Passing the Torch: The Most Important Video for Incoming MBAs (and Everyone Else, too)

When I began my MBA, I watched this 1998 talk given by Warren Buffett to the students of the University of Florida. It was a guiding light. Now, I'm passing the video onto my wife Hannah, who begins her MBA career the week after next at MIT Sloan. 

The speech touches on a number of points, and I've done my best to annotate, but the highlights for an incoming MBA student are: 

• The MBA Game (Part 1, starting at 2:20)  - you are given the chance to invest 10% into one classmate. Which classmate are you going to pick, the one with highest IQ or best grades? No, you're going to pick "the one you responded to best. The one that has the leadership qualities, the one that can get other people to carry out their interests. That is the person who is generous and honest and gives credit to other people for their own ideas." Which classmate will you sell short?
• Do what you love (Part 2, 9:00) Taking a job because it looks good on your resume is like "saving sex for old age."
• Remember how lucky you are (Part 10, 3:00) Let's assume there are 6 billion people on earth. You are given the chance to exchange your life for the chance at 100 other lives. Would you do it?

PART 1 - Intro and the MBA Game
2:20 - The MBA Game - Which classmate will you invest in?
7:12 - Investing in Japan
8:25 - Cigar butt approach to investing, i.e. buying stocks valued below working capital

PART 2 - Wealth, leverage, and taking a job you love
0:10 - Long-Term Capital Management - Berkshire's bid for the imploding hedge fund
4:30 - On the founder's of LTM: "To make the money they did not have and did not need, they risked what they did have and did need. That is foolish."
4:44 - "If you risk something that is important to you for something that is unimportant to you, it just does not make any sense."
5:37 - On leverage - small upside, big downside
6:55 - "Betas don't tell you a damn thing about the risk of stock"
9:18 - "Work in jobs you love. You're out of you mind if you keep taking jobs you don't like because you think they look good on your resume."
9:50 - "Taking a job you don't like is like saving sex for old age."

PART 3 - The Moat
0:30 - Landing the job with Benjamin Graham; "I kept pestering him. I kept writing him and giving him ideas."
2:00 - "I like businesses I understand."
2:39 - "I want a business with a moat around. I want a very valuable castle in the middle. And I want the Duke in charge of the castle to be honest and hardworking and able."
4:15 - Kodak and how they lost "share of mind" to Fuji
5:15 - "I've got one message to the managers: Widen the moat."
7:00 - "I don't want to buy any stock that if they close the NY Stock Exchange tomorrow for five years I won't be happy owning it."
7:25 - "You're not buying a stock; you're buying a part ownership in a business."
7:56 - Buffett buys his first stock at 11 years old.

PART 4 - See's, Disney and Coke: Building and Protecting The Moat
0:49 - See's Candies purchase
3:45 - Disney
5:10 - Coca-Cola

PART 5 - Qualitative Analysis?
1:00 - "Almost every business we bought has taken 5 or 10 minutes, in terms of [quantitative] analysis...if you don't know enough to know about the business instantly, you won't know enough in a month or two months."
2:10 - Circle of competence
3:10 - The Silver Bullet question - To find the best company in a market, ask all the players which competitor they would eliminate if they had the chance.
4:00 - HH Brown acquisition
4:45 - Asian Crisis & Coca-Cola

PART 6 - Mistakes: Warren is an "airoholic"
0:24 - Coca-Cola IPO; if you bought 1 share and reinvested the dividends, it would be worth about $5M now.
2:40 - Mistakes - "The biggest mistakes have not been mistakes of commission, they've been mistakes of omission: where we knew enough about the business to do something, but for one reason or another we sat there sucking our thumbs."
3:20 - Fannie Mae
3:30 - Investing in airlines
4:20 - Solomon Brothers
4:35 - "One form of mistake is buying because you like the terms [of the security], when you don't like the business that well."
5:28 - "Never look back...you can only live life forward."
6:55 - Macro factors - "Figure out what is important and knowable. Macro is important, but it is not knowable....We have never bought a business or not bought a business because of any macro feeling of any kind." 

PART 7- The value of NOT being on Wall Street
0:10 - Benefit of being an out-of-towner v. on Wall Street
1:00 - "Get one good idea a year, and then ride it to its full potential...and that is very hard to do in an environment where people are shouting prices back and forth every five minutes."
1:30 - Stock brokers
3:00 - Berkshire dividend? No chance.
4:10 - Berkshire HQ: 12 people, 3500 sq. ft.
6:35 - "We never buy something with a price target in mind."
8:08 - Arbitrage

PART 8 - Diversification
0:30 - Coco bean arbitrage
1:15 - Diversification: "If you are not a professional investor, than I believe in extreme diversification [and no trading]." In other words, buy and hold index funds. "Once you're in the business of evaluating business, then diversification is a terrible mistake. If you really know businesses, than you probably should not own more than six of them."
3:20 - Procter & Gamble
5:00 - McDonald's
6:10 - Gillette
7:30 - Utilities

PART 9 - Large Caps and REITS
0:10 - Large caps
2:30 - Real Estate Investment Trusts - If you have a large amount of capital, REITs are not attractive.
4:30 - Texas Pacific Land Trust

PART 10 -You're extremely lucky
0:00 - Down markets? "I prefer the market going down."
0:55 - Net buyers should want the price of stocks to go down.
1:45 - Chapter 8 and Chapter 20 in Graham's Intelligent Investor: "the two most important essays ever written on investing."
3:00 - "The Ovarian Lottery." Warren advocates for a John Rawls / Theory of Justice approach to social issues.
6:00 - If you could put your ball back (i.e. life), would you do it in exchange for 100 balls? You're in the luckiest 1% of the world.
7:20 - Only work with people you like.