TIME leadership

This Is How Much It Costs to Lunch With Warren Buffett

Rick Wilking—Reuters Berkshire Hathaway CEO Warren Buffett

If it's part of a charity auction that is

For a little more than $1 million, you too could dine with Warren Buffett. The annual auction of a “power lunch” with the Oracle of Omaha opened on Sunday night at $25,000, and the bidding is already up to $1,000,100.

The eBay auction benefits the Glide Foundation, a charitable organization that assists the poor and homeless, which Buffett has chosen to receive the proceeds of the lunch fundraiser each year. Bidding goes until Friday, June 5, at 10:30 p.m. Eastern Daylight Time.

Still, by the time the auction closes, the winning bidder—so far only four are in the race—will likely have to pay much more than $1 million to eat steak with Buffett.

Last year, a Singapore man, Andy Chua, paid $2.2 million for the lunch date, which is often held at the Smith & Wollensky restaurant in New York. The record price for the meal, however, was in 2012, when an anonymous winner paid nearly $3.5 million.

At the current pace of bidding, this year’s auction stands to beat the 2012 record. The bidding was only at $500,000 with two days to go before the close of the auction that year; the current auction has already double that amount and there are still more than four days left to bid.

After all, dining with Buffett has already yielded much more than bragging rights to at least one lucky winner. Ted Weschler outbid his competitors to win the Glide auction in both 2010 and 2011, paying more than $2.6 million each time. Then a hedge fund manager, Weschler spent the meals discussing his own investment strategy and success—and impressed Buffett so much that the Oracle hired Weschler to run part of his legendary investment portfolio at Berkshire Hathaway.

Now considered one of Buffett’s protégés who will eventually take charge of Berkshire’s investments when Buffett eventually retires, Weschler had remained anonymous during both of the Glide auctions. His identity was first revealed by longtime Fortune writer Carol J. Loomis when his hiring was officially announced.

Perhaps it’s Weschler’s kind of prize—the chance to work directly for Buffett—that is inflating the cost of the charity lunch. In 2008, investor Guy Spier paid just $650,000 to lunch with Buffett.

As is typical, Buffett ordered a cherry coke with his medium-rare steak.

MONEY stocks

Give Your Investments a Midyear Checkup

Kagan McLeod

How to ensure your wealth is still in good health.

Halfway into the year, and 2015 may have already thrown you and your financial plans for a loop.

Stocks, which were supposed to slow as the bull market entered its seventh year, are back to setting all-time highs—and have gotten frothy as a result. Gas prices, which were on the verge of plunging below $2 a gallon, have reversed course and are now headed toward $3. And the job market, once on a roll, looks to have hit another speed bump.

Okay, the changes aren’t of the magnitude of what you saw in the financial crisis. But they don’t have to be to throw your financial plans off-kilter. As with your annual physical exam, the midway point of the year is a smart time to take some vitals, run some tests, and reassess your own situation. Over the coming weeks, we’ll provide you with a wealth-care checklist. First up: a review of your investments.


Ailment: Rising rates. The Federal Reserve says it could raise interest rates at any one of its upcoming meetings now—which would mark the first rate increase in nearly nine years.

Hiking rates is like stepping on the economy’s brakes. Historically, there’s an 80% chance stocks will fall by 5% or more once investors see Fed “tightening” as imminent. Moreover, bond prices move in the opposite direction of market rates, so fixed-income funds could take a hit too. When the Fed lifted rates in 1994, for instance, intermediate-term bond prices sank 11.1%.

Treatment: Don’t overreact. The natural inclination is to be überconservative. But market watchers from Warren Buffett to bond guru Bill Gross think global growth is slow enough for the Fed to be patient. And even if the central bank acts in the coming months, short-term rates are still expected to rise only about half a percentage point by year-end, according to a survey of economists by Blue Chip Economic Indicators.

Move to the middle on bonds. The traditional advice for fixed income is to “shorten up.” That is, sell funds holding long-maturity bonds and hide out in short-term debt that’s less vulnerable to price declines. But with short rates still near zero, you could be leaving a lot of money on the table, warns BlackRock portfolio manager Rick Rieder. Plus there’s no guarantee bonds will lose money. When rates rose in 2005, bond prices fell but investors earned 1% on a total return basis when factoring in yields. So instead of going all short, stick with intermediate funds like Dodge & Cox Income DODGE & COX INCOME FUND DODIX -0.22% , whose nearly 3% yield can soften the blow from price declines.

Stay (mostly) the course with stocks. Not all pullbacks turn into bear markets. In fact, history shows most sectors keep rising six months after the Fed starts raising rates, including economically sensitive ones like technology and consumer discretionary, notes S&P Capital IQ’s Sam Stovall. That’s why Stovall says you’re better off holding on and selling equities only if you need to rebalance. In which case…


Ailment: A frothy market. Stocks are still on a roll, with blue-chip equity funds having posted 15% annual gains over the past three years, vs. 3% for intermediate bonds. What’s wrong with that? Based on 10 years of average profits, the price/earnings ratio for stocks is now above 27, where it was leading up to the Great Depression, the 2000 tech wreck, and the 2007 financial crisis. Even if there is selloff here, history says to expect meager returns over the next 10 years.

