time, so you buy more. They're the psy."

Interviewer: "Where do you get these po these aferisms that you've gotten so so well known for?"
Warren Buffett: "Well, I know it's they're about the limit of my intellectual capacity. So I have to work with one sentence. That is a typical Buffett put down of himself, but he doesn't fool many people. Buffett is a brilliant man. Those around him say his mind works so fast they have trouble just keeping up. He reads just about anything he can get his hands on and beyond that he thinks. A good part of his day is spent just thinking. Often that thinking is about the stock market."

Interviewer: "Was October 19th an aberration or could it happen again?"
Warren Buffett: "Oh, it can always—anything can happen in stock markets. If you read financial history for a couple of hundred years and take the South Sea bubble and the tulip boom and and and some of the panics we've had in this country, we closed the stock exchange for a few months back uh around 1914. Anything can happen and you ought to conduct your affairs so that if the most extraordinary events happen that you're still around to play the next day."

One thing Buffett has long warned about is the development of stock index futures. Those are basically bets on which direction the stock market will go. Back in 1982 when index futures were first developed, Buffett wrote a letter to Congressman John Dingle. He warned that these new instruments would be quote overwhelmingly detrimental to our capital markets.

Anytime you offer a big prize for a small amount of money, you in you encourage stupid behavior on behalf of those you're appealing to. and and and low margins uh uh which you can get through uh through the futures market uh uh encourage that sort of activity.
Interviewer: "How should the small investor look at stock index futures and index arbitrage and all the volatility that has come into the stock market?"
Warren Buffett: "Well, he should hope that they cause other people to behave very silly and then he should step in occasionally. He should ignore them as an himself. But to the extent that silly instruments cause occasionally cause silly prices, he can take advantage of them and the other the rest of the time he ignores them."

Interviewer: "Old basketball players lose their legs. Do old investors lose their legs?"
Warren Buffett: "I don't think so. I think that uh they probably lose their legs, but they don't need their legs that much. And uh really being a sound investor really just requires a certain control of your of your temperament and and and the ability to know what you know and know what you don't know and and and occasionally act. And I don't see any reason why that goes with age."

Interviewer: "When you think we may—I may give you an illustration another few years but so far it it it has no effect. I mean, in in a sense, you keep accumulating a little more business knowledge as you go along, and that's a plus. Warren Buffett, the investor, is only half the story. There's also Warren Buffett, the manager."

Through the years, he's bought not only pieces of companies in the stock market. He's also bought entire companies, which are now under the Berkshire Hathaway umbrella. These companies are not very glamorous or famous, but they are usually tremendously profitable. One example is Seas Candies of California.

Seas has been making candy for more than 60 years and is known for highquality chocolates. Bergkshire Hathaway bought the company in 1968 for $25 million and last year alone sees earned $30 million before taxes. Another Berkshire Hathaway company is World Book Encyclopedias, $26 million of profit last year. Berkshire Hathaway also owns Kirby vacuum cleaners, the Fetchheimr Uniform Company, and various insurance companies.

There's been a lot of talk about the Silicon Valley culture.
Interviewer: "Is there a Bergkshire Hathaway culture?"
Warren Buffett: "I guess there's a Bergkshire Hathaway culture, but it it would be a long way from the Silicon Valley culture. What is the Bergkshire Hathaway culture? We like managers who are in love with our business. We like them that feel like I do. I want to tap dance when I get to the office. And that's the sort of managers we have. And we have terrific luck where we buy businesses with managers that have been enormously successful over a period of time. They're usually rich after we buy the business and they they keep on working afterwards. Uh uh we don't have so much luck uh with business school grads. We we find it's uh we find it's difficult to teach a new dog old tricks and uh uh we like we like the people that have been around a while."

Hi. The perfect example of this philosophy is Rose Blumin. 50 years ago, she started a furniture store in Omaha with $500 in savings. She turned it into the Nebraska Furniture Mart. It's the largest furniture store in the country. Warren Buffett always loved the store, always loved the management.

