Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [18]
Although he is giving away most of his fortune, Warren has provided for his family. For years he said he would not leave them his fortune. Instead, he will leave them fortunate. He will provide ample funding for charitable organizations run by his children. Not only does that give them a social status and control over their lives that would be difficult to achieve in a typical corporate job, they have the opportunity to maintain self-esteem by doing important work. Warren’s wife will also want for nothing, and when one interviewer recently asked Warren to name his hero, he immediately responded:“My wife.”
When we arrived back at the office, Warren showed me a copy of his son Howard’s book of photographs capturing unforgettable faces of people living in the Third World. Warren assumed a poker face, saying, “He has really developed.” Afterwards,Warren gave me a tour of his offices and showed his gallery of letters, stopping to explain the background of some of his favorite mementos.
Warren and I met for more than four hours. By the time Warren’s assistant organized a taxi to take me to the airport, I had a lot to think about. It was time to make subtle shifts in the way I looked at my business and my personal portfolio, and from my point of view, it was well worth the trip.
As for Warren, he was doing his job. Berkshire Hathaway’s success means that Warren has billions of dollars he needs to invest, and he needs transactions of massive size. Several times during the course of the day, Warren repeated that if I found a large-sized investment opportunity in a company that meets his criteria—$1 billion or more in size—to bring it to him. He also asked me to call him.
The flipside of that coin is knowing what not to buy. Another feature of Berkshire Hathaway is that, unlike hedge funds, Warren Buffett and Charlie Munger eschew leverage, avoiding companies burdened with debt. If you are not leveraged, and your businesses generate enough cash to meet your expenses, you do not have to worry about what anyone else thinks of your financial situation.You never have to sell assets into a distressed market to raise money, and if the stock market closes for years, you do not need to worry, since your assets keep growing and generating value. Warren and Charlie know they could have had higher historical returns had they used leverage, but in a distressed market, one can obliterate a great track record by destroying shareholder capital.
When calculating compounded returns, the game is over and your track record is irrelevant if you multiply by zero. We both knew the market was overleveraged, rating agencies misrated debt, and investment banking models were incorrect, but neither Warren nor I was aware that day that our interests would become more closely aligned as the largest financial debacle in the history of the capital markets began to unfold.
Both Warren and I knew the financial markets were overleveraged and credit derivatives contributed to the excessive leverage. Things were still relatively calm as I boarded the plane home in August 2005, but financial warning lights flashed bright red. Archimedes, the ancient Greek inventor and scientist, had said that if you gave him enough leverage, he could move the world. The global markets had combined high leverage with bad lending practices, and the financial world would soon feel the negative force.
Chapter 3
The Prairie Princes versus the Princes of Darkness
Bravo! Your Golden Fleece Award is a gem.
—Warren Buffett
to Janet Tavakoli, October 2, 2006
Both Warren Buffett and I advocate treating employee stock options as a cost of doing business.Warren operates in a competitive marketplace, and he has no problem compensating employees well. This cost of doing business should be calculated correctly and it should be expensed. Stock options are not an issue when Berkshire Hathaway finds a well-run family-owned business to purchase; if Berkshire Hathaway buys shares of stock in the marketplace, however, stock options are difficult to avoid. For example,