Treatment: Get back to your target weight. If you started with 60% stocks/40% bonds three years ago, you’re closer to 70% stocks now. Shift your allocation back before the market does it for you, says planner Eric Roberge.

Use the 5% rule: Don’t overmedicate, as rebalancing can trigger trading costs and taxes. So rebalance only if your mix shifted by five percentage points or more, says Francis Kinniry with Vanguard’s investment strategy group.

Think small: Since rebalancing is about selling high, unload your frothiest equities first. Over the past 15 years, small stocks have trounced the S&P 500 by four percentage points annually, and now trade above their historical 3% P/E premium to bluechip shares.

Sell American: In the past decade, U.S. stocks have outpaced foreign equities by 3.5 points a year. American shares now trade at a 15% higher P/E ratio than global stocks, even though they have historically traded at similar valuations.

MONEY stocks

Here’s the Company Warren Buffett Is Betting Big on Now

Rick Wilking—Reuters Berkshire Hathaway CEO Warren Buffett

He just dropped nearly $400 million on this bank stock.

“Too much of a good thing can be wonderful.”
–Mae West

Warren Buffett must feel that way about megabank Wells Fargo WELLS FARGO & COMPANY WFC 0.14% . At the end of 2014, Berkshire Hathaway held more than 463 million shares of the company, worth $25.4 billion. Berkshire’s stake in Wells Fargo was the largest holding in its portfolio by a country mile: It constituted about 24% of Berkshire’s portfolio and was worth $8.5 billion more than the second-largest holding, Coca-Cola.

And it seems Berkshire loves Wells as much as ever: In the most recently ended quarter, Buffett — or Berkshire portfolio managers Ted Weschler and Todd Combs — bought another 6.8 million shares, worth more than $382 million at recent market prices.

Why is Buffett willing to commit so much of Berkshire’s wealth to this company? Let’s take a closer look.

Sticking with what you’re good at
Buffett has more than proven his investing and business prowess in the insurance and banking industries. These are businesses in which having a margin of safety is incredibly important.

In banking, as we learned through the economic crisis and the liquidity crunch that followed, banks that effectively manage their risk — like Wells Fargo — can be fantastic long-term investments. For Buffett to risk such a large stake on this one bank says a lot about his comfort with Wells Fargo’s management team and their ability both to manage the bank’s risk and to make profitable lending decisions.

Here’s a look at Wells Fargo’s bottom-line results, as many of its megabank peers were struggling in the 2007-2009 banking crisis:

Screen Shot 2015-05-29 at 11.50.27 AM

Wells Fargo continued to deliver solid profits while other banks suffered massive losses. True, Wells did receive $25 billion in funds from the U.S. federal government in 2008, but by December 2009 the company had paid back that $25 billion — plus an additional $1.4 billion in dividends — making it one of the first banks to demonstrate its stability in the wake of the financial crisis.

But what it really boils down to is this: How good is the bank at turning profits on its assets? Wells Fargo is almost peerless in the world of U.S.-based big banks:

Screen Shot 2015-05-29 at 11.51.28 AM

Meanwhile, its ability to grow earnings per share has been unparalleled:

Screen Shot 2015-05-29 at 11.52.19 AM

Berkshire is not risking too much capital

Average investors should not generally hold a quarter of their portfolio in a single stock, but a few things bear pointing out:

  • A concentrated portfolio can be profitable if you’re disciplined and patient and really know the companies and industries you invest in.
  • The Berkshire portfolio will continue to grow for decades to come as Buffett, Combs, and Weschler continue buying more great stocks.
  • The value of Berkshire Hathaway’s operating businesses need to be factored in, too.
Screen Shot 2015-05-29 at 11.53.36 AM

The Berkshire stock portfolio is only part of the profit-producing machine that is Berkshire Hathaway. Think about it this way: Berkshire has a market capitalization of around $356 billion, while the stock portfolio is worth $107 billion and change.

In this context, Wells Fargo only makes up about 7% of Berkshire’s market value.

Is Wells Fargo right for your portfolio?
Wells Fargo is one of the best-run banks on the market. It pays a dividend yielding a respectable 2.7% at recent prices, and along with JPMorgan Chase, it’s one of the few big banks that pay a higher dividend today than they did before the recession. Furthermore, that dividend is likely to grow over time as the company grows its earnings. The bank has increased its dividend every year since 2011 and will raise it 7% in 2015. As CEO John Stumpf said on the recent earnings call, “returning capital to shareholders remains a priority” for management.

