Examiner - June 26, 2009
By William Freehling - Warren Buffett Examiner
$2.1 million is a lot to pay for lunch with anyone, even if it is with the world's second-richest man -- Berkshire Hathaway's Warren Buffett -- and even if it is for charity.
But Janet Tavakoli says Zhao Danyang of Hong Kong will get his money's worth from the charity lunch he had with Buffett this week at the Smith and Wollensky restaurant in New York City. Proceeds from the lunch went to the Glide Foundation, which helps the underprivileged in San Francisco.
Tavakoli should know a thing or two about the value of lunch with Buffett. She dined with the Berkshire chief in 2005 and wrote a book, "Dear Mr. Buffett," partly about the experience. Tavakoli, who still communicates with Buffett periodically and was in Omaha, Neb., for this year's annual meeting, is founder and president of Chicago-based Tavakoli Structured Finance, a financial consulting firm.
As the bidding for this year's charity lunch auction wound down (it was at about $500,000 as of this writing but is expected to shoot higher in the next several hours as the deadline approaches), Tavakoli agreed to answer our questions about her lunch and experiences with Warren Buffett.
Examiner: When and where did the luncheon occur?
JT: Warren and I had lunch on a hot summer day--August 25, 2005, five days before his 75th birthday, and on the eve of the global financial meltdown. We had roast beef and mashed potatoes at Gorat's in Omaha. Warren asked me to lunch, and he picked up the check.
Examiner: How did it come about?
JT: Years before, I had sent Warren a copy of Credit Derivatives, one of the technical finance books I had written. Warren had called derivatives "financial weapons of mass destruction" in his 2002 shareholder letter after an accounting restatement showed losses -- chiefly in his GenRe Securities credit derivatives unit -- of around $173 million.
I had tucked a forgotten note between the pages of the book. Warren wrote me a letter saying he had been looking at the book again and found the note. He invited me to stop in to talk about credit derivatives the next time I came to Omaha. When I responded, Warren invited me to lunch.
Examiner: Were you exceptionally nervous about meeting him?
JT: Of course I was nervous about meeting Warren Buffett. He is the greatest investor who ever lived. I am no slouch when it comes to finance, but I am not in Warren Buffett's league. I felt like a new freshman starter invited by the captain of the varsity team for a game of one-on-one.
Examiner: How did he set you at ease?
JT: I was nervous I would make a faux pas. I couldn't find a coaster for my sweaty water glass, and Warren wanted to make me comfortable. He took his Wall Street Journal from his desk and put it on the coffee table for me to use as a coaster. He showed some nervousness himself about being a good host. He wouldn't feel comfortable until he had made me feel welcome. His gesture of hospitality broke the ice, and was a reminder that good human relations are about making the other guy feel comfortable. Warren is a very down-to-earth person and has no interest in lording his wealth or position over others. I got the impression he would also have no patience with people who have something to prove. Warren takes pride in his accomplishments, but he is not a proud man. You quickly realize his only agenda was to explore new ideas and quickly relax.
Examiner: What was your first impression of him?
JT: I had only seen a few Internet photos of him. My first impression was that he was taller and trimmer than I expected, and he seemed scrubbed and well-groomed. Many executives dress to impress. Warren was well-dressed, but I got the impression that he dresses to be appropriate, not to overwhelm others.
Examiner: How long did you spend with him? Have you seen him since?
JT: I spent over four hours with Warren. I arrived early and he took me into the meeting right away. After lunch Warren gave me a tour of his offices and discussed some of his business trophies.
I haven't met with Warren since, but we have exchanged some phone calls and e-mails. He is on my distribution list and asked me to keep him on it. He reads what I write and sometimes forwards it to Ajit Jain at GenRe or may send a brief comment. We haven't had reason to interact recently, but last week I sent him Caro Sr. Buffett, the Portuguese translation for Brazil.
Examiner: What did you two talk about during the lunch?
JT: We covered dozens of topics. Warren is a highly intelligent polymath, and he has a fabulous memory. His wide base of general knowledge and life experience enable him to add interesting color to almost any topic. He switches topics quickly, and he picked up speed as the afternoon progressed. It is mental work to keep up with Warren. He will go as fast as you can handle.
Warren is proud of the fact that he has created wealth for his shareholders, his long-term partners. By the time Donald Othmer, a chemical engineer, died in 1995, his investment in Berkshire Hathaway was worth around $750 million. He has a keen sense of the enormous responsibility of managing the hard earned money shareholder entrusted to him. The idea of building value is not only wholesome, it is life-affirming. During our meeting, I got the sense of what a totally decent person Warren is. The blow-up in the global financial markets that was just starting to occur, and it was partly due to malicious mischief. Contrasting Warren Buffett's philosophy with the shenanigans of phony assets combined with inexcusable leverage and cover-ups was all the more poignant as the crisis unfolded.
