Warren Buffett - How to Be a Success

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There will be a short speech in this MBA talk, and then there will be a question and answer session. It is important to think about your future. Everyone graduating has the ability to make a lot of money and to succeed. However in order to succeed, more is needed than intellect and energy. You also need integrity. Without integrity, intellect and energy doesn't matter too much.

Think for a moment that you had the right to buy 10% of one of your classmates for the rest of their lifetime. Are you going to give them an IQ test or pick the one with the best grades? Probably not. If you thought about this for an hour, you would probably invest in the person who has the type of leadership qualities, the type of person who has the ability to get other people to do what they want. By the same token, if you had to go short on one of your classmates, then you would also look for qualities like dishonesty and cutting corners.

As you reflect on those qualities, you will notice that they are all qualities that are achievable. They are not forbidden to other people. There aren't any negative qualities that you have to have. They are all simply habitual. Habits are too light to be felt until they are too heavy to cast off. When you are young, you can choose to have any habits that you want. Look around at the people that you admire and try to develop patterns of behavior like them. Benjamin Franklin did this and Benjamin Graham did it as well.

Warren Buffett is not a macro guy. But you can borrow money in Japan at 1%. You would think that you could make money if you can borrow money at 1%. However, he is having trouble finding anything. It is hard to make a lot as an investor if the business you are interested in doesn't make a large return on equity. However, you could take the cigar butt approach to investing. If you are looking for a free puff, then you can purchase a lousy business at a discount. Time is the friend of the wonderful business and the enemy of the lousy business. Japan had an incredible market without a lot of incredible businesses.

Warren Buffett - Coke vs McDonald's

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There are a lot of things you can learn if you are around securities over the course of your career, and you will find a lot of arbitrage opportunities. However, that probably won't be the primary driver of your investment returns.

If you are not a professional investor, then you should be extremely diversified and you should do very little trading. However, if you want to bring an intensity to the game, and you are going to value businesses, then diversification is a terrible mistake. If you really know business, then you shouldn't own more than 6 businesses. Very few people have gotten rich on their 7th best idea. You'd be much better off putting more money into your best idea.

Proctor and Gamble is a good business. But if you are going to go away for 20 years, would you rather own Coca-Cola or Proctor and Gamble? Proctor and Gamble wouldn't be bad, but Coca-Cola has much better pricing power. They sell 1 billion units per day. If they charge a penny more, they will make another $10 million per day.

McDonald's has a lot of things going for it. But it is a tougher business. People do not want to eat at McDonald's every day. If someone drinks 5 Cokes today, they will probably buy 5 more tomorrow. The fast food business is tough, and they don't win taste tests. They are also competing on price more than they used to, and they give away toys in order to sell more product. It is better to own a business with a product that can stand alone absent promotions and price appeals. But it is a very good business. Not as good as Coca-Cola, but then again very few businesses are.

The utility industry is tough to understand because there are so many regulations. Obviously the guy who produces energy more cheaply has an advantage, but it is hard to predict how much of the profits he will be allowed to keep and whether he can sell his energy outside of his geographic area. A lot of money will be made in utilities, but it is hard to be able to tell who is going to make it.