Since the beginning of the financial crisis and recession, Wells has issued a lot of shares, adding more than 50% to the outstanding share count. This was a product of necessity: A significant portion of the capital raised was used to meet higher liquidity standards for banks. But it was also used opportunistically to grow — take for example the stock-funded, $14.8 billion acquisition of Wachovia in 2008. Since mid-2013, however, Wells management has repurchased more than 140 million shares, reducing the outstanding count by almost 3%.

Add it all up, and Wells Fargo is one of the best-run banks of any size, with as strong a long-term track record of earnings growth (and loss avoidance) as you’ll find. I’ll let Warren Buffett sum it up in this quote (emphasis mine):

When assets are 20 times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the “institutional imperative”: the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.

Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a “cheap” price. Instead, our only interest is in buying into well-managed banks at fair prices. With Wells Fargo, we think we have obtained the best managers in the business.

Those words sound especially relevant following the financial crisis, right? Well, Buffett wrote them in 1990. A quarter-century later, plenty of bankers still make bad decisions, while Wells continues to avoid the pitfalls. Does that mean it’s a good fit for your your portfolio? I’d say it’s worth a close look.

Jason Hall owns shares of Berkshire Hathaway and Wells Fargo. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Wells Fargo. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, Citigroup Inc, JPMorgan Chase, and Wells Fargo.

More from Motley Fool:

TIME Economy

Warren Buffett: $15 Minimum Wage Will Crush the Working Class

Warren Buffett And BofA CEO Brian Moynihan Speak At Georgetown University
Drew Angerer/Getty Images

The billionaire has a surprising position on beloved issue for the left

Warren Buffett is a favorite of the American left for his support of such policies as higher taxes on the rich and healthcare reform.

But advocates for workers rights may be a little less pleased with the billionaire investor after he published an op-ed in The Wall Street Journal Friday, decrying the efforts in many cities across the United States to raise the minimum wage to as much as $15 per hour.

Buffett admitted that the middle class has increasingly hurt by an economy that rewards people with “specialized talents,” but not the vast majority of Americans who hold “more commonplace skills.” However, Buffett argues that trying to solve the problem of stagnant wages for working Americans by raising the minimum wage is misguided. Writes Buffett:

In my mind, the country’s economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity.

That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.

Instead, Buffett says, we should expand the earned income tax credit, also known as a “negative income tax,” in which the government subsidizes the wages of workers making under a certain amount. “The EITC rewards work and provides an incentive for workers to improve their skills,” Buffett writes. “Equally important, it does not distort market forces, thereby maximizing employment.”

MONEY Warren Buffett

This is How Much Warren Buffett Spends on Haircuts

Squawk Box - Season 20
CNBC—NBCU Photo Bank via Getty Images Warren Buffett, chairman and CEO of Berkshire Hathaway in an interview on May 4, 2015.

The Oracle of Omaha has been going to the same barber for more than 20 years.

Warren Buffett, the 84-year-old head of Berkshire Hathaway, may be a billionaire. But he doesn’t spend like one.

He famously still lives in the Omaha, Nebraska, house he bought in 1958 for $31,500.

And, according to a new story by Market Watch, he’s a long-time patron of Omaha barber Stan Docekal—who charges him $18 (tip not included) for a hair trimming every two or three weeks.

Docekal, who has cut Buffett’s hair for about 23 years, is also in his early 80s. Desperate to pick up tidbits about the Oracle of Omaha, journalists have interviewed the barber many times over the years. Apparently Buffett’s activities during haircuts include listening to oldies music, watching CNBC, and reading his mail, a newspaper, or an annual report.

Is $18 a good deal?

Technically it’s higher than the national average of about $14 for a men’s cut, according to a recent study. But it’s pretty darn cheap for the third richest person in the world.

Read more: This Is How Much It Costs to Live Next Door to Warren Buffett


Warren Buffett Says He Would Never, Ever Do These 3 Things

Warren Buffett And BofA CEO Brian Moynihan Speak At Georgetown University
Drew Angerer/Getty Images

His rules help explain why Berkshire Hathaway is a top stock

During Berkshire Hathaway’s annual meeting this past weekend, Warren Buffett and his second-in-command, Charlie Munger, had me — along with 40,000 other shareholders — on the edge of my seat as they answered questions on anything and everything.

Over the course of more than five hours, it became clear that as long as Buffett is as the helm, there are three things he will never do. Those three things also help make Berkshire Hathaway one of the best investments you can choose today.

1. Break up Berkshire Hathaway
As Buffett explained during the meeting, “We have the ideal operation.” There is roughly a 0% probability that the company will be broken up. One of the reasons, as Buffett pointed out, is that there are “a lot of benefits to having the companies on the same tax return.”

For example, in his 2014 letter to shareholders, Buffett explained that See’s Candies creates consistently huge earnings and that “we would have loved, of course, to intelligently use those funds to expand our candy operation.” But the efforts didn’t pan out, and now See’s Candies’ excess earnings are put to work more effectively in other places.

