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On Thursday evening, Columbia Business School's Seminar on Value Investing welcomed Warren Buffett as the guest speaker. I was lucky enough to worm my way into it. Here are my notes. (I don't claim that everything is completely accurate, but I think I captured at least the proper meaning of everything).

5:55 pm – 5 minutes to go. The classroom looks like it was built to hold about 160 students and currently holds about 200 people – mainly students, with a few suit-and-tie types sprinkled in. There is some excitement, but not as much as the Berkshire annual meeting I went to 2 years ago. It was an interesting dynamic: In Omaha, everyone there made an effort to be there, which resulted in almost everyone knowing a good deal about Buffett and having some familiarity. In the classroom, there was a bit more curiosity, a “Do you think he'll have bodyguards?” kind of thing. I take my seat in the back and notice 3 cans of cherry coke lined up on the front table.

6:05 – Buffett walks in, picks up a can of cherry coke and holds it aloft. Everyone laughs. Bruce Greenwald (http://www.amazon.com/exec/obidos/ASIN/0471381985/104-9675556-5361512) acts as moderator. After a couple of class-related announcements, I get my first surprise – Walter Schloss is here, too. “If Warren Buffett can be thought of as the Babe Ruth of value investing, then Walter Schloss is the Ty Cobb and Satchel Paige combined.” He notes Schloss' longevity – 47 years of remarkable performance. [Prompted by Buffett later on, Schloss claims a 20.9% (pre-fees) annual return over that time period.]

Greenwald then notes how peculiar it feels to be responsible for introducing someone who clearly needs no introduction. He identifies Warren Buffett as “The Rose Blumkin of the investment world.” Buffett takes the microphone – “Testing, one billion, two billion”.

Some early remarks:
- Speaking on the longevity brought up with regard to Schloss, Buffett knows what he wants people to be saying at his funeral: “My God, he was old!”
- Notes that he has now been married for 50 years and 3 weeks and says that being married to Susie is “the only thing that's happened better than taking Graham's class.” He then points to Susie, who is sitting in the front row (surprise #2). [I think that Carol Loomis and Peter Buffett were also there, but I'm not positive.]

Next, the questions, which he leaves open to anything, whether business or personal related. As anyone who's ever seen Buffett speak can tell you, the questions were pretty standard. What makes the presentation interesting is the path that Buffett's answers take. Throughout this question and answer period, which lasts slightly over 2 hours, WEB is on his feet, leaning back onto a table, cherry coke at his side.

1. Options – We know you don't like them, but what about the companies you own?


WEB only knows of 2 companies that expense options (as is allowed under SFAS 123, but not practiced by many, for obvious reasons): Boeing and Winn-Dixie. He notes that a company (in Manhattan?) is currently voting on switching to an expensing convention. In most cases, options don't do a great job of providing the right incentives. Of all the employees in Berkshire Hathaway, Gen Re employees have made more, by far, from options in the last couple of years than anyone else in BRK. Looking at the dismal results of Gen Re indicates how capricious option rewards can be.

For BRK specifically, it doesn't make sense to give options to anyone. Anything that a division/subsidiary manager does to influence results is swamped by wiggles in the overall portfolio of businesses. Compensation arrangements at BRK are created and agreed upon in minutes – no consultants needed.

Across the spectrum, compensation plans are crazy.

WEB has an envelope with the name of his successor. (The first thing this note says is “Check my pulse again.”) It makes sense for him to have options – he would be responsible for the overall business. However, 2 critical features of these options would be:
- They would be granted with an exercise price equal to the greater of intrinsic value or market value.
- They would include a cost of capital effect so that the exercise price would be increasing each year.

As generally done, options are terrible. There's nothing inherently wrong with options. In the Buffett Limited Partnership, he had options: 25% of any returns in excess of 6%. However, he drew no salary and those options included a cost of capital.

2. Will the Wall Street Journal erode their moat with their recent cosmetic changes [moving a little towards USA Today]?


WSJ is an interesting case. 30 years ago, Dow Jones & Co. owned the world with regard to financial information. They had no competition to speak of. Most newspapers at that time defined their population by geography. The WSJ editor (name?) built the circulation from 50,000 to 1.5 million by defining population by interest. Their population had amazing demographics.

Over the past 30 years, financial information has been a growth industry. Dow Jones missed the boat. Their business was taken away by CNBC and Bloomberg. They got very self-satisfied. In 15 years, they went from #2 on Fortune's “Most Admired Companies” list to about #200.

He compared it to Classic Coke vs. New Coke. In the 1980's, Pepsi was conducting their “Pepsi Challenge” across America – and winning. People at Coke wouldn't admit it, but in 1985, Pepsi was driving them buggy. Americans will always go for a sweeter product in a taste test. Pepsi simply had [has] more calories than Coke and was [is] sweeter. So Coke decided to add some sweetness/calories to compete. They tested New Coke across 300,000 people in every conceivable demographic slice before they brought it out. Pepsi capitalized on New Coke by calling the introduction of New Coke a product recall of Old Coke. Pepsi actually declared a holiday in their company on that day and took out ads the day before the formal New Coke release: “The other guy just blinked.”

As it turns out, the mystique of the Coke formula is great. Only 2 people know it, it's locked in a Sun Trust vault, blah blah blah. In reality, Coke can make Pepsi and Pepsi can make Coke. You can break down the formula. At one point, Pepsi was moving towards introducing a product called Savannah Cola, which was equal in formula to the Old Coke. The only problem they faced was that one of the ingredients from the formula was hard to obtain because almost the entire production was purchased by the Coca Cola company. Little by little, they were able to obtain this ingredient and were within 2 weeks of bringing it out when Coke relented and made Classic Coke.

[Talk about how important the “feelings” are with Coke. The associations one has when thinking about Coke. The fact that he could say RC Cola and no one would have much of a response, but he could say Coke and every single one of us would have some type of reaction. Pepsi consistently beat Coke in a blind challenge. New Coke consistently beat Old Coke in a blind challenge. Yet for some reason, people went ballistic when Coke changed the formula. That's how embedded the Coke idea is.]

It's like See's Candy. It's not that well known in the East, but 33 million people in California will all have a reaction to the See's name. When people in California put a piece of See's Candy in their mouth, they like it a lot. When you tell them that it's See's, they like it even more. It's the combination of all the thoughts that go into the experience.

The Coke CEO a couple of years ago got into trouble when he spoke of a vending machine that could vary prices depending on the weather, increasing prices in hot weather. [WEB: At least say it in a way like you're lowering prices in cold weather.] That brought a lot of bad feelings with it. When you're making $0.01 per 8 oz. Serving and serving over 1 billion of those servings every single day, that's $4 billion in earnings per year – all because of $0.01 per serving. It's critical, huge to keep a favorable opinion in people's minds.

Pt. 2 later.
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