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01/19/2006
What a Card!

01/19/2006
What a Card! by Victor Niederhoffer

The Sage of Nebraska gave an 11-page talk to the students of the Harvard Business School (HBS) on December 22, 2005. It contains one untested, detrimental, or loaded, partial but misleading truth and shibboleth after another. The highlight occurs when he starts off by telling how the secret of his success is buying great companies like Nebraska Furniture Mart, and See's Candy. You would have thought that one of the professors or students would ask him what the rate of return on these companies might have been, or how a company that produces or retails a product in a declining market segment in a declining region in the most competitive of all businesses could have an above average rate of return going forward, but no.

The audience eats up such sayings as "take care of thy shop and it will take care of thee" and "We've bought business after business like the Mart" and "Reading Ben Graham's book The Intelligent Investor is the most important attribute that has contributed to my success" and "There is a very high probability that a major nuclear biological or chemical incident will happen somewhere," and "Markets everywhere follow three stages--- innovators, imitators, and swarming incompetents (that's where the hedge funds are now)" and "Find people you like and are capable, and things will work out" and "Look for businesses that an idiot can run."

And they loved the Sage's explanation of why Berkshire can do so well: it buys businesses and leave the owners alone, and he never buys a business at auction, and two of the five businesses he bought last year had higher bids from private equity shops, but Berkshire has the an advantage in buying from people who don't want to auction off their business, and how he met FlightSafety for a hamburger and cherry coke at Skadden's offices and reached a deal in about an hour. "You see, Al believes in producing safer pilots."

There were dozens of these statements contained in the lecture and you would think that a professor there would have said, "Hundreds of other conglomerates have said that the key to their success is that they leave the companies alone. And can you really make money by buying a business that an idiot can run or is it doing something so repetitive that it doesn't have to worry about competition and aren't these factors taken into consideration in the price?  More importantly, Mr. Sage, doesn't everything that we teach our students here say that our economy is very competitive, and it's becoming even more competitive with increasing free trade and free enterprise around the world and aren't the businesses that any idiot can run that do humdrum things within everyone's sphere of competence, the ones that are guaranteed to have the most competition, with the rate of return on them being driven down to the risk free rate? Isn't that the lesson that Charlie taught you? Are the returns on the humdrum businesses you bought taking every thing into consideration before your credits with and deferrals from the Service so different from the risk free rate of return? And, doesn't every seller tell you that they're taking less money to sell out to you than they could with someone else just to get you to raise the price?" 

(Ninety-nine percent of the thousands of companies that I sold or tried to sell during my 25 years in the merger business were instructed to use this tried and true mantra of the old maid. )

But what really is the key, the one thing that confirms my theory that the Sage is the old snarling lion fighting to keep the younger ones from mating, is the frequent use of the sexual allusion. Here are two samples after his staple, "It always seems there's one dance left." The sage "used to go to sleep counting legs but now he doesn't do it any more because it's not so good for sleep" and "the Wall Street analyst said we could save money by your cooking so we could fire the cook, and the wife said we could save money if you learned to make love and we could fire the gardener."

What naive patsies they must have at HBS to let all these untested and anti-economic theoretic statements go without challenge? Worse yet, because Warren is so tight, and he has a great savings succession plan with his charitable foundation, there is probably very little chance that the school will get a major donor gift from him. All in all, a very dismal moment in the history of investments and the integrity of the academic environment. 

But it's an ill wind that blows no good, as the chronic bear would say. The fact that people like the Sage and the Chronic and the other abelflecprudsortles exist and spread the damaging message that has the world in its grip through their second-hand levelers in the wholesaling-of-info game does open up some nice niches for those who believe in enterprise, can count, or read the work of the Triumphal Trio, or those of my colleagues above.