I mention some of the many topics we discussed in my book, but my personal take-aways have to do with Warren's sane approach to the markets. We hear a lot of black swan quackery making claims that Warren Buffett's investment style is dead. Yet, the "black swan" funds have poor track records, albeit that has not been widely reported, and in fact, it has been inaccurately reported. It is nothing more than a PR stunt. If one wants to buy insurance, i.e., put options, one does not have to pay 2% in fees and 20% of the upside to a mediocre manager with no exit strategy. The funds may have one good year followed by years of consistently losing money. The loss of that money is permanent value destruction. More than that, what kind of person wants to spend their entire life curled up in a corner with their fists balled up in front of their faces in a defensive posture? It's a ridiculous way to spend your life, and you create nothing of value in the economy other than buying insurance. No wonder they have not held onto their insurance payouts and have poor track records.
When one invests in value, there is no permanent destruction of value. Stock prices may go up or down, but the underlying companies have value, and they make products that people want and need. These companies keep generating earnings and value and when the economy recovers, they are positioned to soar. Warren doesn't distinguish between "value" and "growth" companies because they are one in the same to a value investor. He wants to buy companies at a fair price-better yet, at a cheap price-and he wants to buy companies that have a potential to grow.
While it is true that Berkshire Hathaway may not achieve the high returns of its past due to its enormous size, it will continue to achieve future satisfactory returns. Investors focus more on book value and other metrics rather than the fickle market price. People said value investing was dead in the 1970's when Berkshire Hathaway's share price was down two years in a row (more than 15% for the fiscal year then ending March 1974, and down more than 35% for March 1975). The share price was $51 on March 31, 1975, down from $93 on March 31, 1973. Even if you had "bad timing," and had bought the stock at $93, you would be a happy investor today (BRKA closed yesterday at $86,705). Long-term value investing works if you know the principles of finance and know how to value a company.
The philosophy of value investing seems very healthy to me. One generates value by investing in society and creating permanent value in the economy.
Another thing that struck me about Warren is that he does not dwell on past mistakes. He is not a brooder. He freely admits that mistakes will be made, and that you may never figure out what complicated mix of psychology led you to make them. The key is to avoid making big ones. This is where the idea of building a margin of safety comes in. He skews the probability of success in his favor by limiting the probability of disaster and increasing the probability of a high future gain. He doesn't rely on random luck, he is using conditional probabilities. Given that he knows the principles of creating value, he has stacked the odds in his favor of a satisfactory outcome. No one can guarantee you a successful outcome, unexpected events will occur, and mistakes will be made. Knowing all of that, one can still improve one's odds, and Warren Buffett excels at stacking the deck in favor of his investors.
Examiner: Is Zhao Danyang (who paid $2.1 million to have lunch with Buffett this week at the Smith and Wollensky restaurant in New York) getting his money's worth?
JT: That is a nice contribution for the Glide Foundation. Mr. Danyang felt that it was worth $2.1 million to have lunch with Warren Buffett, and Warren will give him his money's worth.
Examiner: What are some things that you have observed about WEB during the lunch or subsequent interactions that the public doesn't know about him?
JT: Warren does not talk down to people, and he doesn't try to impress people with his intelligence. As a result, many people underestimate him. For example, one reporter wasted an interview with Warren by repeating a myth that he doesn't carry a cell phone. Warren whipped out his cell phone and joked that Alexander Graham Bell had given it to him. He would never belittle someone for wasting his time (and theirs), but he also won't tell the reporter what to ask. He can [be] like a Wimbledon winner playing tennis with a child. He won't slam the ball at the feet of an inexperienced player. But when he meets a skilled player, he increases his level of play to match the other player.
Warren's command of derivatives and financial principles is deep, but his explanations are so elegantly simplified that experts sometimes deceive themselves into thinking he is not as smart as they are. I call it the "I am a genius, and you're not" syndrome. Warren doesn't suffer from that. When Warren appears on television, he makes things sound simple. When he hesitates, it is as if he is translating complex material to simple language for public consumption. A less secure man might try to impress the audience with jargon or with details. He is not competing with anyone else, and he respects his audience. I would like to be more like him when I grow up.
Examiner: Do you often attend the annual meeting in Omaha?
JT: My schedule is crammed, and I am not a fan of large crowds, but I attended in 2006 and I attended this year. Warren also invited me to sign copies of "DEAR MR. BUFFETT" at the annual meeting, so I popped out during lunch and the breaks to sign copies.
Examiner: Thanks, Janet.
Tavakoli Structured Finance, Inc.
360 E. Randolph St., Suite 3007
Chicago, Illinois 60601 USA
web site: www.tavakolistructuredfinance.
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