my name is Rhian Martins from Cape Town South Africa and I became a big fan and Avid Reader of your ideas about 10 years ago in 1999 I did an MBA and was nicknamed Warren Buffett because I quoted you in all the cast room discussions all I wanted to learn was how to value a stock and think about stock prices but sadly I was rather disappointed to find out that our MBA did not really teach that Mr Buffett and Mr Munger my question is this if you had to predict who would be the superior investors
from a group of young bright people who share your investment philosophy and possess the realism and discipline you referred to earlier which characteristics or work habits would you like to know about the individuals in the group and what rating would you place on each factor to ensure the greatest probability of your prediction being correct well that's too easy a question for me so I'll let Charlie answer that I think the fair answer to that one is that I'm not capable of answering it no but I do I think this I I think that's exactly right
I mean if you ask me what should how should you pick a wife you know 18 to humor 12 to looks you know 17 you know the parents I I I can't give you the formula but I think you'll make the right decision you know when you get I think if Charlie and I were around a dozen very bright mbas with good records and all of that and we spent some time with him uh I think we'd have a reasonable chance of picking somebody from that group that might not necessarily be number one but they
they they they would be in the upper quartile in terms of how they actually turned out and I but I can't tell you I can't tell you how to you know I can't I can't write out a software program or anything that will enable you to do that it you know I had that I had that problem exactly at Solomon on that Saturday morning whatever it was August 17th and I had to pick a guy to run the place and there were a dozen or so people that all thought that they were the ones or
a number of them thought they were the ones to run it and they all had they all had high IQs and they all had lots of experience in Investment Banking and everything and I you know in the end I had to pick one and I I did pick the right one I will say that and you know was I could I be 100 sure if that time was the right one well probably not but I felt pretty sure I'd I had the right one and I I can't tell you I've had people say to me
well what did you ask them and how did you evaluate it now because I only had about three hours to do it and I don't know I mean I can't write you out a a set of questions that you should ask somebody and you know some of it may be body language and different things of that sort it it there are a lot of variables in it but I think in the end you would have picked the same person I picked if you if you'd if you'd been in that spot you'd had to pick somebody
in the in the in the three hours and it but quantifying it for you I just I can't do it Charlie you've got no more no well when when multiple factors are causing success you get these anomalies you could have two people who are going to be equally successful and one is terribly good at a and terrible at Z and the other is terribly good at Z and yeah it's very good at Z and terrible at a they're equal which factor is most important the answer it doesn't matter in that case when you've got multiple
factors great strength and one will compensate some for weakness in another and the factors can be quite different I think the investment world is full of people who are succeeding uh based on quite different sorts of talent I'm very leery of economic correlations I mean I I spent years fooling around with that sort of thing and I mean I I correlated stock prices with everything in the world and you know the problem was when I found a correlation I mean it's uh you know you've seen these things on on whether the AFC or the NFL
wins the Super Bowl and all that sort of thing you can find something that correlates with something else but in the end a business or any economic asset is going to be worth what it produces in the way of cash over its lifetime and if if you own us if you own an oil field if you own a farm if you own an apartment house you know with the oil field it's the life of the oil field and what you can get out of it maybe you get secondary recovery maybe get tertiary recovery whatever it
may be it's worth the discounted value of the oil that's going to come out and then you have to make them estimate as to volume and it's the price with a farm you make an estimate as to crop yield and costs and and and crop prices and the apartment house you make an estimate is the rentals and operating expenses and how long it'll last and when people will build other new apartment houses that the potential renters in the future will find preferable and so on but all in all this one is is laying out some
money now to get more money back in the future now there's two ways of looking at the getting the money back one is from what the asset itself will produce that's investment one is from what somebody else will pay you for it later on irrespective of what the asset produces and I call that speculation so if you are looking to the asset itself you don't care about the quote because the asset is going to produce the money for you and that's how that's what society as a whole is going to get from investing in that