Think of this as an alternative funding source. While many other companies are forced to take on large amounts of debt to fund growth, Berkshire can funnel money from one of its 60 subsidiaries to another. Best of all, because of Berkshire’s structure, it can do so without paying tax.

These are massive advantages. Berkshire saves millions of dollars a year in taxes, and as some companies hit their growth ceiling, money can instantly be transferred elsewhere. This ability gives Berkshire almost unlimited potential to efficiently scale in size.

2. Worry about macroeconomics
Not only does Buffett insist on keeping Berkshire in one piece, but he also plans to continue adding new and wonderful businesses to the mix. When selecting these companies, Buffett made it clear that he will “never make an acquisition based on macro factors.”

That may sound foreign to investors who consistently hear doom and gloom about interest rates, unemployment, or projections for weak economic growth.

Those things have no impact on his decision-making, because, as he put it, “We know we don’t know.” In other words, he believes that forecasting economic trends is nearly impossible and therefore useless. That’s why he thinks that “any company that has an economist has one employee too many.”

The acquisition of Burlington Northern Santa Fe in 2009 is a great example of Buffett’s approach. No economic indicator, at least that I know of, would have suggested buying a railroad company in the middle of a recession. But what Buffett knew was that BNSF was among the leaders in its industry. He knew it was a well-run company, operating in an industry with high barriers to entry. He knew trains are a cost-efficient and effective way to transport goods, and he believed that would continue to be true decades from now.

It’s that type of long-term thinking, along with a focus on acquiring great businesses, that has allowed Berkshire to be so successful. Today, BNSF accounts for 20% of Berkshire net income. Buffett referred to the company in his 2014 annual letter as “by far, Berkshire’s most important non-insurance subsidiary.”

3. Treat Berkshire as his company
When Buffett thinks about the structure of Berkshire, or what businesses to acquire, he’s thinking about what’s in the best interest of shareholders.

This sentiment has been clear for decades, but Buffett took it a step further when he was asked about whether Berkshire — the company, not Buffett personally — will be getting involved in philanthropy. Buffett’s reply: “I work for the shareholders […] and they should make their own decisions about philanthropy.” Munger added, “My taste for giving away someone else’s money is also quite restrained.”

Take a second to consider just how amazing that commentary really is. Over the course of 50 years, these two men turned Berkshire Hathaway from a textile company into a $300 billion insurance conglomerate, yet they don’t view the company as theirs.

Moreover, Buffett holds 34% of the voting power at Berkshire, which makes him far and away the largest shareholder. So he could do just about anything he wanted, and no one could do anything about it — but he doesn’t. He, along with Munger, continues to treat shareholders as partners, and that is, perhaps, the simplest and most important reason I think Berkshire Hathaway is a great buy today.

That’s also why I am delighted to be a shareholder, and why I plan to be for a long time.

MONEY Warren Buffett

13 Priceless Warren Buffett and Charlie Munger Quotes From the 50th Anniversary Meeting

Nati Harnik—AP Berkshire Hathaway Chairman and CEO Warren Buffett, right, speaks alongside Vice Chairman Charlie Munger.

This year’s event offered numerous gems.

I made the trip to Omaha recently to glean investing wisdom from two of the greatest investors of all-time — Warren Buffett and his second-in-command, Charlie Munger — but I left with much more. Here are 13 of the most memorable life lessons from Berkshire Hathaway’s 2015 annual meeting.

1. On diets

Buffett said: “I am one-quarter Coca Cola. … if had eaten broccoli and brussel sprouts, I don’t think I would have lived as long.” Buffett added, “I don’t see a lot of smiles on the faces of people at Whole Foods.”

Both Buffett and Munger spent the majority of the meeting chowing down on See’s Candies and drinking Coke — though Buffett did mix in some pineapple juice for his voice. Say what you will about their diet — Buffett is 84, and Munger is 91. Maybe they cracked the code: Do what makes you happy.

2. On predicting the future

Buffett made it clear that Berkshire will “never made an acquisition based on macro factors.” This is because “we know we don’t know.”

Worrying about interest rates and the global economy is stressful, and you have no control over macroeconomic events. Just do as Buffett and Munger do: focus on what you can predict and control.

3. On taking risk

Buffett explained that he and Munger missed some opportunities early on and that they could have “pushed harder.” Munger replied: “It’s obviously true. If we’d used the leverage that some others did, Berkshire would have been much bigger … but we would have been sweating at night. It’s crazy to sweat at night.”

To which Buffett added slyly, “Over financial things.”

4. On finding the right people

When asked about Berkshire Hathaway’s investment managers Todd Combs and Ted Weschler, Munger said: “We want people where … every aspect about their personality makes you want to be around them. … Trust first, ability second.”

Surround yourself with people whom you want to be around and whom you can trust — sound advice.

5. On reputations

When asked how Berkshire Hathaway has built its culture, Munger suggested that it’s about “behaving well as you go through life.” Buffett added, “Over time, you get the reputation you deserve. … I believe the same is true for companies.”

