Tag Archives: Warren Buffett

Buffett & Gates on How To Be Successful

Synopsis Of Discussion In 1998

Warren Buffett Points:

Career Advice:

Don’t do a job that you don’t enjoy. Waiting for a good time to have fun at your job is like saving up for sex for your old age. Get right into what you enjoy instead of doing something you don’t enjoy. You are wired to do something best. So find that thing. Enjoy doing your job everyday.

Capitalism is always neutralizing so expect value to be ephemeral.

Good Fortune:

Warren Buffett recognized that he was born in the right place and wired the right way to create immense value. There was a 1/50 chance that he would be born in the US at the time. He doesn’t believe in the dynasty model, he believed in a meritocracy in business. Let the resources flow to those who use them best. Warren is looking for the predictable rather then software product like Gates’. Buffett famously doesn’t invest in technology. Buffett can’t tell the winners and losers in technology stocks so he doesn’t invest in them. (He has now come around in 2012)

Warren Buffet loves playing the game of investing.

When You Find Something Of High Value:

You need to take a swing at that high value opportunity. Don’t read another book on the subject just go do that thing. You should be afraid of decisions of omission just as much as anything else. Never Look Back, don’t worry about the past. Learn from it but that’s a bit it.

What Buffett Does For A Living:

  • Allocate capital investments is 50%
  • The other 50% is keeping a group of manager enthused about what they do when they have no financial need to do it.

What About Retirement?:

Warren Buffett said in 1998 that he would retire 5 years after he died. That his team of Berkshire Hawthaway would be able to contact him via wigi board. But in seriousness, we have outstanding people. Buffett has written a letter that opens “Yesterday, I died. Here’s what you do with Berkshire Hawthaway.”

Bill Gates Points:

We’ve gotten better at understanding non-US markets at Microsoft in 1998. Microsoft is very good at international business because we have scaled outside of the US. The future is that the United States is a replacement market but the international market is early development so that’s more exciting.

Being Too Young When You Start A Company:

Bill Gates couldn’t rent a car to go to meetings because the rental restriction was 25 in the US, he had to take taxi to client meetings in the early days. The best thing is to learn how other businesses work which is sort of a regret on Gates’ part. Clients would say things like, let’s go to the bar but they couldn’t go to the bar. It is hard to find older people because they don’t want to take the risk.

What Gates Does For A Living:

Gates doesn’t miss game changing changes. IBM was unstoppable until they missed a few turns in the road. Microsoft is concerned about pulling things together to prevent a missed change in the tech market. We don’t want to get surprised but we almost missed the internet. The internet came along as the 5th priority at first but then Gates realized it was a much deeper phenomenon. And then they coalesced around ideas and how to measure success ourselves internally, then deployed an internet strategy.

The Future Of Value:

Bill Gates believes that the US is best at allocating capital at the moment. Korea and China are investing in education and technology so we should expect the next generation to get ahead. But there will be shift of value away from country-based value, now with the internet, services and advice are going to be made more easily available and those people are going to be better off and taken advantage. Gates is adamant that China is at least stealing our software then we figure out how to collect.

Picking People Is Important:

You need to totally trust and totally check you people. You need to have really brilliant people around you that have that kind of brilliance to debate openly. Bill Gates sees that anti-trust is not unfair. The judiciary looks at whether the competition has been beneficial to consumers. Developing countries are going to get great development and people are what matter.

What About Retirement?:

Bill Gates said he would resign as CEO in 10 years. Gates actually resigned 2 years after this presentation….

Anything You Do To Make Your Self Valuable Will Pay Off: Warren Buffett

Scrap Thoughts from Warren Buffett’s Management Secrets

  • How To Handle Employees Who Break The Law: You will risk a lot by breaking the law. You need to make sure that you mind the store, if you do not contact the authorities immediately, then you are an accessory to the crime.
  • Dealing With Your Mistakes: learn from your mistakes but don’t dwell on them.
  • Avoid Interacting With Other People, You need to find the No, Man.
  • Learn from missed opportunities: mistakes of omission are the worst but they go unnoticed. Miles Davis: lesser artists borrow, great artists steal. You need to see what someone is doing right, and what someone is doing wrong.
  • Pick Out Associates That Are Better Than You: we are who we hangout with.
  • Anything You Do To Make Yourself Valuable Will Payoff. The more education, and experienced, the more you make money. You need education and experience. Everyone starts at the bottom. Nothing beats your potential to earn. If you have a unique profession will allow them to charge more for their services.
  • Managing Personal Borrowing: Stay away from debt. Being conservative with money is the best way to invest. Don’t be materialistic.
[This is the last précis of Warren Buffett’s Management Secrets.] 

