(Published: November 19, 2018 at 10.30 A.M. EST)
My Fellow Value Investors, it is our honor today, to interview David Clark, the prominent author who enjoys the singular distinction of having close access to Warren Buffett, that too, since the 1970s.
Over the last two decades, David, the pioneer of ‘Buffettology’, has written several books focusing on Buffett, his investing style, management techniques, businesses Buffett likes, and on related themes. Indeed, David can easily be termed as the ultimate authority on the Oracle of Omaha. David’s latest book, “The Tao of Charlie Munger”, is a compilation of Charlie Munger’s quotes, and yet another engrossing read. We are extremely thankful to David, for making himself available to us for this interview.
In this interview, David provides a number of key, unique insights into the life and investing philosophy of Warren Buffett, many of them not widely known.
Indeed, this interview is nothing short of a coup, for our “Interviews with the Investing Elite“ Series!
Transcript of Interview with David Clark
1. Hi David, it’s a great pleasure to have you with us today! You are the well-known, original Buffettologist, and author of several books about Warren Buffett. Could you please share with us your professional activities, interests and preferences, apart from authoring books focusing on Buffett and his investing style?
David: What an interesting question. Outside the investment world and money management, I still enjoy the practice of law.
Right now, I am deep into writing a Berkshire Hathaway corporate history – entitled “Berkshire Hathaway: Warren Buffett’s Fortress of Capital”. After that, I have plans to write a book on Buffett and Munger’s investment methods for professional investors.
2. You were born and grew up in Omaha and are privileged to be one of the very few people to have personally known the Oracle of Omaha since his early days. Could you please tell us about your association with the great Warren Buffett? What are your earliest memories of Buffett?
David: Warren had three children – all three I have been friends with at various times in my life. I went to camp with Howie as a kid. My older brother helped run his political campaign. Hung out with Suzie and Pete in California and Omaha in my early twenties. Partying at the Buffett house – when the parents were out of town – usually involved sneaking downstairs to go through Warren’s old green army surplus filing cabinets filled with annual reports of companies he was interested in. In his upstairs office, right off his bedroom, one would find stacks and stacks of old Value Line and a couple of stacks of old Playboys. Needless to say, Warren had an eye for a bit more than just the bottom line.
His influence with a great many people in Omaha was huge. Looking back, it was because of Warren that I was introduced to investing at the very young age of six. Ben Graham’s book Security Analysis was on my bookshelf by the time I was 12. One of the original investors in the Buffett Partnership was old Doc Angle – who was about as smart as they come. His daughter, Monica, and I dated in high school – we both carried around copies of The Intelligent Investor. She and I used to lay around their house at night reading Warren’s old partnership letters. Today the Angle family is one of several Omaha billionaires that Warren created.
In my early twenties – 1978 – I fell in with another Buffett family friend by the name of Robert Eisenberg. It was with Bob that I started to really look at Warren investment methods – we called ourselves Buffettologists. Bob’s mother, Bella, who had survived the Nazi concentration camps, was Warren’s wife Suzie’s best friend.
Susie liked to tell us stories about Warren in his early days. She told me a story one afternoon sitting on the deck of their beach house in Laguna Beach, about how when they were living in New York, and Warren was working for Ben Graham, that he set about reading Ben’s book Security Analysis twelve times and every time he finished it he would redo one of the doors in the apartment. The story inspired me not only to read and reread Security Analysis, but to read and reread every edition of Security Analysis that Ben worked on. It’s a really good exercise to go through, in that it gives you a real historical education into the world of stock investment, which is very, very, useful in that this field of work is filled with repetition.
Right now, I am working through the early investment manuals that Warren was looking at in the 1960s trying to see what he was seeing way back then. Did you know that during the 1962 Cuban Missal Crisis – which caused the stock market to tank – Warren used this buying opportunity to make his first investments in Berkshire Hathaway? Warren’s game is not predicting when the Black Swan event will occur, his game is just waiting for it to occur. And it always does. As he says, sometimes the hardest thing for a man to do is just sit quietly and wait. With Berkshire holding over $100 billion in cash today, he investment strategy is to still sit quietly and wait.
3. Warren Buffett is probably the most respected, most followed and most analyzed investor of all time. How did he come across to you back then, when he was not as well-known as he is today?