6. On seeing a glass half-full

Munger was asked about insurance premiums for older adults. More precisely, it was a complaint that, even when healthy, elders have to pay more for insurance.

Munger replied: “You find you’re not deteriorating as fast as your contemporaries. You may be paying an unfair price for your auto insurance, but it’s a good tradeoff.”

Given the choice of either staying healthy or paying lower premiums, I’d take the first choice, too.

7. On selecting a spouse

“Look for someone with low expectations,” Munger said.

8. On being liked

The duo was asked by a young boy how they have gotten people to like them. Munger said, “Get very rich and generous.”

Buffett added, “People see all sorts of virtue when you’re writing a check.”

9. On philanthropy

When asked about his pledge to donate 99% of his wealth, Buffett said, “There’s no Forbes 400 in the graveyard.” He added that his equity holdings have “no utility to me, but have enormous utility around the world.”

Later, Buffett said that his goal was to figure out how he could “do the most good.” We may not all have billions of dollars to donate, but I think we can all appreciate the sentiment.

10. On how to succeed

“We’ve now watched a lot of other people get started. The ones who follow [Benjamin] Graham have done pretty well.” Munger continued, “Avoid being a perfect idiot.”

11. On continuing to learn

Munger was asked what matters to him most. He replied, “I think it’s dishonorable to stay stupider than you have to be.”

12. On preparing for opportunity

Buffett was asked why Berkshire Hathaway holds so much cash — never less than $20 billion — and he replied, “You never know when the phone will ring.”

Moral of the story: Make sure you’re ready when the stock market offers you an opportunity you can’t miss.

13. On big-picture thinking

When Buffett was asked whether today’s companies are too short-term-focused, he said, “We don’t ignore yearly earnings, but we don’t live by them.”

Buffett added that he is looking for businesses to be “widening their moat,” or improving their competitive advantage. Essentially, while earnings are important, he wants businesses to be constantly improving, and that doesn’t always immediately translate to bottom-line results.

Insert any personal goal or aspiration, and this applies.

Related Links

MONEY Warren Buffett

5 Secrets to Investing Success from Warren Buffett’s Annual Meeting

Warren Buffett, chairman of Berkshire Hathaway Inc., center, laughs with Bill Gates, chairman and founder of Microsoft Corp. and a Berkshire Hathaway Inc. director, left, as they play bridge during a shareholder event on the sidelines of the Berkshire Hathaway Inc. annual shareholders meeting in Omaha, Nebraska, U.S., on Sunday, May 3, 2015. More than 40,000 people were expected to attend yesterday's Berkshire Hathaway annual meeting, which marks Warren Buffett's 50th year running the company.
Daniel Acker—Bloomberg via Getty Images

At the recent meeting, Buffett cited the factors that contributed to his success.

My trip to Omaha this past weekend meant only one thing, a chance to listen and learn from two of the greatest investors of all time: Warren Buffett and his second in command, Charlie Munger.

Over five hours, the two fielded questions from shareholders on matters ranging from the state of Berkshire Hathaway BRK 0% to the German economy. But one question really grabbed my attention: What has allowed you to become such a successful investor?

In response, Buffett cited the five most important factors that contributed to his success.

1. “Enjoy the game”

Practice makes perfect, and the simple truth is that you’re more likely to practice what you love. As Buffett said, he has always been interested in investing — in fact, he bought his first stock at age 11.

The enthusiasm Buffett brings to the company’s annual meeting, and his obvious joy in educating others, makes it clear that 73 years later he still has great passion for investing.

2. “A great teacher”

Buffett had the first ingredient down pat, but he didn’t have a clear strategy. That began to take form after he read The Intelligent Investor for the first time in 1949. Buffett eventually attended Columbia Business School where he trained under the legendary value investor, and author of the The Intelligent Investor, Ben Graham.

Buffett’s investment philosophy has developed over time, but one major brushstroke hasn’t, and it is a Graham adage he shared in his 2013 letter to shareholders: “Price is what you pay, value is what you get.”

We can’t all go to Columbia, but we do have access to books written about or by legendary investors, and the opportunity to seek out intelligent people to learn from.

3. “It requires a certain emotional stability.”

Buffett and Munger are extraordinarily rational. They understand prices will rise and fall, and view falling stock prices as an opportunity to buy great businesses for less.

Theoretically, this isn’t difficult to grasp. If the same thing can be purchased at a lower cost, it’s a better deal. Yet when the stock market tumbles, it can be difficult not to panic and sell out.

Munger suggested we should all “avoid being a perfect idiot” in such situations. Which is about the best advice anyone can receive.

4. “Exceptional focus”

In a 2013 article by the Omaha World-Herald, Berkshire investment manager Todd Combs remembered Buffett coming into one of his classes at Columbia. Buffett was asked how the students could prepare for a career in investing. He grabbed a stack of pages of reports and other documents, and replied:

Read 500 pages like this every day. … That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.

