In Praise of Buffett

This is a small post, as the common vocabulary goes- a quickie. Quick and a climax which is seldom intellectually satisfying and for all practical purposes adding just a mere notch to my blogging bedpost.
Having said that, why not go ahead and do the deed, indeed.

At the very outset, I have never been a fanatic worshipper at the altar of Buffett. Surely, I like the man for his extreme intellectual sharpness but fanaticism he doesn’t invoke. But that should not be taken as a limitation of that man in any measure. I have just become incapable of being swayed by extreme passion these days, for goods which the vast majority swears by.

Coke? yeah okay. Pizza? yeah okay. Buffett? Yeah, okay.
But my greatest weakness has been for the wisdom and the character that Charlie Munger carries.

Tapdancing To Work300.grid-4x2

However, I have been reading Carol Loomis’s book “Tapdancing to work:Warren Buffett on practically everything“. And the more I read, the more I find myself humbled. For one, Buffett has an exemplary clarity of thought. Not that it is a surprise for Buffett observers, but the more I am reading the newspaper articles around Berkshire Hathaway’s purchases, the more I find myself in awe.

Fortune articles are sanitised version of Buffet’s ideas. It doesn’t talk about the different permutations and combinations he considers for a given matter. It doesn’t concern with the fine judgement and skill he brings to the table before pulling the trigger. It doesn’t consider with the different consequences he might be thinking of because of his actions. All we see is the final action and its post mortem by financial media (Fortune in this case). But even in such sanitised version, Buffett sets a very lofty example for people to follow.

I, for one, am particularly hamstrung by my clarity(or the lack of) in thoughts. And if I am to consider putting in Buffett’s clarity in the vast Gaussian curve of humanity’s, then Buffett will figure out somewhere far off in the horizon, sitting pretty at the mark of 6 sigma.

I will rank myself perhaps somewhere in between negative single sigma and the mean. So being humbled is being disingenuous. Ravaged is more like it.

The second quality that jumps out in case of Buffett, is the huge amount of domain knowledge he carries in his head. Stupendous is an understatement. Encyclopedic will be close. He is known to beat the professionals in their own game- and the game not being that of stock picking but that of deal making.
When Capital Cities Corp was in talks with American Broadcasting Company for a merger, Buffett pitched in along with Tom Murphy to negotiate. On the other side of the table two extremely sharp, smart veterans of deal making were present representing the interests of ABC Corp. The name of the gentlemen were Bruce Wasserstein and takeover specialist Joseph Flom.

Peter Petre (the journalist reporting it in 1986 for Fortune) writes:

“As the two sides neared an agreement, the professional dealmakers held out for more. “Buff ett is so smart,” remembers Wasserstein, “that you had to be careful to avoid being picked.” As the dealmaker tells it, he and Flom demanded that Cap Cities sweeten its cash off er for ABC with stock; but Buff ett, who was not to be pushed far, finally closed by throwing in some small change—a thin veneer of warrants that raised the deal’s value by perhaps 3%.”

Sharp as a whip.

I think another Buffett biographer wrote that Warren always pushed a super hard bargain and used the existing structure to his advantage. When the brokers were making market for illiquid pink sheet stocks, Warren would repeatedly drive the purchasing price down by first quoting a price and then withdrawing it.

In his 1986 Annual Report also where he posted the Business Wanted notice- he lays out one binding condition regarding valuations- the seller has to reveal his price. No preliminary talks will be entertained without a price tag. That’s remarkable!

Any negotiator will tell that the one who names the price first-loses.

The third aspect which comes out of all this is the picture of a man who has put multiplitudes multitudes of 10,000 hours in perfecting his trade. Concentration of his efforts, time and resources in perfecting one single idea. Thats the discipline of a samurai.

I for one, am still looking out for a job which will pay me to become wise.

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The Trust Factor: The Piramal way of doing business

Ajay Piramal channels Warren Buffett. He follows him in his entirety. With all his warts and moles; idiosyncrasies and ingenuity.

A copycat? What’s wrong in it though?

But it will be an insult to Piramal to merely call him a blind follower. He is a true believer in the ethos of Buffett and Munger.
He just doesn’t limit their teachings in business, but mixes it liberally in his life and the way he conducts himself.

Take a moment to think about it. Why do we exactly adore Buffett?
We may adore Munger for his extreme wisdom, rapier wit and piercing observations.

But why Buffett?

Because he is a billionaire?
Because he is the most successful investor- a true rags to riches story?
Because he embodies self-sufficiency?

Perhaps. And perhaps not. There are umpteen other people with similar stories. We might not accept it but we adore him because he inspires trust.

He shows amazing consistency in his behavior, words and belief. He surrounds himself with people of similar impeccable integrity and prevents the use of legalese as a crutch for trust.

This is perhaps the least highlighted aspect of Buffett. He is extreme in identifying and cutting needless costs. And legal experts, consultants are nothing but that.

He rightly understands that human beings can and will game the system, and a legal document cannot protect him. What he employs is empathy, trust and marks human relationships as the bedrock of business.

He is known to acquire companies based on mere handshake. In contrast compare that with Daiichi -Ranbaxy deal. Plenty of investment consultants, plenty of legal documents and still plenty of hassles.

In economics there is a concept called signalling mechanism. Someones actions not only has a direct outcome to it, but also gives off an information.  That is every action also implies something.

Legal documents signal something as well. It implies- “I don’t trust you”. It implies- “I trust the legal guys, the investment consultants with skewed incentives far more than the person on the other end of the table.”. Humans are born with a superb skill set to game existing systems. Call it ingenuity, call it creativity. You just dont want to be on the receiving side of it.

And this signal subconsciously “inspires” unethical behaviour.  Traditional  ideas of buyers beware kicks in. The seller subconsciously understands  that trust is not expected of him. And he might as well game it.

Which brings us to two important mental models–  Expectation and Seamless web of deserved trust.

As natural beings, we are programmed to reciprocate.  And when we tell someone not only in words but also in action that we trust and thus we expect him to cooperate and trust us back- we don’t make him/her our adversary- we make that person our ally.

And what does lack of trust do?

Lack of trust led to World War I.
Lack of trust lead to arms races.
Lack of trust is costly.

Seamless web of deserved trust ought to be the bedrock of business. What does it mean? It means trust generated through one’s own action, and hence deserving. “Seamless web” means consistency. Consistency in every aspect of one’s conduct. So trust generated through consistency.

Its a tough way, especially when perverse incentives exist; but try distrust once and you will understand what I mean.

Which brings us to Ajay Piramal’s knack of doing business efficiently.

Take a look at this article:

Specifically this line:

When they met, Pirmal, who had stitched more than 20 deals without using any bankers, expressed reservations.

20 deals without using any bankers! That’s a substantial confidence, huge amount of trust and an inordinate amount of cost saving.

Cost saving not only in banker fees, but in potential headache down the line. This action signals something.
It signals- “I trust you”

The article continues:

It also marked the beginning of a personal relationship that was rooted in financial services, but routinely sidetracked into business values, classical music, maths and spirituality, among other things.

Whoa!  How many business deals take place like this? I have seen hardball i-bankers conduct negotiations with their one hand sms-ing under the table .

Why?
To do course correction on ball busting !

Swati Piramal says her husband also has a unique ability to bring a personal touch to business relationships. For instance, on the eve of the deal with Shriram Capital, the Piramals hosted Thyagarajan and his family to a meal of South Indian delicacies prepared at home in Piramal House. Many of the deals he does are based on a personal equation, she says.”

Emphasis mine. Last quote taken from here