Stefan Jovanovich remarks:

Whatever J.P. Morgan, Sr.'s faults, he was never "doddering" and the response to his remarks about "character" before the Zagora committee were anything but approving. No one believed him. Morgan's own opinions about Jews were equally puzzling to his contemporaries on Wall Street. In an age where Gentiles' attitudes ranged from wariness at best to outright paranoia, Morgan, Sr. had no fear of Jews - either privately or in business. Many of his art dealers and "scouts" were Jews, and there is no record of his having ever said anything anti-Semitic. His firm did not hire Jews, but they also did not hire Baptists or Catholics. As for the Ivy League, Morgan, Sr. was a skeptic, not a believer. He thought Harvard had made his son into something of a prig, and Yale was not one of his charities. (I have to check, but I do not think that the college is mentioned in his will.)

The Sage of Omaha is a genius. So was Colonel Parker. Buffett knows that Berkshire's valuation is not sustainable, if measured by "mere" financial criteria, so he is busily creating a legacy that makes his company into the ultimate "social responsibility" investment. Selling the Berkshire Hathaway stock will become as unthinkable as doubting the wisdom of the Kyoto Protocol (or whatever its successor will be in virtuous certainties about our sinful world). If you want to become the Saint of Omaha, that is the only way to go; and that is the road that the Buffett carnival show has been traveling for the past decade. Reading from Graham and Dodd, the "bible" of investing, is part of the act. It is truly a masterful performance.

Prof. Gordon Haave comments:

Ultimately, HBS is a business. The business depends on customer satisfaction:

1. Good job placement after graduation, and, less importantly:
2. Being able to instill in the students a sense of superiority

Harvard is aided in both #1 and #2 by a long history of success (or at least perceived success). However, the top 5-10 business schools are in fierce competition to get the top ranking in U.S. News and World Report. Thus, on the margin, #1 and #2 are very important vis-a-vis competition with Stanford, Wharton, Columbia, etc.

What is the last thing that a smart business manager would do in this situation? Telling the customers that the world changes every day, that the cycles are ever-changing, and that no amount of money or text-book education can guarantee success. Therefore, they all work very, very hard to get people like Buffet to come in and make them feel special, and more importantly lead them to believe that their book-smarts along with a few trite platitudes will guarantee success.

This false sense of security is self-fulfilling because self-confidence is a very important trait in hiring and promotion decisions in most industries. HBS, by allowing the "anti economic theoretic statements" to go unchallenged, is thus successfully guaranteeing the success of its business. This should come as no surprise. What is interesting is that a man of such wealth and fame would allow himself to be a part of the charade.

Ken Smith continues:

Our lives could be construed as a series of charades. Fantasy is everything for us, we humans. Harvard dwells in fantasy when books and classes are waved around like patriotic flags. For connections and prestige and background get most Harvard grads into top entry positions in American corporations and in U.S. bureaucracies. It has little to do with academic symbols and meanings.

A brother-in-law played football as a star running back for the University of Washington. Of course Harvard wanted him. The prestige of Harvard Law School got him a slot in a notable legal firm as soon as he graduated. Of course, he had brights too, not to diminish his intellectual credibility. However, hundreds of Harvard students have brights, but they don't have star-level football history.

Dan Grossman adds

I admire the Chair's energy and feistiness in still going after the Sage. Do you have the accurate cite for the HBS reviews of his speech because I would love to look at them.

I can't imagine what it is in Graham's book that he still thumbs through and finds relevant in this day and age.

On the other hand, the Sage at HBS is sort of a ceremonial appearance like Eleanor Roosevelt visiting Quincy House when we were there. If the Sage really had some treasured technique, such as running the cash flow of See's or Furniture Mart through the insurance companies so that under foreign controlled tax regulations he could avoid taxes forever, then that is the last thing he would talk about.

It's sort of like the doddering JP Morgan saying you didn't need to look at financials, the most important thing in lending to someone was his character, (meaning probably that the borrower went to Yale and wasn't Jewish or anything), and everyone nodding and saying 'how brilliant'.

 

 

 

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