If the reading alone doesn’t prove Buffett’s focus, he suggested in his 1993 letter to shareholders, “Indeed, we’ll now settle for one good idea a year.” One big idea and 182,500 pages of reading per year. That’s focus.

5. “Keep yourself open to good accidents.”

Buffett was asked if he went back in time, could he recreate Berkshire Hathaway? He replied that the “odds are against it.” Mainly, he suggested, because he had experienced much good luck.

For instance, despite both growing up in Omaha, Buffett and Munger were introduced through a mutual contact when Buffett was in his late 20s and Munger in his mid-30s. Flash-forward more than 50 years, and in his 2014 letter to shareholders, Buffett credited Munger as the architect of Berkshire Hathaway: “The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

The two men’s introduction might have been fortuitous, but turning a meeting into a lifelong partnership is the ultimate example of being “open to good accidents.”

Bonus: “made some of that luck by being curious” — Charlie Munger

Buffett noted that he was also lucky to have accidentally met Lorimer Davidson in 1951. Davidson, who was named CEO of GEICO in 1958, spent four hours educating Buffett on the insurance industry during their chance meeting.

What Buffett did not mention was that his curiosity about GEICO encouraged him to hop on a train from Washington, D.C. to Maryland and visit the company. It was closed. Unfazed, Buffett pounded on the door until the custodian showed up and pointed him toward Davidson. After the meeting, Buffett began buying shares of GEICO and eventually purchased the company in 1995.

As Munger explained, he and Buffett are “dissatisfied with what they know,” and their curiosity forces them to continue learning and adapting. This has helped them — and can help you — create some of their own luck.

MONEY Warren Buffett

Warren Buffett Is Wrong About Whole Foods

Berkshire Hathaway CEO Warren Buffett enjoys a Dairy Queen ice cream bar prior to the Berkshire annual meeting in Omaha, Nebraska May 2, 2015. Dairy Queen is a Berkshire Hathaway company.
Rick Wilking—Reuters Berkshire Hathaway CEO Warren Buffett enjoys a Dairy Queen ice cream bar prior to the Berkshire annual meeting in Omaha, Nebraska May 2, 2015. Dairy Queen is a Berkshire Hathaway company.

Buffett’s recent dig at Whole Foods reveals misguided thinking.

[Editor’s note: This post originally appeared at Motley Fool.com; John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors.]

I think the world of Warren Buffett. That’s why I just travelled halfway across the country to soak up his wisdom at the 50th annual Berkshire Hathaway BRK 0% shareholders’ meeting. But despite his incredible track record, the Oracle of Omaha occasionally makes an investing mistake – and I believe he’s making one now with Whole Foods Market WHOLE FOODS MARKET INC. WFM -0.41% .

Let’s Go To The Videotape

Towards the beginning of the marathon Q&A session, The New York Times‘ Andrew Ross Sorkin asked Buffett if he was concerned that shifting consumer preferences toward healthier diets might endanger the economic moats of Coca-Cola COCA-COLA COMPANY KO -0.05% and Kraft Foods Group KRAFT FOODS GROUP INC. KRFT -0.21% . Here’s how Buffett responded:

I don’t think there will be anything revolutionary. Food and beverage companies will adjust to the expressed preferences of consumers. No company does well ignoring its consumers. I predict that 20 years from now more Coca-Cola cases will be consumed than today. Back in the late 1930s, Fortune magazine ran an article saying the growth of Coca Cola was over. When we bought stock in the 1980s, people were not enthused about [Coca-Cola’s] growth.

I am probably one-quarter Coca-Cola [big laugh from audience]…. If I had been having broccoli and brussel sprouts, I wouldn’t have lived as long. I would have approached every day like going to jail… Charlie [Munger] and I have enjoyed every meal we’ve ever had except when my grandfather made me eat those damn greens.

It’s amazing how durable [consumer brands are]. Berkshire Hathaway was the largest shareholder of General Foods from 1981 to 1984 – that’s 30-plus years ago. It was bought by Philip Morris and spun out as Kraft. Those same brands are popular today. Heinz goes back to 1869. The ketchup came out in the 1870s. Coca-Cola dates to 1886. It’s a pretty good bet that a lot of people will like the same things.

When I compare drinking Coca-Cola to something they would sell me at Whole Foods, I don’t see a lot of smiles on the faces of people at Whole Foods.

Right Answer, Wrong Approach

Buffett’s conclusions about the future of Coca-Cola and Kraft are probably correct. While consumer preferences have been shifting toward healthier fare, sugary and processed foods are still very popular and will likely remain so for the foreseeable future. And even if a wholesale change in consumer behavior does occur, Coca-Cola and Kraft are capable of adapting. Both companies have the scale advantages, distribution platforms, and marketing muscle to ensure their brands remain relevant for decades to come.

