Buffett's Lectures at the University of Notre Dame (1991)
"I read annual reports, but I don’t read anybody’s opinion about what’s going to happen next week, or next month or next year."
I recently re-read this excellent 48-page transcript of three lectures Warren Buffett gave at Notre Dame in 1991. As one would expect, the talks were wide-ranging and included lessons on investing, business, and life.
Buffett emphasized the importance of studying both success and failure among businesses and managers. He compared one of his favorite managers, Tom Murphy at Capital Cities, with CBS.
When my friend Tom Murphy took over Cap Cities … Cap Cities was selling for $5 million in the market, while CBS was selling for $500 million. Now, Cap Cities has a market value of about $7 billion and CBS has a market value of about $2 billion. They were both in the same business, broadcasting.
And you say “how can that happen?” And that’s what you ought to study in business school. You ought to study Tom Murphy at Cap Cities. And you also ought to study Bill Paley [who was the CEO] at CBS.
We really ought to have a library of value-destructive companies along with charts, financials, and analysis. A kind of inverse The Outsiders.
We have a saying around Berkshire that “all we ever want to know is where we’re going to die, so we’ll never go there.” It’s as important not to do what CBS did, and it is important to do what Cap Cities did. It’s really worth studying what two people in the same field did, and why one succeeded so much and one failed.
Buffett continued by comparing one of his favorite businesses, newspapers (which “raised prices and raised earnings every year without having to put more capital into the business”), with AT&T which had to reinvest capital at low rates of return.
The telephone company, with the patents, the MBAs, the stock options, and everything else, had one problem … And those figures show the plant investment in the telephone business.
The progress in earnings that the telephone company made was only achievable because they kept on shoving more money into the savings account and the truth was, under the conditions of the ‘70s, they were not getting paid commensurate with the amount of money that they had to shove into the pot.
He also discussed his investment in Disney whose content library he compared to “an oil well where all the oil seeps back in.” Wall Street disliked the earnings volatility that came with blockbuster movies like Mary Poppins (“they’re not going to have another Mary Poppins next year, so the earnings will be down”). Buffett on the other hand was not bothered by a near-term decline in earnings.
The whole company was selling for $80 million. Mary Poppins had just come out. Mary Poppins made about $30 million that year. Seven years later you’re going to show it to kids the same age. It’s like having an oil well where all the oil seeps back in.
… I went out to see Walt Disney. He told me the whole plan for the company – he couldn’t have been a nicer guy. It was a joke. If he’d privately gone to some huge venture capitalist, or some major American corporation, they would have bought in based on a valuation of $300 or $400 million dollars. [Wall Street] ignored it because it was so familiar. That happens periodically.
By 1991, Buffett was firmly focused on searching for wonderful businesses that would keep compounding and generate a lot of free cash flow. Explaining that “you need very few good ideas in your lifetime,” he shared his concept of the punch card with students:
I always tell the students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision they used up one of those punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five, or three, or seven. And you can get rich off five, or three, or seven. But what you can’t get rich doing is trying to get one every day.
You’re not going to get more than 20 investment ideas in a lifetime. I’m not going to get more than 20 great ideas. And the important thing is that you recognize them when you see them, and that you do something about them.
However, this idea contains a paradox. Moving to Omaha made it easier for Buffett to be disciplined and patient. At the same time, one needs to see enough pitches to develop pattern recognition and recognize the great ones in the first place.
One could argue that Buffett’s time in New York, or his time of active trading generally, was the prerequisite to using the punch card approach.
You have to be willing to have the discipline to say, “I’m not going to do something I don’t understand.” Why should I do something I don’t understand? That’s why I find it an advantage to be in Omaha instead of New York. I worked in New York for a few years, and people were coming up to me on the corner and whispering in my ear all the time. I was getting excited all the time. I was a wonderful customer for the brokers.
Buffett took it one step further and noted that liquidity could be a curse (“for most people” — not for him) because it tempted action.
The very fact that you have, in effect, an unlimited punch card, you can change your mind every hour or every minute in this business; that very availability, that huge liquidity which people prize so much is, for most people, a curse, because it tends to make them want to do more things than they can intelligently do.
Buffett also turned his emphasis on business quality to career advice:
If you have a choice between going to work for a wonderful business that is not capital intensive, and one that is capital intensive, I suggest that you look at the one that is not capital intensive. I took 25 years to figure that out, incidentally.
It seems that Buffett, were he to receive his MBA today, would choose to work for Google or Meta over Berkshire Hathaway. This idea can be combined with the punch card: 20 punches for investments may not seem like a lot. But the punch card for choosing employers is even more limited.
The transcript makes for great weekend reading. If you lack the time, I am sharing my favorite quotes with subscribers below.
Enjoy and thank you for reading,
How can people who are bright, who work hard, who have their own money in the business, how can they get such a bad result? … If you had to pick one thing that did it more than anything else, it’s the mindless imitation of one’s peers.
Some of my favorite quotes:
Subscribers can find the full quotes about people, investing, and business below.
Always invert. (“The big things are not what you do, they’re what you don’t do. ...”)
Writing facilitates thinking. (“Some of the things I think I think, I find don’t make any sense when I start trying to write them down and explain them to people. …”)
Study why smart people fail. (“Why smart people go astray is one of the most interesting things in business. I’ve seen all sorts of people with terrific IQs that end up flopping in Wall Street or business because they beat themselves...”)
What kind of person would you bet on and why? (“Let’s say for $25,000 you could buy a 10% interest in the income of any one of your classmates that you wanted to. ... Think about why you picked him or her, and how much of that is transferable to you. And it usually won’t be anything you can’t attain yourself. …”)
Life tends to snap you at your weakest link. (“It isn’t the strongest link you’re looking for. It isn’t even the average strength of the chain. It’s the weakest link that causes the problem.”)