 

Leveraging Businesses Can Backfire: Warren Buffett

There are five segments to Warren Buffett’s Management Principles:

  1. Pick the right business: own, manage, or work for the right business, you need to work for the one with the best economics.
  2. Delegate authority: learn how to give up control safely.
  3. Find a manager with the right qualities: integrity, intelligent, and a passion for the business. You need to cultivate this in yourself, and in the right candidates.
  4. Motivate your work force: you need to motivate your managers so that they are all that they can be within your company.
  5. Learn the managerial axioms for different problems: there are axioms for handling dishonest employees, and keeping costs low.

5. Managerial Pitfalls, Challenges, and Learning Opportunities: the axioms of management.

Making A Living On Borrowed Money: those who borrow will try to dodge problems. Banks are the king of leverage. When the bank can’t pay these things back, it can get messy. Life is full of economic change. Leverage is very tempting, and always leads to trouble. Leverage can improve any business, which is the problem with leverage ultimately.

Imagine a 6 million business, you need 100million to finance a deal, if you agree to pay 10million in interest, you will get a net profit of 5 million. So you almost double your net earnings, and who gets the bonus? The managers! That’s why managers want so much debt/leverage. However, if you can’t service the debt you will start collapsing the companies net worth. When companies begin contemplating bankruptcy, the old managers are first to be fired. If you don’t take on the 100million in leverage, then if a recession occurs, you need only reduce production to reflect declining demand, and fire some less important people. Warren still looks at the long-term performance of the company. DO NOT go into debt, if you can’t pay it, then don’t bother. Warren gained a lot from the 2009 drop in stock prices. If you pile on the debt you will have an end to your management career.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

How to Win an argument: Warren Buffett

Learning How to Effectively Use Praise and Criticism is the Primary Task of a Manager: We need praise, because it inspires us to do better. You do not want to criticize for something you did or didn’t do. We often do not like criticism. No one wins friends without praise. Using both praise and criticism is the most effective. You should praise the small, and large, never miss an opportunity, and remember people’s names. Nothing is sweeter to another person, than to hear their own name. You should always acknowledge an idea, then provide counter-examples.

PRAISE the person, CRITICISE the category: your should be quick to praise, an individual banker, but you should blame the banker indirectly.

How To Win An Argument: To win an argument, you sometimes have to lose. The best way to argue is to ensure that the others do not lose face. It is better to agree with someone, and then have that person listen to your ideas. You need to reduce conflict. Benjamin Franklin’s business and life philosophy is powerful. You should avoid arguments. You should not use words that are certain, but do not contradict them abruptly. You should modestly position your views. Avoiding arguments is a way of accepting other people’s opinions.

Henry Ford said that if there is one secret of success it is to see things from other people’s position. You should seek out what people want. Connect their wants with your goals.

Encourage Others To Come Up with the Right Idea: Warren likes to set their own goals and standards, employees will set the standards higher. Warren’s silence, drives their performance. No one likes to be ordered about. If it is your own idea, then you will act on something with conviction. Instead of saying “don’t swim in the lake” you should illustrate the matter “If you swim in the lake, you will be eaten by a shark.” You should ask what your subordinates want from you. Then ask what you would expect from them.

Ask Questions Instead of Direct Orders: asking questions makes you more palatable. It’s better to let people figure something out themselves. Warren Buffet peppers his managers with tough questions, they are direct orders that have been masked.

“This is not the way to do it.” versus “Is there a better way to do that?”

When you are wrong you should admit it: no one can stand someone who won’t admit that they are wrong. Managers who don’t admit that they are wrong which causes a festering. Warren is upfront about mistakes made. People respect honesty. Warren wins the trust of his shareholders.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

Give your Co-workers a Good Reputation to Live Up to: Warren Buffett

There are five segments to Warren Buffett’s Management Principles:

  1. Pick The Right Business: own, manage, or work for the right business, you need to work for the one with the best economics.
  2. Delegate Authority: learn how to give up control safely.
  3. Find A Manager With The Right Qualities: integrity, intelligent, and a passion for the business. You need to cultivate this in yourself, and in the right candidates.
  4. Motivate Your Work Force: you need to motivate your managers so that they are all that they can be within your company.
  5. Learn The Managerial Axioms For Different Problems: there are axioms for handling dishonest employees, and keeping costs low.