For me, the real issue was Buffett’s rationale. I sensed several behavioral biases that could be causing him to make a suboptimal investment decision.

Survivorship Bias

It’s true that Coca-Cola and Kraft successfully fought off challenges in the 1930s and 1980s. But so did Eastman Kodak, General Motors, and Woolworth’s. Competitive conditions are constantly evolving, and a company’s success several decades ago may not be a valid predictor of its ability to fend off competitors today. By focusing only on those companies that survived, Buffett may be overestimating Coca-Cola and Kraft’s odds of continued success.

Liking Bias

Buffett clearly enjoys Coca-Cola, both as a consumer and a shareholder. Furthermore, he is friends with many of the company’s executives, and his son Howard sits on Coca-Cola’s board of directors. These favorable feelings may make it challenging for Buffett to view the company objectively. We saw evidence of this phenomenon in action last year, when Buffett abstained from voting against an executive compensation program that he viewed as excessive.

Projection Bias

But for me, the biggest flaw in Buffett’s thinking concerned the parting shot he took at Whole Foods.

Because Buffett eats like an unsupervised six-year-old, he incorrectly assumes that most consumers share his eating preferences. This fallacy is probably supported by his choice of dining partners, including Munger, who plowed through an entire box of peanut brittle during the shareholder meeting. But I’ve been to the Omaha Whole Foods, and I saw a store full of happy customers buying premium-priced organic produce. Buffett’s bias against healthy eating is likely causing him to underestimate the appeal of Whole Foods’ brand.

So, Should Berkshire Buy Whole Foods?

There are legitimate reasons not to invest in Whole Foods. The grocery business is intensively competitive, with thin margins and no barriers to entry. Buffett knows this firsthand, as his grandfather owned a grocery store in Omaha where Buffett and Munger both worked as young men. Furthermore, Berkshire recently lost $444 million by investing in Tesco, the leading grocer in the U.K.

But Whole Foods is not your typical grocery store. As the largest retailer of natural and organic foods in the U.S., Whole Foods is commonly perceived by consumers as offering healthier and higher-quality fare. Thanks to its strong brand, Whole Foods can charge premium prices for its products, which enables the grocer to post atypically high sales per square foot, gross margins, and return on invested capital.

Whole Foods possesses many of the characteristics that Buffett loves to see when evaluating investments. It has strong and sustainable competitive advantages, a clean balance sheet, a dedicated and shareholder-friendly management team, and attractive growth prospects. With a P/E ratio of 30, shares don’t appear especially cheap at the moment, but this strikes me as a reasonable price for such a high-quality business. If Buffett could look past his hatred of healthy eating, I suspect he might agree.

MONEY Warren Buffett

5 Critical Takeaways From Berkshire Hathaway’s 50th Anniversary Meeting

Berkshire Hathaway CEO Warren Buffett yells "Go big red!", the Nebraska Cornhuskers chant, prior to the Berkshire annual meeting in Omaha, Nebraska May 2, 2015.
Rick Wilking—Reuters Berkshire Hathaway CEO Warren Buffett at the Berkshire annual meeting in Omaha, Nebraska May 2, 2015.

One of our top analysts shares what he learned at the Berkshire event.

Berkshire Hathaway BRK 0% is the quintessential capitalist story of meritocracy, grit, and hard work. Humans have a certain fundamental attraction to these success stories that happen against any measure of statistical improbability — this notion of exceptionalism. The best of these stories provide a window into ourselves — that which we are, aren’t, or hope to achieve. Berkshire and its leader, Warren Buffett, in many respects, represent all of these things on some magnified scale.

It is in this spirit that — as shareholders, investors, and lifelong students of great businesses — a group of Fools and I gathered to hear Warren Buffett and Charlie Munger hold court at Berkshire’s 50th-anniversary shareholder meeting. Well, us and a sellout crowd of more than 40,000.

In its 50th year, Berkshire is still a success story that defies traditional classification, both for the scale of shareholder wealth accrual and its seemingly impossible string of consecutive wins. From its relatively humble roots as an investment partnership — itself an incredibly difficult business — to its radical several-decade transformation into an investment, insurance, and industrial conglomerate, Berkshire has continuously defied classification. Where many businesses hardly withstand the test of a decade or two, Berkshire has dominated across a decades-long horizon.

Throughout, from the 1965 acquisition of a struggling textile mill some 50 years ago, transformational acquisitions of insurers (National Indemnity, GEICO, and Gen Re, along with the formation of Berkshire Hathaway Re), and subsequent forays into capital-intensive regulated businesses — namely, utilities and railroads — Berkshire has been different. It has remained relentlessly focused on a more ethical breed of capitalism, shareholder wealth accrual, and fair treatment of its employees.

And so, as investors, we study its success, for clues and in awe. What follows are several bits from the Berkshire 2015 — of evergreen wisdom, notable Berkshire developments, and sage investment advice from the meeting.

