Lessons from Omaha

Glad to be back in Lenoir this morning, applying a few lessons learned from the Oracle after a whirlwind tour through Omaha with 30,000 of Buffet’s closest friends. Thanks again to the Blumkin Family for being such gracious hosts Friday evening.  Hope to be back next year!

Here’s my top ten list from Warren and Charlie, as well as a few other value guys we bumped into along the way:

  1. People don’t change when they get older. They become more of what they were. While this was my first visit to Omaha, it’s pretty clear that Warren and Charlie have become a lot more of “what they were” over the years. Would have loved to have been a fly on the wall when this partnership started at 29 and 35 years young.
  2. You can learn a lot by asking questions. You can learn even more by asking “the right” questions. People generally like to talk, so give them a reason to do so. Larry Bird was able to sign the highest-valued contract in the NBA at the time by asking the right questions. He talked to every agent in the league and asked them, “Other than you, who is the best agent in the NBA?” He then went on to sign with the “second” best agent in the league.
  3. If you aren’t confused, then you probably don’t understand. Common diseases cause uncommon symptoms more often than uncommon diseases cause common symptoms. Don’t try to over-simplify complex matters, especially when dealing with systems with complicated interactions. In this case, Munger was referring to The Federal Reserve’s policy of Quantitative Easing rather than medicine.
  4. A bird in the hand is worth two in the bush. At the most basic level, this is the essence of value investing. Of course, there are a few questions that naturally arise. One: Are you really sure there are two in the bush? And, two: How far away is the bush?
  5. The nature of boards is that they are part business organizations and part social organizations. Large shareholders have multiple levers to pull to effect change. Some are more public than others.
  6. People would accomplish more if they picked their spots. If we all yelled every time we saw something we disapproved of, we wouldn’t be able to hear each other. We can achieve better results by always putting ourselves in the other fellow’s place and thinking about what we would do ourselves. It takes some imagination, but it pays.
  7. “Ignorance removal” is the simple secret to success.Or as Oliver Wendell Holmes stated in Medical Essays, “The best part of our knowledge is that which teaches us where knowledge leaves off and ignorance begins. Nothing more clearly separates a vulgar from a superior mind, than the confusion in the first between the little that it truly knows, on the one hand, and what it half knows and what it thinks it knows on the other.”
  8. Your true cost of capital is what can be produced by your second best idea. Holmes once said that, “When a man has special knowledge and special powers like my own, it rather encourages him to seek a complex explanation when a simpler one is at hand.” Buffett seems to imply that he may have been referring to MBA’s coming out of today’s business schools as they “calculate” their cost of capital.
  9. Size Matters. Okay. This one didn’t come from Buffett or Munger, but it did come from two good friends at an event we attended on Friday. So in case you were wondering how much capital you should have in your “second best” idea (or any idea for that matter), the formula is quite simple, compliments of the Kelly Criterion. Position size should effectively equal “Expected Value” divided by “Range of Outcomes.”
  10. There is nothing new under the sun. It has all been done before. If you’ve studied Buffett and Munger as much as we have, you can just about anticipate the answer of each question before it’s given. What we couldn’t anticipate was another remix of “YMCA” by the Village People.

Buffett