So in 1983, he walked in and bought the company. And we would expect that our customer will come in and shake hands to buy the store. unexpectingly that quick in two words. He asked me how much I won. I told him and he says, "Okay, let's say you got the deal." One of a kind business and it's run by a one-of-a-kind manager. And you you don't get any other opportunities like that. You had a You'd have you'd have to be a fool not to go into business with Mrs. B. I'll tell you that. The furniture mark really is a one-ofa-kind business.

At age 94, Mrs. Blumin, or Mrs. be, as she is better known, still prowls the carpet department on her motorized cart 7 days a week and rarely goes home. Sitting home, you go nuts. You lose your marbles. That work ethic was passed on to her son Lou, who was president for 40 years, and her grandsons. One of them, Ron, is the current president. The store is known throughout the Midwest, and Mrs. B is a legend. Mrs. Beast had markdown prices and that's just what happened. We always love to give him the best deals we possibly can all year around.

When Warren Buffett bought the store, he promised the Blumin family he would stay out of the way, and that's what he's done. If you were to ask me who owns the business, I'm going to tell you I own the business because nothing's really changed. Uh we run it with a free hand, virtually no interference. Uh we have an annual meeting to discuss Nebraska furniture business every February and uh we meet with Warren possibly once every four or five weeks and discuss business other than Nebraska furniture mart and it's just a joy and a pleasure. He's the perfect boss.

Buffett the boss is always on the lookout for new companies to buy. Once he even placed an ad in the Wall Street Journal offering to provide a new home for interested companies.
Interviewer: "Well, if you had to look over the next five or 10 years, what do you think will be good businesses? They're the businesses that that that have some sort of a franchise to them. What makes a business a good businesses is when if I go into uh a drugstore and I want a Hershey bar, they can't sell me an unmarked bar—you know, if I'm going to pay 35 cents for the Hershey bar and they say, 'But wouldn't you like this wonderful unmarked chocolate bar for 30 cents? Uh, I buy the Hershey bar and uh uh if they don't have it someplace, I'll go across the street to buy it.' That's that's what makes a good business."

I don't feel that way about uh about the carton of milk I buy. I'll take whatever carton of milk is is is uh is in the grocery store's freezer or cooler. So, it's the power of the franchise. It's the power of the franchise. When Ben Graham talked about these things, he talked about tangible assets, iron and steel above the ground, bricks and mortar. But you've expanded Ben Graham's idea to this idea of the franchise, haven't you? I learned that subsequent to Ben. I the principles of buying value and and the margin of safety and the detachment from market. I learned from Ben. You might say that I learned the proper temperamental set from Ben. Uh the the stocks I buy are entirely different from what Ben would buy if he were alive today.

You might be skeptical about one thing.
Interviewer: "Does this billionaire really go to the drugstore to buy a candy bar into the grocery store for a carton of milk? Don't doubt it."
Warren Buffett: "Warren Buffett lives in the same house he bought more than 30 years ago for $32,000. There are no fancy cars or designer clothing. He has rejected most of the exterior signs of wealth that you might expect from someone with his means. Do you still do your own tax returns?"
Interviewer: "Yeah. Yeah. Pretty simple return."
Warren Buffett: "Really? Yeah. It's it's a very simple return."

Warren, you uh have spoken for years against corporate perks. But you finally bought a corporate jet.
Interviewer: "Uh I can't explain it. It's a it's a total it's a total blank in my mind. But I've given speeches against him for years, and I got to tell you, I love it. But you have the cheapest corporate jet of anybody in America."
Warren Buffett: "No, no, I don't know if it's the cheapest corporate jet. It it it works perfectly for me and and I I got to tell you that I have an untapped potential for for that type of life apparently because I I it's made life a lot easier the last couple years. It's doubtful that Buffett will suddenly change. He has been the picture of simplicity for his entire life."