asset then there's the other way of looking at it is what somebody will pay you tomorrow for it even if it's valueless and that speculation and of course Society gets nothing out of that eventually but one group profits to at the expense of another and of course you had that operate in a huge way in the bubble of a few years ago you had all kinds of things that were going to produce nothing but where you had great amounts of wealth transfer uh in the in the in in the in the short term as Investments
you know they were a disaster as means of wealth transfer they were terrific for certain people and they were for the other people that were on the other side of the wealth transfer they were disasters uh we looked solely we don't care whether something's quoted because we're not we don't buy it with the idea of selling it to somebody we look at what the business itself will produce we bought Seas candy in 1972. the success of that has been because of the cash it's produced subsequently it's not based on the fact I call up somebody
at a brokerage house every day and say what's my C's candy in stock worth and that that is our approach to anything on interest rates I'm no good uh I've bought some REITs a couple of years ago because I thought they were undervalued why'd I think they were undervalued because I thought they could produce 11 or 12 percent in terms of the assets that those companies had and I thought an 11 or 12 return was attractive now the research selling at higher prices and you know they're not as attractive as they were then but you
just look at every asset class every business every Farm every Reit whatever it may be and say what is this thing likely to produce over time and that's what it's worth it may sell at vastly different prices from time to time but that just means one person is profiting it against another and that's not our game Charlie makes common stock prices so hard to predict is that a General liquid market for Common Stocks creates from time to time either in sectors of the market or in the whole Market a Ponzi scheme in other words you
have an automatic process where people get sucked in and other people come in because it worked last month or last year and it can build to perfectly ridiculous levels and the levels can last for considerable periods trying to predict that kind of thing sort of a Ponzi scheme which is if you will accidentally thrown into the valuation of Common Stocks by just the forces of life by by definition that's going to be very very hard to predict that's what makes it so dangerous to short stocks even when they're grossly overvalued it's hard to know just
how overvalued they can become an addition to the over evaluation that exists and I don't think you're going to predict the Ponzi scheme effect in markets by looking at the price of gold or any other correlation I mean pulling a figure out the air we we have probably agreed on at least 100 companies maybe more that we thought were were frauds you know bubble type things and if we'd acted on shorting those over the years we might be broke now but we were right on probably just about 100 out of a hundred it's just it's
very hard to predict how far what Charlie calls the Ponzi scheme will go it's not exactly a scheme in the sense that it isn't concocted in most cases by by one but it's sort of a natural phenomenon that seems to nourished Along by promoters and investment bankers and Venture capitalists and so on but it's it's it's it they don't all sit in a room and work it out it just it it plays on human nature in certain ways and it creates its own momentum and eventually it pops you know and nobody knows when it's going
to pop and that's why you can't short at least we don't find it uh makes good sense to short those things but they are it is recognizable you know when you're dealing with those kind of crazy things but you don't know when How High they'll go or when it'll land or anything else and people who think they do you know sometimes playing it and other people know how to take advantage of it I mean there's no question about that you don't you do not have to have a 200 IQ to see a period like that
and figure out how to have a big wealth transfer from somebody else to you you know and and that was done on a huge scale uh you know in recent years uh uh it's not the you know it's not the most admirable aspect of capitalism what's interesting about Japan is that I don't think anybody thought that a major modern Keynesian democracy pervaded by a good culture in terms of engineering product quality product Innovation and so forth could have a period where you would have negative 13 years without major depression either I think I think that
and and that it would occur while interest rates were going down not up I think that was so novel what that the models of the past totally failed to predict it but I think these anomalies are always very interesting and I think it's crazy for Americans to assume that what's happening in Argentina and what has happened in Japan are totally inconceivable forever in America they are not totally inconceivable you had a huge bubble in equity prices in in Japan and and now you've had interest rates go to virtually nothing we've had the passage of time
the country hasn't disappeared people are going to work every day and you've had this the Nikkei you know now at a third of what it's sold for uh not that many years ago it it's an interesting phenomenon and huge fiscal stimulus in the whole period from the government post-bubble periods I think depending on how big the bubble is but and how many were participating but post bubble periods I think can produce Fallout that not everyone will be terribly good at predicting
