Warren Buffett Just Wrote His Best Annual Letter
gatesnotes.com
gatesnotes.com
“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”
Often we tend to focus too much on intelligence and too little on integrity.
http://www.goodreads.com/quotes/76790-somebody-once-said-tha...
Those who are clever and industrious I appoint to the General Staff. Use can under certain circumstances be made of those who are stupid and lazy. The man who is clever and lazy qualifies for the highest leadership posts. He has the requisite nerves and the mental clarity for difficult decisions. But whoever is stupid and industrious must be got rid of, for he is too dangerous.”
Helmuth von Mioltke the Elder
The earliest evidence located by QI appeared in January 1933 in a periodical called “Army, Navy & Air Force Gazette” based in Great Britain. A passage attributed to German General Kurt von Hammerstein-Equord described the placing of officers into four classes.
And hard working can be dangerous. Very, very intelligent workaholics are responsible for some of the most expensive, least efficient work I've ever seen. No matter how hard and difficult, and too complicated things get, they just roll up their sleeves and go to work. And using their super intellect, they can manage it. But everyone else is hurt by that.
Maybe you thought industrious meant inventive, or creative. But if it means only hard working. Then intelligent and hard working is a dangerous combination. Often successful but at a huge cost. Smart and lazy is just as often successful, but without those huge costs.
When smart and lazy people get hard work, they think of ways to make it easier. That's where we get the old saying that civilization advances only thanks to lazy people. Hard working people just put up with however hard or inconvenient work is, lazy people get creative.
(ok, industrious & lazy too, but...)
Maybe because integrity is virtually impossible to objectively evaluate for a candidate who you've got limited time to assess (aside from some extreme examples perhaps).
I guess you could incorporate some sort of formal integrity test [1] into your hiring process but my impression is that those are costly and controversial. Do companies actually use them...?
[1] http://en.wikipedia.org/wiki/Employment_integrity_testing
I would go even further and say that it's virtually impossible even over long periods. As a graduate from a military academy, the ostensible goal was graduating "Leaders of Character" with significant emphasis on "integrity" and "honor." I walked away feeling that the program did not perfect the evaluation.
At the end of the day it's usually a "gut feel" as much as I hate that, and the perceptiveness of the screener really is pivotal.
From the letter Gates was talking about (I've read about the 1st 1/3 of it over the last couple of days), integrity would be why Warren Buffett bought a major insurance company on a handshake and a one page document. No pre-audit. No financial review.
He trusted the guy.
In my opinion, that's the same definition of integrity everyone else uses.
One of Buffett's proudest achievements was paying pennies on the dollar for an immigrant's bootstrapped furniture business.
"Let’s look first at insurance, Berkshire’s core operation. That industry has been the engine that has propelled our expansion since 1967, when we acquired National Indemnity and its sister company, National Fire & Marine, for $8.6 million. Though that purchase had monumental consequences for Berkshire, its execution was simplicity itself.
Jack Ringwalt, a friend of mine who was the controlling shareholder of the two companies, came to my office saying he would like to sell. Fifteen minutes later, we had a deal. Neither of Jack’s companies had ever had an audit by a public accounting firm, and I didn’t ask for one. My reasoning: (1) Jack was honest and (2) He was also a bit quirky and likely to walk away if the deal became at all complicated.
On pages 128-129, we reproduce the 11⁄2-page purchase agreement we used to finalize the transaction. That contract was homemade: Neither side used a lawyer. Per page, this has to be Berkshire’s best deal: National Indemnity today has GAAP (generally accepted accounting principles) net worth of $111 billion, which exceeds that of any other insurer in the world."
1. the quality of being honest and having strong moral principles; moral uprightness.
2. the state of being whole and undivided.
Some Christians would consider anti-homosexuality as a model for integrity, and how can you argue with that? They in fact are protecting integrity of the Bible. They are at least honest about it.
When something is said, it needs to be put in correct context. What Warren Buffet was talking about probably meant loyalty, honesty, and consistent work ethnics and attitude. It should be clearly stated in order to have an objective measurement.
Also, I find organizations putting Integrity as part of their motto distasteful. I don't know, maybe I just don't like any kind of mottos... These things are just generically "good." They don't mean shit when just posted on the wall. Might as well post something like "I'm good, trust me" or "don't be evil." I agree with Mitt Romney - corporations are people. He's right. Both are inherently hypocritical. Never trust what a person says, even yourself, do good and be good. Actions speak the loudest. Seriously, fuck those posters! I hate them so much.
If you have to officially state that integrity is something you value, you've already lost.
That it was part of a scummy company's "values statement," after they "merged" with my great company -- selling the deal to shareholders on a CEO deal they broke after a year, and then breaking up the company and selling it all off to float their drowning businesses -- was PARTICULARLY galling.
[1] Unless you're unbelievably naïve, I suppose, but I don't want unbelievably naïve people working for/with me.
Then, other candidates learn of the integrity test. And they try to game it. They see you drop the wallet, they make a point of giving it back regardless of what their true impulse might be.
So I don't think you can effectively test for these things, unless you hire so rarely that word never really spreads.
Haha! Got a chuckle out of the Wikipedia link. Sounds like pseudo-science (obviously if he answers that his favorite color is red and not blue he's some sort of shifty klepto!).
> And if you don’t have the first (integrity), the other two (intelligence and energy) will kill you. If you hire somebody without integrity, you really want them to be dumb and lazy.