1. Brazilians, private equity, and cost-cutting.

Across the past two years, the most notable development in all of Berkshire has been the conglomerate’s expanding relationship with the ruthlessly efficient, obsessively cost-cutting Brazilian private-equity shop 3G. Berkshire partnered with 3G on deals to acquire H.J. Heinz and Kraft Foods KRAFT FOODS GROUP INC. KRFT -0.21% . They’re among Berkshire’s largest deals in some time, and the partnership hasn’t been without controversy.

At various points across the day, shareholders questioned 3G’s ethos and philosophy as being at odds with Berkshire’s historically cushier brand of capitalism. 3G plays hardball, or so it seems, but Buffett brushed these criticisms off.

“You will have never found a statement from Charlie or me saying that a business should have more people than needed,” he said. “3G has been buying businesses that have too many people.”

More to the point, he cited consumer-goods firms as still ripe for consolidation. The opportunity, for Berkshire and 3G, is substantial — to streamline other organizations, by feeding fatty, lazy consumer-goods firms’ wares through the combined Heinz-Kraft entity’s formidable supply chain. And for Berkshire shareholders, it might prove to be the elephant gun-sized deal they’ve long awaited.

Consider the potential: Yum! Brands’ YUM BRANDS YUM 0.18% market cap is $40 billion, Mondelez MONDELEZ INTERNATIONAL INC. MDLZ -2.16% sits at $64 billion, Hershey HERSHEY FOODS HSY -0.14% is valued at $21 billion, and Campbell Soup CAMPBELL SOUP CO. CPB -0.04% currently fetches $14 billion. I’d expect deals of this flavor to be of increasing import, and a key source of upside optionality in Berkshire shares for decades to come. Viewed 20 years hence, the 3G partnership could indeed prove to be one of Buffett’s master strokes.

2. Railroads: the new float.

On account of what, in simplest terms, amounts to a tax loophole, reported taxes at Berkshire’s regulated utilities are significantly higher than cash taxes. That loophole creates a source of float — an interest-free loan, if you will, that Berkshire may invest. When analyst Jonathan Brandt asked whether it might prove to be an enduring source of float, Buffett demurred.

I’ll respectfully disagree. To the extent that Buffett and Berkshire continue to invest in the regulated utilities, the float generated by this tax treatment can be sustained and grow. And it could be quite substantial.

In the time since Berkshire’s 2010 acquisition of Burlington Northern Santa Fe, it’s increased more than $10 billion. They currently sit near $35 billion, where float is $80 billion. I don’t think it’s impossible to contemplate that Berkshire’s deferred tax liabilities from the regulated utilities could more than double across the next 10 to 15 years, providing a meaningful and heretofore underappreciated source of investable funds.

So why would Buffett play coy or downplay the potential? Simple. He’s hedging. Acknowledging as much — that he’s exploiting the tax code — risks killing a golden goose. Always fear the taxman.

3. Alternative energy, and profit sources.

Much has been made of the threat from alternative energy to MidAmerican Energy and, specifically, distributed power generation. The concern is that power served off the grid, via solar power, might disintermediate traditional power generation. As solar and distributed power become viable options, regulated utilities have two options — to adapt to changing climes, by implementing distributable power-generation technologies and/or pushing power costs lower, or fight and possibly lose.

For MidAmerican, a cash cow for Berkshire, that could prove to be a risk. But in CEO Greg Abel’s remarks, I found cause for optimism. MidAmerican has for years been actively transitioning its power-generation fleet to solar and wind applications, in an effort to drive costs lower. In his remarks, Abel seemed quite willing to explore any and all economic options.

In an otherwise staid industry, this is not a CEO who fears change. I expect that will accrue to MidAmerican and Berkshire’s advantage.

4. Trademark Mungerisms.

Charlie Munger — Buffett’s partner, with an acerbic and incisive wit, and a lover of knowledge accrual — is well known for his pithy, illuminating one-liners. No recount would be complete without them, and a few hit home.

  • On including certain countries in the euro: “You shouldn’t create a partnership with your drunken, shiftless brother-in-law.”
  • On activist investors: “I’m trying to think of any activists I’d like to marry into the family.”
  • On their success: “If people weren’t so often wrong, we wouldn’t be so rich.”
  • On acquiring knowledge: “It’s dishonorable to stay stupider than you need to be.”

5. Semi-reckless prediction.

On account of the growing importance of the regulated utility businesses, my (perhaps flawed) belief that the float from these businesses will assume increasing importance, and the semi-continuous accolades he’s a recipient of, I’d peg Greg Abel for the CEO spot. Dark-horse candidate: Matt Rose, CEO of BNSF.

And to Munger’s exhortation on getting smarter, I don’t think we left dumber. If there are three rules of engagement my years of Berkshire shareholding have reinforced, they’re simultaneously simple and hard to practice: Be contrarian, disciplined, and curious. In that regard, I guess you might say that I’ve emerged enriched not only financially, but also intrinsically.

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