4. Motivate Your Work Force: Management motivational skills that Warren uses, you need to adapt what Carnegie has taught.

Make A Good First Impression: you should begin the encounter in a friendly way. Warren knows that first encounter should be friendly, and be light. You should start with your encounters in a friendly way, because it is the only way that pays.

The Power of Praise: William James said that the need to be appreciated is essential. Charles Schwab was the first superstar manager. What made Charles Schwab a revered manager? Charles Schwab was encouraging! You need to arouse the greatest enthusiasm, you need to appreciate and encourage. You should give people the incentive to work. Schwab noted that Andrew Carnegie always praised his employees, and was a cheerleader, and would praise his managers in private. If you praise them for the little things, they will give them better things down the line.

Give Your Employees a Fine Reputation To Live Up To: the manager worked with a longtime trusted employee, and resulting in decline of productivity. Never miss an opportunity to remind your managers about their quality contributions. You should build up the expected reputation of your managers. If you play up the importance of giving people a fine reputation to live up to, you will motivate them. So Warren has some advice for Bono: don’t appeal to the conscience of American on African aid. If you appeal to a sense of right or wrong, it will not work, because we do not want to feel guilty. Bono should speak to America’s sense of greatness. America put a man on the moon, we should turn to America to save Africa. If you give a person a fine reputation to live up to, it is more effective. Using guilt is not productive.

The Dangers of Criticism: using criticism is ineffective because it arouses resentment. Uninvited criticism is something we hate to hear. We should not provide uninvited criticism of others. Instead of critcizing managers, you need to pay attention to what went wrong, and learn from it. As long as managers are making intelligent risks. We all make mistakes, and that you should learn from your errors but not make such a mistake subsequently.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

Be Obsessed About Your Work: Warren Buffett

OBESSION: you should be dreaming about the business, obsession is the price of perfection. Moody’s Stock Manual was memorized by Warren Buffett. How obsessed are you about what you do? Top managers are obsessive people. You can tell how successful someone will be, if they had an early interest in business. It’s not smarts but obsessiveness that makes the manager or leader in business.

The Power of Honesty: candor benefits us as managers. A manager who is truthful with others is more likely to learn from them. When the manager ignores his own mistakes, then he will more likely lie to himself. The willingness to fuddle the numbers will mean willingness to break other rules, you should be fearful of those who make up the numbers. You don’t want to be in business with people who need a contract in order to perform.

Manage Costs A.k.a: the Good Business Manager; profit is the life blood of a business, the only way to make a profit in a business is if you a profit margin, you either make a profit or not. If you make a lot of profit, you can become rich. So you need to inspire the sales force, and you need to inspire the manufactorer and buying teams. It take two to tango and two to make a profit. You need to develop your own sales skills before leading a team of sales people.

Have an Eye for the Long-Term: being a manager makes you a better investor. You should try to invest for forever, not for short-term gains. If you are short-term motivated then you will not be successful, management is focused on the short-term, this kills long-term planning. Buffett believes in long-term planning. Managers are determined to make the short-term numbers, and they do not plan for the future so they fail. Reactive management is all too common. Avoid being a reactive manager.

The problem is that people throw good money at a mediocre business, and when management tries to get a short-sighted promise passed they spoil the long-term value of a business model. Warren studies a lot of different businesses. Warren learned that he is looking for a great investment which means great people, products, and new businesses.

Determining Salaries: You will want to pay great managers well, they are very rare. How do you measure whether a manager is good?

  • Industry Comparison: If you own a business that is earning a 20% GP margin, they may not be doing all that well compared to other businesses. You need to compare the business within the industry which indicates whether or not the manager is doing a good job.
  • Performance Based Pay: bonuses are paid if the manager improves the underlying economics of the business, NOT whether the manager performs well because the business is already highly profitable. You need to find tangible ways to prove whether that manager is improving a company or not. A poor manager in a highly successful startup is still a poor manager.
[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

Find the Right Manager for the Job: Warren Buffett

Warren Buffett’s Management Secrets

3: Find the Right Manager for the Job: You should hire the right manager, and that means you have found the right characteristics of a manager. Where can you find the right manager? It is time consuming, and management changes are expensive. First, you need to ask if the management changes are necessary or not. Warren looks for competent management already in place within these companies. Promote from within if possible, or look for talent elsewhere, but preferably not..