I met in Omaha with one of Warren's three children, Susan, and one of his nine grandchildren, two-month-old Michael.
Interviewer: "What was it like growing up with Warren Buffett as your father?"
Susan Buffett: "It was completely normal growing up with him. Um, we didn't know anything. I I used to write down on my census cards at school that he was a security analyst and my friends thought he'd check burglar alarms and uh we didn't know. It was normal, you know, we lived in a normal neighborhood and didn't get cars when we turned 16 and didn't know anything about any money."
Interviewer: "Did he make you interested in the stock market at all growing up?"
Susan Buffett: "Um, he didn't talk a lot about his business. I mean, I honestly did not know a lot about what he did. Uh, and I certainly didn't know how much money he had at all ever until I really did not find anything out until I read it in your book. Now, that was a little bit of an eye openener. I thought, hm, okay, but he wasn't even that rich then."
Interviewer: "Yeah, I—that's right. That's right. That's right. I find out every year when I look at the Forbes list how much more he's gotten."

According to the most recent Forbes list of richest Americans, Buffett is now worth about $2.1 billion. But there's some unusual news for his heirs. Buffett doesn't believe in passing great sums of money to the next generation.
Interviewer: "Warren, you created a stir with your remarks about money and children. You have three children and grandchildren. You love your children. They love you. But you've said you're not going to give them any money because that would be a bad thing to do."

I hear children of the rich or the rich themselves talk about the debilitating effect of of uh food stamps on on on welfare mothers and they say it's terrible. You know, you hand them all these food stamps and and it it it it causes the cycle to perpetuate itself. But of course, when a very rich child or one who's going to inherit a lot of money is born when they leave the womb, they're handed this lifetime supply of of of of food stamps only they they and they have they have a welfare officer. He's called a trust department officer. And the food stamps are little stocks and bonds. And nobody seems to notice the debilitating effects of of that particular form of lifetime supply of food stamps.

I I I think that I think by and large that if if if I'm going to be a sprinter, I will become a better sprinter in life if I sprint against everybody else leaving the starting box at the same time than if they say because I'm Jesse Owens child or something, I get to start on the 50 yard line.
Interviewer: "Well, how have your children felt about that?"
Warren Buffett: "I think they feel pretty good."
Interviewer: "Yeah. Yeah. Yeah. You have had a lot of—I’m not quite as draconian as I sound, but I'm I'm I'm quite close to it. Your parents have over a billion dollars. Doesn't that doesn't that sort of cramp when you think you have to get the kitchen fixed sometimes?"
Warren Buffett: "Yeah. I have to tell you the truth about that. Those uh it's like you said it would be nice to have some once in a while and when you are fixing up the kitchen or doing something you think you know he has a billion dollars—probably he could spare a little—but on the other hand I think that basically what he's done makes a lot of sense as far as you know raising kids and trying to put good ideas in their heads and not totally screw them up which does happen with some people who get lots of money."

Interviewer: "Do you do this for the money? What does money mean to you?"
Warren Buffett: "Well money is a byproduct of of doing something I I like to do extremely well. I think if you found an athlete that was doing well—and that my guess is that that—and I don't I'm not comparing myself but but but a Ted Williams or an Arnold Palmer or something—after they have enough to eat, they're not doing it for the money. And my guess is that if that if uh Ted Williams was getting the highest salary in baseball and he was batting 220, he would be unhappy."
Warren Buffett (continuing): "And if he was getting the lowest salary in baseball and batting 400, he'd be very happy. That's that's the way I feel about this this job. What do you feel like when you look at this piece of paper that gives you your net worth and it says you're worth over a billion dollars? It's a byproduct of doing things I like to do. Well, if I bat 400 long enough in in this business, you get you you get a very big sum. That is a big sum. What are you going to do with it? Eventually, it's all going to go back to society with with very 99% plus of it's going to go to society. It should."

I'm Adam Smith. See you next time.