David: Well, he looked and dressed like banker in a farm town. He is a man obsessed. The absent-minded professor. Susie (wife) once got new carpet for the living room and it took him a month to notice. They lived in an old neighborhood – which in its day was rich neighborhood – right next door to the old Hitchcock mansion – Hitchcock’s owned the newspaper. But Warren drove an old car, and in his off hours played with a train set that he and old Doc Angle built above the attic in Warren’s garage. To explain Warren’s obsession best is the story of him attending the wedding reception and sitting in the back reading financial reports.
4. What are your personal observations about Buffett the man, as opposed to Buffett the investor? He is said to have a humble, unassuming demeanor, even with strangers. Any anecdotes from your personal interaction with him, that you could share with us, would be a great value-add for my audience.
David: We were kids back then and really didn’t have much interaction with him. Our parents did. The Buffetts and Newman families were good friends and went on vacation together. The Newmans owned the largest supermarket chain in Nebraska and Nick Newman and Warren were tight. Nick’s wife, Rachel, told me a story about how they went on a trip with Warren and Susie to San Francisco and she, Susie and Nick would go out at night to hear some music and Warren would stay in and read annual reports! Like I said, he is a man obsessed.
5. What was it like for you, to grow up with Buffett’s children? What were the values that he inculcated in them, as far as you can recall?
David: All three of them were great kids. Smart, funny, curious about life. I always thought that his daughter, Little Susie, was the smartest, but they all had their fine points. But what stands out is they were all real normal people. Very genuine, very straight forward. But honestly, I don’t think they really knew just who their father was back then. He was just dad.
6. In your experience, what sort of people did Buffett use to hang out with, back in the 1970s and 1980s? Were most of them related to the investment or corporate world, or from other fields too? Do you believe Buffett learns something from almost everyone he interacts with?
David: The Buffett house entertained everyone. From artists to hippies to business and financial types. But Warren hung out with the Omaha business community, which has a long and storied past. People like Jack Ringwalt – who owned National Indemnity, Nick Newman – who I mentioned, Charles Hider, who was a local investment banker and investor. And of course, Charlie Munger, who he talked on the phone with almost every day.
7. Apart from Bill Gates, are there any other industry captains with whom Buffett shares a close personal rapport? What did Buffett like the most about the person(s)?
David: The stories about him and Kat Graham – then owner of the Washington Post – are legendary. What did he like most about her? She was a smart, connected, rich, business woman, who could talk his language. He stayed with her when he was visiting Washington – kept a change of clothes in her guest room closet. Need I say more?
8. What were the key lessons you learned from Buffett’s investment style? Could you name a couple of Buffett’s investment ideas from the last 5 decades, and why you liked those?
David: His best idea is to buy when the market goes to hell. Which sounds easy, but really isn’t. To buy when the market goes to hell, one must be sitting on a pile of cash. Which is impossible to do as an institutional investor, because they are almost always fully invested.
The market tanks, stocks go down, the mutual fund’s stocks go down, people withdraw from the fund, there is no extra money to take advantage of the market decline. It is almost impossible for a hedge fund or mutual fund to do what Warren does. Can you imagine if a hedge fund was sitting on a $100 billion in cash for year after year and only getting a 2% return on it? They can’t do it. All their investors would leave them. But Warren can. And that is the advantage he has. Individual investors actually have an advantage over institutional investors in that they too can store up cash and wait for the market crash or some other opportunity, just like Warren does. Institutional guys can’t operate that way.
9. Please tell us about Buffettology, the movement. How did it evolve under your leadership, since the 1970s? What are your key takeaways?
David: How did it evolve? At first in Graham, Graham, Graham, then Warren sat for a seminar at Columbia University where he mentioned equity being a bond with a variable coupon attached. That is when the light went on. I saw it in a flash. He was identifying the businesses with a “durable competitive advantage” (a phrase I invented to describe the phenomenon, which he now uses) then waiting for them to go on sale in some sort of market correction or crash. The lower price increases the rate of return on the equity bond. Quite simple in concept, but very difficult to implement, in that it requires sitting on a great deal of low yielding cash waiting for the crash or correction.
