Berkshire Hathaway 2009 Annual Meeting Audience Question # 10

If Warren was running a business school, it will only have two courses

Warren Buffett:

OK, zone 5.

Audience Member:

Hi, Warren. That’s a little loud, sorry. Hi. My name’s Sarah. And I’m from Omaha, Nebraska.

I’d like to know if you could explain your strategies, namely value investing, in regards to cultivating the next generation of investors. How will you teach this young group?

Warren Buffett:

Well, I had 49… mostly universities, a few colleges… that came to Omaha this year. We do them in clumps of six. And then the last one, we had an added university. So we had eight sessions, full-day sessions.

And they asked me what… sometimes they asked me what I’d do if I was running a business school, teaching investments.

And I’d tell them I’d only have two courses. One would be how to value a business, and the second would be how to think about markets.

And there wouldn’t be anything about modern portfolio theory or beta or efficient markets or anything like that. We’d get rid of that in the first 10 minutes. The…

But if you know how to value a business… and you don’t have to know how to value all businesses. On the New York Stock Exchange, I don’t know, there’s 4- or 5,000, probably, businesses and a whole lot more on NASDAQ.

You don’t have to be right on 4,000 or 5,000. You don’t have to be right on 400. You don’t have to be right on 40.

You just have to stay within the circle of competence, the things that you can understand. And look for things that are selling for less than they’re worth, of the ones you can value.

And you can start out with a fairly small circle of competence and learn more about businesses as you go along.

But you’ll learn that there are a whole bunch of them that simply don’t lend themselves to valuations and you forget about those.

And I think if… accounting helps you in that, you need to understand accounting to know the language of business, but accounting also has enormous limitations. And you have to learn enough to know what accounting is meaningful and when you have to ignore certain aspects of accounting.

You have to understand when competitive advantages are durable and when they’re fleeting.

I mean, you have to learn the difference between a hula hoop company, you know, and Coca- Cola. But that isn’t too hard to do.

And then you have to know how to think about market fluctuations and really learn that the market is there to serve you rather than to instruct you.

And to a great extent, that is not a matter of IQ. If you have… if you’re in the investment business and you have a IQ of 150, sell 30 points to somebody else, ’cause you don’t need it.

I mean, it… you need to be reasonably intelligent. But you do not need to be a genius, you know. At all. In fact, it can hurt.

But you do have to have an emotional stability. You have to have sort of an inner peace about your decisions. Because it is a game where you get subjected to minute-by-minute stimuli, where people are offering opinions all the time.

You have to be able to think for yourself. And, I don’t know whether… I don’t know how much of that’s innate and how much can be taught.

But if you have that quality, you’ll do very well in investing if you spend some time at it. Learn something about valuing businesses.

It’s not a complicated game. As I say… said many times… it’s simple, but not easy.

It is not a complicated game. You don’t have to understand higher math. You don’t… you know, you don’t have to understand law.

There’s all kinds of things that you don’t have to be good at. There’s all kinds of jobs in this world that are much tougher.

But you do have to have sort of an emotional stability that will take you through almost anything. And then you’ll make good investment decisions over time.

Charlie?

Charlie Munger:

Yeah, you do have the basic problem that exactly half of the future investors of the world are going to be in the bottom 50 percent.

In other words… you’re always going to have more skill at the top than you have at the bottom. And you’re never going to be able to homogenize the investment expertise of the world.

There is so much that’s false and nutty in modern investment practice, and in modern investment banking, and in modern academia in the business schools, even in the Economics departments, that if you just reduce the nonsense, that’s all I think you should reasonably hope for.

Warren Buffett:

Beyond a certain basic level, though, of skill, wouldn’t you say your emotional make-up’s more important than the… than some super high degree of skill?

Charlie Munger:

Absolutely. And if you think your talent… if you think your IQ is 160 and it’s 150, you’re a disaster.

You know, much better a guy with a 130 that’s operating well within himself.

Warren Buffett:

I get to see the students that come by. I loved a fellow from the University of Chicago, one of the students. And the first question that was asked of me was, “What are we learning that’s most wrong?” That’s the kind of… I mean, I wish they’d ask that sort of thing of the panel here.

Charlie Munger:

How do you handle that in one session?

Warren Buffett:

Yeah.

But it was holy writ 25 years ago, efficient market theory. You know, I never understood how you could even teach it.

I mean, if you walked in in the first five minutes, you said to the students, “Everything is priced properly,” I mean, how do you kill the rest of the hour?

But… they did it. And they got Ph.D.s for doing it well. You know, and the more Greek symbols they could work into their, you know, their writings, you know, the more they were revered.

It’s astounding to me and I… that may have even given me a jaundiced view of academia generally… is the degree to which ideas that are nutty take hold and get propagated.

And then I read a quote the other day that may have partially explained it. Max Planck was talking, the famous physicist.

Max Planck was talking about the resistance of the human mind, even the bright human mind, to new ideas. And particularly the ones that had been developed carefully over many years, and were blessed by others of stature, and so on.

And he said, “Science advances one funeral at a time.” And I think there’s a lot of truth to that. Certainly been true in the world of finance.

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