I don't follow the logic there at all. I think I get the gist of what he is saying (without integrity, intelligence and energy don't matter) but I don't follow how he got to that conclusion. Can you explain it better?
If you hire someone who doesn't have integrity, you want them to be dumb and lazy to limit the damage they can cause.
On a related note, I wonder if Gates writing this praise was spurred by something, maybe some news about Buffet. He's relatively senior (84), and has been running Berkshire for a while now. Maybe he's getting ready to give up the reins.
In fact, he builds up the reputation his menagerie of "very experienced people" to run individual businesses - I wonder how they will run things when Warren isn't around.
While you're at it, take some time to check out the Berkshire Hathaway site. It directly services what they're trying to do: provide investor information.
"Both the board and I believe we now have the right person to succeed me as CEO – a successor ready to assume the job the day after I die or step down."
Aside: to those who enjoyed reading this annual letter I recommend "The Essays of Warren Buffett" — an arranged collection of edited previous letters by theme (though they are all also freely available online).
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Someone of his position shouldn't be waiting in line and taking off shoes at the airport every time he needs a meeting. He owns dozens of companies.
http://www.forbes.com/sites/matthewstibbe/2011/09/22/warren-...
Most probably Ajit Jain would take over as CEO. A significant part of the investment portfolio is already handled by two other managers.
http://www.economist.com/news/business/21645746-warren-buffe...
Even so, I believe there are takeaways. If we're building startups which have yet to prove themselves, it's still good to have a long term view. I'm reminded of Jack Ma's vision to build a company that lasts 99 years. Ma and Buffet's risks are—I believe—not pure chance but well calculated. Something I'm trying to improve personally but have a ways to go…
If you look at the type of businesses that BH is involved in, it's things that have "book value," in other words tangible assets that can be inventoried, depreciate and are generally considered durable goods. In "Tech" the vast majority of assets are human capital and it is too "fickle" and companies are very easily supplanted for the really long game that BH plays. Notice that the "tech" they do own is in things like IBM
Coke for example is a big asset of BH that falls slightly outside of this because the bulk of what makes Coke - Coke, is it's brand. But even still, it has a massive industrial capacity.
His reason for being largely extremely-low-tech is that he loves to understand the businesses he invests in really, really well (probably his big competitive advantage), and by his own admission, he doesn't really understand tech.
I have also read enough of Buffet to know that while he likes to put on the hat of gump old man, he has teams of people who he relies on for things he "doesn't understand" - and we aren't talking about nuclear technology here.
Especially if you are making brand decisions, Google is a huge brand, and the technology is not esoteric nor is the business model. The difference though is that google is software based, while IBM is hardware. At least that's how it has historically been...I am curious what BH will do as IBM moves toward more software/people centered.
http://www.economist.com/news/business/21645746-warren-buffe...
Did this guy not read the letter? Because Buffet spends a lot of time discussing why he thinks his version of the conglomerate model works and will continue to work. You can disagree with his reasoning, but he certainly discusses it at length.
Second, there have been rumors that Buffet is planning to give up control soon, perhaps at this shareholder meeting. Even if he doesn't, it's not clear that it matters. The final word on asset allocation may come from him, but he is surrounded by people essentially making those decisions for him (as he basically implies in the letter).
Nowhere in this do I get the impression this guy actually read the FULL letter, beyond the first part (meaning beyond page 21).
That pattern is pretty typical when talking about women but not wanting to give it away from my experience of playing online warewolf (so yeah huge grain of salt needed there)
Edit: Seems like Mr. Munger mentions Mr. Jain and Mr. Abel, both male. I think I'll stick with my initial impression though :P
Otherwise, going to be a very interesting thing to watch. Mr. Buffet's love of economic moats will likely help ensure that his successor will not be in a Ballmer-type position.
Is it me, or is Bill Gates the coolest person ever after relinquishing his duties at Microsoft?
He seems so at peace with everything (except for his charities and philanthropic efforts of course).
I would love to see a founder tell one of their investors this and watch their head explode.
I love how Warren and Charlie, at 84 and 91 respectively, still bust each other's chops like they're college roommates.
I eagerly await this next implosion too. Billions for companies that make nothing. Well rich people need to park their money somewhere. Just don't be the last one holding cards.
> The fact is that I gave Berkshire stock to the sellers of Dexter rather than cash, and the shares I used for the purchase are now worth about $5.7 billion. As a financial disaster, this one deserves a spot in the Guinness Book of World Records.
Two comments about this: I don't think Buffet has a good concept of financial disaster. Having or not having an extra $5b today makes little difference to the scale of Buffet's and Berkshire Hathaway's wealth. This does not materially change their financial position and cannot have precipitated a crisis situation.
Does Buffet really begrudge the fact that somebody else got rich from a fair deal? Perhaps I am misreading this section, but I feel very disappointed by this.
Somebody else has $5b, but this is not a zero-sum game.
Every decision, including this one, contributed towards Buffet's and Berkshire's position today.
Presumably Buffet took that decision to rather invest the cash in something else - which has apparently done just fine.
I used to read his letters regularly until a couple of years ago. In all his letters, he always seemed to blame himself for investing in bad companies. But at the same time, gave all the credit for profits to his CEOs. IMHO, there is a lot of humility in that.
Buffett's brain is not wired like the rest of us. He even takes losing small amount of money very seriously.
I remember watching Buffett's old video where he bought a gas station when he was young and then sold it as loss of $2000. He said that that the opportunity cost on that money is about $6 billion in early 2000.