Remember that Warren bailed out of all stocks in the late 60s and sat on a pile of cash for years doing nothing, waiting for the crash, when it came in 1973, he went crazy buying stocks, while Munger went crazy watching his portfolio sink like a brick.
10. “The New Buffettology” is the first book to explain how Buffett became legendary for taking advantage of bad situations and down markets… the only book to explain how Buffett uses a selective contrarian investment strategy…, first book to point out that Warren is only interested in companies that have what he calls a “durable competitive advantage.” While these are clichéd phrases today, but back in the 1980s, when Buffett was possibly not followed as closely as he is today, just how did the market react to this kind of second-level thinking?
David: People read the books, but like I said, its very hard if you are an institutional investor to follow the philosophy. Those who say they do are mostly doing so for marketing reasons. The markers for a fund manager who does follow it would be a portfolio of companies with a durable competitive advantage – with a very low turnover rate in the portfolio.
11. Do you believe Buffett’s philosophy of thinking like a business owner, and not a financial investor, can be successfully replicated by ordinary investors, since Berkshire/Buffett does own several businesses?
David: Yes, I do. The individual investors are in a unique position in that they aren’t under any pressure to allocate capital – they can let it accumulate like Warren and Charlie – and then wait for the perfect pitch – which will eventually happen. Mutual fund managers don’t have that luxury – they have to keep fully invested no matter what the state of the market is. They are doomed by the dynamics of their profession constantly having to be the top fund manager of the year. So, they are driven to stay fully invested.
12. Apart from “The New Buffettology”, you have researched Buffett’s investing styles, and authored several other books. Coming to “Warren Buffett and the Art of Stock Arbitrage: Proven Strategies for Arbitrage and Other Special Investment Situations”, yours is the first book which highlighted Buffett’s successes in these. For instance, between 1980 and 2003, Buffett’s average annualized returns on special sits, at 81%, far exceeded his overall average annualized portfolio returns of 39%. However, why were special sits so important for Buffett, vis-à-vis pure-play value investing? Buffett comes across as a patient, long-term investor, who is averse to a frequent churn of his portfolio. Whereas arbitrage and special sits more often than not, are short-term events.
David: Back in Warren and Charlie’s day, special situations had a lot of inefficiency in them – the flow of information wasn’t perfect. But the internet – plus lower commission rates being offered to individual investors – according to Charlie – pretty much killed it – it’s simply too competitive today. Its been years since I did a special sit.
13. You state that Buffett is probably the greatest player in arbitrage and special situations, because he learned how to identify bets with the least risk. Could you please elaborate on this?
David: Hoard your cash, buy into great companies in a down market or if they are suffering from a one-time fixable event. It’s all about reducing risk. The margin of safety really has two parts to it – the first part is the quality of the business – better quality, lower risk. The second part is the price – lower price, the lower the risk.
Same in special sits – lower risk ensures it won’t go bad – because when it goes bad it can really hurt. Same with short selling. I short it at ten, so my potential for gain is ten. But my potential for loss is infinite. The potential for gain is outweighed by the risk. Buffett limited his risk by only betting on the deals that he was certain would go through. It meant a lower rate of return – the certainty not only reduced the risk it also reduced the rate of return – but it was a for sure rate of return.
14. Buffett looks closely at management, when assessing the potential of any investment idea. Which in your experience are traits or attributes that he likes to see, in the management teams of his investments and potential investment targets?
David: Honesty and then intelligence, cause as he has said many time, if the manager isn’t honest, the intelligence piece is going to kill you. Another thing he likes to find out about his new managers is when did they have their first business. Warren says that this is a better indicator of their future success than getting an MBA from Harvard.
15. In “Warren Buffett’s Management Secrets”, you write “Warren Buffett is also a genius of a manager, with over eighty-eight CEOs of different companies reporting directly or indirectly to him. In modern business, no man has managed a more highly talented group of managers, in so many diverse businesses, and delivered such spectacular results.” Given Buffett’s penchant for constantly reading 10-Ks, 10-Q and so much of investing-related literature, just how does he make time to review the operations and financial performance of so many companies? What are his time management techniques/secrets?
David: They all send him their monthly numbers and he reviews them. It’s his way of not only keeping his eye on his businesses, it also is his way of keeping his finger on the pulse of the economy. Remember also, he mostly just sits and reads all day long. And reading the financial statements of his businesses is something he takes great pleasure in.