Victor or Victim: how to select a leader. Would you rather be the worlds worst lover, and have everyone think that you are the best lover, or vice versa? Managers are either true to themselves or they conform to what others want of them. A bureaucrat wants to do what you want. Warren is always going against the herd, these types of managers are the masters of their own destiny.

You Need To Determine The Internal Locust Of Control: you blame yourself when something goes wrong, and if you fail it is because it is your fault. You determine what your life will look like. When you win, you won it, and you have no one else to blame. Learn from your mistakes but do not dwell on them for too long. You need to take responsibility for your failures. Get in control of yourself.

You Need To Determine The External Locust Of Control: you blame everyone but yourself. They don’t believe they have the power to solve their problems.

Work At The Job You Love: you will not jump out of bed, if you keep taking jobs that you don’t like because it will look good on a resume. In the quest for wealth we take on jobs that we don’t like. You will one day end up doing something you enjoy doing. Sometimes the foundation is found on nothing more than greed. Work is drudgery, and destroys your spirit. The most successful people in business are doing what they love. You need to love what you do. Love what you do, and hire people who also love what they do.

Put A Wining Sales Team Together: the best sales people are those who believe in the product, and have a passion for the product. If you are very interested in that product, you need to ask what are its best uses. People who believe in the products, and love to go to work, but have managers who would rather be somewhere else are doomed. Super managers are well-enough to retire in the morning but they go to work anyway because they love what they do.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

Learn How To Delegate: Warren Buffett

There are five segments to Warren Buffett’s Management Principles:

  1. Pick the right business: own, manage, or work for the right business, you need to work for the one with the best economics.
  2. Delegate authority: learn how to give up control safely.
  3. Find a manager with the right qualities: integrity, intelligent, and a passion for the business. You need to cultivate this in yourself, and in the right candidates.
  4. Motivate your work force: you need to motivate your managers so that they are all that they can be within your company.
  5. Learn the managerial axioms for different problems: there are axioms for handling dishonest employees, and keeping costs low.

2. Learn to Delegate Within Your Company: Berkshire growth needs to be competently run. A management approach has allowed Berkshire to become a large multi-national conglomerate.

Rules for Delegating Authority: Do not try to control every event, if you are micro-managing then you will drop all aspects of your work. Delegating to a competent manager means a more thorough execution of the task. There is not enough time in the day to actually delegate, Warren delegates with rules:

  1. Every business culture is unique: workers and managers have developed highly specialized skill sets, even remotely as well as he can. Employees are the experts. If you have any job as a manager; it should be to cheerlead not be a slave driver.
  2. Competent Managers like to do their business as their own.  Play on the manager’s pride.
  3. The managers should not only be hardworking, you should have a great deal of integrity. If they aren’t honest they will rob the company blind. Sell cheap, and tell the truth.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

Principles for Choosing the Company Your Work For: Warren Buffett

The Insights of Warren BuffettThere are Five Segments to Warren Buffett’s Management Principles:

  1. Pick the right business: own, manage, or work for the right business, you need to work for the one with the best economics.
  2. Delegate authority: learn how to give up control safely.
  3. Find a manager with the right qualities: integrity, intelligent, and a passion for the business. You need to cultivate this in yourself, and in the right candidates.
  4. Motivate your work force: you need to motivate your managers so that they are all that they can be within your company.
  5. Learn the managerial axioms for different problems: there are axioms for handling dishonest employees, and keeping costs low.

1. How to Find the Kind of Business that Offers the Greatest Career Opportunities: you need to pick the right business to be part of, and work for. You could have a life of drudgery, or success depending on this crucial choice. Certain kinds of companies that have inherent value will not even need a good manager to be successful. There are number of characteristics that identify these businesses.

