For Warren Buffett’s most devoted followers, a meal at Gorat’s Steak House is near the apex of the visit to Omaha for the Berkshire Hathaway annual meeting, second only to seeing Buffett onstage at the Qwest Center. You do not eat at Gorat’s for the food, which is the apotheosis of indifferent midwestern cooking. You eat at Gorat’s because it is Warren Buffett’s favorite restaurant. Really serious Buffett devotees order the T-bone and hash browns, because that is what “Warren” is rumored to eat.
After five days in Omaha, I still don’t understand what Buffett’s disciples hope to learn by copycatting his food choices. I do have a better sense, though, of why some 30,000 people now make what amounts to an annual pilgrimage to Omaha, from places as far-flung as Singapore and South Africa.
More like the early Christians in pagan Rome than the millions of Muslims thronging Mecca, Buffett’s hard-core “value investors” are few, and in many ways, their entire lives run against the grain of the dominant culture. Only here in Omaha, for one weekend a year, are they a majority. The meeting, with its quasi-ritual speeches, canonical stories and jokes, and the fellowship of other value investors, helps to brace them against a society that almost actively rejects their austere financial philosophy.
And, of course, there is Buffett himself. It is his achievements that give value investing a good name. But while many popularizers who become the public face of a discipline reap the scorn of their colleagues, Buffett epitomizes value investing for insiders as much as for those on the outside. He seems to be the very reason why most value investors are value investors. Much of the writing on the arcane craft eventually comes around to a central question: What Would Warren Do? Which of course makes one wonder: What happens to the value-investing community once he is gone?
I wasn’t the only one wondering about this. During the Q&A, Buffett was asked, once again, why he hasn’t started to give some control of Berkshire Hathaway to a successor. Buffett’s response: “If we had a good way to inject someone into some role that would make them a better CEO of Berkshire, we’d do it, but the candidates we have right now are running businesses, making decisions, getting experience. To bring them into the Berkshire offices while I’m sitting there reading would be a waste of talent.”
Beyond a certain point, what Warren Buffett does can’t be taught. That’s why, as the British financial writer Merryn Somerset Webb once drily pointed out, despite all the self-proclaimed value investors in the world, “Buffett is certainly the only money manager around in a position to give £20 billion to charity.”
But if Buffett is such a hard act to follow, then why were we all spending a beautiful spring day in the Omaha convention center trying to drink in his wisdom, not to mention eat his brain food?
I spent much of my time in Omaha trying to answer that question, a task complicated by the difficulty of defining what, exactly, value investing is. When Benjamin Graham and David L. Dodd wrote the value-investing urtext, Security Analysis, in 1934, the rules were more hard-and-fast. Graham and Dodd looked for companies whose price was less than their intrinsic value, and offered various formulas for divining this value.
Buying stock in firms where the intrinsic value of the assets is higher than the market capitalization worked well in the depths of the Great Depression, when investors were wary of holding equity. Between 1929 and 1932, the Dow lost just about 90 percent of its value, bottoming out at 41.22. What economists call the “equity premium”—the extra return that investors demand to compensate for the risk of holding stocks—has never since been so high. That’s why Graham and Dodd could find companies whose liquidation value offered a substantial “margin of safety” for people who bought their equity.
Moreover, book value and other balance-sheet-based metrics have become less useful, as the market, and the economy, have changed. Persistent inflation means that the historical cost of the assets on the balance sheet in many cases bears only passing resemblance to their actual worth. Meanwhile, firms get more and more of their value from intangible assets, like intellectual property or strong brands, that don’t show up in the financial statements. Geico, one of Buffett’s crown jewels, gets much of its value not from physical equipment or even investment savvy, but from a sterling brand name built on relentless advertising.
Much of what Graham and Dodd did so well was simply hard coolie labor. In an era before spreadsheets or financial databases, they looked at company reports and painstakingly did the arithmetic to see where a company stood. That effort offers no competitive advantage in today’s information-saturated market. So while value investors still hew to the core notion of determining a company’s intrinsic value, waiting for the market to misprice the stock, and then buying on the cheap, nowadays that determination has much more of a subjective skill element.
Buffett is the one who has, more than anyone else, refined and redefined value investing for a new era. He is the one who stopped hunting for superbargains and started buying exceptional companies, even if they weren’t available at fire-sale prices. But what makes a company “exceptional” is idiosyncratic. Warren Buffett is exceptionally good at asking the right questions; the speech he gave in 1999 explaining why he wasn’t investing in the tech boom is astonishing for its foresight. But teaching someone to ask the right questions is much easier said than done.
When Buffett lectures on his craft, his precepts often sound less like investing rules than like the distilled essence of bourgeois virtue. Don’t speculate. Don’t risk money you can’t afford to lose. Don’t try to ride market trends. Don’t try to get rich quick. Don’t panic when the price drops. If there are no good buys, don’t buy anything. Above all, ignore what other people are saying. If everyone jumped off a bridge, would you jump too?
These are admirable traits in any investor. But they are hard to uphold, even in the best of times. And for value investors, the past few decades have not been the best of times. They have spent those years fighting not only their own human instincts, but also a broader financial culture that expected maximum returns for minimum effort. Many hedge funds piled up fortunes with abstruse mathematical trading strategies that paid little attention to the individuals or companies underlying their trades. Consumers bet wildly on stocks they knew little about, or passively stowed their net worth in index funds that required no mental effort—and either way, they expected double-digit annual returns.