16. In the same book, you discuss how Buffett searches for the right manager, how he identifies a leader from a group of managers and even his views on fixing remuneration for managers. You’ve also discussed his rules for delegating authority. Could you please share a few key insights?
David: Warren’s method of compensating his managers is based on how well they deploy the capital they are given to work with – what kind of return they are able to generate given the history of the business.
17. Buffett taught the investing world, concepts like ‘durable competitive advantage’ or ‘economic moat’. Do these go hand in hand with a great management team? Have you come across any of Buffett’s investments, where he saw a great business with moat, but insisted on changing the management?
David: Warren has always said he doesn’t bring management to the game – either it is there or it isn’t. In the same breath, he has also said that he wants to invest in a business that is so good that even an idiot can run it, because someday an idiot just might be running it.
18. In your latest book, “The Tao of Charlie Munger”, you seem to have taken a departure, writing on someone other than Buffett for the first time, albeit, no less a person other than Buffett’s long-time partner and confidante. Is this a sign you are turning into a “Mungerologist” now? Would you be starting off something like a Mungerology? What in your view are the key differences, if any, between the investment philosophies of Buffett and Munger?
David: I like Mungerology – the problem with writing Mungerology is that it would look a lot like Buffettology with one great exception – Munger is willing to occasionally take part in venture capital type of situations like BYD – a Chinese battery and electric car manufacturer. He is far more of a business visionary than Warren – he saw Warren’s worth early on and was one of the first people to really hitch their horses to Warren.
What the Tao of Charlie Munger brought home for me was that the accumulation of cash is very much an investment strategy of major importance. One can’t take advantage of buying opportunities, if one is not sitting on a large amount of cash. As I said, only Buffett and Munger and individual investors can do this – hedge fund managers can’t, in that they have to stay fully invested even when the market gets too high.
Another point that was interesting for me was pointing out that the Margin of Safety – from Munger’s perspective has two focal points – the first is the quality of the business: the higher the quality, the greater the margin of safety. The second is the price: the lower the price, the greater the margin of safety. The two interplay with each other.
But in Benjamin Graham’s world the margin of safety had mostly to do with price – even a crap business had some price that would make it a bargain. In Warren and Charlie’s world, quality of the business was the most important thing, then price. With a quality business it may never sell at what Graham might have considered a bargain, but in Warren and Charlie’s world paying a fair price for a wonderful business, may in fact be the real bargain. Remember, time is on the side of the wonderful business, but is the enemy of the poor business.
19. Buffett has been extremely over-researched over last 3 decades or so. Could you please highlight a couple of his quotes/anecdotes from the several Berkshire Hathaway annual meetings that you must have attended over the years? Something that remained etched in your memory?
David: I don’t think he has been over researched – there are still many mysteries to be explained. Remember, he bought into a dying business, Berkshire Textiles, never infused any additional equity capital, never invented anything, yet created one of the greatest fortunes in the history of the world.
A lot has escaped past researchers – like the fact that Berkshire, when Warren bought control, had $3 million in loss carry forwards for tax purposes – which meant that Berkshire could earn $3 million and not pay taxes on it. Warren used that money to buy National Indemnity. Warren looted a dying business to buy a thriving business.
Jump forward to today and he is buying newspapers because he believes the payouts of these dying businesses will offer him a sufficient return on his investment. Dying businesses don’t need additional capital investment – that capital can be utilized elsewhere – Warren did it with Berkshire, and now he is doing it with newspapers.
20. Would you like to share some message with the countless followers of Warren Buffett on the planet?
David: Don’t become investment analysts, become business analysts. Learn everything you can about business. Be like Warren and read every business biography you can get your hands on. And study accounting, for it is the language of business.
Thanks so much , David, for the unique insights into the mind of Warren Buffett. Good luck with your next book “Berkshire Hathaway: Warren Buffett’s Fortress of Capital” and we hope to read it soon!
David: Thanks for the interview. And for the record, you ask really great questions!
Amazon.com Links to Books authored/co-authored by David Clark, or mentioned in this interview
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David Clark’s photograph by Monte Crose, for Scribner.