There is a big difference between a business that can bootstrap, and those that cannot.* The best businesses are those that have a key service or a strong brand name product that never has to change; there is no R&D, and no retooling of the plant for design changes. The capital needed for growth can be used over the year, all the money that it saves is easy money that doesn’t need to be invested in innovation. The capital needed for growth is internal, thus making the managers look great.

Coca-Cola Has A Strong Competitive AdvantageFor example, Coca-Cola doesn’t have to redesign its product, so they can spend time to pay big bonuses, and buying other companies. General Motors on the other hand, produces automobiles and have to spend billions on new designs, and therefore needs to compete with Toyota et al. So, which one would you work for? The one that is producing excess cash or the one that is internally burning its funds on R&D? Excess cash makes management look good. Getting paid more money is always good.

*Remember that Warren Buffet hates technology companies.

Competitive Advantage: the company that is best is that one that has a lock down on its competitive landscape. These companies never really change, and are easy to sell. This equates to higher profit margins, and they are awash with cash. You need to have a durable competitive advantage. There are three kinds of such companies;

1) sell a unique product,

2) sell a unique service,

3) are a low cost buyer or seller of the products that people need daily.

1) Sell a Unique Product: examples are Coors, Kraft, Coca-Cola, P&G, Philip Morris. Through the process of branding their products, they are what we think of when we buy. Wrigley Gum is another great example. Marlboro cigarettes owns a piece of the consumer’s mind. So these mega brands can also sell higher profits, higher inventory turnover, and therefore these companies are easy to identify because they have strong yearly earnings. These special companies, offer us the opportunity for managerial super-stardom. They also have the money to buy new businesses.

2) Sell a Unique Service: examples are H&R Block, Amex, Wells-Fargo etc. Like lawyers and doctors, people need these services inevitably, but unlike lawyers and doctors, these companies are institution specific as opposed to people specific. The economics of selling a unique service is that you don’t have to build a production plant. You can also own a piece of the consumers mind. No matter how bad the recession, H&R Block never has much of a slow-down in tax filing business, management does not need to work around union demands, debt, or the buying whims of customers.

3) Low Cost Buyer: example is Walmart. Instead of big margins, these companies seek out big volume. For a business like this to succeed, you need to have the highest volume, and you need to have the best price in town. The low cost buyer and seller offers the least potential for management and employment opportunities.

If you business doesn’t fit into one of these categories then you are wasting your time.

**Please note that Buffett owns stock in every company mentioned above.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

Do Your Earnings, Debt and Margin Test: Warren Buffett

Three quick tests to identify the best companies to work for are as follows:

Oracle of Omaha Warren Buffett
Earning Test
: Check the yearly per share figure. Look at the per share earnings for a 10 year competitive advantage. Warren looks for a per share earnings that is consistent. Per share earnings of $1.3 1990, and 2001, $1.6, 2005, $2.35, 2007, $2.68, 2008 $2.95 = a promising company. So you can see a long-term upward trend. So the company must have a competitive advantage. Consistent earnings is a good sign that the product is good. The companies economics are promising. If the yearly earnings are wildly unstable, then you are working in the wrong company. You might even see a downward industry, the boom increases demand which increases prices, this increases costs, and supply increases causing the prices within the industry to drop. There are 1000s of companies with this problem of competitive advantage which will destroy your results.

Debt Test: companies that have a low debt, surplus of cash with self-financing, and they can weather a recession. You need to gauge debt based on a given industry, but the general rule is that if a company that has more than 5 times the debt versus earnings then you are in bad shape. High levels of debt is due to uncompetitiveness. The company that is highly leveraged means that the company will eat any excess cash, and even your own job. There will be no excess capital, and little growth in managerial opportunities.

Gross Margin Test: you can look at the companies gross profit margin, you need to look at the financial forum. You look at revenue, and then cost of goods sold. Gross profit divided by revenue = gross profit margin. 10,000 total revenue – 6,000 cost of goods sold = 4,000 Gross Profit / 10,000 = 40% Gross Profit margin.

Coca-Cola 60% Gross profit margin, Wrigley Gum has a Gross profit margin of  51%

Versus

United Airlines has a gross profit margin 14%, US Steal has a gross profit margin of 14%, Goodyear has a gross profit margin of 20%.

Microsoft has a 79% gross profit margin, Microsoft produces better software.

  • You need to price yourself way higher than the cost of goods sold. If you are working for poor inherent economics then you should consider leaving that company now.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]